CH 5 : Strategic Capacity Planning

Question 1

capacity

Answer 1

upper limit on the load that an operating unit can handle, usually measured as max output rate, throughput, or production rate

Question 2

strategic capacity planning

Answer 2

used to achieve a match between long term supply capabilities of an organization and predict long term demand

Question 3

capacity planning

Answer 3

process of establishing the output rate that can be achieved at a facility

Question 4

overcapacity results in

Answer 4

operating costs that are too high

Question 5

under capacity results in

Answer 5

strained resources and possible loss of customers

Question 6

importance of long term capacity

Answer 6

impacts ability to meet future demands, affects operating costs, major determinant of initial costs, involves long-term commitment, affects competitiveness, affects ease of management, globalization has increased complexity of capacity decisions, involve substantial financial resources

Question 7

efficiency

Answer 7

ratio of actual output rate to effective capacity

Question 8

efficiency equation

Answer 8

actual output rate / effective capacity x 100%

Question 9

capacity utilization

Answer 9

the ratio of actual output to design capacity (how much of the available capacity is being used)

Question 10

capacity utilization equation

Answer 10

actual output / design capacity x 100%

Question 11

design capacity

Answer 11

maximum obtainable output rate under ideal conditions

Question 12

effective capacity

Answer 12

maximum output rate given work breaks, product mix, scheduling difficulties, equipment maintenance, delays, and other realities

Question 13

factors influencing capacity

Answer 13

facilities and machines, product mix, workers, planning and operational factors, supply chain management, external factors

Question 14

strategic capacity planning process

Answer 14

1. forecast demand of products
2. calculate capacity requirements to meet forecast
3. measure existing capacity and decide how to bridge gaps (generate alternatives, evaluate alternative economically, consider non economic aspects, choose best alternative)

Question 15

major considerations for developing capacity alternatives

Answer 15

design flexibility into the system
take stages of life cycle into account
take a big picture approach to capacity changes
choose capacity timing and increments
prepare to deal with chunks
attempt to smooth out capacity requirements
use capacity cushion
identify optimal operating level

Question 16

bottle neck operation

Answer 16

an operation in a sequence of operations whose capacity is lower than that of the other operations (longer length)

Question 17

leading strategy

Answer 17

plan to make capacity available just before demand occurs because construction of capacity takes a long time, more risky, greater potential for reward

Question 18

lagging strategy

Answer 18

plan to make capacity available just after demand occurs, less risky, less potential for reward

Question 19

capacity cushion

Answer 19

capacity - average demand

Question 20

economies of scale

Answer 20

the cost per unit of output drops as volume of output increases, spread the fixed costs of buildings and equipment over multiple units, allow bulk purchasing and handling of material

Question 21

diseconomies of scale

Answer 21

the cost per unit rises as volume increases, often caused by congestion (overwhelming process with too much work-in-progress) and scheduling complexity

Question 22

optimal operating level

Answer 22

output that results in the lowest average cost

Question 23

two alternatives to expanding capacity

Answer 23

1. purchasing one large facility, requiring one large investment
2. add capacity incrementally in smaller chunks as needed

Question 24

purchasing one large facility results

Answer 24

large amount of excess capacity at beginning, initial costs would be high, risk that demand never increases resulting in overcapacity

Question 25

adding capacity incrementally results

Answer 25

less risk than one big facility but does not offer the same opportunities and flexibility

Question 26

focused factories

Answer 26

small, specialized facilities with limited oobjectives

Question 27

plant within a plant (PWP)

Answer 27

segmenting larger operations into smaller operating units with focused objectives

Question 28

outsourcing

Answer 28

delegating the production of a product or delivery of a service to an external company

no need to create the capacity in house for production or service delivery

Question 29

planning service capacity factors

Answer 29

potential need to be near customers, inability to store services, degree of volatility of demandev

Question 30

evaluating alternatives

Answer 30

economic considerations (cost, useful life, compatibility, revenue)
non economic considerations (public opinion, reactions from employees, community pressure)

Question 31

techniques used for evaluation

Answer 31

break even analysis
payback period
net present value

Question 32

three step procedure for making capacity planning decisions

Answer 32

1. identify capacity requirements
2. develop capacity alternatives
3. evaluate capacity alternatives

Question 33

identifying capacity requirements

Answer 33

forecasting capacity, longterm capacity requirements, capacity cushions, plan for added capacity, strategic implications

Question 34

developing capacity alternatives

Answer 34

1. do nothing
2. expand large now
3. expand small now with option to add later

Question 35

evaluating capacity alternatives

Answer 35

use decision support aids to evaluate decisions, managers need to use many different inputs and judgment

Question 36

break even analysis

Answer 36

compute the amount of goods required to be sold to just cover costs

Question 37

break even analysis equation

Answer 37

TR = TC

TR = p x Q
TC = FC + VC

Question 38

Make or Buy analysis

Answer 38

deciding wether to buy a machine (fixed cost) and make the product in house (variable cost), or to buy the product (variable cost only)

Question 39

step costs

Answer 39

costs that increase stepwise as range of output increases

Question 40

financial analysis use

Answer 40

rank investment proposals, taking into account the time value of money

Question 41

cash flow

Answer 41

refers to the difference between the cash received from sales and other sources and the cash outflow for labour, materials, overhead, and taxes

Question 42

present value

Answer 42

expresses in current value the sum of all future cash flows of an investment proposal

Question 43

payback

Answer 43

focuses on the length of time it will take for an investment to return its original cost

Question 44

payback time

Answer 44

initial cost / annual saving