[MUSIC] The first three modules of the course introduced the VCAT framework for operation strategy, and outline the main diagnostic tools. We discussed how operations creates value and the role of capabilities in a competitive environment. In this module, we adopt a resource view, and we turn our attention to the assets that comprise the operating system of the firm. Our main topic is capacity sizing and the capacity investment decision. After discussing the key trad-offs and challenges in a capacity strategy, we will study how uncertainty impacts capacity valuation. Maximizing this value suggests guidelines on how we can tailor an operation's capacity-sizing decision. All organizations have a bundle of real assets or resources that perform their activities. Few real assets are available abundantly. A resource's limitations and processing are quantified by its capacity, which typically represents the maximum sustainable output rate of that resource. The level at which we choose to operate that resource at any given time is the resource capacity utilization. This is typically a fraction of the resource capacity. >> For example, Mercedes plant in Tuscaloosa had a capacity of 65,000 vehicles per year. If the economy slowed down so that annual demand decreased from 60,000 to 40,000, Mercedes could choose to reduce utilization from 92% to 62%. In reality, however, Mercedes had underestimated demand, and even though the plant ran its full utilization, some demand could not be met. In the short run, this meant that a customer had to either wait or buy another vehicle made by Mercedes or a rival. Similarly, most hospitals operate at a capacity utilization between 70% and 85%. A capacity strategy is a long-term plan to developing assets that answer at least four questions. One, what do you want your capacity size to be, one to five years from now? What overall capacity do you aim for? Two, how do you plan to get there? How do you expand or shrink capacity over time? What are the dynamics, year to year? Three, what kind of assets do you plan to use, specialized or flexible, manual or automated? And four, where will you locate the assets and which global network will you configure? >> In this module, we focus on making strategic decisions about type, location, and size for the next several years. While the capacity sizing problem is clearly dynamic in nature and interrelated with the timing, type, and location decisions. It is important to understand the aggregate strategic sizing decision. How much capacity does a firm need for the next several years when it is planning to grow? In this module, we thus focus on one initial capacity sizing decision in a static, aggregate setting. When firms decide on capacity investment, they face a rather simple trade-off. The higher the capacity, the more likely it can meet market demand, yet, the more costly and risky it is. To make this trade-off, we must forecast future market demand and determine the factors that impact capacity. [MUSIC]