Chapter 10Capacity Management

TRUE/FALSE
1. A measure of capacity is the number of seats on an airplane per flight.
ANS: T

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2. A formal definition of capacity is the average rate of output per unit of time.
ANS: F

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3. Short-term capacity decisions usually involve adjusting schedules or staffing levels.

ANS: T

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4. Economies of scale occur when the average unit cost of the good or service begins to increase as the
capacity and/or volume of throughput increases.
ANS: F

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5. Focused factories are often devoted to a specific technology or particular market segments or
customers.
ANS: T

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6. Long setup times increase capacity and improve flexibility.

ANS: F

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7. An example of safety capacity would be planning additional capacity to account for employee summer
vacations.
ANS: F

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8. In calculating required capacity for a job shop, setup time is a significant factor.
ANS: T

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9. Capacity costs depend primarily on annual operating and maintenance costs.

ANS: F

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10. Complementary goods or services balance seasonal demand cycles and therefore use excess capacity
available.
ANS: T

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11. A strategy for increasing long-term capacity in a service organization is to design higher levels of selfservice into operations.
ANS: T

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12. It is never appropriate to expand capacity in advance of growing demand because the excess capacity
will always be underutilized.
ANS: F

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13. Large capacity increases help to spread fixed costs of construction and operating system setup over
one large project.
ANS: T

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14. Changing labor skill mix is a means to adjust short-term capacity.

ANS: T

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15. Giving customers information on the best time to call a service center is purely an advertising and
promotion strategy.
ANS: F

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16. Varying the price of goods or services is a way of influencing demand patterns.
ANS: T

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17. Reservations reduce risks for customers but provide little benefit for service providers.
ANS: F

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18. The Theory of Constraints is focused on eliminating all bottlenecks in a process.

ANS: F

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19. Constraints determine the throughput of a facility.

ANS: T

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20. A physical constraint is associated with the capacity of a resource.

ANS: T

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21. An unsold broadcast advertising space is an example of a perishable asset.

ANS: T

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22. Revenue management systems are vital to most manufacturing organizations.

ANS: F

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23. The earliest revenue management systems focused solely on overbooking.

ANS: T

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24. Offering complementary goods or services is an example of a short-term capacity strategy.

ANS: F

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25. Long-term capacity planning must be closely tied to the strategic direction of the organization.
ANS: T

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26. Complementary goods and services are those that require different resources than the organizations
other goods and services.
ANS: F

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MULTIPLE CHOICE
1. Average safety capacity (%) is computed as
a. Average resource utilization (%) 100%
b. 100% average resource utilization (%)
c. [maximum safety capacity (%) + minimum safety capacity (%)]/2
d. 100% maximum resource utilization (%)
ANS: B

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2. Safety capacity is intended for all of the following except

a. power outages
b. equipment breakdowns
c. seasonal demand
d. material shortages
ANS: C

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3. The long-term capacity expansion strategy that can be called a capacity straddle strategy is
a. One large capacity increase
b. Small capacity increases that match demand
c. Small capacity increases that lead demand
d. Small capacity increases that lag demand
ANS: B

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4. Safety capacity or a capacity cushion is

a. needed for processes with little demand variability
b. provided for anticipated events
c. generally higher in a job shop
d. not appropriate for service organizations
ANS: C

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5. C&M Machining is developing plans for a dedicated production line and needs to determine how
many drill presses will be needed. Engineering estimates are that one drill press will be able to process
120 parts per hour. Daily demand is 2,400 parts. C&M operates one 8 hour shift per day. How many
drill presses are needed to meet the capacity requirements?
a. 2 drills
b. 3 drills
c. 4 drills
d. 5 drills
ANS: B

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6. In service organizations, capacity is more often viewed as ____

a. The maximum rate of output per unit time
b. Units of resource availability
c. The ability to meet any customer demand
d. The amount of overtime scheduled
ANS: B

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7. Which of the following is a short-term capacity decision?

a. Expanding the size and number of beds in a hospital
b. Amount of warehouse space to rent for a new promotional item
c. Closing down a distribution center
d. Changing the cooking technology in a chain of fast-food restaurants
ANS: B

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8. When the average unit cost of a good or service decreases as the capacity and/or volume of throughput
increases, it is called ____
a. Economies of scale
b. Diseconomies of scale
c. Cost cushioning
d. A nonphysical constraint
ANS: A

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9. A focused factory is least likely to focus on

a. A few key products
b. A specific technology
c. A certain process design and capability
d. A seasonal demand good
ANS: D

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10. Safety capacity is most closely related to

a. Bottlenecks
b. Economies of scale
c. Unanticipated events
d. Focused factory
ANS: C

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11. Safety capacity or a capacity cushion is

a. Needed for processes with little demand variability
b. Generally higher in a job shop
c. Not appropriate for service organizations
d. Provided for anticipated events
ANS: B

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12. Which of the following is not a key consideration in long-term capacity strategy?
a. Equipment sharing
b. Initial investment in facilities and equipment
c. Annual cost of operating and maintaining facilities and equipment
d. Opportunity loss incurred from lost sales and reduced market share
ANS: A

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13. The capacity expansion approach that provides the most safety capacity is
a. One large capacity increase
b. Small capacity increases that match demand
c. Small capacity increases that lead demand
d. Small capacity increases that lag demand
ANS: C

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14. A firm will encounter short periods of over- and under-utilization with which of the following capacity
expansion approaches?
a. One large capacity increase
b. Small capacity increases that match demand
c. Small capacity increases that lead demand
d. Small capacity increases that lag demand
ANS: B

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15. A capacity straddle strategy is related to

a. One large capacity increase
b. Small capacity increases that match average demand
c. Small capacity increases that lead demand
d. Small capacity increases that lag demand
ANS: B

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16. All the following are means to adjust short-term capacity except
a. Add peripheral goods and/or services
b. Add or share equipment
c. Sell unused capacity
d. Change labor skill mix
ANS: A

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17. All the following are means to manage capacity by shifting and stimulating demand except
a. Vary price of goods or services
b. Add peripheral goods and/or services
c. Provide reservations
d. Shift work to slack periods
ANS: D

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18. According to the Theory of Constraints, ____ is the amount of money generated per time period
through actual sales.
a. Throughput
b. Non-Bottleneck (NBN) work activity
c. Non-physical constraint
d. Utilization
ANS: A

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19. Which of the following is not correct relating to bottleneck resources?

a. Should be scheduled first
b. An hour lost is an hour lost for the entire process or factory output
c. Use large order sizes
d. Should plan safety capacity
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ANS: D

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20. For a non-bottleneck activity,

a. Utilization must be near 100%
b. An hour lost has no effect on total process or factory output
c. Use large order sizes to minimize setups
d. Work-in-process buffer inventory should be placed in front of non-bottlenecks
ANS: B

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21. An entity in which idle capacity exists is called a ____.

a. Bottleneck work activity
b. Physical constraint
c. Non-bottleneck work activity
d. Nonphysical constraint
ANS: C

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22. A doctor's office would charge no-show patients $30 if they did not cancel their appointment 24 hours
ahead of the appointment because
a. insurance will pay the no-show fee anyway.
b. the appointment time and associated revenue is perishable, and the doctor may lose
revenue.
c. the doctor's office does a poor job of forecasting demand.
d. the no-show price of $30 can be added to medical fees for reimbursement.
ANS: B

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23. Referring to a Revenue Management System (RMS), which of the following is not a component?
a. Marketing
b. Forecasting
c. Pricing
d. Allocating
ANS: A

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24. Revenue Management Systems (RMS)

a. are batched daily
b. rely solely on overbooking
c. are cost minimization models
d. are time-dependent
ANS: D

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25. An organization that would typically use a revenue management system is

a. Computer manufacturer
b. Fast food restaurant
c. Car rental company
d. Package delivery service
ANS: C

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26. Chapter 10 describes how a clogged court system tried to solve the bottleneck problem regarding the
processing of tens of thousands of foreclosures by
a. hiring extra retired judges to process foreclosures.

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b. shifting civil and criminal court work to slack periods so foreclosures could be processed.
c. increase the price of court filing fees to influence demand.
d. apply the Theory of Constraints to this court system.
ANS: A

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SHORT ANSWER
1. Define capacity including the two ways it can be viewed. Provide an example of each way.
ANS:
Capacity is the capability of a manufacturing or service resource such as a facility process,
workstation or piece of equipment to accomplish its purpose over a specified time period.
Capacity can be viewed in one of two ways:
1.
As the maximum rate of output per unit of time
2.
As units of resource availability
For example, the capacity of an automobile plant might be measured as the number of automobiles
capable of being produced per week. As a resource availability measure, the capacity of a hospital
would be measured by the number of beds available.
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2. Define Economies of Scale and Diseconomies of Scale. Explain how they relate to capacity decisions.
ANS:
Economies of Scale are achieved when the average unit cost of a good or service decreases as the
capacity and/or volume of throughput increases. Economies of Scale support building larger facilities
with more capacity.
Diseconomies of Scale occur when the average unit cost of the good or service begin to increase as the
capacity and/or volume of throughput increase. Diseconomies of Scale suggest that some optimal
amount of capacity exists where costs are at a minimum.
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3. Explain the concept of a focused factory. Include different ways a factory can be focused.
ANS:
A focused factory is a way to achieve economies of scale without extensive investments in facilities
and capacity by focusing on a narrow range of goods or services, target market segments and/or
dedicated processes to maximize efficiency and effectiveness. The focused factory argues to "divide
and conquer" by adopting smaller more focused facilities dedicated to
1 A few key products
.
2 A specific technology
.
3 A certain process design and capability
.
4 A specific competitive priority objective such as next day delivery
.
5 A particular market segments or customers and associated volumes
.

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4. What is safety capacity? Discuss reasons for using it.
ANS:
Safety capacity (often called the capacity cushion) is defined as an amount of capacity reserved for
unanticipated events such as demand surges, materials shortages, and equipment breakdowns.
The actual utilization rates at most facilities are not planned to be 100% of effective capacity.
Unanticipated events such as equipment breakdowns, employee absences or sudden, short-term surges
in demand will reduce the capability of planned capacity levels to meet demand and satisfy customers.
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5. What are complementary goods and services and why do firms have them?
ANS:
Complementary goods and services are goods and services that can be produced or delivered using
the same resources available to the firm, but whose seasonal demand patterns are out of phase with
each other. Complementary goods or services balance seasonal demand cycles and therefore use the
excess capacity available. For instance, demand for lawn mowers peaks in the spring and summer; to
balance manufacturing capacity, the producer might also produce leaf blowers and vacuums for the
autumn season and snowblowers for the winter season
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6. Discuss each of the four strategies for capacity expansion. Include the risks and benefits of each.
ANS:
1 One large capacity increase: The advantage of one large capacity increase is that the
. fixed costs of construction and operating system setup needs to be incurred only once,
enabling the firm to allocate these costs over one large project. However, if aggregate
demand exhibits steady growth, the facility will be underutilized.
2 Small capacity increases that match average demand: When capacity is above the
. demand curve, the firm has excess capacity; when it is below, there is a shortage of
capacity to meet demand. In this situation, there will be short periods of over and under
resource utilization.
3 Small capacity increases the lead demand: Since there is always excess capacity,
. safety capacity to meet unexpected demand from large orders or new customers is
provided. This safety capacity also enables the firm to give good customer service since
backorders will rarely occur. Of course, this strategy is expensive.
4 Small capacity increases that lag demand: This results in constant capacity shortages.
. It requires less investment and provides for high capacity utilization and thus a higher
rate of return on investment. However, it may also reduce long-term profitability through
overtime, subcontracting and productivity losses that occur as the firm scrambles to
satisfy demand. In the long run, such a policy can lead to a permanent loss of market
position.
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7. Discuss the following:
a. Approaches to adjust short-term capacity
b Approaches for shifting and stimulating demand
.

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ANS:
a. Adjust short-term capacity levels by adding or sharing equipment, selling unused
capacity, change labor capacity and schedules, change labor skill mix and shift work to
slack periods.
b Ways to shift and stimulate demand include varying the price of goods or services,
. providing customers information, advertising and promotion, adding peripheral goods or
services, and providing reservations.
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8. Define a Revenue Management System (RMS) and explain how it works. Give several examples of
assets that can be managed using an RMS.
ANS:
A Revenue Management System (RMS) consists of dynamic methods to forecast demand, allocate
perishable assets across market segments, decide when to overbook and by how much, and determine
what price to charge different customer (price) classes. The ideas and methods surrounding RMS are
often called yield management.
Modern RMS software simultaneously makes changes in the forecast, allocation, overbooking, and
pricing decisions in a real-time operating system. This process does not end until there is no more
opportunity to maximize revenue (because the airplane has taken off, the concert has begun, the cruise
ship has launched, etc.).
Applicable assets might include: a hotel room, an airline seat, a rental car, a concert seat, a room on a
cruise ship, and broadcast advertising space.
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9. Define the Theory of Constraints (TOC). How does TOC view throughput differently from the
traditional OM perspective?
ANS:
The Theory of Constraints (TOC) is a set of principles that focus on increasing total process
throughput by maximizing the utilization of all bottleneck work activities and workstations. The
traditional OM definition of throughput is the average number of goods or services completed per time
period by a process. TOC views throughput differently: Throughput is the amount of money
generated per time period through actual sales.
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PROBLEM
1. For a Marriott hotel call center the expected service rate was 3.0 minutes per telephone call per
customer service representative (CSR). With 3 telephone CSRs on-duty during the 6:30 to 7:00 am
time period, and assuming a 90% target CSR labor utilization rate, how many telephone calls can these
3 CSRs handle during this time period.
ANS:
Utilization = Arrival (Demand) Rate/[(Service Rate)(Number of Servers)] or
0.9 = AR/[(20 calls/hour)(3 CSR)] or AR = 54 calls/hour/CSR
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2. An assembly line normally operates two shifts a day, five days per week. Each shift can produce 475
assemblies. What is the weekly capacity?
ANS:
(2 shifts/day)(5 days/week)(475 assemblies/shift) = 4750 assemblies/week
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3. An order fulfillment process normally operates two shifts a day, five days per week. Under normal
conditions, 380 orders can be processed per shift. What is the daily capacity?
ANS:
(2 shifts/day) (380 orders/shift) = 760 orders/day
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4. An assembly line normally operates two shifts a day, five days per week. The planned capacity of the
assembly line is 380 units/shift. Determine the average safety capacity if 700 items are assembled a
day, on average.
ANS:
Average resource utilization = 700/(2 x 380) = 0.92. Therefore the average safety capacity is 1 0.92
or 8%.
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5. A machine in a job shop is used for only two parts, A and B. The time per setup (in minutes),
processing time (in seconds), order size (in units) is given below. Using the information, determine the
total capacity required for this machine in minutes.
Part
A
B

Machine Setup Time (minutes)

55
30

Processing Time (seconds)

54
64

Order Size (units)

600
700

ANS:
Capacity required (Ci) = Setup time (Si) + Processing time (Pi) x Order size (Qi)
For multiple products, total capacity is C = Ci = [Si + Pi x Qi]
C = 55(60 sec/min) + 54(600) + 30(60 sec/min) + 64(700) = 82,300 seconds, or 1372 minutes
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6. C&M Machining is developing plans for a dedicated production line and needs to determine how
many drill presses will be needed. Engineering estimates are that one drill press will be able to process
120 parts per hour. Daily demand is 2400 parts. C&M operates one 8 hour shift per day. How many
drill presses are needed to meet the capacity requirements?
ANS:
One drill press can produce (120 parts/hour)(8 hours/day) = 960 parts/day. With a demand of 2400
parts/day, C&M would require 2400/960 = 2.5, or 3 drill presses.
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7. A food packaging plant has planned shipments over the next six weeks of 9500, 8500, 10000, 8800,
8200, and 9000. The plant normally operates 2 shifts per day, five days per week. During each shift,
1000 food products can be packaged and ready to ship. What is the plant's weekly capacity? At what
percentage of capacity is the plant actually operating?
ANS:
Weekly capacity = (2 shifts/day)(5 days/week)(1000 units/shift) = 10,000 units per week.
Planned shipments = 54,000. Percent of capacity used = 54,000/(10,000 x 6) = 0.9 or 90%
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8. A pharmacy lab is used for only two high volume prescriptions, A and B. The time per setup (in
minutes), processing time (in seconds), order size (in units) is given below. Using the information,
determine the total capacity required for this lab in minutes.
Prescription
A
B

Setup Time (minutes)

75
60

Processing Time (seconds)

84
54

Order Size (units)

700
1,500

ANS:
Capacity required (Ci) = Setup time (Si) + Processing time (Pi) x Order size (Qi)
For multiple products, total capacity is C = Ci = [Si + Pi x Qi]
C = 75(60 sec/min) + 84(700) + 60(60 sec/min) + 54(1,500) = 147,900 seconds, or 2,465 minutes
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9.

Jack's Ice Cream Parlor produces two types of ice cream on a contract basis for a major restaurant
chain using a large blender. A batch of ice cream A requires a setup time of 45 minutes, a process
mixing time of 1.2 minutes per gallon, and 50 gallons are made per day. Ice cream B requires the same
machine to be cleaned and setup which takes 30 minutes, a process mixing time of 2 minutes per
gallon, and 100 gallons produced per day.
a. Compute the capacity required.
b. What percentage of total capacity required is setup time?
ANS:
a. Capacity required (Ci) = Setup time (Si) + Processing time (Pi) x Order size (Qi)
For multiple products, total capacity is C = Ci = [Si + Pi x Qi]
C = 45 + 1.2(50) + 30 + 2.0(100) = 335 minutes
b. Setup time as a % of capacity
(45 + 30)/335 = .2239 = 22.39%
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