Explain the decision tree modeling for capacity expansion

Strategic Capacity Management
Subject
Business Finance

Question Description
What is capacity management and why is it an important focus for firms?
How does one execute capacity planning?
Compare and contrast capacity planning for service and manufacturing businesses.
500-600 word response

Jacobs, F. R. & Chase, R. B. (2014). Operations and Supply Chain Management (14th ed). New York, NY: McGraw-Hill
LO5–1

Explain what capacity management is and why it is strategically important.

A dictionary definition of capacity is “the ability to hold, receive, store, or accommodate.” In a general business sense, it is most frequently viewed as the amount of output that a system is capable of achieving over a specific period of time. In a service setting, this might be the number of customers that can be handled between noon and 1:00 P.M. In manufacturing, this might be the number of automobiles that can be produced in a single shift.

When looking at capacity, operations managers need to look at both resource inputs and product outputs. For planning purposes, real (or effective) capacity depends on what is to be produced. For example, a firm that makes multiple products inevitably can produce more of one kind than of another with a given level of resource inputs. Thus, while the managers of an automobile factory may state that their facility has 6,000 production hours available per year, they are also thinking that these hours can be used to make either 150,000 two-door models or 120,000 four-door models (or some mix of the two- and four-door models). This reflects their knowledge of what their current technology and labor force inputs can produce and the product mix that is to be demanded from these resources.

While many industries measure and report their capacity in terms of outputs, those whose product mix is very uncertain often express capacity in terms of inputs. For example, hospital capacity is expressed as the number of beds because the number of patients served and the types of services provided will depend on patient needs.

An operations and supply chain management view also emphasizes the time dimension of capacity. That is, capacity must also be stated relative to some period of time. This is evidenced in the common distinction drawn between long-range, intermediate-range, and short-range capacity planning.