capacity decisions

Question 1

what is capacity planning?

Answer 1

• establishing the maximum output rate of a facility
  First level: strategic investments in new facilities and equipment
  -> long-term commitments of expensive resources
  -> risky due to uncertainty in long-term forecasting
  -> purchased in chunks rather than smooth increments
  Second level: short term planning or workforce, inventories

Question 2

why is it important to make sure capacity is at right level?

Answer 2

too little capacity: lost sales, cant fulfill all demands

too big capacity: extra costs, idle machines and workers

Question 3

how to measure capacity (2 most common way)

Answer 3

• companies have different interpretation of what capacity means
• either measured in inputs or outputs
  EX: hospital (input: available beds) (output: number of patients per month)
• design capacity
• effective capacity

Question 4

design capacity vs effective capacity

Answer 4

Design: maximum output rate under ideal conditions (maintained for a short period of time)
Ex: overtime, max use of equipment

Effective: maximum output rate under realistic conditions

Question 5

How to measure the effectiveness of the available capacity use

Answer 5

Measure the capacity utilization: tells us how much of our capacity we are actually using

Utilization (design) = actual output/ design capacity (cant exceed 100%)
Utilization (effective) = actual output/ effective capacity (can exceed 100%, but only for a short time)

Question 6

capacity considerations

Answer 6

• capacity is purchased in discrete chunks
• capacity decisions are long-term and strategic in nature
• acquiring capacity ahead of time will save cost and disruption the long run

Best operating level: the volume of output that results in the lowest average unit cost

Considerations

• economies of scale: average cost of a unit produced decreases when the amount of output is increased
• diseconomies of scale: a condition where the cost of each additional unit made increases

Question 7

how to make capacity planning decisions?

Answer 7

3 steps:

1. identify capacity requirements
   - > qualitative forecasting methods
   - > capacity cushions (additional capacity added to provide flexibility)
   - > position in the market relative to competitors
2. Develop capacity alternatives
   - > do nothing
   - > expand large now
   - > expand small now, with option to add later
3. Evaluate capacity alternatives

Question 8

Evaluating capacity alternatives

Answer 8

Decision trees evaluate interdependent decisions that must be made in a sequence and under uncertainty

• a diagram that models the alternatives being considered and the possible outcomes
• contains decision points, decision alternatives, chance events, outcomes

Question 9

how to build a decision tree

Answer 9

• build decision tree from present to future
• > rectangles are decisions that the company can take
• > circles are chance events that the company has no control over
• > sum of probabilities have to equal 1
• > indicate the outcome associated with every alternative
• Solve the decision tree from future to present
• > At a chance event, compute expected value based on given probabilities
• > in decision node, choose the alternative having the highest expected value

Question 10

location analysis/ best geographic location for new facility

Answer 10

many factors affect the decision
Ex: proximity toc ustomers. trasnportation, source of labor, community attitude, proximity to suppliers
depends on the nature of the firm’s business
- Proximity to suppliers, distributors, customers. Other facilities
- Infrastructure: cost of land, cost of energy, accessibility, room for expansion
- Labor: skills, wage cost, unions, attitude
- Political issues: regulations, subsidies and taxes, trade barriers, trade blocks

Question 11

techniques to choose best location

Answer 11

• Factor rating
  evaluate alternative locations based on a number of factors
  evaluations that are qualitative in nature
  helps structure their opinions relative to the factors that are important
  1. identify dominant factors
  2. assign importance number (must equal 100)
  3. assign a scoring method (1-5)
  4. multiply for each
  5. highest score

- Load distance model 
evaluates alternative locations based on distance 
quantifiable things 
objectove is to reduce the total amount of loads moved weighted by the distance 
1. identify distance 
2. compute load 
3. calculate distance load 
4. lowest number 

• center of gravity
  identifies good set of potential locations in the load distance model
  calculate center of gravity, good starting point to test load distance score
• break-even analysis
  computes the amount of goods that need to sold just to cover costs
  whatever is sold beyond that point is a profit, lower is a loss
  uses fixed and variable costs of each potential location