12 Questions
What is the outcome when the average unit cost of a good or service decreases as capacity increases?
Economies of scale
What occurs when the average unit cost of a good or service starts to increase with the increase in capacity?
Diseconomies of scale
How can a focused factory achieve economies of scale without large investments in facilities and capacity?
By concentrating on a narrow range of goods or services
What is safety capacity, also known as the capacity cushion, reserved for?
Unanticipated events like demand surges
Which short-term capacity adjustment strategy involves leasing equipment or setting up partnerships for capacity sharing?
Add or share equipment
What does the strategy of shifting work to slack periods help in achieving?
Optimizing labor efficiency
What are economies of scale?
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.
Define diseconomies of scale.
Diseconomies 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.
What is a focused factory?
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.
What is safety capacity, or the capacity cushion, reserved for?
Safety capacity (often called the capacity cushion) is an amount of capacity reserved for unanticipated events, such as demand surges, materials shortages, and equipment breakdowns.
What are some short-term capacity adjustments that a business can make?
Short-term capacity adjustments might include: Add or share equipment, sell unused capacity, change labor capacity and schedules, change labor skill mix, and shift work to slack periods.
Give an example of a short-term capacity adjustment strategy.
An example of a short-term capacity adjustment strategy is leasing equipment as needed or setting up a partnership arrangement for capacity sharing.
Study Notes
Economies of Scale
- 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.
- This leads to a decrease in the average unit cost of production.
Diseconomies of Scale
- Diseconomies 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.
- This happens when the capacity and/or volume of throughput exceeds the optimal level.
Focused Factory
- A focused factory is a way to achieve economies of scale without extensive investments in facilities and capacity.
- This is done by focusing on a narrow range of goods or services, target market segments, and/or dedicated processes to maximize efficiency and effectiveness.
Safety Capacity
- Safety capacity (also called the capacity cushion) is an amount of capacity reserved for unanticipated events.
- Such events include demand surges, materials shortages, and equipment breakdowns.
Short-term Capacity Adjustments
- Add or share equipment: lease equipment as needed or set up a partnership arrangement with capacity sharing.
- Examples: mainframe computers, CAT scanner, farm equipment.
- Sell unused capacity: sell idle capacity to outside buyers and even competitors.
- Examples: computing capacity, perishable hotel rooms.
- Change labor capacity and schedules: short-term changes in work force levels.
- Examples: overtime, extra shifts, temporary employees, outsourcing.
- Change labor skill mix: hiring the right people.
- Shift work to slack periods.
Test your knowledge on economies of scale, diseconomies of scale, and focused factories. Learn how these concepts impact the average unit cost of goods or services as capacity and volume increase.
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