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Ch. 5 Strategic Capacity Planning for Products and ServicesChapter 5 Managers should recognize the broader effects capacity decisions have on the entire organization. Common strategies include leading capacity, where capacity is increased to meet expected demand, and following capacity, where companies wait for demand increases before expanding capabilities. A third approach is tracking capacity which adds incremental capacity over time to meet demand. Finally, The two most useful functions of capacity planning are design capacity and effective capacity. Design capacity refers to the maximum designed service capacity or output rate and the effective capacity is the design capacity minus personal and other allowances. These two functions of capacity can be used to find the efficiency and utilization. These are calculated by the formulas below: Efficiency = Actual Output/ Effective Capacity x 100% Utilization = Actual Output/ Design Capacity x 100% Capacity refers to a system’s potential for producing goods or delivering services over a specified time interval. Capacity planning involves long-term and short term considerations. Long-term considerations relate to the overall level of capacity; short-term considerations relate to variations in capacity requirements due to seasonal, random, and irregular fluctuations in demand. Excess capacity arises when actual production is less than what is achievable or optimal for a firm. This often means that the demand in the market for the product is below what the firm could potentially supply to the market. Excess capacity is inefficient and will cause manufacturers to incur extra costs or lose market share. Capacity can be broken down in two categories: Design Capacity and Effective Capacity: refers to the maximum designed service capacity or output rate. Effective capacity is design capacity minus personal and other allowances. Product and service factors effect capacity tremendously. Chapter 5 focuses on capacity planning for products and services. Capacity is the ability of a systems potential for producing goods or delivering services over a specific time interval. The capacity decisions within a company are very important because they help determine the limit of output and provide a major insight to determining operating costs. Basic decisions about capacity often have long term consequences and this chapter explains the ramifications of those choices. When considering capacity planning within a company, three key inputs should be considered. The three inputs are the kind of capacity to be determined, how much of the products will be needed, and when will the product be needed. The most important concept of capacity planning is to find a medium between long term supply and capabilities of an organization and the predicted level of long term demand. Organizations also have to plan for actual changes in capacity, changes in consumer wants and demand, technology and even the environment. When evaluating alternatives in capacity planning, managers have to consider qualitative and quantitative aspects of the business. These aspects involve economic factors, public opinions, personal preferences of managers. This chapter describes capacity planning as a key factor in designing systems. The capacity decision is strategic and long-term in nature. Capacity planning is described as matching the capabilities of an organization with the predicted level of future demand. Many organizations become involved with capacity planning due to changes in demand, technology, the environment, etc. Organizations have capacities or limits that their system can handle. Three key
inputs to capacity planning: Defining And Measuring Capacity Determinants of Effective Capacity
The most important parts of effective capacity are process and human factors. Process factors must be efficient and must operate smoothly, if not the rate of output will dramatically decrease. Human factors must be trained well and have experience, they must be motivated and have a low absenteeism and labor turnover. In resolving constraint issues, all possible alternative solutions must be evaluated. This is possible by using CVP analysis and the Break-Even Point formula. Steps in the Capacity Planning Process Questions: 2. The capacity planning process DOES NOT include which of the following? 3. All of the following are true of Capacity decisions except: 4. Which of the following industries measure capacity? 5. Which of the following describes the initial cost of an investment? 6) Which statement best describes a constraint of capacity planning? 7) What are the three primary strategies in capacity planning? 8) Which of the following is NOT a determinant of effective capacity planning? 9) What are the major difference between design capacity and effective capacity? 10)
Which answer(s) defines why capacity decisions are important? 11) When would a company incorporate a capacity cushion? a. when
demand is certain 12) Which of the following is a reason a company would want to outsource? 13) What is the evidence of an unbalanced
system? 14) At the break even point… 15) Dis-economies of scale happen when… 16) Reasons for strategic capacity planning include all of the following except : 17) Strategic capacity planning for services differs from that
for goods due to: 18) Relevant criteria in determining whether to outsource production include: a) Location 19) In dis-economies of scale, average unit costs after the optimal level are: 20) Which of the following assumptions must be satisfied in order to use Cost Volume Analysis? 21) Which of the following is NOT a primary capacity strategy? 22) Which is an important factor in planning service capacity? 23)The maximum designed service capacity or output rate is known as? 24) Given the following
information, compute the efficiency: Effective capacity = 40 trucks per day, Actual output = 36 trucks per day 25) Which of the following are steps in the capacity planning process? 26) Which of these are NOT determinants of effective capacity? 27) What is a constraint? 28) Which
assumptions must be satisfied in order for cost-volume analysis to be a valuable tool? 29) What is the correct formula for the break even point in units? 30) What is the best way to measure capacity for a steel mill? 31) What is the first step in the capacity planning process? 32) Which of these is a determinant of effective capacity? 33) What is the first step in strategy formulation? 34) When is it best to use simulation? 35) Decision theory is best used in which of the following? 36) What is capacity? I. The upper limit or ceiling on the load that an operating unit can handle. a.) I and II 37) What is the difference between efficiency and utilization? a.) Efficiency is the ratio of actual output to effective capacity, while capacity utilization is the ratio of actual output to design capacity. 38) Find the design capacity when utilization = 72 and actual output = 36 trucks per day. a.) 35 trucks per day 39) An operation in a sequence of operations whose capacity is lower than that of the other operations is known as: a.) Effective Capacity 40) Which of the following is NOT one of the five steps used to resolve constraint issues: a.) Identify the most pressing constraint.
41. Use the information above to answer this question. If the company uses Maxi-min Criterion to choose the best alternative, what would be the best choice for this company? 42. What is Capacity cushion? If utilization is 38%.
43. Use the information in the table to answer this question. Note: department is working one 8-hour shift 250 days a year. How many machines would be needed to handle the required volume? (Round your answer to the whole number) Based on the information below answer the following Questions 44-47. The owner of Cookies Inc., Zoya, is contemplating adding a new line of cookies, which require leasing for a monthly payment of $4,000. Variable costs would be $2 per cookie, and cookies retail price for $6 each. 44. How many cookies must be sold in order to break-even? a) 1000 cookies/month 45. What would be the profit (loss) if 900 cookies are made and sold in a month? a) 400 profit 46. How many cookies must be sold to realize a profit of $10,000? a) 3500 cookies 47. If 2,500 cookies can be sold, and a profit is $8,000, what price should be charged per cookie? a) $7.00
Variable Cots is $12 per unit, and revenue is $42 per unit. Use the table above to answer the following Questions 8-10. 48. Determine the break-even point for range (0 to 300). a) 400 units 49. Determine the break even point for range (301 to 600). a) 500 units 50.
If projected annual demand is between 580 and 650 units, how many machines should the manager purchase. If break-even point for 51) If the output rate is less than the optimal level, increasing the output rate results in decreasing average unit costs according to: 52) If: Design capacity= 60 trucks per day, effective capacity = 40 trucks per day, actual output = 36 trucks per day, compute the efficiency: a) 20% 54) What is capacity cushion? a) Extra amount of capacity intended to offset uncertainty in demand 55) What do long term considerations relate to? a) demand 56) What are the three primary strategies of a strategy formulation? a. leading, following, and concluding When evaluating capacity managers need to consider both resource inputs and product output?When evaluating capacity, managers need to consider both resource inputs and product outputs. Capacity can be defined as the amount of available resource inputs relative to requirements for output over a particular period of time. The capacity utilization rate is found by dividing best operating level by capacity used.
When adding or decreasing capacity three important items should be considered?Many issues must be considered when adding or decreasing capacity. Three important ones are maintaining system balance, frequency of capacity additions or reductions, and the use of external capacity.
What are the two strategies an organization can use when adding in house capacity is not cost effective?What are the two strategies an organization can use when adding in-house capacity is not cost effective? Outsourcing or shared capacity. Insourcing or shared capacity.
What is the correct definition of the capacity of a resource?Capacity, in the context of resource capacity as it pertains to project management, is the amount of time a resource or group of resources is available for productive work in any given time frame.
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