W8 Capacity and Inventory Planning

Question 1

Capacity

Answer 1

Maximum level of value added activity over a period of time that the manufacturing
process can achieve under normal operating conditions.. We emasure input and output capacity

Question 2

Measures of capacity

Answer 2

• Design capacity- e maximum
  attainable output
• Effective capacity- maximum capacity with product mix, scheduling
  challenges and other issues taken into account
• Actual output- rate of output that is
  actually achieved; this can never exceed the effective capacity

Question 3

Long term capacity planning considerations

Answer 3

• Capital available
• Economies and
  diseconomies of scale: Economies of scale are the decrements in unit cost with the increase of volume and
  diseconomies of scale are the increments of unit cost resulting from the increase of volume

Question 4

Long term
capacity
planning
strategies

Answer 4

Move resources to
different tasks
(ex. add a catering
business to your coffee
shop operation)
Additional equipment
The company might relocate to more
suitable (e.g. larger) premises.

Question 5

Medium Term capacity Planning

Answer 5

Measure aggregate
demand and
capacity
Identify the
alternative capacity
plans
Choose the most
appropriate capacity
plan.

Question 6

Why does demand change

Answer 6

Climatic, Festive, Behavioural, Political, Financial, Social

Question 7

Measure aggregate demand and capacity

Answer 7

… in terms which are useful for capacity planning and control
… as accurately as possible
… giving an indication of relative uncertainty

Question 8

Identify the alternative capacity plans

Answer 8

Level Capacity Plan: fluctuations are ignored and the activity levels are kept
constant. Where non-perishable materials are processed but not immediately sold, they can
be transferred to finished goods inventory in anticipation of future sales
Chase Demand Plan: an attempt is made to match the capacity closely to the varying
levels of forecasted demand (i.e. hiring and firing, using part-time staff).
Manage Demand Plan: an attempt is made to change and level demand through price
manipulation (i.e. promotions for off-season tickets). Sometimes, the available resources can
produce alternative products and services in off-peak times (i.e. university halls of residence
being used for conference accommodation in the summer)

Question 9

Choose the most appropriate plan

Answer 9

Seasonality

Question 10

Short time capacity planning

Answer 10

• Lease extra space temporarily
• Authorise overtime
• Temporary workers
• Alternate routings — different workstations with excess capacity
• Level output by building up inventory in slack season
• Postpone preventive maintenance
• Use multi-skilled workers to alleviate bottlenecks
• Allow backorders to increase, extend due date promises, or have stock-outs
• Subcontract work

Question 11

Utilisation

Answer 11

Utilisation is an indicator of how close the facility is functioning with regards to its design
capacity. The best operating
point is usually near 70% of the design capacity. Efficiency indicates how close the facility is
functioning to the effective capacity

Question 12

Whens should you expand capacity?

Answer 12

Capacity leads
demand
(expansionist
approach)
Capacity lags
demand
(wait-and-see
approach)

Question 13

Capacity leading (expansionist approach) strategies Advantages

Answer 13

Always sufficient capacity to meet demand, therefore revenue is maximised and customers satisfied
Most of the time there is a capacity cushion which can absorb extra demand if forecasts are pessimistic
Any critical start up problems with new plants are less likely to affect supply to customers
Ahead of competition
No lost sales

Question 14

Capacity leading (expansionist approach) strategies disadvantages

Answer 14

Utilisation of the plant is always relatively low, therefore costs will be high
~Risks of even greater or even permanent overcapacity if demand does not reach forecast levels
~ Capital spending on plant early
Risky if demand changes

Question 15

Capacity lagging (wait and see) strategies Advantages

Answer 15

Always sufficient demand to keep the plants working at full capacity, therefore unit costs are minimised
Capital spending on the plants if delayed
Overcapacity problems are minimised if forecasts are optimistic
No unused capacity
Easier to adapt to new technologies

Question 16

Capacity lagging (wait and see) strategies disadvantages

Answer 16

Insufficient capacity to meet demand fully, therefore reduced revenue and dissatified customers
No ability to exploit short term increases in demand
Under supply position even worse if there are start up probloems with the new plants
Relies on short-term option

Question 17

Inventory Control

Answer 17

‘The stored accumulation
of material resources’

Question 18

Why is
inventory
needed?

Answer 18

• quality (Aged Cognac)
• speed of the operation (Blood bank)
• dependability (Protection against warehouse fires)
• flexibility (Custom Dell computers)
• cost objectives (Bulk buying of fruits by cake factories, in season)

Question 19

Downsides of holding
inventory

Answer 19

• Reduces working capital
• Storage costs
• May become obsolete
• Can be damaged or deteriorate.
• Might be hazardous to store
• Uses space that could be used to add value.
• Administrative and insurance costs

Question 20

Categories of inventory

Answer 20

– Buffer inventory to compensate for fluctuations in supply and demand (safety inventory).
– Cycle inventory occurs when one or more stages in the process cannot supply all items
simultaneously.
– De-Coupling inventory is required to allow two processes to proceed at various speeds,
independently from each other.
– Anticipation inventory is stored to cope with predictable fluctuations in seasonal demand.
– Pipeline inventory exists due to the fact that delivery is not instantaneous.

Question 21

Decisions in day to day inventory management

Answer 21

The Volume Decision- how much to order (storage costs vs order costs)
The time decision- when to order
The Control Decision- how to control the system

Question 22

The volume decision EOQ assumptions

Answer 22

Economic Order Quantity (EOQ) model
Assumptions:
The EOQ is a simple model to determine order size. In this simple model, the demand rate is
assumed to be constant, the stock is replenished instantaneously after an order is placed and order
cost is a constant and independent of order size.

• Fixed order size – 𝑄
• Instantaneous delivery
• Constant demand –𝐷
• Ordering Cost – 𝐶𝑜
• Storage cost/unit – 𝐶s

Question 23

Economic Batch Quantity model (EBQ)
Gradual replacement

Answer 23

Identical to EOQ, except:
* Deliveries at constant rate P
deliveries are not instantaneous and are carried out at a constant rate (P);
demand is also assumed to be depleting the inventory at a constant rate (D)

Question 24

Re order point

Answer 24

The point in time at
which more items are ordered, usually
calculated to ensure that inventory does
not run out before the next batch of
inventory arrives.

Question 25

Re order level

Answer 25

The level of inventory
at which more items are ordered, usually
calculated to ensure that inventory does
not run out before the next batch of
inventory arrives.

Question 26

Two bin inventory control

Answer 26

Two-bin ordering is usually utilised in continuous review inventory systems to ensure smooth
operations. In this approach, the inventory is divided into two bins, one containing the items that are
being used and the other the ROL and an additional safety inventory. When the first bin is empty
the order is made. During the lead-time the second bin is used. Sometimes the safety inventory is
put into a separate bin to create a three-bin system. These systems are excellent at showing when
the ordering strategy for a component requires to be reviewed.

Question 27

ABC Inventory Control

Answer 27

ABC inventory control is an approach to inventory control that classes inventory by its usage value
and varies the approach to managing it accordingly

Question 28

Pareto Law (80/20 rule)

Answer 28

A relatively small proportion of the
total range of items contained in an inventory will account for a large proportion of the total usage
value. 80 per cent of an operation’s sales are accounted for by only 20 per
cent of all stocked item types.

Question 29

Measuring the inventory

Answer 29

The total monetary value of the stored inventory.
* Stock cover, usually used in push control: how long the items stored in the inventory will last
for under normal operating conditions.
* Stock turn measure: the number of times that the stock would be completely depleted over a
period of time (usually a year) at the normal rate of operation