Chapter 8

# Chapter 8 - BUS 370 Chapter 8 Capacity Decisions Donavon...

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BUS 370: Chapter 8 - Capacity Decisions Donavon Favre College of Management North Carolina State University

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Chapter Objectives Be able to: Explain manufacturing and service capacity; identify measures of capacity Explain the difference between theoretical and rated capacity Describe the pros and cons associated with two different capacity strategies: lead and lag Apply a wide variety of analytical tools to capacity decisions, including expected value and break-even analysis, decision trees, waiting line theory, and learning curves 2
Definition of Capacity Definition of Capacity - The capability of a worker, machine, work center, plant or organization to produce output per time period Managerial Question to be answered: Are our company’s resources adequate to meet current or future customer demand? Questions: What happens when a company’s supply can’t meet customer demand (examples - Xbox, iPad, Sold Out Movie, No Seat/2 Hour Wait at a Restaurant). Why do companies run out of capacity? 3

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Jiffy Lube ==> Oil changes per hour Law firm ==> Billable hours College ==> Student hours per semester What happens when a college doesn’t have the right capacity in place? Examples of Capacity Measures 4
Personal Computer Plant – Capacity Considerations Capacity for a PC Assembly Plant: (800 units shift/line)*(No. of lines)*(No. of Shifts) The plant is large enough to have 3 assembly lines and management wants to have a maximum of 2 shifts. What is the theoretical maximum capacity? Could rated capacity be different? Why? Can we increase capacity without adding lines and shifts? How? It costs money to build assembly lines and hire workers. How many assembly lines and shifts for the following levels of demand: 700, 900, 1300, 2500, 4500, 5000? 5

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Theoretical and Rated Capacity Theoretical Capacity - The maximum output capability, allowing for no adjustments for preventive maintenance or unplanned downtime Rated Capacity - The long-term, expected output capability of a resource or system Question: Why would the theoretical and rated capacity be different for lawn care; for airlines? http://www.youtube.com/watch?v=4wp3m1vg06Q Lucy, Lucy, Lucy (I Love Lucy Show) 6
Lead Capacity Strategy Lead Capacity Strategy Definition - A capacity strategy in which capacity is added in anticipation of (before) demand Advantages - Plans for adequate capacity to meet demand, even with high growth; Preempt competitors; can be cheaper and less disruptive Risks – Demand is unpredictable (demand may never materialize; technology is evolving rapidly (your product or service becomes obsolete soon after building the capacity) 7

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Lag Capacity Strategy Lag Capacity Strategy Definition - A capacity strategy in which capacity is added only after demand has materialized – typically a good strategy for mature, cost sensitive products and services Advantages - Reduced risk of overbuilding; greater productivity due to higher utilization levels; ability to put off large investments Risks – Reduced availability of products or services during periods of high demand 8
Capacity Strategies: When and how much?

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## This note was uploaded on 10/27/2011 for the course BUS 370 taught by Professor Favre during the Fall '08 term at N.C. State.

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Chapter 8 - BUS 370 Chapter 8 Capacity Decisions Donavon...

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