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CHAPTER 5 STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND SERVICES Teaching Notes Capacity is an upper bound on the load that a facility or a plant can serve or manufacture. We measure the capacity of a plant, machine department, worker, hospital, etc., either in terms of output (number of units or number of pounds manufactured) or in terms of input (number of machine hours or machines needed to satisfy demand). Capacity planning refers to the activities of the firm in determining the capacity of a plant or a facility in terms of equipment, machines, space, workers and processes based on the resource constraints of the facility. In other words, a major function of capacity planning is to match the capacity of the machine or facility with the demand for the products of the firm. Capacity planning can be classified into three planning horizons: 1. Long range 2. Medium range 3. Short range The amount of time covered by each of the above planning horizons can vary from industry to industry. Therefore, the lines of demarcation between the three different levels of planning horizons can be very imprecise. Nevertheless, the long range planning generally considers planning horizons of one year or longer. A time period of one year or longer is needed to provide sufficient time to build a new facility, to expand the existing facility or to move to a new facility due to forecasted changes in demand. Medium range capacity planning horizon ranges approximately from one month to six months. At this level of planning, decisions or activities include acquisition of a major piece of machinery and subcontracting. Short range planning horizon covers capacity planning activities on a daily or a weekly basis and are generated as a result of disaggregation of the long or medium range capacity plans. These activities include machine loading and detailed production scheduling. The main quantitative technique covered is cost-volume analysis. It may be skipped or may need only light review if students have had it in another course. Answers to Discussion and Review Questions 1. Design capacity is the maximum possible output. Effective capacity is the maximum output given product mix, scheduling realities, machine maintenance requirements, and so on. 2. (See Table 5–3.) 3. Long-term considerations related to the overall level of capacity, while short-term considerations related to variations in capacity requirements caused by seasonality, randomness, and so on. 4. a. Annual seasonality in demand for campgrounds, Christmas trees, Mother’s Day cards, snow skis, lawn and garden equipment, snow tires. Instructor’s Manual, Chapter 5 81
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b. Monthly seasonal patterns are often created by welfare and social security checks being sent out and deposited in banks or increased spending, demand for examinations and registrations at motor vehicle bureaus, subscription renewals and delinquent payment notices. c.
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