Strategic capacity planning

1. Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.

2. SERVICE CAPACITY
The maximum level of output of services
that a given system can potentially produce
over a set period of time.
Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.

3. 3 Important factors in Planning
Service Capacity
Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.
1. The need to be near the customer
• capacity and location are closely tied
2. The inability to store services
• capacity must be matched with timing of
demand
3. The degree of volatility of demand
• peak demand periods

4.  Pricing,
 Promotions
 Discounts
 Similar tactics
Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.

5. MAKE OR BUY?
Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.
• obtain a good or
service from an
external providerOutsource
• produce a good or
provide a service
itself
In-House

6. Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.
Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk

7. Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.
Design flexibility
into systems
• Provisions for
future expansion
in the original
design.
Take stage of life
cycle into account
• Capacity
requirements are
often closely
linked to the
stage of the life
cycle that a
product or
service is in.
Take a “big
picture” approach
to capacity
changes
• consider how
parts of the
system
interrelated
• Bottleneck
Operation

10. Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.
Prepare to deal
with capacity
“chunks”
• no machine
comes in
continuous
capacities.
Attempt to smooth
out capacity
requirements
• unevenness
in capacity
requirements
also can
create certain
problems.
Identify the
optimal operating
level
• Production
units typically
have an ideal
or optimal
level of
operation in
terms of unit
cost of
output.
Choose a strategy
if expansion is
involved
• Consider
whether
incremental
expansion or
single step is
more
appropriate.

11. Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.
As quantity of production increases from Q to Q2, the average cost of
each unit decreases from C to C1.
The cost advantage that arises with increased output of a product.

12. Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.
Fixed costs are
spread over
more units,
reducing the
fixed cost per
unit.
Construction
costs increase
at a decreasing
rate with
respect to the
size of the
facility to be
built.
Processing
costs
decreases as
output rates
increase
because
operations
become more
standardized,
which reduces
unit costs.
Reasons
for
economies
of scale

13. Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.
An economic concept referring to a situation in which economies of
scale no longer function for a firm. Rather than experiencing
continued decreasing costs per increase in output, firms see an
increase in marginal cost when output is increased.
The rising part of the long-run average cost curve illustrates the effect
of diseconomies of scale. Beyond Q1 (ideal firm size), additional
production will increase per-unit costs.

14. Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.
Reasons for
diseconomies
of scale
Distribution costs
increase due to
traffic congestion
and shipping from
one large
centralized facility
instead of several
smaller,
decentralized
facilities.
Complexity
increases costs;
control and
communication
become more
problematic.
Inflexibility can
be an issue.
Additional levels of
bureaucracy exist,
slowing decision
making and
approvals for
changes.

15. Source: Operations Management by Stevenson, W. (2007). Boston: Mc
Graw Hill.
1. Competitive pressures
2. Market opportunities
3. Costs of funds
4. Disruption of operations
5. Training requirements
6. Availability of funds
Factors:
Choose a strategy if expansion is
involved