Lecture 8 - Capacity Management Flashcards
What is capacity management?
Capacity is ‘the maximum level of value-added activity over a period of time that the process can achieve under normal
operating conditions’
What is Heizer’s definition of capacity?
Capacity is ‘the “throughput,” or number of units a facility can hold, receive, store, or produce in a period of time
What kind of function is capacity?
It is a primary function of the operating system’s transforming resources (e.g. staff, facilities, plant, equipment)
What does capacity management involve?
Study of demand patterns, the capacity required to meet this demand, development strategies for deployment of resources and management of demand, particularly for accommodating variability in demand and resource availability
What is the impact of capacity management on cost?
- Excess capacity cam lead to underutilisation of resources and higher costs
- Too little capacity management may require costly coping strategies
What is the impact of capacity management on speed and dependability?
- Too little capacity may increase lead times and/or reduce dependability
What is the impact of capacity management on quality?
- Overloaded capacity may decrease customer experience/increase risk of errors
- Excess capacity may lead to an un-engaging customer experience in some services
What is the impact of capacity management on flexibilty?
- Too little capacity may reduce volume flexibility and ability to customise
What are the three levels of capacity management decision making?
Strategic capacity management, medium-term capacity planning, short-term capacity planning
3LCM: what is involved in strategic capacity planning?
- Horizontal time years and months
Concerns: - Baseline capacity
- Capacity location and distribution
- Long-term supply arrangements
3LCM: what is involved in medium-term capacity planning?
- Horizontal time quarters, months and weeks
Concerns: - Aggregate staffing levels
- Degree of subcontracted resources
3LCM: what is involved in short-term capacity planning?
- Horizontal time weeks, days, hours
Concerns: - loading activities on specific resources
- workforce scheduling
What is demand forecasting?
Are projections of demand for an organisation’s products for each time period in the planning horizon
What features do demand forecasts need for operations?
- Expressed in units useful for capacity and inventory planning
- Reflect the current capacity adjustment lead times
- As accurate as possible
- Give an indication of relative uncertainty
What organisational intentions should forecasts take into account?
- New product launches
- product withdrawals
- product promotions
What is long-term capacity management?
- Concerned with adding (or removing) major capacity increments, has an 18-month plus time frame
What are features of long-term capacity management?
- Design and implement new production processes
- Add (or selling) long lead-time equipment
- Aquire or sell facilities
- Acquire competitors
What are key decision areas of long-term capacity management?
Optimum level, Location and timing of capacity
What are advantages of capacity-leading strategies?
- Sufficient capacity to meet demand (revenue and customer satisfaction)
- Capacity cushion to absorb extra demand
- Start-up problems less likely to affect supply
- Gain market share
What are disadvantages of capacity-leading strategies?
- Relatively low plant utilisation = higher costs
- Risk of longer or permanent overcapacity if demand doesn’t materialise
- Early capital investment
- May encourage incentives and subsidies to soak up excess capacity
What are advantages of capacity-lagging strategies?
- Sufficient demand to keep plants at full capacity, therefore unit costs minimised
- Over-capacity problems minimised if demand doesn’t materialise
- Later capital investment
What are disadvantages of capacity-lagging strategies?
- Insufficient capacity to meet demand = potential reduced revenue, dissatisfied customers
- Can’t respond to short-term demand increases
- Under-supply worse if start-up problems occur
- Lose market share
What is medium-term capacity management?
Concerned with managing capacity to achieve required performance, time frame of 2-18 months
What are features of medium capacity management?
- Add or reduce personnel
- Add or reduce shifts
- Buy, lease or sell equipment
- More or improved training (improve productivity)
- Subcontracting
What are key decision areas in medium-term capacity management?
- Base level of capacity
- Coping with variability
What factors tend to increase the base level of capacity?
- Low fixed costs
- Need for high levels of customer service
- High perishability (most services, food, fashion)
- inability to adjust capacity or manage demand
What factors tend to decrease the base level of capacity?
- High fixed costs (high cost of underutilisation)
- Need for high capacity utilisation
- Ability to store output
- Ability to adjust capacity or manage demand
What is the objective of level capacity planning?
Maintaining fixed level of capacity regardless of forecast demand fluctuations
What are methods of level capacity planning?
- Maintain some excess capacity (e.g. for essential or emergency services)
- Used finished good stocks to meet demand peaks
- Accept queuing/loss of trade
What are objectives of chase demand planning?
Adjust capacity to meet expected or actual demand fluctuations
What are methods of Chase demand planning?
Overtime, Workforce scheduling, Annualising hours, Part-time/seasonal staff, multi-skilling, subcontract/outsource/lease, postpone planned holidays/maintenance/training, etc
What are objectives of managing demand?
Change customer demand to align with available capacity
What are methods of managing demand?
– Constraining customer access
– Price differentials
– Scheduling promotions
– Service differentials
– Alternative products/services
– Yield (revenue) management
Measuring capacity: What are output measures?
(i.e. throughput rate) are usual for demand forecasts and for capacity calculations in
high-volume, standardised processes
Examples of output measures:
– Automotive production line: number of cars per week
– Brewery: litres per week
Measuring capacity: What are input measures?
– Consulting: consultant hours
– Hospital: beds available
How to relate input measures to output (demand) measures for capacity planning:
– Capacity is influenced by the service/product mix
– Capacity is influenced by specification of output
– Capacity is influenced by resource capability (e.g. staff skills mix)
– Capacity is influenced by duration of required output
– All interact in practice!
Utilisation =
actual output/design capacity x 100
Efficiency =
actual output/effective capacity x 100
Expected output =
effective capacity x (historical) efficiency
What is stock in the definition of Slack and Brandon-Jones?
Inventory [or stock] is the accumulations of transformed resources – materials, customers or information – as they flow through processes, operations or supply networks
What are examples of inventory?
- Raw materials
- Work-in-progress
- Finished goods
- Maintenance, repair and operating supplies
Inventory and performance objectives: Quality
+ Range of facilitating goods to support service (e.g. stationary items for a conference centre)
+ Opportunity to inspect (e.g. retail)
- Product obsolescence
- Damage or deterioration of stock
Inventory and performance objectives: Speed
+ Rapid supply ex-stock (e.g. Ikea)
+ Immediate availability of facilitating goods in services (e.g. hospital pharmacy)
- High stock levels (WIP) increases throughput times
- Long queues mean long waits
Inventory and performance objectives: Dependability
+ Buffer against demand or supply uncertainty
+ Build up stocks in low-demand periods to use in high demand periods
- Protective buying leading to shortages elsewhere
Inventory and performance objectives: Flexibility
+ Range of goods/products to meet customer needs
- High stock levels can reduce responsiveness(e.g. long lead times to introduce new products)
Inventory and performance objectives: Cost
+ Batch production to save set up costs
+ Bulk purchasing to gain price discounts
+ Hedge against price/currency fluctuations
+ (Batch customers for efficient processing)
- Interest charges
- Storage and handling costs
- Loss and wastage/rework costs
- Opportunity costs
What is inventory management?
Answers the question of how much inventory is needed to buffer against the fluctuations in forecast, customer demand and supplier deliveries
What are inventory related costs?
Inventory holding costs: Working capital, storage and obsolescence costs
Inventory ordering costs: costs of placing and shipping orders
Order Quantity
Q
Demand
D
Average inventory
Q/2
Slope =
Demand rate
Instantaneous deliveries at a frequency of:
D/Q per period
What is Economic Order Quantity (EOQ)?
Is the quantity of inventory items to be ordered that aims to minimise the total cost of inventory ordering and holding.
EOQ =
√2CoD/Ch
Co =
Ordering cost
D =
Demand in period
Ch =
Holding cost
What are assumptions of the EOQ model?
- Demand is constant and deterministic
- Purchase (or set-up) and holding costs are fixed/known
- Single product with no interactions with other products
What are critiques of the EOQ model?
- Unrealistic assumptions (more sophisticated versions address some)
- Holding costs may be unrealistic
- EOQ-type models focus attention on optimisation rather than improvement
