Central State University The Determinants of Effective Capacity Discussion

What determines the success of capacity planning is labeled as Determinants of Effective Capacity (p.193 in textbook). List them all in your post and for 3 of them explain how they affected capacity and why do they need to be effectively managed for business success.

READING  EXCESS CAPACITY CAN BE BAD NEWS!

Today, huge gaps between supply and demand have many companies struggling. Excess capacity abounds in such major industries as telecom, airline, and auto manufacturing. The bad news is that some companies are losing millions of dollars a year because of this. In the telecom industry, the increasing reach of cellular technology and other kinds of wireless access is continuing to create more and more supply, requiring telecom companies to cut prices and offer incentives to increase demand.

As newer television models come onto the market, demand for older sets declines, leaving manufacturing companies that produce the older type of sets with excess capacity, and prices are greatly reduced.

Similarly, auto manufacturers have to reduce output or close factories for models where demand has fallen substantially (e.g., sedans being replaced by SUVs and pickup trucks).

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 (i.e., excess capacity) causes operating costs that are too high, while undercapacity (i.e., not enough capacity to meet demand) causes strained resources and a possible loss of customers.

LO5.1 Name the three key questions in capacity planning.

The key questions in capacity planning are the following:

What kind of capacity is needed?

How much is needed to match demand?

When is it needed?

The question of what kind of capacity is needed depends on the products and services 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 capacity is needed and when is it needed.

Related questions include:

How much will it cost, how will it be funded, and what is the expected return?

What are the potential benefits and risks? These involve the 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. The degree of accuracy that can be attached to forecasts is an important consideration. The likelihood and impact of wrong decisions also need to be assessed.

Are there sustainability issues that need to be addressed?

Should capacity be changed all at once, or through several (or more) small changes?

Can the supply chain handle the necessary changes? Before an organization commits to ramping up its input, it is essential to confirm that its supply chain will be able to handle related requirements. And different issues occur for the supply chain when output decreases.

Because of uncertainties, some organizations prefer to delay capacity investment until demand materializes. However, such strategies often inhibit growth because adding capacity takes time and customers won’t 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 choices 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,  page 193and 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, or other reasons.