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1. Home 2. Ch. 1 Introduction 3. Ch. 2 Strategy and Productivity 4. Ch. 3 Forecasting 5. Ch. 4 Product and Service Design 6. Ch. 5 Strategic Capacity Planning for Products and Services 7. Ch. 5s Decision Making 8. Ch. 6 Process Selection and Facility Layout 9. Ch. 7 Design of Work Systems 10. Ch. 8 Location Planning and Analysis 11. Ch. 8s Transportation Model 12. Ch. 9 Management of Quality 13. Ch.10 Quality Control 14. Ch.11 Supply Chain Management 15. Ch.12 Inventory Managementtheir composite 16. Ch.13 Aggregate Planning 17. Ch.14 MRP and ERP 18. Ch.15 Lean Operations 19. Ch.17 Project Management 20. Chap11 pages 517-521 21. Pages539-540 22. Summary for Chapter 10

Ch. 5 Strategic Capacity Planning for Products and Services

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Chapter 5 This chapter examines how important strategic capacity planning is for products and services. The overall objective of s production capabilities meet demand. Capacity needs include equipment, space, and employee skills. If production capa resources, and customer loss may result. It is important to note that capacity planning has many long term concerns giv

Managers should recognize the broader effects capacity decisions have on the entire organization. Common strategies meet expected demand, and following capacity, where companies wait for demand increases before expanding capab incremental capacity over time to meet demand.

Finally, The two most useful functions of capacity planning are design capacity and effective capacity. Design capacity rate and the effective capacity is the design capacity minus personal and other allowances. These two functions of cap are calculated by the formulas below: Efficiency = Actual Output/ Effective Capacity x 100% Utilization = Actual Output/ Design Capacity x 100% -Chapter 5 Strategic Capacity Planning for Products and Services

Capacity refers to a system's potential for producing goods or delivering services over a specified time interval. Capacity Long-term considerations relate to the overall level of capacity; short-term considerations relate to variations in capacity fluctuations in demand.

Excess capacity arises when actual production is less than what is achievable or optimal for a firm. This often means th firm could potentially supply to the market. Excess capacity is inefficient and will cause manufacturers to incur extra cos categories: Design Capacity and Effective Capacity: refers to the maximum designed service capacity or output rate. Ef allowances. Product and service factors effect capacity tremendously.

Chapter 5 focuses on capacity planning for products and services. Capacity is the ability of a systems potential for produ interval. The capacity decisions within a company are very important because they help determine the limit of output an Basic decisions about capacity often have long term consequences and this chapter explains the ramifications of those company, three key inputs should be considered. The three inputs are the kind of capacity to be determined, how much needed.

The most important concept of capacity planning is to find a medium between long term supply and capabilities of an or Organizations also have to plan for actual changes in capacity, changes in consumer wants and demand, technology an capacity planning, managers have to consider qualitative and quantitative aspects of the business. These aspects involv managers.

This chapter describes capacity planning as a key factor in designing systems. The capacity decision is strategic and lo matching the capabilities of an organization with the predicted level of future demand. Many organizations become invo technology, the environment, etc. Organizations have capacities or limits that their system can handle. Three key inputs to capacity planning: 1. The kind of capacity that will be needed 2. How much capacity will be needed 3. When will it be needed *Accurate forecasts are critical to the planning process

Defining And Measuring Capacity When selecting a measure of capacity, it is best to choose one that doesn't need updating. When dealing with more tha product. For example, the capacity of a firm is to either produce 100 microwaves or 75 refrigerators. This is less confusi

of measuring capacity is by referring to the availability of inputs. Note that one specific measure of capacity can't be used i hand. Determinants of Effective Capacity

Facilities: The size and provision for expansion are key in the design of facilities. Other facility factors include lo labor supply, energy sources). The layout of the work area can determine how smoothly work can be performed

Product and Service Factors: The more uniform the output, the more opportunities there are for standardizatio

Process Factors: Quantity capability is an important determinant of capacity, but so is output quality. If the qua because of need of inspection and rework activities. Process improvements that increase quality and productivi consider is the time it takes to change over equipment settings for different products or services.

Human Factors: the tasks that are needed in certain jobs, the array of activities involved and the training, skill, potential and actual output. Employee motivation, absenteeism, and labor turnover all affect the output rate as w

Policy Factors: Management policy can affect capacity by allowing or not allowing capacity options such as ov

Operational Factors: Scheduling problems may occur when an organization has differences in equipment cap job requirements. Other areas of impact on effective capacity include inventory stocking decisions, late deliverie materials and parts, and quality inspection and control procedures.

Supply Chain Factors: Questions include: What impact will the changes have on suppliers, warehousing, trans these elements of the supply chain be able to handle the increase? If capacity is to be decreased, what impact chain? Inadequate planning can be a major limiting determining of effective capacity.

External Factors: Minimum quality and performance standards can restrict management's options for increasin

The most important parts of effective capacity are process and human factors. Process factors must be efficient and mu decrease. Human factors must be trained well and have experience, they must be motivated and have a low absenteeis possible alternative solutions must be evaluated. This is possible by using CVP analysis and the Break-Even Point form

Steps in the Capacity Planning Process 1. Estimate future capacity requirements 2. Evaluate existing capacity and facilities and identify gaps 3. Identify alternatives for meeting requirements 4. Conduct financial analyses of each alternative 5. Assess key qualitative issues for each alternative 6. Select the alternative to pursue that will be best in the long term 7. Implement the selected alternative 8. Monitor results Questions: 1. All of the following factors are part of determining effective capacity except: a. Human b. External c. Facility d. Design e. all of the above are factors answer:d design factors...page 181 2. The capacity planning process DOES NOT include which of the following?

a. Estimate future requirements b. Implement selected alternative c. Access key quantitative issues d. Identify alternatives e. Both a & d answer:c page 183 3. All of the following are true of Capacity decisions except: a. impact the ability of the organization to meet future demands b. affect operating costs c. are a major determinant of initial cost d. are a major determinant of variable cost e. often involve long term commitment of resources. answer: d 4. Which of the following industries measure capacity? a. Farming b. Theater c. Retail Sales d. Hospital e. All of the above answer e. page 180 5. Which of the following describes the initial cost of an investment? a. Internal rate of return b. proceeds c. Present value d. cash flow e. Both a & d answer: c. page 196 6) Which statement best describes a constraint of capacity planning? a. Facilitates the performance of a process or system in achieving its goal b. Limits the performance of a process or system in achieving its goal c. Enhances the performance of a process or system in achieving its goal d. Excels the performance of a process or a system in achieving its goal. e. Maximizes the performance of a process or a system in achieving its goal Answer: B answer on page 201 in the margin 7) What are the three primary strategies in capacity planning? a. growing,leading, tracking b. leading, moving, tracking c. leading, following, tracking d. tracking, analyzing, leading e. synthesizing, leading, tracking Answer: C found on page 191 8) Which of the following is NOT a determinant of effective capacity planning? a. supply chain b. external forces c. human considerations

d. operational factors e. all the above are determinants of effective capacity planning Answer: E all the above, answer found on page 189 9) What are the major difference between design capacity and effective capacity? a. the size of the facility vs the effectiveness of the facility b. the design and aesthetics of the facility vs. the size of the facility c. the design and aesthetics of the facility vs. the effectiveness of the facility d. the actual amount of output vs. the potential maximum amount of output e. there is no difference Answer: D actual output vs. potential maximum output 10) Which answer(s) defines why capacity decisions are important? a. capacity decisions have a real impact on whether or not a company will meet future demands b. capacity decisions affect operating costs c. capacity decisions are generally a major determinant of initial cost d. capacity decisions affect competitiveness and management e. all of the above are components of capacity decision importance Answer: E all of the above 11) When would a company incorporate a capacity cushion? a. when demand is certain b. when demand is uncertain c. when the company has very standard products d. when the company sales are declining e. when the company sales are increasing Answer: B demand is uncertain (192) 12) Which of the following is a reason a company would want to outsource? a. The organization does not have the necessary skills b. The organization has unique quality requirements c. Demand is high and steady e. none of the above answer: E none of the above (195) 13) What is the evidence of an unbalanced system? a. system is flexible b. stage of life cycle is taken into account c. capacity requirements are smoothed out d. a bottleneck operation exists e. the company is in the growth phase Answer: E bottleneck operation exists (197) 14) At the break even point a.TC=TR b. The firm is obtaining a profit c. TFC=TVC d. Volume of output is TC > TR e. none of the above answer: (A) total cost and total revenue are equal (203)

15) Dis-economies of scale happen when a. the output rate is less than the optimal level b. the firm should increase the output rate in order to decrease average unit costs c. the output rate is more than the optimal level d. none of the above e. both a and b answer: C the output rate is more than the optimal level (200) 16) Reasons for strategic capacity planning include all of the following except : a) Changes in the environment b) Changes in technology c) Changes in demand d) Strengths and weaknesses e) Opportunities and threats D. Strengths and weaknesses (pg 185) 17) Strategic capacity planning for services differs from that for goods due to: a) The inability to store services in advance b) Demand volatility c) Degree of customization d) The need for customer convenience e) All of the above E. All of the above (pg 194) 18) Relevant criteria in determining whether to outsource production include: a) Location b) Quality c) Current in-house capacity d) Costs e) All of the above E. All of the above (pg 195) 19) In dis-economies of scale, average unit costs after the optimal level are: a) Larger b) Smaller c) Lowest d) Constant e) None of the above A. Larger (pg 200) 20) Which of the following assumptions must be satisfied in order to use Cost Volume Analysis? a) Variable cost per unit is greater than revenue per unit b) Variable cost per unit is constant c) More than one product in involved d) Fixed costs change with volume e) Revenue per unit changes with volume B. Variable cost per unit is constant (pg 205)

21) Which of the following is NOT a primary capacity strategy? a) continuous b) leading c) following d) tracking e) both b and d Answer: a, page 191 22) Which is an important factor in planning service capacity? a) availability of capacity b) the need to be near customers c) the degree of volatility of demand d) both b and c e) none of the above Answer: d, page 194 23)The maximum designed service capacity or output rate is known as? a) capacity cushion b) bottleneck operation c) effective capacity d) design capacity e) both c and d Answer: d, page 188

24) Given the following information, compute the efficiency: Effective capacity = 40 trucks per day, Actual output = 36 tru a) 82% b) 99% c) 90% d) 89.7% e) 54% Answer: c, page 189 25) Which of the following are steps in the capacity planning process? a) estimate future capacity requirements b) conduct financial analysis c) monitor results d) implement the selective alternative e) all of the above Answer: e, page 192 26) Which of these are NOT determinants of effective capacity? a) Facilities b) Process Factors c) Human Factors d) Policy Factors e) All of above are determinants of effective capacity Answer E (page 190) 27) What is a constraint? a) Something that allows a system to perform more effectively and efficiently. b) Something that hinders performance of a system in achieving its goals. c) Something that attempts to smooth out capacity requirements. d) Something that monitors results e) Something that can never be overcome. Answer B (page 201)

28) Which assumptions must be satisfied in order for cost-volume analysis to be a valuable tool? a) Variable cost/unit exceeds revenue/unit b) Everything produced may not be sold c) Only one product involved d) Revenue per unit may change depending on volume e) Variable cost per unit may differ depending on volume Answer C (page 205) 29) What is the correct formula for the break even point in units? a) FC / (Revenue per unit - VC per unit) b) VC/(FC-Revenue) c) Revenue/(VC - FC) d) FC/(VC-Revenue) e) None of the above Answer A (page 204) 30) What is the best way to measure capacity for a steel mill? a) In dollars b) In number of workers c) In the size of the mill d) In tons of steel produced per day e) In number of resources used Answer D (page 188) 31) What is the first step in the capacity planning process? A. Evaluate existing capacity B. Estimate future capacity C. Determine future capacity price D. Select alternative capacity E. Find key quality issues Answer = B. Page 192 32) Which of these is a determinant of effective capacity? A. Facilities B. Product factors C. Human factors D. Operational factors E. All of these Answer = E. Page 190 33) What is the first step in strategy formulation? A. Determine Product/Service B. Formulate policy C. Locate facilities D. Formulate process Order operations Answer = C. Page 191 34) When is it best to use simulation? A. For short tem goals B. For long term goals C. For current goals D. For customer wants E. For what if analysis Answer = E. Page 207

35) Decision theory is best used in which of the following? A. Finance B. Inventory C. Long term analysis D. Consumer demand E. Short term analysis Answer = A. Page 207 36) What is capacity? I. The upper limit or ceiling on the load that an operating unit can handle. II. The lower limit or bottom on the load that an operating unit can handle. III. A systems potential for producing goods or delivering services over a specified time interval. IV. A ceiling on output and a major determinant of operating costs. a.) I and II b.) II and III c.) I, II, and IV d.) I, III, and IV e.) I and IV Answer: D. Found on pages 185, 207 37) What is the difference between efficiency and utilization?

a.) Efficiency is the ratio of actual output to effective capacity, while capacity utilization is the ratio of actual output to des b.) Efficiency is expressed as a percentage, while capacity utilization is not. c.) Efficiency is a measure of system effectiveness, while capacity utilization measures capacity tailored to a situation. d.) Utilization is the ratio of actual output to effective capacity, while efficiency is the ratio of actual output to design capa e.) Utilization is expressed as a percentage, while efficiency is not. Answer: A. Found on page 188 38) Find the design capacity when utilization = 72 and actual output = 36 trucks per day. a.) 35 trucks per day b.) 40 trucks per day c.) 45 trucks per day d.) 50 trucks per day e.) 55 trucks per day Answer: D. Found on page 189 (Utilization = [Actual Output/ Design Capacity] x 100) Therefore: [36/x] x 100 = 72 36 x 100x = 72x 36 = .72x x = 50 39) An operation in a sequence of operations whose capacity is lower than that of the other operations is known as: a.) Effective Capacity b.) Design Capacity c.) Bottleneck Operation d.) Capacity Cushion e.) Effective Operation Answer: C. Found on page 197

40) Which of the following is NOT one of the five steps used to resolve constraint issues: a.) Identify the most pressing constraint. b.) Change the operation to achieve the maximum benefit, given the constraint. c.) Make sure other portions of the process are supportive of the constraint. d.) Explore and evaluate ways to overcome the constraint. e.) Allow the constraint to limit performance when a strategy is expanding. Answer: E. Found on page 201 and 202

Possible Future Demand Alternatives Small Facility Low Moderate $10 $11 12 2 High $11 12 16

Medium Facility 7 Large Facility (3)

41. Use the information above to answer this question. If the company uses Maxi-min Criterion to choose the company? a) Small Facility b) Medium Facility c) Large Facility d) Do Nothing e) They are all incorrect answers. Answer is A found on page 217 (Supplement to Chapter 5) 42. What is Capacity cushion? If utilization is 38%. a) 72% b) 74% c) 12% d) 22% e) 62%
Answer is E found on page The formula is Capacity cushion = 100% - Utilization Product Annual Demand Standard Processing Time per Unit (Hr) Processing Time Needed (Hr) 1 2 300 400 5.00 8.00 1,500 3,200

700

2.00 Total

1,400 6,100

43. Use the information in the table to answer this question. Note: department is working one 8-hour shift 250 handle the required volume? (Round your answer to the whole number) a) 3 machines b) 1 machines c) 5 machines d) 2 machines e) 4 machines Answer is A found on page 194.
Based on the information below answer the following Questions 44-47.

The owner of Cookies Inc., Zoya, is contemplating adding a new line of cookies, which require leasing for a monthly and cookies retail price for $6 each. 44. How many cookies must be sold in order to break-even? a) 1000 cookies/month b) 1200 cookies/moth c) 2100 cookies/moth d) 1100 cookies/moth e) None of the above.

Answer is A found on page 204. FC=$4,000; VC=$2 per cookie: Rev.=$6 per cookie; Q=FC/(Rev-VC); Q=$4,000/($645. What would be the profit (loss) if 900 cookies are made and sold in a month? a) 400 profit b) 400 loss c) 4000 profit d) 4000 loss e) None of the above. Answer is B found on page 204. P = Q(R - v) - FC 46. How many cookies must be sold to realize a profit of $10,000? a) 3500 cookies b) 5300 cookies c) 3000 cookies d) 3200 cookies e) 2300 cookies Answer is A found on page 204. Q=($10,000+$4,000)/($6-$2)=3,500 cookies

47. If 2,500 cookies can be sold, and a profit is $8,000, what price should be charged per cookie? a) $7.00 b) $7.50 c) $6.80 d) $6.50 e) $7.80 Answer is C found on page 204. Profit = Q(R - v) - FC $8,000=2,500(R-$2)-$4,000 $8,000+$4,000=2,500R-$5,000 $17,000=2,500R R=$6.8

Number of Machines 1 2 3

Total Annual Fixed Costs Corresponding Range of Output

$12,00 15,000 24,000

0 to 300 301 to 600 601 to 900

Variable Cots is $12 per unit, and revenue is $42 per unit. Use the table above to answer the following Questions 8-10. 48. Determine the break-even point for range (0 to 300). a) 400 units b) 320 units c) 420 units d) 380 units e) 520 units Answer is A found on page 205. Q=FC/(R-v); 12,000/($42-$12)=400 units. 49. Determine the break even point for range (301 to 600). a) 500 units b) 400 units c) 320 units d) 420 units e) 520 units Answer is A found on page 205.

50. If projected annual demand is between 580 and 650 units, how many machines should the manager purchase. If bre One machine: 400 units Range (0 to 300) Two machines: 500 units Range (301 to 600) Three machines: 800 units Range (601 to 900)

a) 2 machines b) 3 machines c) 1 machine d) a&b both are correct e) None of the above; the manager should do nothing.

Answer is A found on page 205. Comparing the projected range of demand to the two ranges for which a break -even point, you can see that the break-e means that even if demand is at the low end of the range, it would be above the break even point and thus yield a profit projected demand, the volume would still be less than the break-even point for that range, so there would be no profit. T

51) If the output rate is less than the optimal level, increasing the output rate results in decreasing average unit costs ac a) diseconomies of scale b) economies of scale c) capacity cushion d) efficiency e) utilization Answer B (Page 200)

52) If: Design capacity= 60 trucks per day, effective capacity = 40 trucks per day, actual output = 36 trucks per day, com a) 20% b) 30% c) 40% d) 50% e) 90% Answer E (Efficiency=Actual output/effective capacity=36trucks per day/40 trucks per day=90%) (Page 188) 54) What is capacity cushion? a) Extra amount of capacity intended to offset uncertainty in demand b) Estimate in future capacity requirement c) Common demand pattern d) External service or good e) All of the above Answer A (Page 192) 55) What do long term considerations relate to? a) demand b) capacity cushion c) supply d) overall level of capacity requirements e) short term events Answer D (Page 192) 56) What are the three primary strategies of a strategy formulation? a. leading, following, and concluding b. start up, following, and tracking c. leading, following, and tracking

d. start up, leading, and follow up e. leading, processing, concluding answer is c. (found on page 191)
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