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Capacity+Management+lecture+note - Capacity Management A...

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Capacity Management A dictionary definition of capacity is ‘the ability to hold, receive, store or accommodate.” In a general business sense, it is most frequently viewed as the amount of output that a system is capable of achieving over a specific period of time. In a service setting, this might be the number of customers that can be handled between noon and 1:00 P.M. In manufacturing, this might be the number of automobiles that can be produced in a single shift. When looking at capacity, operations managers need to look at both resource inputs and product outputs. The reason is that, for planning purposes, real (or effective) capacity depends on what is to be produced. For example, a firm that makes multiple products inevitably can produce more of one kind than of another with a given level of resource inputs. An operations management view also emphasizes the time dimension of capacity. That is, capacity must also be stated relative to some period of time. This is evidenced in the common distinction drawn between long-range, intermediate-range, and short-range capacity planning. Although there is no one person with the job title ‘capacity manager,” there are several managerial positions charged with the effective use of capacity. Capacity is a relative term; in an operations management context, it may be defined as the amount of resource inputs available relative to output requirements over a particular period of time. Strategic Capacity Planning The objective of strategic capacity planning is to provide an approach for determining the overall capacity level of capital-intensive resources—facilities, equipment, and overall labor force size —that best supports the company’s long-range competitive strategy. The capacity level selected has a critical impact on the firm’s response rate, its cost structure, its inventory policies, and its management and staff support requirements. Capacity Planning Concepts The term capacity implies an attainable rate of output, for example 300 cars per day, but say nothing about how long that rate can be sustained. To avoid this problem, the concept of best operating level is used. This is the level of capacity for which the process was designed and thus is the volume of output at which average unit cost is minimized. Determining this minimum is
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difficult because it involves a complex trade-of between the allocation of fixed overhead costs and the cost of overtime, equipment wear defect rates, and other costs. An important measure is the capacity utilization rate, which reveals how close a firms is to its best operating point (that is, design capacity): Capacity utilization rate =Capacity Used / Best operating level The capacity utilization rate is expressed as a percentage and requires that the numerator and denominator be measured in the same units and time periods (such as machine hour/day, barrels of oil/day, dollar of output/day). Economies and Diseconomies of Scale
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This note was uploaded on 11/05/2010 for the course BUS F370 taught by Professor Tom during the Spring '10 term at Indiana Institute of Technology.

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Capacity+Management+lecture+note - Capacity Management A...

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