January-April 2021_Question

a. Why is capacity planning one of the most important decisions a manager has to
make? Briefly explain with example

Capacity planning is crucial for an organization's success as it involves determining the

optimal level of resources, production capabilities, and infrastructure needed to meet current
and future demand for products or services. It's a critical decision for managers because it
directly impacts a company's ability to fulfill customer orders, maintain efficiency, and make
informed investment choices.

Importance of Capacity Planning:

Meeting Customer Demand: Effective capacity planning ensures that a company can meet
customer demands promptly without overloading resources or causing delays. Having excess
capacity can lead to unnecessary costs, while insufficient capacity can result in lost sales and
dissatisfied customers.

Cost Efficiency: Proper capacity planning helps allocate resources efficiently. Overcapacity
leads to wasted resources and increased operational costs, while under capacity can lead to
rush orders, expedited shipping, and overtime pay, all of which increase costs.

Competitive Advantage: Organizations with well-aligned capacity planning can respond

quickly to market changes and seize opportunities faster than competitors, thereby gaining a
competitive edge.

Resource Allocation: Capacity planning aids in optimizing resource utilization by ensuring

that resources like labor, machinery, and facilities are used optimally and not sitting idle or
overburdened.

Strategic Investments: It guides strategic decisions such as when and where to expand or
invest in new facilities or equipment. These investments are significant and long-term,
requiring careful consideration of demand forecasts and growth projections.

Example:
Consider a retail company that sells electronic gadgets. During the holiday season, there's a
significant spike in demand for smartphones, tablets, and other electronic devices. If the
company fails to plan its capacity effectively, it might not have enough products to meet the
increased demand. This would result in missed sales opportunities, frustrated customers, and
potential reputational damage. On the other hand, if the company invests heavily in additional
production capacity that remains unused during the rest of the year, it would incur
unnecessary costs.
By implementing effective capacity planning, the company can forecast the increase in
demand accurately, adjust its production capabilities accordingly, and even consider strategies
like hiring temporary staff or outsourcing to address the seasonal surge. This ensures that the
company maximizes sales during peak periods while avoiding wastage during slower times,
ultimately enhancing profitability and customer satisfaction.

b. Why is capacity planning for services more challenging than it is for goods
production? Briefly explain with appropriate logic and example.

Capacity planning for services is often more challenging than it is for goods production due
to several unique factors that affect service delivery. Let's break down the reasons using a
simple example:

1. Intangibility:
Goods are tangible products that can be stored and inspected, allowing for easier
measurement and control of production. Services, on the other hand, are intangible and
involve interactions, experiences, and performances that are not as easy to quantify or predict.

Example: Consider a restaurant. Producing goods like pizzas involves known quantities of
ingredients and standardized cooking times. In contrast, providing a service like fine dining
involves interactions with customers, personalized experiences, and variations in dining
durations, making capacity planning more complex.

2. Variability:
Services are often subject to higher levels of variability due to factors like customer
preferences, human interactions, and external conditions. This variability makes it
challenging to predict and manage demand accurately.

Example: A car repair shop's capacity planning can be difficult because the time needed to fix
different car problems can vary widely. Unforeseen issues can arise during repairs, leading to
delays and variations in service delivery times.

3. Perishability:
Services are often perishable and cannot be stored for future use. If a service capacity is not
utilized at a particular time, it cannot be "saved" or rolled over to another time, leading to
potential revenue loss.

Example: In the airline industry, empty seats on a flight represent lost revenue that cannot be
recovered. Once the flight departs, the unsold seats cannot be sold later.

4. Customer Involvement:
Customers are active participants in the service delivery process, which can add complexity
to capacity planning. Customer behavior and preferences impact the demand and flow of
services.

Example: In a hair salon, customer preferences for different hairstyling options can result in
varying service durations. Some customers might want intricate styles that take more time,
affecting the salon's ability to schedule appointments efficiently.

In essence, capacity planning for services is challenging because of the intangible nature of
services, the variability in customer preferences and interactions, the perishable nature of
service capacity, and the active role of customers in the service process. These factors make it
harder to accurately predict and manage demand, which is critical for maintaining high
service quality, customer satisfaction, and resource utilization. Effective capacity planning for
services requires considering these unique challenges and developing strategies to handle
them while ensuring a smooth and satisfactory customer experience.

September-December 2020_Question

Question No. 2
“Binney & Smith, maker of Crayola products, produces nearly three billion crayons
each year in its Easton, PA, manufacturing facility.”- Which kind of process and
automation is applicable for this type of industry and why? Briefly explain.

The production of three billion crayons annually involves a high-volume manufacturing

process that requires efficient automation to ensure quality, consistency, and
cost-effectiveness. A suitable approach for this type of industry is continuous manufacturing
with a combination of batch processing and automation.

Batch Processing: Crayons can be produced in batches to maintain quality control and
enable adjustments for variations in color, formulation, and other factors. Batch processing
allows for careful monitoring and adjustment of each batch's characteristics before moving to
the next stage, ensuring that the final product meets quality standards.

Automation Techniques - Flexible Manufacturing System (FMS)

Robotic Mixing and Formulation: Automated robots can be used to precisely mix the
ingredients for crayon wax, pigments, and other additives. This ensures consistent color and
texture across batches.
Molding and Shaping: Automated molding machines can efficiently shape the crayons,
ensuring uniform size and shape. These machines can work continuously, producing a large
number of crayons without manual intervention.
Quality Control: Vision systems and sensors can be employed to inspect crayons for defects,
color accuracy, and uniformity. Any crayons that don't meet the criteria can be automatically
sorted out.
Packaging and Labeling: Automated packaging systems can package crayons into boxes or
sets, ensuring accurate counting and labeling.

Benefits of Automation:

● Increased Efficiency: Automation reduces the need for manual labor, leading to higher
production rates and reduced cycle times.
● Consistency: Automated processes ensure that each crayon is of the same quality,
color, and size, eliminating human errors and variations.
● Cost Savings: While initial investment in automation might be high, the long-term
cost savings from reduced labor and improved efficiency can be significant.
● Quality Assurance: Automated quality control systems minimize the risk of defective
products reaching consumers, maintaining the reputation of the Crayola brand.
● Scalability: As the demand for crayons increases, automation allows the facility to
easily scale up production without relying solely on hiring and training additional
manual workers.
In summary, the crayon manufacturing industry benefits from a combination of batch
processing and automation techniques to achieve high-quality, consistent, and cost-effective
production. This approach ensures that the vast quantity of crayons produced each year meets
the standards expected by consumers while optimizing efficiency and resource utilization.

Question No. 4
Briefly describe the primary reasons for holding inventory with example and
appropriate logic.

1. To Meet Anticipated Customer Demand:

Example: A grocery store holds extra supplies of bottled water during the summer months
when demand increases due to higher temperatures.
Logic: By maintaining inventory, the store ensures that it can fulfill customers' needs
promptly, avoiding stockouts and maintaining customer satisfaction.
2. To Smooth Production Requirements:
Example: An automobile manufacturer holds a buffer of car seats to account for variations in
the production rate of vehicles.
Logic: Inventory acts as a buffer, enabling production to continue even if one part of the
manufacturing process experiences disruptions or variability.

3. To Decouple Operations:
Example: A computer assembly plant holds inventory of components like memory modules,
processors, and hard drives to reduce interdependence between different production stages.
Logic: Decoupling operations using inventory prevents delays in one stage of production
from causing bottlenecks throughout the entire process.

4. To Protect Against Stockout:

Example: An online retailer maintains a safety stock of popular electronic gadgets to avoid
running out of stock during periods of unexpectedly high demand.
Logic: Safety stock acts as a cushion against uncertainties in demand or supply, helping the
retailer maintain a consistent level of service to customers.

5. To Take Advantage of Order Cycles:

Example: A bakery orders flour in bulk during a supplier's annual promotion to benefit from
reduced prices and shipping costs.
Logic: By aligning inventory purchases with supplier order cycles, the bakery can optimize
cost savings and minimize overall procurement expenses.

6. . To Hedge Against Price Increase:

Example: An oil refinery holds a reserve of crude oil inventory to offset potential increases in
oil prices in the future.
Logic: Holding inventory at a current price can help mitigate the financial impact of price
fluctuations, allowing the company to lock in lower costs.

7. To Permit Operations:
Example: An assembly line for smartphones holds a certain quantity of microchips to ensure
a continuous production flow even if there are delays in chip deliveries.
Logic: Adequate inventory enables production to continue without interruption, maintaining
the efficiency of the manufacturing process.

8. To Take Advantage of Quantity Discount:

Example: A retail clothing store purchases winter coats in larger quantities to take advantage
of bulk purchase discounts.
Logic: Holding inventory in larger quantities allows the retailer to benefit from reduced
per-unit costs, offsetting the carrying costs associated with holding excess inventory.

In summary, holding inventory serves a range of strategic purposes in supply chain

management, from meeting customer demand and protecting against stockouts to capitalizing
on cost savings and ensuring smooth production. While holding inventory incurs costs, it also
provides valuable benefits that help organizations maintain operational efficiency, meet
customer expectations, and optimize their overall supply chain performance.