Page 74 - DMGT501_OPERATIONS_MANAGEMENT

Operations Management

Notes When

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.
Figure 3.1: Relationship between Capacity Gap and Demand

Present Capacity
No. of Units Forecasted Demand

Construction Lead Time

1 2 3 4 5
Time (Years)

Figure 3.1 shows the relationship between capacity gap and demand. Based on this data,
management has to decide when to add capacity. The construction lead time is shown to be 12
months. Should the capacity be added by the start of the second year so that the project is
completed by the start of the third year?
The answer is probably 'no', because there would be excess capacity when the project is completed.
Management could simply choose not to satisfy all the demand during the third year, if it is
consistent with a company policy of building market share. Therefore, perhaps capacity should
be added at the end of the fourth year so that capacity and demand can be matched.
Figure 3.2: Capacity Addition Options

Capacity

Incremental
Demand
Demand
Incremental vs. one-step Average Capacity

Capacity is in some ways a variable and subject to change. This is shown in Figure 3.2. It is
possible to raise the operating capacity incrementally depending upon demand. This is because
rarely does a plant operate at 100 per cent of its capacity. An industry with an 80 per cent average
utilization would have a 20 per cent capacity cushion for unexpected surges in demand or
temporary work stoppages.

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