ASSIGNMENT

1) "Product design, capacity and process selection have a direct relationship". Substantiate.

Product design, capacity and process selection have a direct relationship. Product design determines
the value provided to the customer; the value determines the market size; the market size
determines the volumes and therefore the capacity; and capacity leads to the process.

Capacity planning should be solely based on the principle of maximizing the value delivered to the
customer. This reflects in minimizing costs of producing products and services, providing them in a
timely manner, and ensuring that the products provide the highest level of quality.

Capacity planning has become a strategic tool in the operations function. It guides our choices on
capacity, locations, and layout for the long-term. It also helps in managing supply and demand, and
these choices in turn, affect the ways a firm uses its resources and facilities in the short-term.

2) "To estimate capacity, you must first select a yardstick to measure it". Discuss.

To estimate Capacity, you must first select a yardstick to measure it. The first major task in Capacity
Measurement is to define the unit of output. In some cases, the choice is obvious.

Finding a yardstick to estimate capacity is more difficult in many service industries where there is no
uniform product on which the measurement can be based, e.g., airlines, hospitals, restaurants, etc.
However, measures can be devised to assess capacity. For example, an airline can use seat miles as a
measure of capacity. A hospital can measure capacity as beds-days each year. In a restaurant, this
might be the number of customers that can be handled per day.

In a process-focused facility, Capacity is often determined by some measure of size, such as the
number of beds in a hospital, seating capacity in a restaurant, etc. In a repetitive process, the
number of units assembled per shift, such as number of refrigerators, may be the criterion for
Capacity. And in a product-focused facility, such as TISCO, tones of steel processed per shift may be
the measure of capacity.

Whatever the measure, the Capacity decision is critical to the management of an organization
because everything from cost to customer service is measured on the basis of the Capacity of the
process, once the Capacity is determined.

3) Compare and contrast the expansionist and wait-n-see strategy.

In industries where the product or process technology is likely to change rapidly, the organization
would not want to build plants that limit its long-term ability to compete. The wait-and-see strategy
fits this type of outlook but can erode market share over the long run. The wait-and-see strategy
lags behind demands, relying on short-term options such as use of overtime, additional shifts, and
outsourcing. There can be short term stretch strategies employed, e.g., stock-outs, and
postponement of preventive maintenance to meet any shortfalls.

The decision for incremental expansion should be tempered so that any capacity expansion program
is geared towards achieving economies of scale. You have to accept that there are practical limits to
economies of scale. The decision has to be restricted to economies of scale that are available under
the given circumstances. At that volume the unit cost of production can be reduced, but very often
it cannot be minimized.

The expansionist strategy or economic approach generally results in economies of scale and a faster
rate of learning. This, with supporting strategies, often helps a firm reduce its costs and compete on
price. It also can help increase the firm's market share by preempting competition. Competing firms
must sacrifice some of their market share or risk burdening the industry with over capacity. To be
successful, however, the preempting firm must have credibility and signal its plans before the
competition can act.

Capacity addition is based either on economics or demand. The economic approach is the basis for
the success of Reliance Industries. RIL created world-scale capacity ahead of actual demand, on the
basis of the latent demand. This preempted competitors from expanding their capacities. Then RIL
went about systematically removing the barriers that were constraining demand. This continuing
capacity growth allowed Reliance to dominate the markets in which it competed and also emerge as
a low cost manufacturer. RIL emerged as the lowest cost polyester producer in the world. In 1994,
its conversion cost for polyester was 18 cents per pound, over 60 per cent lower than its West
European, North American and Far Eastern competitors.

4) “Capacity offerings can also yield a competitive advantage". Comment.

In the first place, capacity planning has to address the external environment of the firm. One needs
to assess the company's situation and think about why the decision to alter capacity should be
considered. Is the company responding to a competitor's move?

In the second place, capacity planning has also to be based on the demands for individual product
lines, availability of more efficient technologies, and introduction of new products. As demand for
the individual product line increases, there is a need to examine the capacity. Addition of assets to
enhance capacity should be considered only when available assets do not meet the gap in capacity
envisaged by the management

Informed capacity decisions can be made only when management knows the ability of its present
 resources and the bottlenecks in the existing array of assets (system capacity) and what causes
them. An assessment of individual plant capabilities and allocation of production throughout the
plant network has to be made. There must be a high level of confidence in the accuracy of the
demand forecast. Once a forecast is available and management determines the point where
demand exceeds existing capacity, the time it takes to add on the additional capacity needs to be
determined. If capacity is expected to exceed two years in the future and it takes eighteen months
to add that capacity, then management should begin to plan the construction of the additional
capacity six months from date.

The timing and sizing of expansion are related. Capacity gap analysis is essential in determining
when demand will exceed Capacity and by how much. Gap analysis tells you what kind of Capacity
you need at given points in time. The temporal dimension of Capacity analysis is important. In every
aspect of business, whether it is in finance, marketing, or production, you can gain competitive
advantage through strategies in each area. Capacity offerings can also yield a competitive
advantage. You have to determine whether or not you will gain a competitive advantage by
introducing that kind of capacity at a particular point in time.

5) Define effective capacity.

It is found that an organization can operate more efficiently when its resources are not stretched
beyond a limit. Effective Capacity is the Capacity, which a firm can expect to achieve, given its
product mix, methods of scheduling, maintenance, and standards of quality. Efficiency is a measure
of actual output over Effective Capacity and is expressed as a percentage of the Effective Capacity.
The Rated Capacity is a measure of the maximum usable capacity of a particular facility.

Rated capacity = (Capacity) (Utilization) (Efficiency)

The matter of product mix is important, especially while planning for future activities. Top
management often finds it desirable to express addition to new capacity in terms of money value of
sales. Details regarding product mix breakdown, type and number of machines needed, etc., which
are vital to achieve the desired increase in capacity, are left to the concerned engineers. Thus, the
definition of unit of output is closely linked with the product mix, and therefore poses a difficult
problem as regards capacity measurement.

Time poses another problem. Capacity is often defined as the quantity of output in a given time.
However, some manufacturing processes require continuous operation. Thus, a thermal power
generation unit must either operate continuously or not at all, as otherwise the boilers cool down.
So, the capacity of a thermal power generation unit is the total amount of electricity it can produce
by operating 24 × 7. Most factory operations are not, however, like this, since they operate on a shift
basis and hence for a specified period. However, these capacities are measured by the output per
shift.