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In-House vs Outsourcing: Capacity Strategies

This document discusses factors to consider when determining whether to handle capacity internally or outsource it such as available resources, expertise, costs, and risks. It also covers developing capacity strategies by designing flexibility into systems and accounting for a product's life cycle stage. Finally, it outlines analytical tools for capacity planning including cost-volume analysis, financial analysis, decision theory, and simulation.

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Queenie Ericka
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48 views17 pages

In-House vs Outsourcing: Capacity Strategies

This document discusses factors to consider when determining whether to handle capacity internally or outsource it such as available resources, expertise, costs, and risks. It also covers developing capacity strategies by designing flexibility into systems and accounting for a product's life cycle stage. Finally, it outlines analytical tools for capacity planning including cost-volume analysis, financial analysis, decision theory, and simulation.

Uploaded by

Queenie Ericka
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

In-House or

Outsource?
Factors to consider:
O Available capacity
O Expertise
O Quality considerations
O The nature of demand
O Cost
O Risks
Developing
Capacity
Strategies
O Design flexibility into systems
O Take stage of life cycle into account
a. Introduction phase
b. Growth phase
c. Maturity phase
d. Decline phase
O Take a “big-picture” approach to
capacity changes
Bottleneck Operation
O Prepare to deal with capacity
“chunks”
O Attempt to smooth capacity
requirements
O Identify the optimal operating
level
a. Economies of Scale
b. Diseconomies of scale
O Choose a strategy if expansion is
involved
Facility Size and Optimal
Operating Level
Average cost per unit

Small
plant Medium
plant
Large
plant

Output rate
Cost-Volume
Analysis
O Fixed Costs (FC)
- remain constant regardless of output volume

O Variable Costs (VC)


- vary directly with volume of output
- VC = Quantity(Q) x variable cost per unit (v)

O Total Cost
O TC = FC + VC

O Total Revenue (TR)


O TR = revenue per unit (R) x Q
Break-Even Point (BEP)
O The volume of output at which total cost
and total revenue are equal

O Profit (P) = Total Revenue – Total Cost


= Q(R – VC) – FC

FC
QBEP 
R  vc
Cost-Volume Relationships
Financial Analysis
O Cash flow – difference between cash
received from sales and other sources,
and cash putflow for labor, material,
overhead and taxes
O Present Value – The sum, in current
value, of all future cash flows of an
investment proposal
O Decision Theory – A helpful tool for financial
comparison of alternatives under conditions of
risk or uncertainty. It involves identifying a set
of possible future conditions that could
influence result.
O Waiting-Line Analysis – It helps 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
O Simulation – useful for evaluating what-if
scenarios
Operations
Strategy
O It determines the conditions under which
operations will have to function

O Flexibility allows an organization to be agile


O It reduces the organization’s dependence on
forecast accuracy and reliability
O Many organizations utilize capacity cushions
to achieve flexibility

O Bottleneck management is one way by which


organizations can enhance their effective
capacities
O Capacity expansion strategies are important
organizational considerations
O Expand-early strategy
O Wait-and-see strategy

O Capacity contraction is sometimes


necessary
O Capacity disposal strategies become
important under these
conditions

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