STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND SERVICESCapacity planning is a key strategic component in designing the system. It encompasses a number of basic decisions with long-term consequences for the organization. Decisions made in the product or service design stage have major implications for capacity planning. Designs have processing requirements related to volume and degree of customization affecting capacity planning. It is thus important to learn about the importance of capacity decisions, the measurement of capacity, how capacity requirements are determined and the development and evaluation of capacity alternatives.Not too long ago, hospitals had what could be described as facility oversupply. Now, however, they are experiencing what can be described as capacity crisis in some areas. The way hospitals plan for capacity will be critical for their future success. And the same applies to all sorts of organizations, and at all levels of these organizations. Capacity refers to an upper limit or ceiling on the load that an operating unit can handle. The load might be in terms of the number of physical units produced or the number of services performed. The operating unit might be a plant, department, machine, store or worker. Capacity needs to include equipment, space, and employee skills.The goal of strategic capacity planning is to achieve a match between the long term supply capabilities of an organization and the predicted level of long-term demand. Organizations become involved in capacity planning for various reasons. Among the chief reasons are changes in demand, changes in technology, changes in the environment, and perceived threats or opportunities. A gap between current and desired capacity will result in capacity that is out of balance. Overcapacity causes operating costs that are too high, while undercapacity causes strained resources and possible loss of customers.

Basic Questions in Capacity Planning:1. What kind of capacity is needed?2. How much is needed to match the demand?3. When is it needed? The question what kind of capacity is needed depends on the products that management intends to produce or provide. Hence, in a very real sense, capacity planning is governed by those choices.Forecasts are key inputs used to answer the questions of how much is needed and when is it needed.Related Questions:1. How much will it cost, and what is the expected return?2. What are the potential benefits and risks These involve a degree of uncertainty related to forecasts of the amount of demand and the rate of change in demand, as well as costs, profits and the time to implement capacity changes.3. Are there sustainability issues that need to be addressed?4. Should capacity bee changed all at once, or through several or more small changes?5. Can the supply chain handle the necessary changes? Before an organization commits to ramping up its input, it is essential o confirm that its supply chain will be able to handle related requirements.Due to uncertainties, some organizations prefer to delay capacity investment until demand materializes. However, such strategies often inhibit growth because adding capacity takes time and customers will not usually wait. Conversely, organizations that add capacity in anticipation of growth often discover that the new capacity actually attracts growth. Some organizations hedge their bets by making a series of small changes and then evaluating the results before committing to the next change.In some instances, capacity changes are made very infrequently; in others, they are made regularly, as part of an ongoing process. Generally, the factors that influence this frequency are the stability of demand, the rate of technological change in equipment and product design, and competitive factors. Other factors relate to the type of product or service and whether style changes are important (e.g. automobiles and clothing). In any case, management must review product and service choices periodically to ensure that the company makes capacity changes when they are needed for cost, competitive effectiveness and other reasons.

CAPACITY DECISIONS ARE STRATEGICFor a number of reasons, capacity decisions are among the most fundamental of all the design decisions that managers must make. In fact, capacity decisions can be critical for an organization for the following reasons: Capacity decisions have real impact on the ability of the organization to meet future demands for products and services; capacity essentially limits the rate of output possible. Having capacity to satisfy demand can often allow a company to take advantage of tremendous benefits. Capacity decisions affect operating costs. Ideally, capacity and demand requirements will be matched, which will tend to minimize operating costs. In practice, however, this is not always achieved because actual demand either differs from expected demand or tends to vary (cyclically). In such cases, a decision might be made to attempt to balance the costs of over and/or undercapacity. Capacity is usually a major determinant of initial cost. Typically, the greater the capacity of a productive unit, the greater the cost. This does not necessarily imply a one-for-one relationship; larger units tend to cost proportionately less than smaller units. Capacity decisions often involve long-term commitment of resources and the fact that once they are implemented, those decisions may be difficult to modify without incurring major costs. Capacity decisions can affect competitiveness. If a firm has excess capacity, or can quickly add capacity, that fact may serve as a barrier to entry by other firms. Then too, capacity can affect delivery speed, which can be a competitive advantage. Capacity affects the ease of management; having appropriate capacity makes management easier than when capacity is mismatched. Globalization has increased the importance and the complexity of capacity decisions. Far-flung supply chains and distant markets add to the uncertainty about capacity needs. Because capacity decisions often involve substantial financial and other resources, it is necessary to plan for them far in advance. For example, it may take years for a new power generating plant to be constructed and become operational. However, this increases the risk that the designated amount of capacity will not match actual demand when the capacity becomes available.

DEFINING AND MEASURING CAPACITYAs above defined, capacity often refers to an upper limit on the rate of output. Even though this seems simple enough, there are subtle difficulties in actually measuring capacity in certain cases. These difficulties may arise because of different interpretations of the term capacity and problem with identifying suitable measures for a specific situation.In selecting a measure of capacity, it is important to choose one that does not require updating. For example, price is not a good measure of capacity because price changes necessitate updating of that measure.Where only one product or service is involved, the capacity of the productive unit may be expressed in terms of that item. However, when multiple products or services are involve, as is often the case, using a simple measure of capacity based on units of output can be misleading An appliance manufacturer may produce both refrigerators and freezers. It the output rates for these tow are different, it would not make sense to simply state capacity in units without reference to either refrigerators or freezers. The problem is compounded if the firm has other products. One possible is to state capacities in terms of each product. Thus, the firm may be able to produce 100 refrigerators per day or 80 freezers per day. Sometimes, this approach is helpful, sometimes not. For instance, if an organization has many different products or services, it may not be practical to list all of the relevant capacities. This is especially true if there are frequent changing composite index of capacity. The preferred alternative in such case is to use a measure of capacity that refers to availability of inputs.No single measure of capacity is appropriate in every situation. Rather, the measure of capacity must be tailored to fit the situation. The following are some examples of commonly used measures of capacity:BusinessInputsOutputs

Auto manufacturingLabor hours, machine hoursNumber of cars per shift

Steel millFurnace sizeTons of steel per day

Oil RefineryRefinery sizeGallons of fuel per day

FarmingNumber of hectares; number of animals (cows/carabaos, etc)Bushels of produce per hectare per year; gallons of milk per day

RestaurantNumber of tables, seating capacityNumber of meals served per day

TheaterNumber of seatsNumber of tickets sold per performance

Retail salesSquare feet of floor spaceRevenue generated per day

The term capacity can also be defined as follows: Design Capacity and Effective Capacity.Design Capacity is the maximum output rate or service capacity an operation, process or facility is designed for. It is the maximum rate of output achieved under ideal conditions.On the other hand, effective capacity is defined as design capacity less allowances such as personal time, and maintenance. It s less than design capacity owing to realities of changing product mix, the need for periodic maintenance of equipment, lunch breaks, coffee breaks, problems in scheduling and balancing operations and similar circumstances. Actual output cannot exceed effective capacity and is often les because of machine breakdowns, absenteeism, shortages of materials, and quantity problems, as well as factors that are outside the control of the operations managers.These different measures of capacity are useful in defining two measures of system effectiveness: efficiency and utilization. Efficiency is the ratio of actual output to effective capacity. Capacity utilization is the ratio of actual design to design capacity. Both are expressed in percentages. It is not unusual for managers to focus exclusively on efficiency, but in many instances, this emphasis can be misleading. This happens when effective capacity is low compared to design capacity. In those cases, high efficiency would seem to indicate effective use of resources when it does not.

FACTORS THAT DETERMINE EFFECTIVE CAPACITY1. Facilities The design of facilities, including size and provision for expansion, is key. Locational factors, such as transportation costs, distance to market, labor supply, energy sources, and room for expansion, are also important. Likewise, layout of the work area often determines how smoothly work can be performed, and environmental factors such as heating, lighting, and ventilation also play significant role in determining whether personnel can perform effectively or whether they must struggle to overcome poor design characteristics.2. Product/Service This can have a tremendous influence on capacity. For example, when items are similar, the ability of the system to produce those items is generally much greater than when successive items differ. In general, the more uniform the output, the more opportunities there are standardization of methods and materials, leading to greater capacity. The particular mix of products or services rendered must also be considered since different items will have different rates of output.3. Process The quantity capability of a process is an obvious determinant of capacity. A more subtle determinant is the influence of output quality. For example, if quality of output does not meet the standards, the rate of output will be slowed by the need for inspection and rework activities. Process improvements increasing quality and productivity that can result in increased capacity. Also, if multiple products or multiple services are processed in batches, the time to change over equipment settings must be taken into account.4. Human The tasks that make up a job the variety of activities involved, and the training, skill, and experience required to perform a job all have an impact on the potential and actual output. In addition, employee motivation has a very basic relationship to capacity, as to absenteeism and labor turnover.5. Policy Management policy can affect capacity by allowing or not allowing capacity options.6. Operational Scheduling problems may occur when an organization has differences in equipment capabilities among alternative pieces of equipment or differences in job requirements. Inventory stocking decisions, late deliveries, purchasing requirements, acceptability of purchased materials and parts, and quality inspection and control procedures also have an impact on effective capacity.Inventory shortages of even one component of an assembled item can cause a temporary halt to assembly operations until the component becomes available. This can have a major impact on effective capacity. Thus, insufficient capacity in one area can affect overall capacity.7. Supply Chain This must be taken into account in capacity planning if substantial capacity changes are involved. Key questions include: if capacity will be increased, will these elements of the supply chain be able to handle the increase? Conversely, if capacity is to be decreased, what impact will the loss of business have on these elements of the supply chain?8. External Product standards (especially minimum quality and performance standards) which can restrict managements options for increasing and using capacity; pollution standards on products and equipment often reduce effective capacity, as does paperwork required by government regulatory agencies by engaging employees in non-productive activities. Inadequate planning can also be major limiting determinant of effective capacity.

STRATEGY FORMULATION1. Leading Capacity Strategy This builds capacity in anticipation of future demand increases. If capacity increases involve a long lead time, this strategy may be the best option. 2. Following Capacity Strategy This builds capacity when demands exceeds current capacity3. Tracking Capacity Strategy This is similar to Following Capacity Strategy but it adds capacity in relatively small increments to keep pace with increasing demand.An organization typically bases its capacity strategy on assumptions and predictions about long-term demand patterns, technological changes, and the behavior of its competitors. These typically involve (1) growth rate and variability of demand (2) costs of building and operating facilities of various sizes, (3) the rate and direction of technological innovation, (4) the likely behaviour of competitors, and (5) availability of capital and other inputs.In some instances, a decision may be made to incorporate a capacity cushion, which is an amount of excess capacity in excess of expected demand when there is uncertainty about demand. It is the extra capacity used to offset demand uncertainty. Typically, the greater the degree of demand uncertainty, the greater the amount of cushion used. Organizations that have standard products or services generally have smaller capacity cushions. Cost and competitive priorities are also key factors.Steps in the Capacity Planning Process:1. Estimate future capacity requirements2. Evaluate existing capacity and facilities and identify gaps3. Identify alternatives for meeting requirements4. Conduct financial analysis for each alternative5. Assess key qualitative issues for each alternative6. Select the alternative to pursue that will be best in the long term7. Implement the selected alternative8. Monitor resultsCapacity planning can be difficult at times due to the complex influence of market forces and technology.

FORECASTING CAPACITY REQUIREMENTSCapacity planning decisions involve both long-term and short-term considerations. Long-term considerations relate to overall level of capacity, such as facility size; short-term considerations relate to probable variations in capacity requirements created by such things as seasonal, random, and irregular fluctuations in demand. Because the time intervals covered by each of these categories can vary significantly from industry to industry, it would be misleading to put times on the intervals.Long-term capacity needs require forecasting demand over a time horizon and then converting those forecasts into capacity requirements. When trends are identified, the fundamental issues are (1) how long the trend might persist, because few things last forever, and (2) the slope of the trend. If cycles are identified, interest focuses on (1) the approximate length of the cycles and (2)) the amplitude of the cycles.Short-term capacity needs are less concerned with cycles or trends than with seasonal variations and other variations from average. These deviations are particularly important because then can place a severe strain on a systems ability to satisfy demand at some times and yet result in idle capacity at other times.An organization can identify seasonal patterns using forecasting techniques. Although commonly thought of as annual fluctuations, seasonal variations are also reflected in monthly, weekly and even daily capacity requirements.When time intervals are too short to have seasonal variations in demand, the analysis can often describe the variations by probability distributions such as a normal, uniform, or Poisson distribution.Calculating Processing RequirementsA necessary piece of information is the capacity requirements of products that will be processes. To get this information, one must have reasonable accurate demand forecasts for each product and know the standard processing time per unit for each product, the number of work days per year, and the number of shifts that will be used.The task of determining capacity requirements should not be taken lightly. Substantial losses can occur when there are misjudgements on capacity needs. One key reason for those misjudgements can be overly optimistic projections of demand and growth. Marketing personnel are generally optimistic projections of demand and growth. Marketing personnel are generally optimistic in their outlook. However, care must be taken so that optimism does not lead to overcapacity, because the resulting underutilized capacity will create additional cost burden. Another key reason for misjudgments may be focusing exclusively on sales and revenue potential. And not taking into account the product mix that will be needed to generate those sales and revenues. To avoid that, marketing and operations personnel must work closely to determine the optimal product mix needed and the resulting cost and profit.A reasonable approach to determine capacity requirements is to obtain a forecast of future demand, translate demand into both the quantity and the timing of capacity requirements, and then decide what capacity changes are needed.Long-term capacity alternatives include expansion or contraction of an existing facility, opening or closing branch facilities and relocation of existing operations. At this point a decision must be made on whether to make or buy a god, or provide or buy a service.

ADDITIONAL CHALLENGES OF PLANNING SERVICE CAPACITYCapacity planning for services can present special challenges due to the nature of services. Important Factors in Planning Service Capacity(1) Need to be near customers convenience for customers is a very important aspect of service. Generally, a service must be located near customers.(2) Inability to store services capacity must thus be matched with the timing of demand. Unlike goods, services cannot be produced in one period and stored for use in a later period. Speed of delivery and customer waiting time are major concerns in service capacity planning.(3) Degree of demand volatility this presents problems for capacity planners because demand volatility tends to be higher for services then for goods, not only in timing of demand, but also in the amount of time required to service individual customers. Service planners have to devise other methods of coping with demand volatility and cyclical demands.In certain instances, demand management strategies can be used to offset capacity limitations. Pricing, promotions, discounts and similar tactics can help to shift some demand away from peak periods into slow periods allowing organizations to achieve a closer match in supply and demand.

DO IT IN-HOUSE OR OUTSOURCE IT? The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a firm that has developed a product or partor significantly modified a product or partis having trouble with current suppliers, or has diminishing capacity or changing demand.Factors Considered in Determining Whether to Make or Buy:1. Available Capacity If an organization has the available equipment, necessary skills and time, it often makes sense to produce an item. The additional costs would be relatively small compared with those required to buy items or sub-contract services.2. Expertise If a firm lacks the expertise to do a job satisfactorily, buying might be a reasonable alternative.3. Quality Considerations Firms that specialize can usually offer higher quality than what the organization can attain by itself. Conversely unique quality requirements or the desire to closely monitor quality may cause an organization to perform a job itself.4. Nature of Demand When demand for an item is high and steady, the organization is often better off doing the work itself. However, wide fluctuations in demand or small orders are usually better handles by specialists who are able to combine orders from multiple sources which results in higher volumes and tends to offset individual buyer fluctuations.5. Cost Any cost savings achieved from buying or making must be weighed against the preceding factors. Cost savings might come from the item itself or from transportation cost savings. If there are fixed costs associated with making an item that cannot be reallocated if the service or product is outsourced, that has to be recognized in the analysis, located if the service or product is outsourced, that has to be recognized in the analysis. Conversely, outsourcing may help a firm avoid incurring fixed costs.6. Risks Buying goods or services may entail considerable risks, Loss of direct control over operations, knowledge sharing, and the possible need to disclose proprietary information are three risks. And liability can be a tremendous risk if the products or services of other companies cause harm to customers or the environment, as well as damage to an organizations reputation. Reputation can also be damaged if the public discovers that a supplier operates with substandard working conditions.In some cases, a firm might choose to perform part of the work itself and let others handle the rest in order to maintain flexibility and to hedge against loss of a subcontractor. If part or all of the work will be done in-house, capacity alternatives will need to be developed. Outsourcing brings with it a host of supply chain considerations.

DEVELOPING CAPACITY ALTERNATIVES1. Design flexibility into systems the long-term nature of many capacity decisions and the risks inherent in long-term forecasts suggest potential benefits from designing flexible systems. For example, provision for future expansion in the original design of a structure frequently can be obtained at a small price compared to what it would cost to remodel an existing structure that did not have such a provision. Hence, if future expansion of the building seems likely, water lines, power hook-ups, ad waste disposal lines can be put in place initially so that if expansion becomes a reality, modification to the existing structure can be minimized. Other considerations in flexible design involve layout of equipment, locations, equipment selection, production planning, scheduling, and inventory policies.2. 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. Three operating questions will quickly occur to the alert executive: Given a proposed new product or service, how and to what extent can the shape and duration of each stage be predicted? Given an existing product, how can one determine what stage it is in? Given all this knowledge, how can it be effectively used?Stage 1. Market Development or Introduction PhaseThis is when a new product is first brought to market, even before there is an actual demand for it. Sales are low and creep along slowly. At this stage, it can be difficult to determine both the size of the market and the organizations eventual share of that market. Therefore, an organization should be cautious in making large and/or inflexible capacity investments.Stage 2. Market Growth or Take-off StageDemand begins to accelerate and the size of the total market expands rapidly. In the growth phase, the overall market may experience rapid growth. However, the real issue is the rate at which the organizations market share grows, which may be more or less than the market rate, depending on the success of the organizations strategies. Organizations generally regard growth as a good thing. They want growth in the overall market for their products or services, and in their share of the market, because they see this as a way of increasing volume, and thus, increasing profits. However, there can also be a downside to this because increasing output levels will require increasing capacity, and that means increasing investment and increasing complexity. In addition, decision makers should take into account possible similar moves by competitors, which would increase the risk of overcapacity in the market, and result in higher unit costs of output. Another strategy would be to compete on some nonprice attribute of the product by investing in technology and process improvements to make a differentiation a competitive advantage.Stage 3. Market MaturityDemand levels off and grows, for the most part, only at the replacement and new family-formation rate.In the maturity phase, the size of the market levels off, and organization tend to have stable market shares. Organizations may still be able to increase profitability by increasing capacity if they believe this stage will be fairly long, or the cost to increase capacity is relatively small.Stage 4. Market DeclineThe product begins to lose consumer appeal and sales drift downward. In the decline phase, an organization is faced with underutilization of capacity due to declining demand. Organizations may eliminate the excess capacity by selling it, or by introducing new products or services. An option that is sometimes used in manufacturing is to transfer capacity to a location that has lower labor costs, which allows the organization to continue to make a profit on the product for a while longer.3. Take a big picture approach to capacity changes When developing capacity alternatives, it is important to consider how parts of the system interrelate. Capacity changes inevitably affect an organizations supply chain. Suppliers may need time to adjust to their capacity, so collaborating with supply chain partners on plans for capacity increases is essential. That includes not only suppliers, but also distributors and transporters.The risk in not taking a big-picture approach is that the systems will be unbalanced. Evidence of unbalanced system is the existence of a bottleneck operation, defined as an operation in a sequence of operations whose capacity is lower than the capacities of other operations in the sequence. As a consequence, the capacity of the bottleneck operation limits the system capacity; the capacity of the system is reduced to the capacity of the bottleneck operation. 4. Prepare to deal with capacity chunks Capacity increases are often acquired in fairly large chunks rather than smooth increments, making it difficult to achieve a match between desired capacity and feasible capacity.5. Attempt to smooth out capacity requirements Unevenness in capacity requirements can also create certain problems. The unevenness in demand for products and services is due to a number of reasons like seasonality. Variability in demand can pose a problem for managers, Simply adding capacity by increasing the size of the operation may not always be the best approach because that reduces flexibility and adds to fixed costs. Consequently, managers often choose to respond to higher than normal demand in other ways. One way is through the use of overtime work. Another way is to subcontract some of the work. A third way is to draw down finished goods inventories during periods of high demand and replenish them during periods of slow demand. 6. Identify the optimal operating level Production units typically have an ideal or optimal level of operation in terms of unit cost of output. At the ideal level, cost per unit is the lowest level for that production unit. If the output rate is less than the optimal level, increasing the output rate will result in decreasing average unit cost. This is known as economies of scale. The reasons for economies of scale include the following:a. Fixed costs are spread over more units, reducing the fixed cost per unit.b. Construction costs increase at a decreasing rate with respect to the size of the facility to be built.c. Processing costs decrease as output rates increase because operations become more standardized, which reduces unit costs.However, if output is increased beyond the optimal level, average unit costs would become increasingly larger. This is known as the diseconomies of scale. The reasons for diseconomies of scale are as follows:a. Distribution costs increase due to traffic congestion and shipping from one large centralized facility instead of several smaller, decentralized facilities.b. Complexity increases costs; control and communication become more problematic.c. Inflexibility can be an issue.d. Additional levels of bureaucracy exist, slowing decision making and approvals for changes.7. Choose a strategy if expansion is involved Consider whether incremental expansion or single step is more appropriate. Factors include competitive pressures, market opportunities, costs and availability of finds, disruption of operations, and training requirements. Also, decide whether to lead or follow competitors. Leading is more risky but it may have greater potential for rewards.

CONSTRAINT MANAGEMENTA constraint is something that limits the performance of a process or system in achieving its goals. 7 Principles of the Theory of Constraints:1. The focus is on balancing flow, not on balancing capacity.2. Maximizing output and efficiency of every resource will not maximize the throughput of the entire system.3. An hour lost at a bottleneck or constrained resource is an hour lost for the whole system. An hour saved at a non-constrained resource does not necessarily make the whole system more productive. 4. Inventory is needed only in front of the bottlenecks to prevent them from sitting idle, and in front of assembly and shipping points to protect customer schedules. Building inventories elsewhere should be avoided.5. Work should be released into the system only as frequently as the bottlenecks need it. Bottleneck flows should be equal to the market demand. Pacing everything to the slowest resource minimizes inventory and operating expenses. 6. Activation of non-bottleneck resources cannot increase throughput, nor promote better performance on financial measures.Every capital investment must be viewed from the perspective of its global impact on overall throughput, inventory, and operating expense.Categories of Constraints:Market: Insufficient demandResource: Too little of one or more resources.Material: Too little of one more materials.Financial: Insufficient funds.Supplier: Unreliable, long lead, substandard qualityKnowledge or competency: Needed knowledge or skills missing or incompletePolicy: Laws or regulations interfere.However, in general, these types of constraints can just be either internal or external to the system. An internal constraint is present when the market demands more from the system than it can deliver. If this is the case, then the focus of the organization should be on discovering that constraint and following the five focusing steps to open it up (and potentially remove it). An external constraint exists when the system can produce more than the market will bear. If this is the case, then the organization should focus on mechanisms to create more demand for its products or services.Types of (internal) constraints: Equipment: The way equipment is currently used limits the ability of the system to produce more sellable goods/services. People: Lack of skilled people limits the system. Mental models held by people can cause behaviour that becomes a constraint. Policy: A written or unwritten policy prevents the system from making more.Steps in Resolving Conflicts:1. Identify the most pressing constraint. It if can easily be overcome, do so, and return to step 1 for the next constraint. Otherwise, proceed to step 2.2. Change the operation to achieve the maximum benefit, given the constraint. This may be a short-term solution.3. Make sure other portions of the process are supportive of the constraint.4. Explore and evaluate ways to overcome the constraint.5. Repeat the process until the level of constraints is acceptable.

EVALUATING ALTERNATIVES1. Cost-Volume Analysis this focuses on relationships between cost revenue and volume of output. The purpose of cost-volume analysis is to estimate the income of an organization under different operating conditions. It is particularly useful as a tool for comparing capacity alternatives. The volume at which the total cost and total revenue is referred as the break-even point. Thus, when the volume is less than break-even point, there is a loss; and when volume is greater, there is profit.Use of the technique requires the identification of all costs related to the production of a given product. These costs are then designated as fixed or variable costs. Fixed costs tend to remain constant regardless of volume of output while variable costs vary directly with volume of output. Assumptions Used:(a) One product is involved(b) Everything produced can be sold(c) the variable cost per unit is the same regardless of the volume(d) fixed costs do not change with volume changes or they are step changes(e) the revenue per unit exceeds variable cost per unitAs with any quantitative tool, it is important to verify that the assumptions on which the technique is based are reasonably satisfied for a particular situation. Also, cost-volume analysis requires that fixed and variable costs can be separated and this is sometimes exceedingly difficult to accomplish. Cost-volume analysis works best with one product or a few products that have the same cost characteristics. A notable benefit of cost-volume considerations is the conceptual framework it provides for integrating costs, revenue and profit estimates into capacity decisions. If a proposal looks attractive using cost-volume analysis the next step would be to develop cash flow models to see how it fares with the addition of time and more flexible conditions.2. Financial Analysis Operations personnel tend to have the ability to do financial analysis. A problem that is universally encountered by managers is how to allocate scarce funds. A common approach is to use financial analysis to rank investment proposals, taking into account the time value of money. Two important terms in financial analysis are:Cash Flow which refers to the difference between the case received from sales and other sources and the cash outflow for labor, materials, overhead, and taxesPresent Value - expresses in current value the sum of all future cash flows of an investment proposal3 Most Commonly Used Methods of Financial Analysis:a. Payback - a crude but widely used method that focuses on the length of time it will take for an investment to return its original costs. Payback ignores the time value of money. Its use is easier to rationalize for short-term than for long-term projects.b. Present Value summarizes the initial costs of an investment, its estimated annual cash flows, and any expected salvage value in a single value called equivalent current value, taking into account the time value of money (interest rates).c. Internal Rate of Return (IRR) summarizes the initial cost, expected annual cash flows, and estimated future salvage value of an investment proposal in an equivalent interest rate. In other words, this method identifies the rate of return that equates the estimate future returns and the initial costs.These techniques are appropriate when there is a high degree of certainty associated with estimates of future cash flows. In many instances, however, operations managers and other managers must deal with situations better described as risky or uncertain. When conditions of risk or uncertainty are present, decision theory is often applied.3. Decision Theory a helpful tool for financial comparison of alternatives under conditions of risk or uncertainty. It is suited to capacity decisions and to a wide range of other decisions managers must make. It involves identifying a set of possible future conditions that could influence results, listing alternative courses of action, and developing a financial outcome for each alternative-future condition combination.4. Waiting-Line Analysis Analysis of lines is often useful for designing or modifying service systems. Waiting lines have a tendency to form in a wide variety of service systems. The lines are symptoms of bottleneck operations. Analysis is useful in helping managers choose a capacity level that will be cost-effective through balancing the cost of having customers wait with the cost of providing additional capacity.5. Simulation This is useful in evaluating what if scenarios. What ifanalysis is a powerful tool for improvement that evaluates how strategic, tactical or operational changes may impact the business. Through differentscenarios, the manager will be able to perform a true-to-life analysis of the processes without putting the business operation at risk. Further, the following questions will be answered: How would the processing time of a case decrease if the number of available resources is doubled? What would be the cost/benefit rate of reducing the process time in a specified activity? What would be the effect of altering the working shift configuration in the operational cost and service level?

OPERATIONS STRATEGYThe strategic implication of capacity decisions can be enormous for an organization, impacting all areas of the organization. From an operations management standpoint, capacity decisions establish a set of conditions within which operations will be required to function. Hence, it is extremely important to include input from operations management people in making capacity decisions. Flexibility can be a key issue in capacity decisions, although it is not always an option particularly in capital-intensive industries. However, where possible, flexibility allows an organization to respond to changes in the marketplace. Also, it reduces dependence on long-range forecasts to accurately product demand. Moreover, flexibility makes it easier for the organization to take advantage of technological and other innovations. Maintaining a capacity cushion may provide flexibility but at added cost.Some organizations use a strategy of maintaining capacity cushion for the purpose of blocking the entry of new market players. However, this entails maintaining higher-than-necessary unit costs, and it makes it more difficult to cut back if demand slows, or to shift to new product or services.Bottleneck management can be an effective way of increasing capacity.In cases where capacity expansion is undertaken there are two (2) strategies for determining the timing and degree of expansion expand-early strategy and wait-and-see strategy.expand-early strategywait-and-see strategy

When undertakenexpansion is undertaken even before demand materializesexpansion is undertaken only after demand materializes

Purpose/advantagesachieve economies of scaleexpand market sharepre-empt competitors from expandinglower chance of oversupply due to more accurate matching of supply and demandhigher capacity utilization

Risksoversupply that will drive down the pricesunderutilized equipment that increases unit costsloss of market share

PROCESS SELECTIONProcess Selectionis basically the way goods or services are made or delivered, which influences numerous aspects of an organization, including capacity planning, layout of facilities, equipment and design of work systems. It is primarily used during the planning of new products or services that is subject to technological advances and competition. It has major implications for Capacity planning Layout of facilities Equipment Design of work systemsProcess selection is dependent on the company's process strategy, which has two main components: Capital Intensity and Process FlexibilityCapital Intensityis simply the combination of equipment and labor that an organization uses to accomplish some objective.Process Flexibilityis, as its name implies, how well a system can be adjusted to meet changes in processing requirements that are interdependent on variables such as product or service design, volume of production, and technology.Facility Layoutis simply the way a facility is arranged in order to maximize processes that are not only efficient but effective towards the overall organizational goal. It is also dependent on process selection.

TECHNOLOGYTechnology and technological innovation often have a major influence on business processes. Technological innovation refers to the discovery and development of new or improved products, services, or processes for producing or providing them. Technology refers to applications of scientific discoveries to the development and improvement of goods and services and/or the processes that produce or provide them. It includes the use of knowledge, materials, tools, techniques, and sources of power to make life easier or more pleasant and work more productive. The term high technology refers to the most advanced and development equipment and methods.3 Kinds of Technology1. Product and services technology: is the discovery and development of new product and service. This is done by researchers and engineers, who use the scientific approach to develop new knowledge and translate that into commercial applications.2. Process Technology: this includes methods, procedures and equipment used to produce goods and services. It does not only include processes within the organization but also extends to supply chain processes.3. Information technology (IT): this is the science and use of computers and other electronic equipment to store, process and send information. Technology as a Competitive AdvantageTechnological innovation in products and services and in processing technology can produce tremendous benefits for organizations.We all want to grow our business, right? And for most of us, growing means we need to leverage our competitive advantage.Competitive advantageoccurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. And so its important to understand exactly what your business competitive advantage is and how you can wield it to win customers.Information technology can play a significant role in augmenting your competitive advantage, but businesses must ensure that the time, money, and energy they spend on IT is properly placed.When one thinks of a business technology and how it relates to supporting competitive advantage, the layers of a pyramid easily comes to mind. (And yes, it sort of maps toMaslows hierarchyfor you Psychology buffs). The higher one moves on the pyramid, the more likely it is that technology increases his competitive advantage.Table Stakes Layers:The bottom two layers of the pyramid are table stakes layers. Table stakes are the minimum requirements to be in business or to enter a market. In poker, table stakes are the minimum bet before one can join the game. One cant come to the table without the table stakes.1. Infrastructure: At the bottom of the pyramid lies the companys infrastructure: servers, switches, computers, routers, networking, etc. Practically every one of the companys competitors has a system that is enough to run their business. So, unless the organization has something profoundly better or totally different, infrastructure typically does not add to its competitive advantage.2. Compliancy, Security, Disaster Recovery: These systems are another table stakes layer. It doesnt make the company better or different to be compliant, it just allows the company to legally play in the game. Security and Disaster Recovery are not significant competitive advantages, either. Clients expect the company to keep the data secure. They expect the systems to be up and running even in the face of disaster. If the company cannot do this, then it should not be in the business.

Competitive Advantages Layers:Companies are unique. The services and products offered make the businesses and lives of its customers better. Technologies that help amplify that uniqueness will strengthen the companys competitive advantage. These technologies are typically software solutions that increase productivity, improve business insight, or mitigate risk.1. Business Productivity and Communication:Most companies have business productivity and communications software. If the company uses Microsoft Office, Exchange, Lyncor something similar, then it uses business productivity technology. Since most businesses have this technology, adoption and proficiency is key. Investing in employee training in these technologies can really give the company an edge.2. Line-of Business Applications (LOB): Its likely that the organization owns an application that was designed to support the specific needs of its industry. It can be a mission-critical system that the business depends on to function. Oddly enough, some studies suggest that on average, 40% of features and functions in software areneverused and an additional 20% arerarelyused. While it may not make sense for you the company to use all the bells and whistles within its LOB application, itspossiblethat its software has some functionality thatcan it a competitive advantage if utilized. 3. Custom Applications:There is a pretty good chance that the LOB software the company is using was developed as a custom application by someone also within the industry. Perhaps one of the companys competitors or a supplier was trying to address the challenges and opportunities facing its industry. Custom applications are thepinnacleof The Technology Competitive Advantage Pyramid because these applications can give the company the tools and offerings that no one else in its industry has!Technology AcquisitionWhile Process technology can have enormous benefits, it also carriers substantial risk unless a significant effort is made to fully understand both downside as well as the upside of a particular technology.

PROCESS SELECTIONProcess selection refers to the strategic decisions of selecting the kind of production process to have in a manufacturing plant. Three primary questions bear on process selection:1. How much variety in products or services will the system need to handle?2. What degree of equipment flexibility will be needed?3. What is the expected volume of output?Answers to these questions serve as guide to selecting the appropriate process.5 Basic Process Types1. Job Shop: This usually operates on a relatively small scale. It is used when a low volume of high variety goods or services will be needed. Job shopsare typically smallmanufacturingsystems that handlejob production, that is custom/bespoke or semi-custom/bespoke manufacturing processes such as small to medium-size customer orders or batch jobs. Job shops typically move on to different jobs (possibly with different customers) when each job is completed. In job shops machines are aggregated in shops by the nature ofskillsand technologicalprocessesinvolved, each shop therefore may contain different machines, which gives this production system processing flexibility, since jobs are not necessarily constrained to a single machine. High flexibility using general-purpose equipment and skilled workers are important characteristics of a job shop. A typical example would be a machine shop, which may make parts for local industrial machinery, farm machinery and implements, boats and ships, or even batches of specialized components for the aircraft industry. Other types of common job shops aregrinding,honing,jig-boring,gear manufacturing, andfabricationshops.The opposite would be continuous flow manufactures such as textile, steel, food manufacturing and manual labor.Advantages: High flexibility in product engineering High expansion flexibility (machines are easily added or substituted) High production volume elasticity (due to small increments to productive capacity) Low obsolescence (machines are typically multipurpose) High robustness to machine failuresDisadvantages: Very hard scheduling due to high product variability and twisted production flow Low capacity utilization2. Batch: Batch processing is used when a moderate volume of goods or services is desired, and it can handle a moderate variety in products or services. The equipment need not be as flexible as in job shop, but processing is still intermittent. The skill level of workers doesnt need to be as high as in a job shop because there is less variety in the jobs being processed. Examples of batch systems include bakeries, which make breads, cakes or cookies in batches, movie theaters which show movies in groups of people. 3. Repetitive: When higher volumes of more standardized goods and services are needed, repetitive processing is used. The standardized output means only slight flexibility of equipment is needed. Skill of workers is generally low. Examples include production lines and assembly lines.4. Continuous: when very high volume of non-discrete, highly standardized output is desired, a continuous system is used. These systems have almost no variety in output and hence, no need for equipment flexibility workers skill requirements can range from low to high, depending on the complexity of the system and the expertise workers need.Job ShopBatchRepetitive or AssemblyContinuous

DescriptionCustomized goods or servicesSemi-standardized goods or servicesStandardized goods or servicesHighly standardized goods or services

AdvantagesAble to handle a wide variety of workFlexibilityLow unit cost, high volume efficientVery efficient, very high volume

DisadvantagesLow, high cost per unit, complex planning and schedulingModerate cost per unit, moderate scheduling complexityLow flexibility, high cost of downtimeVery rigid, lack of variety, costly to change, very high cost of downtime

5. Project: All the above four (4) process types are typically ongoing operations. However, some situations are not ongoing but instead are of limited durations. In such instances, the work is often organized as a project. A project is used for work that is non-routine, with a unique set of objectives to be accomplished in a limited time frame. Equipment flexibility and worker skills can range from high to low. Product and Service Profiling:Product or service profiling can be used to avoid any inconsistencies by identifying key product or service dimensions and then selecting appropriate processes. Key dimensions often relate to range of products or services that will be processed, expected order sizes, pricing strategies, expected frequency or schedule changes, and order-winning requirements.Automation:Automation is machinery that has sensing and control devices that enable it to operate automatically. If the company decides to automate, the next question is how much. In order for automated processing to be an option, job-processing requirements must be standardized or have a very little or no variety.Automate services are also an option. Examples range from automated teller machines to automated heating and airconditioning.Advantages of Automation (over human labor): Low variability whereas it is difficult for a human to perform a task in exactly the same way, in the same amount of time, and on a repetitive basis. In production setting, variability is detrimental to quality and meeting schedules. Further, machines do not get bored or get distracted, nor do they go on strikes, ask for higher wages for file labor complaints) Reduction of variable costs Disadvantages (over human labor): Costly Technology is expensive. It requires high volume of output to offset high costs. Less flexible Once a process has been automated, there is substantial reason for not changing it. Adverse effect on morale and productivity Workers usually fear automation because it might result to them losing their jobsQuestions that need to be answered in determining whether to automate or not:1. What level of automation is appropriate?2. How could automation affect the flexibility of an operating system?3. How can automation projects be justified?4. How should changes be managed?5. What are the risks of automating?6. What are some of the likely effects of implementing automation on market share, costs, quality, customer satisfaction, labor relations and on-going operations?Kinds of Automation:1. Fixed Automation - also known as hard automation, refers to an automated production facility in which the sequence of processing operations is fixed by the equipment configuration. Of the three kinds of automation, this is the most rigid. It uses high-cost, specialized equipment for a fixed sequence of operations. Low cost and high volume are its primary advantages; minimal variety and high cost of making major changes in either product or process are its primary limitations.2. Programmable automation is at the opposite end of the spectrum. It involves the use of high cost, general purpose equipment controlled by a computer program that provides both the sequence of operations and specific details about each operation. This type of automation has the capability of economically producing a fairly wide variety of low-volume products in small batches. The products are made in batch quantities ranging from several dozen to several thousand units at a time. For each new batch, the production equipment must be reprogrammed and changed over to accommodate the new product style.3. Flexible Automation is the ability for a robot or system to be quickly and easily re-tasked to change product design for both low and high mix manufacturing. When properly utilized, a Flexible Automation cell can evolve with process and demand, reduce and fix production costs, improve quality, and eliminate health and safety issues.

OPERATIONS STRATEGYFlexibility as a competitive strategy is important. However, flexibility does not always offer the best choice in processing decisions. Flexible systems and equipment are often more expensive and not as efficient as less flexible alternative. In certain instances, flexibility is unnecessary because products are in mature stages, requiring few design changes, and there is a steady volume of output. Ordinarily, this type of situation calls for specialized processing equipment, with no need for flexibility. Thus, flexibility should be matched with situations in which a need for flexibility clearly exists.In practice, decision makers choose flexibility for two reasons: demands are varied or uncertainty exists about demand. The second reason can be overcome through improved forecasting.

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