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Excess capacity creates capacity slack, a competitive weapon that can reduce lead time and inventory. Many managers may not recognize excess capacity as a tradeoff with lead time. Rather, they may view the correct capacity as the minimum output that meets average load requirements. Perhaps this is not surprising since management accounting systems report excess capacity as a cost and associate it with unfavorable performance. In any case, overlooking this trade-off precludes a useful capability.
The purpose of this article is to show the relationship between capacity, lead time, and inventories. Understanding this relationship permits the development of capacity and lead-time strategies that can deliver not just on low cost, but on a variety of performance dimensions.
CAPACITY SLACK
Capacity slack is the amount of capacity in excess of requirements (or load). Capacity slack is an issue whenever work-center load is not constant over time (that is, load variation exists). If load is constant, capacity equal to the average load is enough for any period and capacity slack is of little value.
In many companies, however, major setup costs warrant larger lot sizes, uneven demand causes master schedule variation, or production rate differences between products magnify load variability. Whatever the cause, work-center load variation exists and must be managed [8].
Just-in-Time (JIT) philosophies address this head on. With JIT, identifying the causes of load variation and systematically reducing the variation are clear objectives. With the leveling of load, the material flows smoothly and quickly, enhancing performance under most conditions. But what if one cannot eliminate the load variations, at least in the short run?
GENERAL KNOWLEDGE
In general, managers and writers have acknowledged several aspects of lead time, inventory, and capacity. For example, most would agree that as planned lead time increases, so does actual lead time. Planned lead time is a policy parameter in manufacturing planning and control (MPC) systems stating the time planned for production. In material requirements planning (MRP), planned lead time is an offset time that determines how long before a part due date to release the work. Actual lead time is the elapsed time from work release until a product's completion and availability for use.
Longer planned lead times cause work to be released earlier, filling the shop with...