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An operations capacity dictates its potential level of productive activity. It is, the maximum level of value-added activity over a period of time that the operation can achieve under normal conditions.
The capacity strategy of an operation defines its overall scale, the number and size of different sites between which its capacity is distributed, the specific activities allocated to each site and the location of each site.
Capacity Strategy
Configuring Capacity
Type of Capacity
Location of Capacity
Timing of Change
Magnitude of Change
Utilization and efficiency measures for two divisions of a food processing company
Ice Cream Division
Efficiency = Actual output Effective capacity = 90.08% Avoidable Loss 410 hrs Actual Output 3724 hrs
= 4622 5437
Utilization
Utilization
Years Months
How much capacity do we need in total? How should the capacity be distributed? Where should the capacity be located? To what extent do we keep capacity level fluctuate capacity levels? Should we change staffing levels as demand changes? Should we subcontract off-load demand?
Months Weeks
Business site
Contd .
Level Time - Scale Decisions concern provision of . . . Individual staff within the operation Loading of individual facilities Span of decisions Starting point of decision Key questions
WeeksHours Minutes
Site Department
Which resources are to be allocated to what tasks? When should activities be loaded on individual resources?
OPERATIONS RESOURCES
Economies of scale Flexibility of capacity provisions
Unit Costs
Total cost = Fixes Cost + variable cost * Demand Unit cost = Total Cost / output For example, the theoretical capacity in Figure was based on an assumption that the operation would be working 112 hours a week (14 shifts a week out of a possible 21 shifts a week) whereas the operation is theoretically available168 hours a week. Utilising some of this unused time for production will help to spread further the fixed costs of the operation but could also incur extra costs. For example, overtime payments and shift premiums together with incrementally higher energy bills may be incurred after a certain level of output. There may also be less obvious costs of operating above nominal capacity levels.
Contd
Long periods of overtime may reduce productivity levels, reduced or delayed maintenance time may increase the chances of breakdown, operating facilities and equipment at a higher rate or for longer periods may also expose problems which hitherto lay dormant. These diseconomies of over-using capacity can have the effect of increasing unit costs above a certain level of output. However, all the fixed costs are not usually incurred at one time at the start of operations. Rather they occur at many points as volume increases. Operations managers often have some discretion as to where these fixed-cost breaks will occur. The factors that go together to reduce costs as volume increases are often called economies of scale. Those that work to increase unit costs for increased output beyond a certain volume are called diseconomies of scale.
In practice Unit costs are are capable of being extended beyond nominal capacity;
The alternative is to build a fully equipped facility of half the capacity. A further identical capacity increment would then beadded as required. Although this latter strategy requires a lower initial cash outflow, it shows a lower cumulative cash flow in the longer term.
Expanding physical capacity in advance of effective capacity can bring greater returns in the longer term
CASE
Suppose a company which stores and distributes books to book shops is considering its capacity strategy. Currently in its European market it has three distribution centres, one in the UK, one in France and one in Germany. The UK depot looks after the UK and Ireland, the French depot looks after France, Spain, Portugal and Belgium, and the German depot looks after the rest of Europe. The consultants decide to simulate the alternative operations in order to estimate (a) the cost of running the depots (this includes fixed costs such as rent and local taxes, heating, wages, security, and working capital charges for the inventory, etc.),
Results
By moving to one large site it can save 9.1 million per year (the savings on depot costs easily outweighing the increase in transportation costs). Yet, delivery times will increase on average by 1.4 days. Alternatively, moving to six smaller sites would increase costs by 9.3 million per year, yet gives what looks like a significant improvement in delivery time of 2.5 days.
In practice, however, the decision is probably more sensibly approached by presenting a number of questions to the companys managers.
Is an increase in average delivery time from 6.3 to 7.7 days likely to result in losses of business greater than the 9.1 million savings in moving to a large site? Is the increase in business which may be gained from a reduction in delivery time from 6.3 days to 3.8 days likely to compensate for the 9.3 million extra cost of moving to six smaller sites?
Are either of these alternative positions likely to be superior to its existing profitability?
One final point: In evaluating the sizes and number of sites in any operation, it is not just the increase in profitability which may result from a change in configuration that needs to be considered, it is whether that increase in profitability is worth the costs of making the change. Presumably, either option will involve this company in not only capital expenditure, but also a great deal of management effort and disruption to its existing business. It may be that these costs and risks outweigh any increase in profitability.
Capacity Change
Planning changes easier if it were not for two characteristics of capacity:
lead-time economies of scale.
If capacity could be introduced with zero delay between the decision to expand and the capacity coming on stream, an operation could wait until demand clearly warranted the change. Deciding to Change capacity inevitably involves some degree of risk, but so does delaying the Decision leading to more problems This means that, when changing capacity levels, there is pressure to make the change big enough to exploit scale economies Capacity by too little may mean Opportunity risks of tying the operation in to small, non-economic units of capacity. Put both long lead-times and signicant economies of scale together and capacity Change decisions become particularly risky.
OPERATIONS RESOURCES
MARKET REQUIREMENTS
Uncertainty of future demand Required level of service
Economies of scale
(a) Capacity-leading and capacity-lagging strategies; (b) smoothing with inventory means using the excess capacity of one period to produce inventory which can be used to supply the under-capacity period
The advantages and disadvantages of pure leading, pure lagging and smoothing with inventories strategies of capacity timing
Capacity plans for meeting demand using either 800- or 400-unit capacity plants; (b) smaller-scale capacity increments allow the capacity plan to be adjusted to accommodate changes in demand
Resource costs Land and facilities investment OPERATIONS RESOURCES Resource availability Community factors Location of sites
Labour
Energy
history of labour relations, absenteeism, productivity, etc environmental restrictions and waste disposal
Resource Cost