Aligning Capacity To Demand Flashcards
What is level capacity plan?
Strategy for maintaining the capacity of an operation at a fixed level
What is chase demand?
A strategy that creates flexibility in an operations capacity to match increases and decreases in demand. Takes the form of a lag or lead approach.
What is managed demand?
Strategy to influence the demand to match it to capacity - usually through price adjustments
What are the three characteristics of capacity?
a) must be defined in reference to a temporal (time) dimension.
b) must be defined by either an input or output measure
C) must reflect the nature of the transaction with the operation
What is capacity?
Scale of the operation
What are the advantages of LCP?
a) stable employment
b) high utilisation of assets
c) aligned to high volume/low variety/low variation of demand operations with low unit costs
What happens in service/production ops when demand is above the capacity line in LCP?
Service - service failure/queueing
Production - use inventory
Why is LCP the easiest capacity management strategy?
Requires the operation to hold it’s capacity fixed or level - unwavering from a continuous production level. Ignores changes in demand.
What does LCP rely on to be effective?
Good forecasting and understanding of demand.
Draw a LCP diagram.
Draw the diagram.
What type of businesses is LCP good for?
Capital intensive businesses where assets or facility utilisation is a priority (or too expensive to adjust).
What are the disadvantages of LCP?
a) Requires the management of inventories (in production operations)
b) Danger of under/over production in production operations
c) In service operations can lead to service failure or wastage.
What is chase demand?
approach to flex the capacity of the operation to fit the demand. Takes a significant level of flexibility in the operations resources and design.
What are the two variants of chase demand
A) Lead Approach
B) Lag Approach
Define lead approach variant of Chase Demand
Capacity is always kept ahead of demand (you have some resource wastage but it is limited).
Define lag approach variant of chase demand
Capacity is alway kept behind the demand changes so you have some service failure or inventory usage but limited.
Draw the lead variant of chase demand
Draw the diagram
Draw the lag variant diagram for chase demand
Draw the diagram
What kind of operations is chase demand normally used?
Service operations as consumption and production tends to be simultaneous and the inability to store outputs as inventory in the same manner as production operations.
Benefits of CD
Flex/Reduce/Less Waste
a) Operation is more Flexible to changes in demand
b) Reduction in over/under production
c) less waste in terms of resources
Limitations of CD
Costly/Quality suffers/Zero hours contracts
A) Increased costs to provide flexibility of resources
B) Can reduce levels of quality control
C) Zero hours contracts - negative connotations
What does MD do?
Influences the demand in a way that flattens out the demand or moves demand to periods of capacity availability.
What’s the common approach to MD?
Price adjustment.
What do you need for MD to be effective?
Need to understand the shape of demand and price elasticity of demand. Need to also understand the system wide effects of price adjustments.
What kind of operations are MD best suited to?
Operations that experience high seasonality or demand that fluctuates Ona more predictable basis (short term).
What are the benefits of MD?
Reduces Cost of creating capacity flexibility
Improves Utilisation
Reduces service failure (waiting and queueing.
What are the disadvantages of MD
A) Requires High levels of planning and forecasting - can be costly
B) Detailed understanding of price elasticity of customer demand
C) Discounting may have unintended consequences (may permanently devalue the product)
D) May create permanent loss of business
How might CD be enhanced?
A) Sharing capacity b/w operations
B) Cross training employees
C) Use of part time employees (zero hours contracts)
D) Increase customer participation in the process
How might LCP/MD be enhanced?
A) Offer price incentives (increase price to reduce demand/discount to increase demand)
B) Offer complementary services (if discounting is inappropriate)
C) Use reservation systems - to forecast demand
D) Create customer awareness of your capacity - highlighting where there might be busy periods.
When does inventory occur?
Mismatch of demand with supply
What are the three types of inventory?
a) Raw Materials
b) Work in progress or intermediate goods
c) finished goods
What are the advantages of inventory?
a) Inventory can be used to mitigate supply and/or demand uncertainty - supply can be impacted because of transport timeframes and demand can be impacted by uncertain weather.
b) Can provide process flexibility and efficiency - WIP can be used to configure products to order (process flex). Inventory also maximises efficiency by ensuring WIP and Raw materials are on hand to feed the processes. Example - car plants. Inventory helps to max utilisation.
C) Can reduce costs. When the benefits of increased orders exceeds the costs of holding inventory.
D) Can increase in value. For example fuel price hedging by airlines.
What are the disadvantages of inventory?
A) Costs money to store and manage and ties up capital. Cost of ordering/storing/managing inventory is typically 25% of the value of the good per year.
B)Requires space to store.
C) Can deteriorate over time - example food or rubber seals. Companies holding inventory for a long time can risk obsolescence. Also risk of theft (shrinkage).
D) Can hide problems in the process. Japanisation of manufacturing led to lean and JIT. Allowed orgs to determine if there were underlying factors such as excessive demand unpredictability, poor quality, unreliable processes/suppliers, or process constraints masked by excessive inventory.
Define actual output
Actual Output = effective capacity - avoidable loss
Define effective capacity
Effective capacity is design capacity - planned loss
Define efficiency
Efficiency is actual output/effective capacity
Definite utilisation
Utilisation is actual output / design capacity
