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Chapter 5

Chapter 5 discusses strategic capacity planning, defining key terms such as capacity, effective capacity, and utilization. It emphasizes the importance of capacity decisions for long-term business success, including factors like cost impact, flexibility, and alignment with business strategy. The chapter also covers forecasting capacity requirements, developing capacity strategies, managing constraints, and evaluating alternatives to ensure effective capacity planning.

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19 views3 pages

Chapter 5

Chapter 5 discusses strategic capacity planning, defining key terms such as capacity, effective capacity, and utilization. It emphasizes the importance of capacity decisions for long-term business success, including factors like cost impact, flexibility, and alignment with business strategy. The chapter also covers forecasting capacity requirements, developing capacity strategies, managing constraints, and evaluating alternatives to ensure effective capacity planning.

Uploaded by

nickzyvenn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 5: Strategic Capacity Planning for Products and Services

Definition of Terms
1. Capacity – The maximum output that a system or facility can produce over a
specific period.
2. Capacity Planning – The process of determining the production capacity
needed to meet demand.
3. Effective Capacity – The realistic output level after considering constraints
like maintenance and labor availability.
4. Design Capacity – The maximum possible output under ideal conditions.
5. Utilization – The percentage of design capacity that is actually used.

Capacity Decisions Are Strategic


Capacity decisions affect long-term business success and competitiveness. Key
considerations include:
 Long-term Commitment: Capacity decisions require significant
investments in facilities and equipment.
 Impact on Costs: Overcapacity leads to wasted resources, while
undercapacity results in lost sales.
 Flexibility: Adapting to market demand changes efficiently.
 Alignment with Business Strategy: Ensuring capacity supports corporate
goals, such as cost leadership or differentiation.

Defining and Measuring Capacity


Capacity is measured in different ways, depending on the industry:
 Manufacturing: Units produced per hour or per day.
 Services: Number of customers served per hour (e.g., hospital beds
available, airline seats occupied).
 Retail: Sales volume per square foot.
Key Performance Metrics:
 Efficiency = (Actual Output / Effective Capacity) × 100%
 Utilization = (Actual Output / Design Capacity) × 100%
Determinants of Effective Capacity
Several factors influence effective capacity, including:
1. Facility Design – Layout and space efficiency.
2. Workforce Factors – Training, skill levels, and motivation.
3. Supply Chain Efficiency – Availability of materials and suppliers.
4. Product and Process Design – Standardization and complexity impact
production speed.
5. External Factors – Government regulations, environmental constraints.

Strategy Formulation
Organizations formulate capacity strategies based on:
 Short-term vs. Long-term Needs: Expanding production vs. adjusting
schedules.
 Demand Forecasting: Anticipating changes in market conditions.
 Technology Investments: Automating processes to enhance efficiency.

Forecasting Capacity Requirements


Forecasting helps businesses estimate future capacity needs. Key forecasting
methods include:
 Qualitative Methods: Expert opinions, market research.
 Quantitative Methods: Time-series analysis, regression models.
 Simulation Models: Computer-based scenario planning.
Example: A hospital forecasting the number of beds required for flu season.

Developing Capacity Strategies


Capacity strategies help organizations balance supply and demand. Major
approaches include:
1. Leading Strategy – Expanding capacity before demand increases.
2. Lagging Strategy – Expanding capacity after demand increases.
3. Matching Strategy – Incremental capacity expansions aligned with demand
trends.
4. Adjusting Short-term Capacity – Using temporary workers, outsourcing, or
overtime.
Constraint Management
Capacity is often limited by constraints or bottlenecks. Managing these constraints
includes:
 Identifying Bottlenecks: The slowest process in the production chain.
 Optimizing Workflows: Removing inefficiencies.
 Technology Upgrades: Investing in automation or new equipment.
Example: How airlines manage peak-time capacity constraints.

Evaluating Alternatives
Organizations must assess various capacity expansion options:
 Cost-Benefit Analysis: Evaluating financial implications.
 Break-even Analysis: Determining the point at which investment becomes
profitable.
 Risk Assessment: Considering market uncertainties and operational
challenges.
Example: Comparing the cost of building a new factory vs. expanding an existing
one.

Operations Strategy and Capacity Planning


Capacity planning must align with overall business strategy. Key considerations
include:
 Cost Leadership Strategy: Maximizing efficiency and lowering costs.
 Differentiation Strategy: Enhancing flexibility and responsiveness.
 Global Strategy: Managing capacity across international markets.

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