Page 86 - DMGT501_OPERATIONS_MANAGEMENT

Operations Management

Notes Figure 3.7: Economies and Diseconomies of Scale

Average
Cost 250 500 1000
Per unit
rooms rooms rooms
hotel hotel hotel

Best operating Best operating Best operating
level level level
Economies of scale Diseconomies of scale

Occupancy rate

7. Choose a strategy if expansion is involved: Consider whether incremental expansion or
single step is more appropriate.

Task Can you find out the names of few companies that completely make all of
their own components and some which completely outsource?

3.8 Challenges of Planning Service Capacity

Despite their differences, the concepts of determining system capacity and finding bottlenecks
apply to service as well. The principles are the same but in some cases the application is different.
Service operations are direct and cannot be inventoried and as a general rule services are produced
and consumed simultaneously. This means that service organizations must:
1. Build enough capacity to meet maximum demand, and

2. Use demand management principles so that people will use the services at off-peak times.
If they do not use this approach, they will not be able to satisfy the demand.

Example: A restaurant that has long waiting lines is likely to lose business.
Each of these options has a cost. Building sufficient capacity to meet maximum demand means
that a portion of the capacity is used infrequently. Choosing to ignore demand means a loss of
customers that may have long-term as well as short-term effects.
In service industries, there is often a high level of interaction with the customer in the production
of a service. This can result in uncertainty about processing time. Many services require the
customer to come to the service delivery system. This has important implications for the location
decision. It also means that capacity decisions should result in adequate space for the customer
in the service delivery system.

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