Page 78 - DMGT501_OPERATIONS_MANAGEMENT

Operations Management

Notes Table 3.3: Number of Machines to be Provisioned

Machine Number to be Provisioned
1 3
2 7
3 4
4 3
5 3

Even in this simple illustration, we can see that capacity planning has been influenced by several
factors such as operation time, operator efficiency, machine use ratio, expected volume of future
sales etc.
In addition, most businesses face variability of demand, i.e., peaking by time of day, day of
week, month of year. Seasonality in demand creates risks of under-utilization of capacity
during the off-peaks and strain on capacity during the peaks. There are both quantitative and
qualitative implications in such decisions.

Example: Jet Airways when deciding on their fleet, knowing that there is a peak for a
few weeks during puja holidays and during the winter holidays, has to decide whether it is
going to equip the fleet and tie in to long-term investment of airplanes for a peak that is only
going to last a few weeks during the holiday season.

There is a cost involved in having too much capacity versus the cost of having too little capacity,
i.e., the impact on the reputation and growth in the business. We need to evaluate the cost of
'overage' in relation to the cost of 'underage'.
Do the economics favour erring on the side of having too little or too much capacity?
The likelihood is that the economics may favour Jet Airways meeting the capacity during those
peaks, because it coincides with the tourist season in India. However, it may turn out to be the
opposite also, if the tourist traffic is expected to be small, on account of, say, recent terrorist
activity.

The decision about how much capacity to be added is again critical. It is complicated by the
uncertainly in the estimates of future demand and technological changes. There can be two
extreme strategies:
1. Expansionist strategy, which involves large, infrequent jumps in capacity, and
2. Wait-and-see strategy, which involves smaller, more frequent incremental jumps.

The expansionist strategy, which stays ahead of demand, minimizes the chance of sales lost to
insufficient capacity.

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

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