1. Issues covered in this chapter
Resource Usage
Issues include:
Quality
Capacity levels
Number of sites
Size of sites
Location
Speed
Performance objectives
Dependability
Market Competitiveness
Flexibility
Cost
Development
and Organization
Capacity (configuration)
Supply Networks
Process Technology
Decision areas
Issues covered in this chapter

2. Issues in capacity strategy
Configuring Capacity
Managing Capacity Change
Overall Level of Capacity
Location of Capacity
Timing of Change
Magnitude of
Change
Location of changed capacity
Type of Capacity
Issues in capacity strategy

3. Ice Cream Division
Canned Food Division
Actual output
Effective capacity
Actual output
Effective capacity
Efficiency =
Efficiency =
3724
4134
4622
5437 = =
90.08% = =
85.01%
Planned Loss
Avoidable Loss
Planned Loss
Avoidable Loss
Total Capacity
Total Capacity
3762 hrs
410 hrs
2459 hrs
815 hrs
7896 hrs
7896 hrs
Effective Capacity
Effective Capacity
Actual Output
Actual Output
4134 hrs
5437 hrs
3724 hrs
3724 hrs
Actual output
Total capacity
Actual output
Total capacity
Utilization =
Utilization =
3724
7896
4622
7896 = =
47.16% = =
58.54%
Utilization and efficiency measures for two divisions of a food processing company

4. Some factors influencing the overall level of capacity
Forecast level of demand
Availability of capital
Cost structure of capacity increment
Changes in future demand
OPERATIONS RESOURCES
Overall level of capacity
MARKET REQUIREMENTS
Uncertainty of future demand
Economies of scale
Flexibility of capacity provisions
Consequences of over/under supply
Some factors influencing the overall level of capacity

5. LONG-TERM CAPACITY CHANGE STRATEGY
Issues include…..
NUMBER OF SITES
CAPACITY OF EACH SITE
LOCATION OF EACH SITE a
LONG-TERM CAPACITY CHANGE STRATEGY
ALLOCATION
OF TASKS
TO EACH SITE

6. Questions Options Questions:
“Who should be involved in these decisions?”
“How does the company make this type of decision?”
Questions
Options
NUMBER OF SITES and CAPACITY OF SITES
Many small sites?
Few larger sites?
LOCATION
OF SITES
Supply side dominated?
Demand side dominated?
ALLOCATION OF TASKS
TO SITES
All sites make all products/services?
Each site focuses on a few products/
services?
LONG-TERM CAPACITY CHANGE STRATEGY
Capacity leads demand?
Capacity lags demand?

7. Why is capacity strategy important?
Without an appropriate capacity strategy operations will always be struggling to supply markets in a competitive manner
Getting capacity strategy right is the starting point for developing competitive operations

8. ? How should one judge a capacity strategy ?
NUMBER OF SITES
What performance measures will all these decisions have a major impact on ?
CAPACITY OF EACH SITE
LOCATION OF EACH SITE ?
LONG-TERM CAPACITY CHANGE STRATEGY
ALLOCATION
OF TASKS
TO SITES

9. Should capacity lead or lag demand ?
Capacity leads demand
Capacity lags demand
Capacity
Capacity
Demand
Demand
Volume
Volume
Time
Time
What competitive objectives will be affected?

10. The three options ….. Capacity Leading Strategy
Demand
Capacity Leading Strategy
Capacity
Volume
Time
Time
Demand
Capacity Lagging Strategy
Capacity
Volume
Time
Demand
Capacity Smoothing Strategy
Capacity
Volume
Time

11. Cost, volume, profit illustration12 10 8
Cost
Costs / Revenue ($)
Forecast demand = 9000 units 6 4
Revenue 2 2 4 6 8 10 12
Volume in thousands of units
Cost, volume, profit illustration

12. Unit cost curve 8 8 6 6 Unit cost (total cost / volume)
Diseconomies of scale kick in
Nominal capacity limit 4 4 2 2 1 2 3 4 5 6 1 2 3 4 5 6
Volume in thousands of units
Volume in thousands of units
(a)
(b)
Unit cost curve

13. Cash flow with extended physical capacity
Cash flow with two identical capacity increments
Physical capacity of facilities
Demand
Cumulative cash flow
Volume
Time
Effective Capacity
Time
Expanding physical capacity in advance of effective capacity can bring greater returns in the longer term

14. Some factors influencing the number and size of sites
Economies of scale
Required service level
Size and number of sites
OPERATIONS RESOURCES
MARKET REQUIREMENTS
Geographical distribution of demand
Supply costs
Some factors influencing the number and size of sites

15. Some factors influencing the location of sites
Resource costs
Required service level
Land and facilities investment
Suitability of site
OPERATIONS RESOURCES
Location of sites
MARKET REQUIREMENTS
Resource availability
Image of location
Community factors
Some factors influencing the location of sites

16. Office rents in various cities ($’000 per square metre, January 1999)
London (city)
Hong Kong
New York (midtown)
Singapore
Stockholm
Amsterdam
Madrid
0.4
0.6
0.8
1.0
1.2
Office rents in various cities ($’000 per square metre, January 1999)
Source: Richard Ellis, The Economist

17. Denmark
Britain
Japan
France
Germany
Sweden
Netherlands
Spain
United States = 100 60 80
100
120
140
160
Unit labour costs in various countries (1998) (includes effects of currency exchange rates and productivity)
Source: OECD, The Economist

18. (a) Location concerned with profit maximization;
Fast food restaurant
Electronics manufacturer
Revenue
Revenue
Costs / Revenue
Costs
Costs / Revenue
Costs
Location A
Location B
Location A
Location of operation
Location of operation
(a)
(b)
(a) Location concerned with profit maximization;
(b) Location concerned with cost minimization

19. Cost-volume-profit curves for two alternative capacity strategies
$US 4m
Revenue 3m
3 Brayford facilities 2m
1 Bi-line 8 facility & 1 Brayford facility 1m
150000
Current volume
1000
2000
3000
4000
Monthly volume (kg)
Cost-volume-profit curves for two alternative capacity strategies