Some Factors Influencing The Overall Level of Capacity: Operations Resources Market Requirements

Slide 3.
Some factors influencing the overall

level of capacity
Forecast
Availability of
level of
capital
demand
Cost structure Changes in
of capacity future
increment demand
OPERATIONS Overall level of MARKET

RESOURCES capacity REQUIREMENTS
Uncertainty
Economie
of future
s of scale
demand
Flexibility of Consequences
capacity of over/under-
provisions supply
Nigel Slack and Michael Lewis, Operations Strategy, 2nd Edition, © Nigel Slack and Michael Lewis 2008
Slide 3.2
Capacity strategy issues include…..
NUMBER OF
SITES
CAPACITY OF LOCATION OF
EACH SITE EACH SITE
LONG-TERM
ALLOCATION CAPACITY
OF TASKS CHANGE
TO EACH SITE STRATEGY
Slide 3.3
Questions Options
NUMBER OF SITES and Many small sites?
CAPACITY OF SITES Few larger sites?
Supply side dominated?

LOCATION
OF SITES Demand side dominated?
ALLOCATION OF TASKS All sites make all products/services?

TO SITES Each site focuses on a few products/
services?
LONG-TERM CAPACITY Capacity leads demand?

CHANGE STRATEGY Capacity lags demand?
Slide 3.4
Why is capacity strategy important?
Without an appropriate capacity

strategy, operations will always be
struggling to supply markets in a
competitive manner
Getting capacity strategy right is the

starting point for developing
competitive operations
Slide 3.5
How should one judge a capacity strategy ?
NUMBER
OF SITES
Costs
CAPACITY OF LOCATION OF
What performance Revenues
EACH SITE EACH SITE
measures will all
these decisions
have a major Cash
impact on? requirements
LONG-TERM
ALLOCATION CAPACITY
OF TASKS CHANGE
TO SITES STRATEGY Service levels
Slide 3.6
Some factors influencing the number and

size of sites
Economies of Required
scale service level
OPERATIONS Size and number MARKET

RESOURCES of sites REQUIREMENTS
Geographical
Supply
distribution of
costs
demand
Slide 3.7
Cost, volume, profit illustration
12
10
Costs / Revenue
8
Cost
($)
4
Revenue
2
0
0 2 4 6 8 10 12
Volume in
thousands of units Forecast demand
= 9,000 units
Slide 3.8
Unit cost curve

(a)
Unit cost (total cost / volume)
Nominal
4
capacity limit
0
0 1 2 3 4 5 6
Volume in thousands of units
Slide 3.9
Unit cost curve

(b)
Unit cost (total cost/volume)
Diseconomies
4
of scale kick in
0
0 1 2 3 4 5 6
Slide 3.10
Expanding physical capacity in advance of effective

capacity can bring greater returns in the longer term
Physical
capacity of
facilities Demand
Volume
Effective capacity
Time
Slide 3.11
Expanding physical capacity in advance of effective

capacity can bring greater returns in the longer term
Cash flow with
extended physical
capacity
Cumulative cash flow

Cash flow with two identical
capacity increments
Time
Slide 3.12
Some factors influencing the location of sites
Resource Required
costs service level
Land and Suitability of
facilities site
investment
OPERATIONS Location of MARKET

RESOURCES sites REQUIREMENTS
Resource Image of
availability location
Community
factors
Slide 3.13
The cost breakdown of a shirt made in various

countries and sold in France
France 15.55€
Portugal 14.33€
Turkey 11.43€
Thailand 11.43€
Labour
Morocco 11.13€
Transport
Romania 10.82€
Fabric
China 10.37€ Supplies
Myanmar 9.60€ Customs duties
0 2 4 6 8 10 12 14 16
Cost in euros
Source: Slack, N., Chambers, S. and Johnston, R. (2007) Operations Management, 5th edn. Harlow: financial Times Prentice Hall. Reproduced with permission from Pearson Education Ltd.
Slide 3.14
Some factors influencing the timing of

capacity change
Lead-time of Forecast
capacity level of
change demand
Ability to
Competitor
cope with
activity
change
OPERATIONS Overall level of MARKET

RESOURCES capacity REQUIREMENTS
Uncertainty
Economies
of future
of scale
demand
Required level
of service
Slide 3.15
Capacity plans for meeting demand using

either 800- or 400-unit capacity plants
Capacity plan using
800-unit plants
2,400
Capacity plan
using 400-unit Demand
2,000 plants
Volume (Units / week)
1,600
1,200
800
400
Time
Slide 3.16
Smaller-scale capacity increments allow the capacity plan

to be adjusted to accommodate changes in demand
Capacity plan using
800-unit plants
2,400
Capacity plan Forecast demand
using 400-unit
2,000 plants
Actual demand
Volume (Units/week)
1,600
1,200
800
400
Time
Slide 3.17
Rarely does each stage of a supply chain have perfectly

balanced capacity because of different optimum
capacity increments
Parts Assembly
manufacture Warehouse Distribution
plant
Current capacity Current capacity Current capacity Current capacity

= 1,010 units = 1,000 units = 900 units = 1,100 units
Required new Required new Required new Required new

capacity capacity capacity capacity
= 1,800 units = 1,800 units = 1,800 units = 1,800 units
Operating cost
Operating cost
Operating cost
Operating cost
800 units 600 units
Capacity increment Capacity increment Capacity increment Capacity increment
Slide 3.18
Cost, volume, profit illustration
12
Forecast demand = 9,000 units

10
Costs / Revenue ($)
8
Cost
6
4
Revenue
2
0
0 2 4 6 8 10 12
Slide 3.19
The three options …..

Demand
y
Volume
a pacit Capacity
C ding
Lea tegy
Stra
Time Time
Demand
city
Volume
a Capacity
p
Ca ging
Lag tegy
Stra
Time
Demand
Volume
city g Capacity
p a
Ca othin
o
Sm tegy
Stra
Time
Slide 3.20
Capacity planning with certain forecasts and

capacity introduction
Output
Planned
capacity
Forecast
demand
Time
Capacity Capacity Capacity Capacity
increment increment increment increment
1 2 3 4
Slide 3.21
Decision tree for simple capacity expansion example

$10m
gr ows
e mand )
D (0.5
A
d Yr1 Dem (0.5)

an
Exp $8m) and
leve
( l
$3m
$5m
Do
n’ gr ows
t Ex and
)
pan
d Dem (0.5
Yr1
B
Dem (0.5)
and
l ev e
l
$5m
Slide 3.22
Decision tree for ) Expa

nd Yr
2
Growth
(0.3)
(0.7)
$32m
0.5 ) Level
two-year analysis ow
s (
C
($8m
Don
$18m
gr expa ’t
d Growth $24m
an n
m Yr 2 d (0.3)
De (0.7)
A Level $24m
De (0.5 Growth $15m

m ) r2 (0.7)
r1 and Y
Y lev and Exp ) (0.3)
a nd m ) el ($8m Level $8m
p 8
Ex ($ D Don
expa ’t Growth $17m
n (0.7)
Yr2 d (0.3)
Level $9m
Growth $18m
r2 (0.3)
nd Y
Do
x pa (0.7)
n’ Yr1
E )
($8m
te
) Level $18m
0.5
xp
s (
an
E Don
ow expa ’t Growth
d
r
dg n (0.3)
$8m
n Yr2 d
ema (0.7)
D Level $8m
B
De (0.5 2 Growth $18m
m ) nd Y
r (0.7)
lev and Expa m) (0.3)
el ( $8 Level $14m
F D
expa on’t Growth
nd Y $8m
r2 (0.7)
( 0 . 3)
Level $8m

Some Factors Influencing The Overall Level of Capacity: Operations Resources Market Requirements

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Slide 3.

Some factors influencing the overall

OPERATIONS Overall level of MARKET

Capacity strategy issues include…..

Supply side dominated?

ALLOCATION OF TASKS All sites make all products/services?

LONG-TERM CAPACITY Capacity leads demand?

Why is capacity strategy important?

Without an appropriate capacity

Getting capacity strategy right is the

How should one judge a capacity strategy ?

Some factors influencing the number and

OPERATIONS Size and number MARKET

Cost, volume, profit illustration

Unit cost curve

Unit cost curve

Expanding physical capacity in advance of effective

Expanding physical capacity in advance of effective

Cumulative cash flow

Some factors influencing the location of sites

OPERATIONS Location of MARKET

The cost breakdown of a shirt made in various

Myanmar 9.60€ Customs duties

Some factors influencing the timing of

OPERATIONS Overall level of MARKET

Capacity plans for meeting demand using

Smaller-scale capacity increments allow the capacity plan

Rarely does each stage of a supply chain have perfectly

Current capacity Current capacity Current capacity Current capacity

Required new Required new Required new Required new

Capacity increment Capacity increment Capacity increment Capacity increment

Cost, volume, profit illustration

Forecast demand = 9,000 units

The three options …..

Capacity planning with certain forecasts and

Decision tree for simple capacity expansion example

d Yr1 Dem (0.5)

Decision tree for ) Expa

De (0.5 Growth $15m

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