Chap 003

Chapter 03 - Strategic Capacity Management

Chapter 03Strategic Capacity Management

Learning Objectives for Chapter 3:

1. Recognize the concept of capacity and how important it is to “manage” capacity.2. Explain the impact of economies of scale on the capacity of a firm.3. Understand how to use decision trees to analyze alternatives when faced with the

problem of adding capacity.4. Describe the differences in planning capacity between manufacturing firms and

service firms.

True / False Questions

1. Capacity can be defined as the ability to hold, receive, store, or accommodate. True False

2. When evaluating capacity, managers need to consider both resource inputs and product outputs. True False

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3. Capacity can be defined as the amount of available resource inputs relative to requirements for output over a particular period of time. True False

4. The capacity utilization rate is found by dividing best operating level by capacity used. True False

5. The objective of strategic capacity planning is to provide an approach for determining the overall capacity level of labor-intensive resources. True False

6. The objective of strategic capacity planning is to determine the overall capacity level of capital intensive resources (including facilities, equipment, and overall labor force size) that best supports the company's short-range competitive strategy. True False

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7. The objective of strategic capacity planning is to determine the overall capacity level of capital intensive resources (including facilities, equipment, and overall labor force size) that best supports the company's long-range competitive strategy. True False

8. Best operating level is usually a multiple of the level of capacity for which a process was designed. True False

9. Best operating level is the volume of output at which average unit cost is minimized. True False

10. At some point, the size of a growing plant can become too large and diseconomies of scale become a capacity planning problem. True False

11. Long-range capacity planning requires top management participation. True False

12. Overtime and personnel transfers are solutions to capacity problems in the intermediate term. True False

13. Capacity planning is generally viewed in three time durations: Immediate, Intermediate and Indeterminate. True False

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14. The basic notion of economies of scale is that as a plant gets larger and volume increases, the average cost per unit of output drops. True False

15. A piece of equipment with twice the capacity of another piece typically costs twice as much to purchase and to operate. True False

16. The problem of keeping demand sufficiently high to keep a large factory busy is a sales issue and not a diseconomy of scale. True False

17. A production facility works best when it focuses on a fairly limited set of production objectives. True False

18. A production facility develops virtuosity and works best when it focuses on a widely varied set of production objectives. True False

19. Making adjustments to eliminate the variance between planned and actual output is tied into intermediate range capacity planning. True False

20. The ultimate in plant flexibility is a one-hour-changeover time plant. True False

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21. Capacity flexibility means having the ability to rapidly increase or decrease production levels, or to shift production capacity quickly from one product or service to another. True False

22. Economies of scope exist when multiple products can be produced at a lower cost in combination than they can separately. True False

23. The frequency of additions to productive capacity should balance the costs of upgrading too frequently and the costs of upgrading too infrequently. True False

24. Subcontracting is a common source of external capacity. True False

25. Sharing capacity is a common source of external capacity. True False

26. A capacity cushion is the amount of capacity less than expected demand. True False

27. A decision tree problem does not need probabilities or payoffs to generate a solution. True False

28. In solving a decision tree problem, calculations start at the ends of the "branches" of the tree and work backwards to the base "trunk" of the tree. True False

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29. The probability of each occurrence at a decision tree chance node is the reciprocal of the number of possibilities at the chance node. True False

30. In a decision tree, the only time probabilities are applied to a decision node is when the decision is being made by someone else such as your customer or your competitor. True False

31. Low rates of capacity utilization in service organizations are never appropriate. True False

32. The smaller the capacity cushion the better. True False

33. The larger the capacity cushion the better. True False

34. The capacity cushion is the ratio of capacity used to the best capacity level. True False

35. When a firm's design capacity is less than the capacity required to meet its demand, it is said to have a negative capacity cushion. True False

36. In decision tree analysis the time value of money is ignored because you are only concerned with cash costs. True False

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Multiple Choice Questions

37. The ability to rapidly and inexpensively switch production from one product to another enables what are sometimes referred to as: A. Economies of scaleB. Economies of sizeC. Economies of shapeD. Economies of scopeE. Economies of shipping

38. Capacity planning involving hiring, layoffs, some new tooling, minor equipment purchases, and subcontracting is considered as which one of the following planning horizons? A. Intermediate rangeB. Long rangeC. Short rangeD. CurrentE. Upcoming

39. Capacity planning involving acquisition or disposal of fixed assets such as buildings, equipment or facilities is considered as which one of the following planning horizons? A. Intermediate-rangeB. Long-rangeC. Short-rangeD. CurrentE. Upcoming

40. If the best operating level of a piece of equipment is at a rate of 400 units per hour and the actual output during an hour is 300 units, which of the following is the capacity utilization rate? A. 0.75B. 1.00C. 1.33D. 2.33E. 300

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41. If the actual output of a piece of equipment during an hour is 500 units and its best operating level is at a rate of 400 units per hour, which of the following is the capacity utilization rate? A. 0.75B. 1.00C. 1.25D. 1.33E. 100

42. If the best operating level of a piece of equipment is at a rate of 400 units per hour and the actual output during an hour is 300 units, which of the following is the capacity cushion? A. 33 percentB. 75 percentC. 90 percentD. 100 percentE. 133 percent

43. The capacity focus concept can be put into practice through a mechanism called which of the following? A. Best operating level (BOL)B. Plants within plants (PWP)C. Total quality management (TQM)D. Capacity utilization rate (CUR)E. Zero-changeover-time (ZXT)

44. The way to build in greater flexibility in your workers is to do which of the following? A. Pay higher wages to motivate a willingness to do a variety to tasksB. Provide a broader range of trainingC. Provide a wide variety of technology to augment workers skillsD. Institute a "pay for skills" programE. Use part-time employees with specialized skills as needed

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45. When deciding to add capacity to a factory which of the following need not be considered? A. Maintaining system balanceB. The frequency of capacity additionsC. Use of external capacityD. Immediate product demandE. Availability of raw materials

46. Which of the following is not a step used in determining production capacity requirements? A. Forecasting to predict product salesB. Forecasting raw material usageC. Projecting availability of laborD. Calculating equipment and labor needsE. Projecting equipment availability

47. Which of the following models uses a schematic model of the sequence of steps in a problem and the conditions and consequences of each step? A. Probability indexingB. Johnson's sequencing ruleC. Decision treesD. Activity System MapsE. Decision mapping

48. Compared with a service operation, a manufacturing operation's capacity is which of the following? A. More dependent on time and locationB. Subject to more volatile demand fluctuationsC. Utilization more directly impacts qualityD. Demand can be smoothed by inventory policiesE. More capable of reacting to demand fluctuations

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49. At a decision point in a decision tree, which machine would you select when trying to maximize payoff when the anticipated benefit of selecting machine A is $45,000 with a probability of 90%; the expected benefit of selecting machine B is $80,000 with a probability of 50% and the expected benefit of selecting machine C is $60,000 with a probability of 75%? A. Machine AB. Machine BC. Machine CD. You would be indifferent between machines A and CE. You would be indifferent between machines A and B

50. What is an important difference between capacity planning in services as contrasted to capacity planning in manufacturing operations? A. TimeB. LocationC. Demand volatilityD. Utilization impacts serviceE. All of the above

51. Capacity planning involving consideration of production scheduling and inventory position is characterized by which one of the following time durations? A. Intermediate-rangeB. Long-rangeC. Short-rangeD. CurrentE. Upcoming

Fill in the Blank Questions

52. A chance node on a decision tree has four possible outcomes each worth $100,000. The probabilities of the outcomes occurring are assessed as 10%, 27%, 43% and 20%. What is the expected value of this chance node? ____________________ ________________________________________

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53. If demand for product "A" were forecast at 1,000,000 units for the coming year and your factory has trained labor and equipment sufficient to produce 150,000 units per month, is the capacity cushion positive or negative? ____________________ ________________________________________

54. If demand for product "A" were forecast at 1,000,000 units for the coming year and your factory has one machine capable of producing 4,500 units per week, how many similar machines might you plan to acquire? ___________________ ________________________________________

55. If demand for product "A" were forecast at 1,000,000 units for the coming year and your factory has one machine capable of producing 75,000 units per month, how much of product "A" might you plan to acquire through outsourcing? _______________ ________________________________________

56. A chance node on a decision tree has four possible outcomes worth $10,000, $20,000, $30,000 and minus $100,000 respectively. The probabilities of these outcomes occurring are assessed as 10%, 25%, 50% and 15% correspondingly. What is the expected value of this chance node? _________________________ ________________________________________

57. If the best operating level of a piece of equipment is at a rate of 400 units per hour and the actual output during an hour is 300 units, what is the capacity utilization rate? ____________________ ________________________________________

58. If the best operating level of a piece of equipment is at a rate of 400 units per hour and the actual output during an hour is 300 units, what is the capacity cushion? __________________ ________________________________________

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Essay Questions

59. What is a capacity cushion and why would a firm have one?

60. Why does volatility of demand have a higher effect on a service delivery system than on a manufacturing system?

61. Describe the relationship between capacity utilization and quality in a service operation.

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Chapter 03 Strategic Capacity Management Answer Key

True / False Questions

1. Capacity can be defined as the ability to hold, receive, store, or accommodate. TRUE

AACSB: AnalyticDifficulty: EasyLearning Objective: 1Taxonomy: KnowledgeTopic: Capacity Management in Operations

2. When evaluating capacity, managers need to consider both resource inputs and product outputs. TRUE


3. Capacity can be defined as the amount of available resource inputs relative to requirements for output over a particular period of time. TRUE


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4. The capacity utilization rate is found by dividing best operating level by capacity used. FALSE


5. The objective of strategic capacity planning is to provide an approach for determining the overall capacity level of labor-intensive resources. FALSE


6. The objective of strategic capacity planning is to determine the overall capacity level of capital intensive resources (including facilities, equipment, and overall labor force size) that best supports the company's short-range competitive strategy. FALSE


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7. The objective of strategic capacity planning is to determine the overall capacity level of capital intensive resources (including facilities, equipment, and overall labor force size) that best supports the company's long-range competitive strategy. TRUE


8. Best operating level is usually a multiple of the level of capacity for which a process was designed. FALSE


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9. Best operating level is the volume of output at which average unit cost is minimized. TRUE


10. At some point, the size of a growing plant can become too large and diseconomies of scale become a capacity planning problem. TRUE

AACSB: AnalyticDifficulty: EasyLearning Objective: 2Taxonomy: KnowledgeTopic: Capacity Planning Concepts

11. Long-range capacity planning requires top management participation. TRUE


12. Overtime and personnel transfers are solutions to capacity problems in the intermediate term. FALSE


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13. Capacity planning is generally viewed in three time durations: Immediate, Intermediate and Indeterminate. FALSE


14. The basic notion of economies of scale is that as a plant gets larger and volume increases, the average cost per unit of output drops. TRUE


15. A piece of equipment with twice the capacity of another piece typically costs twice as much to purchase and to operate. FALSE


16. The problem of keeping demand sufficiently high to keep a large factory busy is a sales issue and not a diseconomy of scale. FALSE


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17. A production facility works best when it focuses on a fairly limited set of production objectives. TRUE


18. A production facility develops virtuosity and works best when it focuses on a widely varied set of production objectives. FALSE


19. Making adjustments to eliminate the variance between planned and actual output is tied into intermediate range capacity planning. FALSE


20. The ultimate in plant flexibility is a one-hour-changeover time plant. FALSE


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21. Capacity flexibility means having the ability to rapidly increase or decrease production levels, or to shift production capacity quickly from one product or service to another. TRUE


22. Economies of scope exist when multiple products can be produced at a lower cost in combination than they can separately. TRUE


23. The frequency of additions to productive capacity should balance the costs of upgrading too frequently and the costs of upgrading too infrequently. TRUE


24. Subcontracting is a common source of external capacity. TRUE


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25. Sharing capacity is a common source of external capacity. TRUE


26. A capacity cushion is the amount of capacity less than expected demand. FALSE


27. A decision tree problem does not need probabilities or payoffs to generate a solution. FALSE

AACSB: AnalyticDifficulty: EasyLearning Objective: 3Taxonomy: KnowledgeTopic: Capacity Planning

28. In solving a decision tree problem, calculations start at the ends of the "branches" of the tree and work backwards to the base "trunk" of the tree. TRUE


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29. The probability of each occurrence at a decision tree chance node is the reciprocal of the number of possibilities at the chance node. FALSE

AACSB: AnalyticDifficulty: MediumLearning Objective: 3Taxonomy: KnowledgeTopic: Capacity Planning

30. In a decision tree, the only time probabilities are applied to a decision node is when the decision is being made by someone else such as your customer or your competitor. FALSE


31. Low rates of capacity utilization in service organizations are never appropriate. FALSE

AACSB: AnalyticDifficulty: EasyLearning Objective: 4Taxonomy: KnowledgeTopic: Planning Service Capacity

32. The smaller the capacity cushion the better. FALSE

AACSB: AnalyticDifficulty: MediumLearning Objective: 1Taxonomy: KnowledgeTopic: Capacity Management in Operations

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33. The larger the capacity cushion the better. FALSE


34. The capacity cushion is the ratio of capacity used to the best capacity level. FALSE


35. When a firm's design capacity is less than the capacity required to meet its demand, it is said to have a negative capacity cushion. TRUE


36. In decision tree analysis the time value of money is ignored because you are only concerned with cash costs. FALSE


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Multiple Choice Questions

37. The ability to rapidly and inexpensively switch production from one product to another enables what are sometimes referred to as: A. Economies of scaleB. Economies of sizeC. Economies of shapeD. Economies of scopeE. Economies of shipping

AACSB: AnalyticDifficulty: MediumLearning Objective: 2Taxonomy: KnowledgeTopic: Capacity Planning Concepts

38. Capacity planning involving hiring, layoffs, some new tooling, minor equipment purchases, and subcontracting is considered as which one of the following planning horizons? A. Intermediate rangeB. Long rangeC. Short rangeD. CurrentE. Upcoming


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39. Capacity planning involving acquisition or disposal of fixed assets such as buildings, equipment or facilities is considered as which one of the following planning horizons? A. Intermediate-rangeB. Long-rangeC. Short-rangeD. CurrentE. Upcoming


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40. If the best operating level of a piece of equipment is at a rate of 400 units per hour and the actual output during an hour is 300 units, which of the following is the capacity utilization rate? A. 0.75B. 1.00C. 1.33D. 2.33E. 300

AACSB: AnalyticDifficulty: EasyLearning Objective: 1Taxonomy: AnalysisTopic: Capacity Management in Operations

41. If the actual output of a piece of equipment during an hour is 500 units and its best operating level is at a rate of 400 units per hour, which of the following is the capacity utilization rate? A. 0.75B. 1.00C. 1.25D. 1.33E. 100


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42. If the best operating level of a piece of equipment is at a rate of 400 units per hour and the actual output during an hour is 300 units, which of the following is the capacity cushion? A. 33 percentB. 75 percentC. 90 percentD. 100 percentE. 133 percent


43. The capacity focus concept can be put into practice through a mechanism called which of the following? A. Best operating level (BOL)B. Plants within plants (PWP)C. Total quality management (TQM)D. Capacity utilization rate (CUR)E. Zero-changeover-time (ZXT)


44. The way to build in greater flexibility in your workers is to do which of the following? A. Pay higher wages to motivate a willingness to do a variety to tasksB. Provide a broader range of trainingC. Provide a wide variety of technology to augment workers skillsD. Institute a "pay for skills" programE. Use part-time employees with specialized skills as needed


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45. When deciding to add capacity to a factory which of the following need not be considered? A. Maintaining system balanceB. The frequency of capacity additionsC. Use of external capacityD. Immediate product demandE. Availability of raw materials


46. Which of the following is not a step used in determining production capacity requirements? A. Forecasting to predict product salesB. Forecasting raw material usageC. Projecting availability of laborD. Calculating equipment and labor needsE. Projecting equipment availability


47. Which of the following models uses a schematic model of the sequence of steps in a problem and the conditions and consequences of each step? A. Probability indexingB. Johnson's sequencing ruleC. Decision treesD. Activity System MapsE. Decision mapping


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48. Compared with a service operation, a manufacturing operation's capacity is which of the following? A. More dependent on time and locationB. Subject to more volatile demand fluctuationsC. Utilization more directly impacts qualityD. Demand can be smoothed by inventory policiesE. More capable of reacting to demand fluctuations

AACSB: AnalyticDifficulty: EasyLearning Objective: 4Taxonomy: KnowledgeTopic: Planning Service Capacity

49. At a decision point in a decision tree, which machine would you select when trying to maximize payoff when the anticipated benefit of selecting machine A is $45,000 with a probability of 90%; the expected benefit of selecting machine B is $80,000 with a probability of 50% and the expected benefit of selecting machine C is $60,000 with a probability of 75%? A. Machine AB. Machine BC. Machine CD. You would be indifferent between machines A and CE. You would be indifferent between machines A and B

AACSB: AnalyticDifficulty: MediumLearning Objective: 3Taxonomy: AnalysisTopic: Capacity Planning

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50. What is an important difference between capacity planning in services as contrasted to capacity planning in manufacturing operations? A. TimeB. LocationC. Demand volatilityD. Utilization impacts serviceE. All of the above

AACSB: AnalyticDifficulty: EasyLearning Objective: 4Taxonomy: AnalysisTopic: Planning Service Capacity

51. Capacity planning involving consideration of production scheduling and inventory position is characterized by which one of the following time durations? A. Intermediate-rangeB. Long-rangeC. Short-rangeD. CurrentE. Upcoming


Fill in the Blank Questions

52. A chance node on a decision tree has four possible outcomes each worth $100,000. The probabilities of the outcomes occurring are assessed as 10%, 27%, 43% and 20%. What is the expected value of this chance node? ____________________ $100,000

AACSB: AnalyticDifficulty: EasyLearning Objective: 3Taxonomy: AnalysisTopic: Capacity Planning

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53. If demand for product "A" were forecast at 1,000,000 units for the coming year and your factory has trained labor and equipment sufficient to produce 150,000 units per month, is the capacity cushion positive or negative? ____________________ Positive


54. If demand for product "A" were forecast at 1,000,000 units for the coming year and your factory has one machine capable of producing 4,500 units per week, how many similar machines might you plan to acquire? ___________________ 5 (five)

AACSB: AnalyticDifficulty: MediumLearning Objective: 1Taxonomy: AnalysisTopic: Capacity Management in Operations

55. If demand for product "A" were forecast at 1,000,000 units for the coming year and your factory has one machine capable of producing 75,000 units per month, how much of product "A" might you plan to acquire through outsourcing? _______________ 100,000 units

AACSB: AnalyticDifficulty: MediumLearning Objective: 1Taxonomy: AnalysisTopic: Capacity Management in Operations

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56. A chance node on a decision tree has four possible outcomes worth $10,000, $20,000, $30,000 and minus $100,000 respectively. The probabilities of these outcomes occurring are assessed as 10%, 25%, 50% and 15% correspondingly. What is the expected value of this chance node? _________________________ $6,000

AACSB: AnalyticDifficulty: MediumLearning Objective: 3Taxonomy: AnalysisTopic: Capacity Planning

57. If the best operating level of a piece of equipment is at a rate of 400 units per hour and the actual output during an hour is 300 units, what is the capacity utilization rate? ____________________ 0.75 or 75%


58. If the best operating level of a piece of equipment is at a rate of 400 units per hour and the actual output during an hour is 300 units, what is the capacity cushion? __________________ 0.33 or 33%


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Essay Questions

59. What is a capacity cushion and why would a firm have one?

The capacity cushion is an amount of excess capacity over expected demand maintained by a firm. Capacity cushion is discussed in the text beginning on page 49. A satisfactory response to this question will indicate that firms typically hold capacity cushions when demand is more rapidly variable than capacity adjustments can be. For example, in many service operations it is not possible to inventory finished goods, they must be produced to demand. To be able to meet peak demand, therefore, service operations must have a cushion of capacity over average demand. Electric utilities, where demand varies considerably over a 24-hour period, are a good example of this. Other reasons for a capacity cushion include expected rapid growth and a desire to service expanded demand rapidly.

AACSB: AnalyticDifficulty: MediumLearning Objective: 1Taxonomy: SynthesisTopic: Capacity Management in Operations

60. Why does volatility of demand have a higher effect on a service delivery system than on a manufacturing system?

The impact of demand volatility on services is discussed in the text on page 55. A successful response to this question will mention the following three issues: (1) a service can not be inventoried and thus must be produced as demanded; (2) that customers interact directly with the service delivery system and each may have unique needs or will require different levels of service; and (3) consumer behaviors can magnify volatility of demand very significantly in service operations.

AACSB: AnalyticDifficulty: HardLearning Objective: 4Taxonomy: SynthesisTopic: Planning Service Capacity

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61. Describe the relationship between capacity utilization and quality in a service operation.

The relationship between capacity utilization and service quality is discussed in the text beginning on page 55. A good response will note that higher levels of capacity utilization may result in waiting lines and hurried or overwhelmed service personnel causing perceptions of service quality to decline. An excellent response will include the observation that the optimal utilization rates are context specific with the optimal rates depending on the degrees of uncertainty (or variability in arrivals and service times). For example, a low rate of capacity utilization is appropriate where the stakes are very high as in hospital emergency rooms or fire departments.

AACSB: AnalyticDifficulty: HardLearning Objective: 4Taxonomy: SynthesisTopic: Planning Service Capacity

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Chap 003

Documents

level of capacity

planning capacity

capacity problems

concept of capacity

true false questions

capacity planning problem

longrange capacity planning

capacity utilization