Operations Management (Chapter 1) KEY POINTS

Operations Management is the 1. The operations function is that part of

management of systems or processes that every business organization that produces
create goods and/or provide services. products and/or delivers services.
A supply chain is the sequence of 2. Operations consists of processes that
organizations—their facilities, functions, convert inputs into outputs. Failure to
and activities—that are involved in manage those processes effectively will
producing and delivering a product or have a negative impact on the
service. The sequence begins with basic organization.
suppliers of raw materials and extends all
3. A key goal of business organizations is
the way to the final customer.
to achieve an economic matching of
SUMMARY supply and demand. The operations
function is responsible for providing the
The operations function in business
supply or service capacity for
organizations is responsible for producing
expected demand.
goods and providing services. It is a core
function of every business. Supply chains 4. All processes exhibit variation that
are the sequential system of suppliers and must be managed.
customers that begins with basic sources
5. Although there are some basic
of inputs and ends with final customers of
differences between services and
the system. Operations and supply chains
products that must be taken into account
are interdependent—one couldn’t exist
from a managerial standpoint, there are
without the other, and no business
also many similarities between the two.
organization could exist without both.
Operations management involves system 6. Environmental issues will increasingly
design and operating decisions related to impact operations decision making.
product and service design, capacity
7. Ethical behavior is an integral part of
planning, process selection, location
good management practice.
selection, work management, inventory
and supply management, production 8. All business organizations have, and
planning, quality assurance, scheduling, are part of, a supply chain that must be
and project management. The historical managed.
evolution of operations management
provides interesting background
information on the continuing evolution
of this core business function. The
Operations Tours and Readings included
in this and subsequent chapters provide
insights into actual business operations.
Competitiveness, Strategy, and
Productivity (Chapter 2)
This chapter discusses competitiveness,
strategy, and productivity, three separate
but related topics that are vitally
important to business organizations.
Competitiveness relates to the
effectiveness of an organization in the
marketplace relative to other
organizations that offer similar products
or services. Operations and marketing
have a major impact on competitiveness.
Strategy relates to the plans that
determine how an organization pursues
its goals. Operations strategy is
particularly important in this regard.
Productivity relates to the effective use of
resources, and it has a direct impact on
competitiveness. Operations management
is chiefly responsible for productivity.
Competitiveness is an important factor in
determining whether a company
prospers, barely gets by, or fails. Business
organizations compete through some
combination of price, delivery time, and
product or service differentiation.
Summary
Competition is the driving force in many
organizations. It may involve price,
quality, special features or services, time,
or other factors. To develop effective
strategies for business, it is essential for
organizations to determine what
combinations of factors are important to
customers, which factors are order
qualifiers, and which are order winners. It
is essential that goals and strategies be
aligned with the organization’s mission.
Strategies are plans for achieving
organizational goals. They provide focus
for decision making. Strategies must take
into account present and future customer
wants, as well as the organization’s
strengths and weaknesses, threats and
opportunities. These can run the gamut
from what competitors are doing, or are
likely to do, to technology, supply chain
management, and e-business.
Organizations generally have overall
strategies that pertain to the entire
organization and strategies that pertain to
each of the functional areas. Functional
strategies are narrower in scope and
should be linked to overall strategies.
Time-based strategies and quality-based
strategies are among the most widely
used strategies business organizations
employ to serve their customers and to
become more productive. The chapter
includes a description of the Balanced
Scorecard approach, which can be helpful
for transforming strategies into actions,
and the implications of organization
strategy for operations management.
Productivity is a measure of the use of
resources. There is considerable interest
in productivity both from an
organizational standpoint and from a
national standpoint. Business
organizations want higher productivity
because it yields lower costs and helps
them to become more competitive.
Nations want higher productivity because
it makes their goods and services more
attractive, offsets inflationary pressures
associated with higher wages, and results
in a higher standard of living for their
people.
Key Points
1. Competitive pressure often means that
business organizations must frequently
assess their competitors’ strengths and
weaknesses, as well as their own, to
remain competitive.
 2. Strategy formulation is critical because
strategies provide direction for the
organization, so they can play a role in the
success or failure of a business
organization.
3. Functional strategies and supply chain
strategies need to be aligned with the
goals and strategies of the overall
organization.
4. The three primary business strategies
are low cost, responsiveness, and
differentiation.
5. Productivity is a key factor in the cost
of goods and services. Increases in
productivity can become a competitive
advantage.
6. High productivity is particularly
important for organizations that have a
strategy of low costs.
Product and Service Design (Chapter 4)
The essence of a business organization is
the products and services it offers, and
every aspect of the organization and its
supply chain are structured around those
products and services. Organizations that
have well-designed products or services
are more likely to realize their goals than
those with poorly designed products or
services. Hence, organizations have a
strategic interest in product and service
design. Product or service design should
be closely tied to an organization’s
strategy. It is a major factor in cost,
quality, time-to-market, customer
satisfaction, and competitive advantage.
Consequently, marketing, finance,
operations, accounting, IT, and HR need to
be involved. Demand forecasts and
projected costs are important, as is the
expected impact on the supply chain. It is
significant to note that an important
cause of operations failures can be traced
to faulty design. Designs that have not
been well thought out, or incorrectly
implemented, or instructions for assembly
or usage that are wrong or unclear, can be
the cause of product and service failures,
leading to lawsuits, injuries and deaths,
product recalls, and damaged reputations.
The introduction of new products or
services, or changes to product or service
designs, can have impacts throughout the
organization and the entire supply chain.
Some processes may change very little,
while others may have to change
considerably in terms of what they do or
how and when they do it. New processes
may have to be added, and some current
ones may be eliminated. New suppliers
and distributors may need to be found
and integrated into the system, and some
current suppliers and distributors may no
longer be an appropriate fit. Moreover, it
is necessary to take into account
projected impact on demand as well as
financial, marketing, and distribution
implications. Because of the potential for
widespread effects, taking a “big picture”
systems approach early and throughout
the design or redesign process is
imperative to reduce the chance of
missing some implications and costs, and
to understand the time it will take.
Product and service design is a key factor
in satisfying the customer. To be
successful in product and service design,
organizations must be continually aware
of what customers want, what the
competition is doing, what government
regulations are, and what new
technologies are available. The design
process involves motivation, ideas for
improvement, organizational capabilities,
and forecasting. In addition to product life
cycles, legal, environmental, and ethical
considerations influence design choices.
What degree of standardization designers
should incorporate into designs is also an
important consideration. A key objective
for designers is to achieve a product or
service design that will meet or exceed
customer expectations, within cost or SUMMARY
budget and taking into account the
Product and service design is a key factor
capabilities of operations. Although
in satisfying the customer. To be
product design and service design are
successful in product and service design,
similar in some respects, a number of key
organizations must be continually aware
differences exist between products and
of what customers want, what the
services that influence the way they are
competition is doing, what government
designed. Successful design often
regulations are, and what new
incorporates many of these basic
technologies are available. The design
principles: Determine what customers
process involves motivation, ideas for
want as a starting point; minimize the
improvement, organizational capabilities,
number of parts needed to manufacture
and forecasting. In addition to product life
an item or the number of steps to provide
cycles, legal, environmental, and ethical
a service; simplify assembly or service,
considerations influence design choices.
standardize as much as possible; and
What degree of standardization designers
make the design robust. Trade-off
should incorporate into designs is also an
decisions are common in design, and they
important consideration. A key objective
involve such things as development time
for designers is to achieve a product or
and cost, product or service cost, special
service design that will meet or exceed
features/performance, and product or
customer expectations, within cost or
service complexity. Research and
budget and taking into account the
development efforts can play a significant
capabilities of operations. Although
role in product and process innovations,
product design and service design are
although these are sometimes so costly
similar in some respects, a number of key
that only large companies or governments
differences exist between products and
can afford to underwrite them. Reliability
services that influence the way they are
of a product or service is often a key
designed. Successful design often
dimension in the eyes of the customer.
incorporates many of these basic
Measuring and improving reliability are
principles: Determine what customers
important aspects of product and service
want as a starting point; minimize the
design, although other areas of the
number of parts needed to manufacture
organization also have an influence on
an item or the number of steps to provide
reliability. Quality function deployment is
a service; simplify assembly or service,
one approach for getting customer input
standardize as much as possible; and
for product or service design. In this
make the design robust. Trade-off
chapter you will discover insights into the
decisions are common in design, and they
design process that apply to both product
involve such things as development time
and service design.
and cost, product or service cost, special
features/performance, and product or
service complexity. Research and
development efforts can play a significant
role in product and process innovations,
although these are sometimes so costly
that only large companies or governments
can afford to underwrite them. Reliability
of a product or service is often a key
dimension in the eyes of the customer.
Measuring and improving reliability are
important aspects of product and service
design, although other areas of the
organization also have an influence on
reliability. Quality function deployment is
one approach for getting customer input
for product or service design.
KEY POINTS
1. A range of factors can cause an
organization to design or redesign a
product or service, including economic,
legal, political, social, technological, and
competitive pressures. Furthermore, an
important cause of operations failures can
be traced to faulty design.
2. Every area of a business organization
and its supply chain is connected to, and
influenced by, its products and/or
services, so the potential impact on each
area must be taken into account when
products or services are redesigned or
new products or services are to be
designed.
3. Central issues relate to the actual or
expected demand for a product or service,
the organization’s capabilities, the cost to
produce or provide, the desired quality
level, and the cost and availability of
necessary resources.
4. Among considerations that are
generally important are legal, ethical, and
environmental.
5. Although there are some basic
differences between product design and
service design, there are many similarities
between the two.
Process Selection and Facility Layout
(Chapter Six)
SUMMARY
Process selection choices often have
strategic implications for organizations.
They can affect cost, quality, productivity,
customer satisfaction, and competitive
advantage. Process types include job
shop, batch processing, repetitive
processing, continuous processing, and
projects. Process type determines how
work is organized, and it has implications
for the entire organization and its supply
chain. Process type and layout are closely
related. Except for projects, process
selection is usually a function of the
volume and variety needed. Layout
decisions are an important aspect of the
design of operations systems, affecting
operating costs and efficiency. Layout
decisions are often closely related to
process selection decisions. Product
layouts are geared to high-volume output
of standardized items. Workers and
equipment are arranged according to the
technological sequence required by the
product or service involved. Emphasis in
design is on work flow through the
system, and specialized processing and
handling equipment is often used. Product
layouts are highly vulnerable to
breakdowns. Preventive maintenance is
used to reduce the occurrence of
breakdowns. Software is available for
large or complex designs. Process layouts
group similar activities into departments
or other work centers. These systems can
handle a wide range of processing
requirements and are less susceptible to
breakdowns. However, the variety of
processing requirements necessitates
continual routing and scheduling and the
use of variable-path material-handling
equipment. The rate of output is generally
much lower than that of product layouts.
Fixed-position layouts are used when size,
fragility, cost, or other factors make it
undesirable or impractical to move a
product through a system. Instead,
workers, equipment, and materials are
brought to the product. The main design
efforts in product layout development
focus on dividing up the work required to
produce a product or service into a series
of tasks that are as nearly equal as
possible. The goal is to achieve a high
degree of utilization of labor and
equipment. In process layout, design
efforts often focus on the relative
positioning of departments to minimize
transportation costs or to meet other
requirements concerning the proximity of
certain department pairs. The large
number of possible alternatives to layout
problems prevents an examination of
each one. Instead, heuristic rules guide
discovery of alternatives. The solutions
thus obtained are usually satisfactory
although not necessarily optimal.
Software packages are available to reduce
the effort required to obtain solutions to
layout problems, but these too rely largely
on heuristic methods.
KEY POINTS
1. Process choice is demand driven.
2. Process type and layout are a function
of expected demand volume and the
degree of customization that will be
needed.
3. Each process type and layout type has
advantages and limitations that should be
clearly understood when making process
selection and layout decisions.
4. Process design is critical in a product-
focused system, whereas managing is
critical in a process focused system.
Work Design and Measurement (Chapter
7)
This chapter has four major sections: job
design, quality of work life, methods
analysis, and work measurement. As you
read this chapter, note how decisions in
other design areas have an impact on
work design. For example, product or
service design decisions in large measure
determine the kinds of activities workers
will be involved with. Similarly, layout
decisions often influence work design.
Process layouts tend to necessitate
broader job content than product layouts.
The implication of these interrelationships
is that it is essential to adopt a systems
approach to design; decisions in one area
must be related to the overall system.
The importance of work design is
underscored by an organization’s
dependence on human efforts (i.e., work)
to accomplish its goals. Furthermore,
many of the topics in this chapter are
especially relevant for productivity
improvement and continuous
improvement.
SUMMARY
Quality of work life includes relationships
with managers and co-workers, working
conditions, and compensation. Job design
is concerned with job content and work
methods. In the past, job design tended to
emphasize efficiency. More recently,
emphasis has expanded to include
behavioral considerations and worker
satisfaction. Current concerns about
productivity have thrust job design into
the limelight. However, the jobs usually
associated with high productivity are
often the same jobs that are the greatest
source of worker dissatisfaction, creating
somewhat of a paradox for job designers.
Analysts often use methods analysis and
motion study techniques to develop the
“efficiency” aspects of jobs, but these do
not directly address behavioral aspects.
Nonetheless, they are an important part
of job design. Working conditions are also
a notable aspect of job design, not only
because of the behavioral and efficiency
factors but also because of concern for
the health and safety of workers. Work
measurement is concerned with
specifying the length of time needed to
complete a job. Such information is vital
for personnel planning, cost estimating,
budgeting, scheduling, and worker
compensation. Commonly used
approaches include stopwatch time study
and predetermined times. A related
technique is work sampling, which can
also be used to obtain data on activity
times. More commonly, work sampling is
used to estimate the proportion of time a
worker spends on a certain aspect of the
job. Table 7.7 provides a summary of the
formulas used in time studies and work
sampling. Organizations can choose from
a variety of compensation plans. It is
important to do so carefully, for
compensation is key to both the worker
and the organization, and, once adopted,
it is usually difficult to substantially
change a compensation plan.
KEY POINTS
1. Work design focuses on the core of
operations.
2. Job design determines job content;
methods analysis and motion study
determine how a job is to be performed;
and work measurement determines the
time it should take to do a job.
3. The information provided by job
design, methods analysis, motion study,
and time standards is extremely valuable
for process and productivity
improvement.
4. Quality of work life can be a major
factor in maintaining a productive
workforce.
Management of Quality (Chapter 9)
This chapter is the first of two chapters on
quality. In this chapter you will learn
about the evolution of quality
management, definitions of quality, the
costs of quality and the consequences of
poor quality, some quality awards and
quality certification, total quality
management, and quality tools. The
importance of quality cannot be
overstated; two key elements of every
purchasing decision are price and quality.
Consequently, having a focus on quality
and quality improvement should be a part
of every business organization, whether
the organization’s business is making cars,
selling electronic goods, providing organization buy in to the idea.
financial services, providing medical Otherwise, there is a risk that a significant
services, or baking cookies. portion of the benefits of the approach
will not be realized. Therefore, it is
Broadly defined, quality refers to the
important to give this sufficient attention,
ability of a product or service to
and to confirm that concordance exists
consistently meet or exceed customer
before plunging ahead. A key aspect of
requirements or expectations. However,
this is a top-down approach: Top
different customers will have different
management needs to be visibly involved
requirements, so a working definition of
and needs to be supportive, both
quality is customer-dependent. For a
financially and emotionally. Also
decade or so, quality was an important
important is education of managers and
focal point in business. But after a while,
workers in the concepts, tools, and
the emphasis on quality began to fade,
procedures of quality. Again, if education
and quality took a backseat to other
is incomplete, there is the risk that TQM
concerns. However, there has been an
will not produce the desired benefits. And
upsurge recently in the need for attention
here’s a note of caution: Although
to quality. Much of this has been driven
customer retention rates can have a
by recent experience with costs and
dramatic impact on profitability, customer
adverse publicity associated with wide
satisfaction does not always guarantee
ranging recalls that have included
customer loyalty. Consequently,
automobiles, ground meat, toys, produce,
organizations may need to develop a
dog food, and pharmaceuticals.
retention strategy to deal with this
OPERATIONS STRATEGY possibility. It is not enough for an
organization to incorporate quality into its
All customers are concerned with the
operations; the entire supply chain has to
quality of goods or services they receive.
be involved. Problems such as defects in
For this reason alone, business
purchased parts, long lead times, and late
organizations have a vital, strategic
or missed deliveries of goods or services
interest in achieving and maintaining high
all negatively impact an organization’s
quality standards. Moreover, there is a
ability to satisfy its customers. So it is
positive link between quality and
essential to incorporate quality
productivity, giving an additional incentive
throughout the supply chain.
for achieving high quality and being able
to present that image to current and SUMMARY
potential customers. The best business
This chapter presents philosophies and
organizations view quality as a never-
tools that can be used to achieve high
ending journey. That is, they strive for
quality and continually improve quality.
continual improvement with the attitude
Quality is the culmination of efforts of the
that no matter how good quality is, it can
entire organization and its supply chain. It
always be improved, and there are
begins with careful assessment of what
benefits for doing so. In order for total
the customers want, then translating this
quality management to be successful, it is
information into technical specifications
essential that a majority of those in an
to which goods or services must conform.
The specifications guide product and on selected projects to achieve business
service design, process design, production results.
of goods and delivery of services, and
KEY POINTS
service after the sale or delivery.
The consequences of poor quality include
loss of market share, liability claims, a 1. Price and quality are the two primary
decrease in productivity, and an increase considerations in every buying
in costs. Quality costs include costs transaction, so quality is extremely
related to prevention, appraisal, and important.
failure. Determinants of quality are
2. Quality gurus have made important
design, conformance to design, ease of
contributions to the way business
use, and service after delivery. Modern
organizations view quality and achieve
quality management is directed at
quality.
preventing mistakes rather than finding
them after they occur and reducing 3. Quality certification and quality awards
process output variation. Currently, the are important because they can provide
business community shows widespread some degree of assurance to customers
interest in improving quality and about quality.
competitiveness. The chapter includes a
4. Many simple-to-use tools are available
description of the key contributors to
for problem solving and process
quality management, and it outlines the
improvement.
ISO 9000, ISO 14000, and ISO 24700
international quality standards. Three JIT and Lean Operations (Chapter 14)
awards of distinction—the Baldrige
As business organizations strive to
Award, the European Quality Award, and
maintain competitiveness in an ever-
the Deming Prize—are given annually to
changing global economy, they are
organizations that have shown great
increasingly seeking new and better ways
achievement in quality management.
of operating. For some, this means
Total quality management is a never-
changing from the traditional ways of
ending pursuit of quality that involves
operating to what is now referred to as
everyone in an organization. The driving
lean operation. A lean operation is a
force is customer satisfaction; a key
flexible system of operation that uses
philosophy is continuous improvement.
considerably fewer resources (i.e.,
Training of managers and workers in
activities, people, inventory, and floor
quality concepts, tools, and procedures is
space) than a traditional system.
an important aspect of the approach.
Moreover, lean systems tend to achieve
Teams are an integral part of TQM. Two
greater productivity, lower costs, shorter
major aspects of the TQM approach are
cycle times, and higher quality than
problem solving and process
nonlean systems. Lean systems are
improvement. Six-Sigma programs are a
sometimes referred to as just-in-time (JIT)
form of TQM. They emphasize the use of
systems owing to their highly coordinated
statistical and management science tools
activities and delivery of goods that occur
just as they are needed. The lean
approach was pioneered by Toyota’s
founder, Taiichi Ohno, and Shigeo Shingo
as a much faster and less costly way of
producing automobiles. Following its
success, today the lean approach is being
applied in a wide range of manufacturing
and service operations. Lean is both a
philosophy and a methodology that
focuses on eliminating waste (nonvalue-
added activities) and streamlining
operations by closely coordinating all
activities. Lean systems have three basic
elements: They are demand driven, are
focused on waste reduction, and have a
culture that is dedicated to excellence and
continuous improvement. This chapter
describes the lean production approach,
including the basic elements of these
systems and what it takes to make them
work effectively. It also points out the
benefits of these systems and the
potential obstacles that companies may
encounter when they attempt to convert
from a traditional system to a lean
production system.
Lean operations began as lean
manufacturing in the mid-1900s. It was
developed by the Japanese automobile
manufacturer Toyota. The development in
Japan was influenced by the limited
resources available at the time. Not
surprisingly, the Japanese were very
sensitive to waste and inefficiency.
Widespread interest in lean
manufacturing occurred after a book
about automobile production, The
Machine That Changed the World, by
James Womack, Daniel Jones, and Daniel
Roos, was published in 1990. As described
in the book, Toyota’s focus was on the
elimination of all waste from every aspect
of the process. Waste was defined as
anything that interfered with, or did not
add value to, the process of producing
automobiles.
SUMMARY
Lean operation is an alternative to
traditional operation that an increasing
number of organizations are adopting.
The ultimate goal of a lean system is to
achieve a balanced, smooth flow of
operations. Supporting goals include
eliminating disruptions to the system,
making the system flexible, and
eliminating waste. The building blocks of a
lean production system are product
design, process design, personnel and
organization, and manufacturing planning
and control. Lean systems require the
elimination of sources of potential
disruption to the even flow of work. High
quality is essential because problems with
quality can disrupt the process. Quick,
low-cost setups, special layouts, allowing
work to be pulled through the system
rather than pushed through, and a spirit
of cooperation are important features of
lean systems. So, too, are problem solving
aimed at reducing disruptions and making
the system more efficient, and an attitude
of working toward continual
improvement. Key benefits of lean
systems are reduced inventory levels, high
quality, flexibility, reduced lead times,
increased productivity and equipment
utilization, reduced amounts of scrap and
rework, and reduced space requirements.
The risks stem from the absence of
buffers, such as extra personnel and
inventory stockpiles to fall back on if
something goes wrong. The possible
results of risks include lost sales and lost
customers. Just-in-time (JIT) is a system of
lean production used mainly in repetitive
operations, in which goods move through
the system and tasks are completed just in
time to maintain the schedule. JIT systems
require very little inventory because
successive operations are closely
coordinated. Careful planning and much
effort are needed to achieve a smoothly
functioning system in which all resources
needed for production come together at
precisely the right time throughout the
process. Raw materials and purchased
parts must arrive when needed,
fabricated parts and subassemblies must
be ready when needed for final assembly,
and finished goods must be delivered to
customers when needed. Special attention
must be given to reducing the risk of
disruptions to the system as well as rapid
response to resolving any disruptions that
do occur. Usually, a firm must redesign its
facilities and rework labor contracts to
implement lean operation. Teamwork and
cooperation are important at all levels, as
are problem-solving abilities of workers
and an attitude of continuous
improvement.
OVERVIEW OF LEAN
Lean systems are designed to operate
with fewer resources than traditional
systems. Elements of lean operation
include: Smooth flow of work (the
ultimate goal) Elimination of waste
Continuous improvement Elimination of
anything that does not add value Simple
systems that are easy to manage Use of
product layouts that minimize time spent
moving materials and parts Quality at the
source: Each worker is responsible for the
quality of his or her output Poka-yoke:
fail-safe tools and methods to prevent
mistakes Preventive maintenance to
reduce the risk of equipment breakdown
Good housekeeping: an orderly and clean
workplace Setup time reduction Cross-
trained workers A pull system There are
eight types of waste: Inventory
Overproduction Waiting time Excess
transportation Processing waste
Inefficient work methods Product or
service defects Underused people
KEY POINTS
1. Lean systems produce high-quality
goods or services using fewer resources
than traditional operations systems.
2. Lean thinking helps business
organizations to become more productive,
reduce costs, and be more market-
responsive.
3. Lean operations are designed to
eliminate waste (value stream mapping),
minimize inventory (JIT deliveries),
maximize work flow (small batches with
quick changeovers), make only what is
needed (demand pull), empower work
teams, do it right the first time (quality at
the source), and continually improve.
Strategic Capacity Planning for Products
and Services (Chapter 5)
Capacity planning is a key strategic
component in designing the system. It
encompasses many basic decisions with
long-term consequences for the
organization. In this chapter, you will learn
about the importance of capacity
decisions, the measurement of capacity,
how capacity requirements are
determined, and the development and
evaluation of capacity alternatives. Note
that 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 that
affect capacity planning.
OPERATIONS STRATEGY
 The strategic implications of capacity
decisions can be enormous, 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
flexibility is not always an option,
particularly in capital-intensive industries.
However, where possible, flexibility allows
an organization to be agile—that is,
responsive to changes in the marketplace.
Also, it reduces to a certain extent the
dependence on long-range forecasts to
accurately predict demand. And flexibility
makes it easier for organizations to take
advantage of technological and other
innovations. Maintaining excess capacity
(a capacity cushion) may provide a degree
of flexibility, albeit at added cost. Some
organizations use a strategy of
maintaining a capacity cushion for the
purpose of blocking entry into the market
by new competitors. The excess capacity
enables them to produce at costs lower
than what new competitors can. However,
such a strategy means higherthan-
necessary unit costs, and it makes it more
difficult to cut back if demand slows, or to
shift to new product or service offerings.
Efficiency improvements and utilization
improvements can provide capacity
increases. Such improvements can be
achieved by streamlining operations and
reducing waste. The chapter on lean
operations describes ways for achieving
those improvements. Bottleneck
management can be a way to increase
effective capacity, by scheduling
nonbottleneck operations to achieve
maximum utilization of bottleneck
operations. In cases where capacity
expansion will be undertaken, there are
two strategies for determining the timing
and degree of capacity expansion. One is
the expand-early strategy (i.e., before
demand materializes). The intent might be
to achieve economies of scale, to expand
market share, or to preempt competitors
from expanding. The risks of this strategy
include an oversupply that would drive
prices down, and underutilized equipment
that would result in higher unit costs. The
other approach is the wait-and-see
strategy (i.e., to expand capacity only after
demand materializes, perhaps
incrementally). Its advantages include a
lower chance of oversupply due to more
accurate matching of supply and demand,
and higher capacity utilization. The key
risks are loss of market share and the
inability to meet demand if expansion
requires a long lead time. In cases where
capacity contraction will be undertaken,
capacity disposal strategies become
important. This can be the result of the
need to replace aging equipment with
newer equipment. It can also be the result
of outsourcing and downsizing operations.
The cost or benefit of asset disposal
should be taken into account when
contemplating these actions.
SUMMARY
Capacity refers to a system’s potential for
producing goods or delivering services
over a specified time interval. Capacity
decisions are important because capacity
is a ceiling on output and a major
determinant of operating costs. Three key
inputs to capacity planning are the kind of
capacity that will be needed, how much
will be needed, and when it will be
needed. Accurate forecasts are critical to
the planning process. The capacity public opinion and personal preferences
planning decision is one of the most of managers. Cost–volume analysis can be
important decisions that managers make. useful for analyzing alternatives.
The capacity decision is strategic and long-
KEY POINTS
term in nature, often involving a
significant initial investment of capital. 1. Capacity decisions can be critical to the
Capacity planning is particularly difficult in success of a business organization
cases where returns will accrue over a because capacity is the supply side of the
lengthy period and risk is a major supply-demand equation, and too little or
consideration. A variety of factors can too much capacity is costly.
interfere with effective capacity, so
2. The key issues in capacity planning
effective capacity is usually somewhat less
relate to determining what kind of
than design capacity. These factors
capacity is needed, how much is needed,
include facilities design and layout, human
and when it is needed.
factors, product/ service design,
equipment failures, scheduling problems, 3. Volatile demand and long lead times to
and quality considerations. Capacity achieve capacity changes can be
planning involves long-term and short- challenging.
term considerations. Long-term
4. One or more constraints can adversely
considerations relate to the overall level
affect the overall capacity of a system
of capacity; short-term considerations
(see, for example, Figure 5.2). Capacity
relate to variations in capacity
increases can only be achieved by
requirements due to seasonal, random,
loosening those constraints, not by
and irregular fluctuations in demand.
increasing other resources, so it is
Ideally, capacity will match demand. Thus,
essential to identify constraining
there is a close link between forecasting
resources and focus efforts on overcoming
and capacity planning, particularly in the
them.
long term. In the short term, emphasis
shifts to describing and coping with
variations in demand.
Development of capacity alternatives is
enhanced by taking a systems approach to
planning, by recognizing that capacity
increments are often acquired in chunks,
by designing flexible systems, and by
considering product/service complements
as a way of dealing with various patterns
of demand. In evaluating capacity
alternatives, a manager must consider
both quantitative and qualitative aspects.
Quantitative analysis usually reflects
economic factors, and qualitative
considerations include intangibles such as