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The formula for the moving average is:Learning Objectives, Capacity Planning

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Production and Operations Management ­MGT613
VU
Lesson 15
After completing discussion on product or service design, organizations end up answering the questions
relating to capacity and demand. Since we have already discussed demand forecasting, we should now
focus on what capacity planning decisions are. We should also try to understand the importance of
capacity.
Capacity decisions are important to all departments of the organization; an accountant would be
interested in collecting cost accounting information in order to ensure that correct capacity expansion
decision is reached. Similarly a financial manager would be interested in performing the financial
analysis of whether the investment decision is justified for a plant or capacity increase. An Information
Technology Manager would end up preparing data bases that would aid the organization again to decide
about the capacity and last but not the least an operations manager would select strategies that would
help the organization achieve the optimum capacity levels to meet the capacity demand.
Learning Objectives
Capacity planning lectures deal with different types of Capacity like Design, Effective; Utilization etc
Quite often the operations manager has to identify various determinants of Effective Capacity. The
manager has to formulate Strategy with respect to Capacity Planning and plans by looking in to
developing Capacity Alternatives and studying Economies of Scale and focusing on Cost Volume
Relationship
Hopefully by completing the lecture on Capacity Planning an Operations Management the students
would be able to:-
Understand, appreciate and explain the importance of capacity planning.
Discuss ways of defining and measuring capacity.
Describe the factors that determine effective capacity alternatives.
Discuss the major considerations related to developing capacity alternatives.
Capacity Planning
Capacity is the upper limit or ceiling on the load (demand for a product or service) that an operating unit
can handle.
An Operations Manager is supposed to identify tactics and formulate a strategy in order to answer the
basic questions with respect to capacity handling. These questions are:
1. What kind of capacity is needed?
2. How much is needed?
3. When is it needed?
This word "Capacity Planning" reached us a day after the tragic and life changing incident of
earthquake of 8th October 2005. We were exposed to the idea of capacity limitation with respect to food,
shelter, medicines and rescue operations. As a consequence we also faced the challenge of planning how
to overcome this shortcoming.
If you could recall in our earlier lectures we talked about Irregular variations caused by unusual
circumstances such as severe weathers, earthquakes, worker strikes, or major change in product
or service. These irregular variations do not capture or reflect the true behavior of a variable and
can distort the overall picture. These should be identified and removed from the data.
There are two uses for forecasts. One is to help the Operations Manager plan the system and the
other one is to help him plan the use of the system.
Planning the system refers to planning long term plans about the type of products or services to
offer, what facilities and equipment to have, where to locate and so on and so forth. Planning
the use of the system relates to short range and intermediate range planning which means
planning inventory workforce resources, planning of purchasing and production activities,
budgeting and scheduling etc.
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Production and Operations Management ­MGT613
VU
Importance of Capacity Decisions
Capacity decisions impacts ability to meet future demands, affects operating costs. These decisions
often act as a major determinant of initial costs, as they involve long-term commitment. These
decisions affect competitiveness and gives ease of management. Capacity Decisions focus on
globalization as it is more complex and impacts long range planning.
Impacts ability to meet future demands. Capacity essentially limits the rate of possible output.
Having capacity to satisfy demand can allow a company of taking advantage of tremendous
opportunities. An international automobile manufacturer of good repute increased its production
by working on its capacity decision after its quality product received a lot more demand than it
was originally anticipated.
Affects operating costs. We already know that estimated or forecasted demand differs from
actual demand, so the ideal concept of capacity matching demand is untrue. Organizations
should be willing to take a critical decision to balance the cost of over and under capacity.
Overcapacity reflects overkill of resources and under capacity shows a weak management
philosophy to make best use of an available market.
Acts as a major determinant of initial costs. It is typical to see that greater the capacity of a
productive unit, greater would be the cost. This does not mean I am advocating a one to one
relationship for higher capacity for production to costs; in fact larger units tend to cost
proportionately less than smaller units. E.g. Pakistan Steel Mill at Karachi is one good example,
where higher costs are misunderstood as the mills capacity is not being fully utilized
Involves long-term commitment. Once long term commitments of resources have been taken,
the difficulty of reversing would cost more. Indicating a capacity increase or decrease for an
organization set up would mean additional costs.
Affects competitiveness. This is very critical, if a firm has an excessive capacity or can quickly
add capacity, which fact may serve as a barrier against entry by other firms.
Affects ease of management. Capacity increase or decrease decisions involves management to
answer the question of operating the organization as well as an increase or decrease in the plant
capacity
Globalization adds complexity. Capacity decision often involves making a decision in a foreign
country which requires the management to know about the political, economic and cultural
issues.
Impacts long range planning.  Capacity decisions extend beyond 18 months and thus get
classified as long term in nature.
Organizations often end up making use of rupees amount in order to show their capacity ceiling this
unfortunately needs a constant updating due to changes in price of raw materials as well as utilities. A
simple way out is to reflect the load or capacity in terms of unit produced but this has the limitation that
its only good for a single unit and fails in case of multiple types , designs of units being produced. A
preferred type of capacity measurement is to identify capacity in terms of availability of input units.e.g.
like hospitals are identified to have a capacity of 200 beds, a workshop by its man-hours and so on and
so forth.
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Table of Contents:
  1. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT
  2. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Decision Making
  3. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Strategy
  4. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Service Delivery System
  5. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Productivity
  6. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:The Decision Process
  7. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Demand Management
  8. Roadmap to the Lecture:Fundamental Types of Forecasts, Finer Classification of Forecasts
  9. Time Series Forecasts:Techniques for Averaging, Simple Moving Average Solution
  10. The formula for the moving average is:Exponential Smoothing Model, Common Nonlinear Trends
  11. The formula for the moving average is:Major factors in design strategy
  12. The formula for the moving average is:Standardization, Mass Customization
  13. The formula for the moving average is:DESIGN STRATEGIES
  14. The formula for the moving average is:Measuring Reliability, AVAILABILITY
  15. The formula for the moving average is:Learning Objectives, Capacity Planning
  16. The formula for the moving average is:Efficiency and Utilization, Evaluating Alternatives
  17. The formula for the moving average is:Evaluating Alternatives, Financial Analysis
  18. PROCESS SELECTION:Types of Operation, Intermittent Processing
  19. PROCESS SELECTION:Basic Layout Types, Advantages of Product Layout
  20. PROCESS SELECTION:Cellular Layouts, Facilities Layouts, Importance of Layout Decisions
  21. DESIGN OF WORK SYSTEMS:Job Design, Specialization, Methods Analysis
  22. LOCATION PLANNING AND ANALYSIS:MANAGING GLOBAL OPERATIONS, Regional Factors
  23. MANAGEMENT OF QUALITY:Dimensions of Quality, Examples of Service Quality
  24. SERVICE QUALITY:Moments of Truth, Perceived Service Quality, Service Gap Analysis
  25. TOTAL QUALITY MANAGEMENT:Determinants of Quality, Responsibility for Quality
  26. TQM QUALITY:Six Sigma Team, PROCESS IMPROVEMENT
  27. QUALITY CONTROL & QUALITY ASSURANCE:INSPECTION, Control Chart
  28. ACCEPTANCE SAMPLING:CHOOSING A PLAN, CONSUMER’S AND PRODUCER’S RISK
  29. AGGREGATE PLANNING:Demand and Capacity Options
  30. AGGREGATE PLANNING:Aggregate Planning Relationships, Master Scheduling
  31. INVENTORY MANAGEMENT:Objective of Inventory Control, Inventory Counting Systems
  32. INVENTORY MANAGEMENT:ABC Classification System, Cycle Counting
  33. INVENTORY MANAGEMENT:Economic Production Quantity Assumptions
  34. INVENTORY MANAGEMENT:Independent and Dependent Demand
  35. INVENTORY MANAGEMENT:Capacity Planning, Manufacturing Resource Planning
  36. JUST IN TIME PRODUCTION SYSTEMS:Organizational and Operational Strategies
  37. JUST IN TIME PRODUCTION SYSTEMS:Operational Benefits, Kanban Formula
  38. JUST IN TIME PRODUCTION SYSTEMS:Secondary Goals, Tiered Supplier Network
  39. SUPPLY CHAIN MANAGEMENT:Logistics, Distribution Requirements Planning
  40. SUPPLY CHAIN MANAGEMENT:Supply Chain Benefits and Drawbacks
  41. SCHEDULING:High-Volume Systems, Load Chart, Hungarian Method
  42. SEQUENCING:Assumptions to Priority Rules, Scheduling Service Operations
  43. PROJECT MANAGEMENT:Project Life Cycle, Work Breakdown Structure
  44. PROJECT MANAGEMENT:Computing Algorithm, Project Crashing, Risk Management
  45. Waiting Lines:Queuing Analysis, System Characteristics, Priority Model