Chapter 8: Capacity Planning

Question 1

Define capacity

Answer 1

Capacity is the maximum output level an organization can sustain to provide its products for services. It is often referred to as the ceiling that an organization must not exceed to remain profitable. Capacity is never constant it changes according to demand.

Question 2

Organizations must manage capacity to ensure that _____

Answer 2

Resources are used optimally to meet demand and thereby ensure customer satisfaction

Question 3

Name the factors that are important in managing capacity

Answer 3

-flexibility
-goods and service quality
-income
-supply reliability
-operating capital
-costs
-reaction time to consumer demand

Question 4

Explain economy of scale

Answer 4

An economy of scale is the proportionate saving in costs an organization makes by an increased level of production

Question 5

Explain fixed cost

Answer 5

Cost that do not change with production volume, for example costs like rent, insurance and overheads

Question 6

Explain variable costs

Answer 6

Cost that change with production volume, for example cost like material, labor and energy

Question 7

What are the reasons for the occurrence of economies of scale

Answer 7

1. Learning by employees
2. Fixed cost allocation
3. Decrease in purchasing costs
4. The cost incurred for enlarging facilities

Question 8

Explain diseconomies of scale

Answer 8

Diseconomies of scale occur when a business grows so large that the costs per unit increase

Question 9

What are the reasons for the occurrence of diseconomies of scale

Answer 9

1. difficulties of managing a larger workforce
2. protracted decision making process

Question 10

Explain capacity planning

Answer 10

It is a long-term decision that establishes an organizations overall level of resources over a predetermined time period. This decision affects production lead time, customer responsiveness, operating costs and the organizations ability to remain competitive in a market

Question 11

What are the time periods under strategic capacity planning

Answer 11

• short-term: in the short-term the length varies from one day to 30 days
• medium-term: planning can be undertaken on a quarterly or monthly basis, the time period for this planning can be between 6 and 18 months
• long-term: this time period is longer than one year

Question 12

Capacity should be stated in terms of ____

Answer 12

The number of units produced by the organization, for example capacity can be stated in terms of the number of each model that is produced by a vehicle manufacturer

Question 13

Name the types of capacity measurement

Answer 13

1. Availability - considers the events that stop planned production long enough for a reason to be found (typically several minutes)
2. Performance - ideal cycle time is the fastest cycle time the method can accomplish under the best circumstances.
3. Quality - considers manufactured parts that do not comply with quality standards, as well as pieces that need rework
4. Overall equipment effectiveness formula - all losses are taken into account which results in a measure of truly productive manufacturing time

Question 14

Explain capacity efficiency

Answer 14

It is the ratio of production output to effective capacity. It is a measure of effective management in utilizing effective capacity

Question 15

Explain utilization

Answer 15

It is the ratio between the expected capacity of an organization and its design capacity

Question 16

What are the factors that influence effective capacity

Answer 16

• facility issues
• goods and services issues
• process and operational
• employee issues

Question 17

Describe the critical capacity decisions (pg 207-209)

Question 18

Explain capacity planning

Answer 18

It is a long-term decision that establishes an organizations overall level of resources over a predetermined time.

Question 19

Explain the theory of constraints

Answer 19

TOC states that any system contains a choke point that prevented from achieving its goals. In operations this constrained is known as a bottleneck - it is a point of congestion in the production process

Question 20

What are the five steps of theory of constraints

Answer 20

• step one: identify the constraint - every constraint in the process must be clearly identified, management and employees will they know exactly what the obstacles are
• step two: exploit the constraint - as soon as the constraints are identified strategies must be employed to minimize the effect of the bottleneck on their entire process
• step three: subordinate and synchronize to the constraint - the available assets must be subordinated to synchronize the operations to produce at the rate of the bottleneck operation. decisions taken to exploit the throughput rate are directed by step two
• step four: elevate the process of constraint - the capability of a system or process must be adjusted to the pace of the bottleneck
• step five: repeat the process - when the bottleneck constraint has been scheduled the process must be repeated to adjust the remaining operations to align with the bottle neck

Question 21

_____ can be tangible or non-tangible

Answer 21

Constraints

Question 22

Explain the difference between tangible and non-tangible constraints

Answer 22

Tangible constraints can be classified as systems, processes, labour, raw materials, equipment and machines. Non-tangible constraints can be training procedures and drive.

Question 23

There are three main measurable categories through which profitability can be measured, name them

Answer 23

1. Throughput rate
2. Inventory
3. Operating expenses

Question 24

There are three main measurable categories through which profitability can be measured, name them

Answer 24

1. Throughput rate
2. Inventory
3. Operating expenses

Question 25

What are constraints that limit the throughput rate

Answer 25

• a balance should be achieved in the process. Therefore the flow of work through the process must be balanced, rather than the capacity
• it is counterproductive to have a production batch and a transfer batch of equal size
• time lost in the bottle neck operation is time lost throughout the process, this time cannot be recouped. The throughput rate will suffer as a result
• the rate of throughput and the amount of inventory within a process are dictated by the bottle neck operation
• bottlenecks influence the throughput rate

Question 26

What are barriers to implementing the theory of constraints

Answer 26

• the principles of the organization are ignored
• the management Concepts in an organization are neglected
• the way processes perform after implementation is not measured
• prescribed and unofficial procedures of an organization and never addressed

Question 27

What is a drum-buffer-rope

Answer 27

DBR is a method of synchronizing the production of goods to the constraint, while minimizing inventory and work in process. the utilization of DBR is regulated by the five steps of the theory of constraints

Question 28

_____ would be the root of bottlenecks in the production system

Answer 28

Capacity-constrained resources (CCR)

Question 29

What are the characteristics of a bottle neck machine or operation

Answer 29

• there is a higher utilization rate of resources waiting to be processed at the bottleneck operation
• more work in progress accumulate before the bottleneck operation than at the proceeding machines or operations
• fewer interruptions occur due to material shortages at the bottleneck operation than at non-bottleneck operations
• the bottleneck operation creates blockages to upstream operations as well as starvation at the downstream operations
• the bottleneck operations effective processing time is lower than the non-bottleneck operations

Question 30

The _____ system is an extension of the theory of constraints approach

Answer 30

Optimized production technology (OPT)

Question 31

The Drum buffer rope system can be used in _____ and _____

Answer 31

Job shops and repetitive production systems

Question 32

What questions must be considered before a decision can be taken on a capacity plan

Answer 32

• which option is the most economical and realistic
• what will the cost of the capacity plan be
• what is the lead time for the chosen option
• is the plan well suited to the current operations within the organization

Question 33

Explain the break-even point (pg 224)

Answer 33

This methodology computes a point at which income (revenue) and cost are equal, this can be in monetary values or units produced.

Formula: P * X = FC + VC * X

Question 34

What is required to compute the break even point

Answer 34

• fixed costs: an organization will always incur this type of cost irrespective of units produced, these costs include rent, insurance costs, and interest to be paid
• variable costs: this type of cost varies significantly with the quantity of product produced by the organization, the more units produced the higher the variable costs. the two main costs that contribute towards variable costs are labor and material costs
• selling price: this is what the customer pays for a product