Chapter 4

Question 1

What are the consequences that result from getting capacity decisions wrong?

Answer 1

• too much capacity -> underutilized capacity and higher costs
• too little capacity -> limited ability to serve customers

Question 2

What is capacity strategy?

Answer 2

capacity - maximum level of value-added activity over a period of time that the operation can achieve under normal conditions

defines overall scale

Question 3

What is the difference between capacity and output?

Answer 3

there may not be sufficeint demand to operate at full capabity
in high-contact operations demand cannot exceed capacity (hairdresser)

Question 4

At what 3 levels are capacity decisions made?

Answer 4

1) strategic level
2) medium-term level
3) short-term level

Question 5

How does an organization decide on an overall level of capacity?

Answer 5

• decisions on initial capacity level cannot be done in isolation from market positioning strategy
• affected by competitors’ actions
• cost and ability to serve are critically affected
• question of time-scale

Question 6

What are the factors influencing the overall level of capacity?

Answer 6

1) Operations resources
1.1 availability of capital
1.2 cost structure of capacity increment
1.3 economies of scale
1.4 flexibility of capacity provision
2) Market requirements
2.1 forecast level of demand
2.2 uncertainty of future demand
2.3 consequences of over/under supply
2.4 changes in future demand

Question 7

What is the cost structure of capacity increment?

Answer 7

The relationship between cost, volume and profit
capacity can only increase by chunks

Question 8

What are diseconomies of scale?

Answer 8

Once you have reached the nominal capacity limit, costs per unit could rise

Question 9

What 2 factors influence capacity?

Answer 9

time & location

Question 10

What are the 3 capacity strategies?

Answer 10

capacity leading strategy
capacity lagging strategy
capacity smoothing strategy

Question 11

What are the benefits/risks of the capacity strategies?

Answer 11

1) leading
+ maximize revenue and customer satisfaction, capacity cushion, low effect of start-up problems
- low utilization, risk of overcapacity, capital spending early
2) lagging
+unit costs minimized, overcapacity problem minimized, capital spending delayed
- reduce revenue and customer satisfaction, no ability to exploit short-term increases in demand, start-up problems
3) smoothing
+ maximized revenue and customer satisfaction, high utilization, low costs, inventory can meet short-term demand surges
- cost of inventory, risk of deterioration & obsolence, not applicable for all operations (services)

Question 12

Why is location relevant when planning capacity strategy?

Answer 12

• can have impact on both investment in resources and market impact
• location is difficult to change
• are made because of changes in demand and changes in supply of input resources

Question 13

What are the factors influencing the location of sites?

Answer 13

1) Operations resources:
1.1resource costs (labor, energy, transport)
1.2 land and facilities investment
1.3 community factors (english speaking location)
2) Market requirements:
2.1 required service level (not willing to drive to get to fast food)
2.2 suitability of site
2.3 image of location