Chapter 5: Strategic Capacity Planning

Question 1

Q: What is capacity?

Answer 1

A: The upper limit or ceiling on the load that an operating unit can handle, usually measured in terms of output rate.

Question 2

Q: What is an example of design capacity vs effective capacity?

Answer 2

A: A bakery can produce 30 pies/day under ideal conditions (design capacity) but only 20 pies/day under normal conditions (effective capacity).

Question 3

Q: Why is long-term capacity planning important?

Answer 3

A: It impacts future demand, costs, and competitiveness. Poor planning can lead to overcapacity (wasted resources) or undercapacity (missed sales).

Question 4

Q: What is an example of the importance of long-term capacity planning?

Answer 4

A: A hospital with too few beds during peak demand leads to long waiting times, while too many beds during off-peak periods result in wasted resources.

Question 5

Q: What is design capacity?

Answer 5

A: Maximum output under ideal conditions.

Question 6

Q: What is effective capacity?

Answer 6

A: Maximum output under normal conditions, accounting for downtime and scheduling.

Question 7

Q: How do you calculate utilization for design capacity?

Answer 7

A: Utilization (Design) = (Actual Output / Design Capacity) × 100%

Question 8

Q: How do you calculate utilization for effective capacity?

Answer 8

A: Utilization (Effective) = (Actual Output / Effective Capacity) × 100%

Question 9

Q: What factors influence capacity?

Answer 9

A: Facilities, product mix, workers, operational factors, supply chain, and external factors.

Question 10

Q: What is the first step in the capacity planning process?

Answer 10

A: Forecast demand to predict future product/service needs.

Question 11

Q: What is the purpose of break-even analysis in capacity planning?

Answer 11

A: To determine the level of sales needed to cover fixed and variable costs.

Question 12

Q: What is the formula for break-even quantity?

Answer 12

A: Break-even Quantity (Q) = Fixed Costs / (Price - Variable Costs)

Question 13

Q: What is the leading strategy for capacity expansion?

Answer 13

A: Increasing capacity before demand occurs, which is high risk but offers high rewards.

Question 14

Q: What is the lagging strategy for capacity expansion?

Answer 14

A: Adding capacity after demand is confirmed, which is safer but may miss opportunities.

Question 15

Q: What is incremental expansion in capacity planning?

Answer 15

A: Adding small capacity chunks over time, providing flexibility but with higher costs.

Question 16

Q: What are economies of scale?

Answer 16

A: As production increases, the cost per unit decreases due to fixed costs spread over more units.

Question 17

Q: What is an example of economies of scale?

Answer 17

A: A large factory can buy materials in bulk at a discount, lowering costs.

Question 18

Q: What are diseconomies of scale?

Answer 18

A: Increasing production can lead to higher costs per unit due to factors like complexity and equipment wear.

Question 19

Q: What is an example of diseconomies of scale?

Answer 19

A: A factory grows too large, leading to scheduling issues and higher maintenance costs.

Question 20

Q: What is a bottleneck operation?

Answer 20

A: An operation in a production process that limits overall output due to lower capacity than other operations.

Question 21

Q: What is an example of a bottleneck?

Answer 21

A: A bakery has one oven that can bake 10 pies/hour, but other operations can handle 20 pies/hour, making the oven a bottleneck.

Question 22

Q: What are unique challenges in service capacity planning?

Answer 22

A: Services cannot be stored and must often be provided near the customer, with demand fluctuations requiring flexible capacity.

Question 23

Q: What is the solution for planning capacity in a hospital with fluctuating demand?

Answer 23

A: Plan capacity to handle peak demand, not just average demand, to avoid service delays during busy periods.