Lecture 4 - Capacity Management

Question 1

Capacity Definition

Answer 1

“Capacity is the throughput, or number of units a facility can hold, receive, store, or produce in a period of time” Heizer et al (2017: 346) Capacity Management involves the study of likely demand patterns (Wild, 2002:306), the determination of the capacity required to meet such demand, and the development of strategies for the deployment of resources, in particular for accommodating variability in demand and resource availability

Question 2

3 Levels of Capacity Management

Answer 2

Long Term Strategic Decisions (Years/Months)

Medium Term Strategic Decisions (Months/Weeks)

Short Term Strategic Decisions (Weeks/Hours/Minutes)

Steps

(1) Measure aggregate demand and capacity
(2) Understand changes in demand and capacity
(3) Determine the operation’s base level of capacity
(4) Identify and select methods of coping with mismatches between demand and capacity
(5) Allocate resources and control capacity over time

Question 3

Demand Forecast

Answer 3

• Operations needs forecasts that are: (GEAR)

– Expressed in units useful for capacity planning

– Reflect the current capacity adjustment lead times

– As accurate as possible

– Give an indication of relative uncertainty

• Forecasts should take into account our own intentions: (PNP)

– Product promotions

– New product launches

– Product withdrawals

Question 4

Time Series Components

Answer 4

Question 5

Long Term Capacity Management

Answer 5

Leading (excess) Capacity Strategies

Advantages

• 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

Sufficient demand to keep plants at full capacity, therefore unit costs minimised

Disadvantages

Relatively low plant utilisation, therefore higher costs

• Risk of longer or permanent overcapacity if demand doesn’t materialise • Capital investment early
• May encourage incentives and subsidies to soak up excess capacity

Lagging (shortage) Capacity Strategies

Advantages

Sufficient demand to keep plants at full capacity, therefore unit costs minimised

• Over-capacity problems minimised if demand doesn’t materialise
• Capital investment later

Disadvantages

• Insufficient capacity to meet demand; reduced revenue and dissatisfied customers
• Cannot respond to short-term demand increases
• Under supply worse if start-up problems occur
• Lose market share

Question 6

Measuring Capacity

Answer 6

Output measures (i.e throughout rate) are needed for demand forecasts and for capacity calculations (eg Automotive production line: number of cars per week)

Input Measures are usual for low-volume, flexible processes and for many service operations (Consultation: consulting hours)

Question 7

Design and Effective Capacity

Answer 7

Planned Loss - Other Loss = Actual output

Question 8

Utilisation

Answer 8

= actual output/design capacity x 100%

Question 9

Little Law calculation

Answer 9

Work in process = throughput time x throughput rate

Throughput time = work in process/throughput rate

Example:

– 60 people waiting in queue (Work in process)

– Throughput rate is 4 people per minute (Throughput rate)

– How long before everyone is served? (Throuput time)

It holds for stable systems (inflow = outflow) in the long run, even when there is variability

• Applicable to manufacturing and services (and information systems) (Little, 2011)
• If you know two of the three components of Little’s Law you can calculate the third
• Because: throughput time = work in process throughput rate – Reducing work in process will decrease throughput time for a given throughput rate – Increasing throughput rate will decrease throughput time for a given level of work in process

Question 10

Managing Capacity-Demand Mismatches

Answer 10

Level Capacity Plan - Keep excess capacity to account for fluctuations in demand

Chase Demand Plan - Adjust capacity levels to meed demand fluctuatios

Manage Demand - Attempt to increase demand to fit in with capacity

Question 11

Methods of Adjusting Capacity in a Chase Demand Plan

Answer 11

Overtime

• Annualised hours
• Staff scheduling
• Varying the size of the workforce (seasonal workforce)
• Using part-time staff
• Skills flexibility (multi-skilling)
• Subcontracting/outsourcing/leasing
• Change output rate (work faster than normal)
• Postponing planned maintenance/holidays/training, etc.

Question 12

Capacity Management in Services

Answer 12

Simultaneity of production and consumption

– Timing

– Location

– Volatility of demand

• Perishability – can’t store outputs

– Demand management

– Yield management

• Heterogeneity – variation in processing time

– Variation in capability of customers and service staff

– Interaction of capacity and service quality

• Queue (waiting line) management