Lecture 8 - Capacity Management

Question 1

What is capacity management?

Answer 1

Capacity is ‘the maximum level of value-added activity over a period of time that the process can achieve under normal
operating conditions’

Question 2

What is Heizer’s definition of capacity?

Answer 2

Capacity is ‘the “throughput,” or number of units a facility can hold, receive, store, or produce in a period of time

Question 3

What kind of function is capacity?

Answer 3

It is a primary function of the operating system’s transforming resources (e.g. staff, facilities, plant, equipment)

Question 4

What does capacity management involve?

Answer 4

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

Question 5

What is the impact of capacity management on cost?

Answer 5

• Excess capacity cam lead to underutilisation of resources and higher costs
• Too little capacity management may require costly coping strategies

Question 6

What is the impact of capacity management on speed and dependability?

Answer 6

• Too little capacity may increase lead times and/or reduce dependability

Question 7

What is the impact of capacity management on quality?

Answer 7

• Overloaded capacity may decrease customer experience/increase risk of errors
• Excess capacity may lead to an un-engaging customer experience in some services

Question 8

What is the impact of capacity management on flexibilty?

Answer 8

• Too little capacity may reduce volume flexibility and ability to customise

Question 9

What are the three levels of capacity management decision making?

Answer 9

Strategic capacity management, medium-term capacity planning, short-term capacity planning

Question 10

3LCM: what is involved in strategic capacity planning?

Answer 10

• Horizontal time years and months
  Concerns:
• Baseline capacity
• Capacity location and distribution
• Long-term supply arrangements

Question 11

3LCM: what is involved in medium-term capacity planning?

Answer 11

• Horizontal time quarters, months and weeks
  Concerns:
• Aggregate staffing levels
• Degree of subcontracted resources

Question 12

3LCM: what is involved in short-term capacity planning?

Answer 12

• Horizontal time weeks, days, hours
  Concerns:
• loading activities on specific resources
• workforce scheduling

Question 13

What is demand forecasting?

Answer 13

Are projections of demand for an organisation’s products for each time period in the planning horizon

Question 14

What features do demand forecasts need for operations?

Answer 14

• 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

Question 15

What organisational intentions should forecasts take into account?

Answer 15

• New product launches
• product withdrawals
• product promotions

Question 16

What is long-term capacity management?

Answer 16

• Concerned with adding (or removing) major capacity increments, has an 18-month plus time frame

Question 17

What are features of long-term capacity management?

Answer 17

• Design and implement new production processes
• Add (or selling) long lead-time equipment
• Aquire or sell facilities
• Acquire competitors

Question 18

What are key decision areas of long-term capacity management?

Answer 18

Optimum level, Location and timing of capacity

Question 19

What are advantages of capacity-leading strategies?

Answer 19

• 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

Question 20

What are disadvantages of capacity-leading strategies?

Answer 20

• 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

Question 21

What are advantages of capacity-lagging strategies?

Answer 21

• Sufficient demand to keep plants at full capacity, therefore unit costs minimised
• Over-capacity problems minimised if demand doesn’t materialise
• Later capital investment

Question 22

What are disadvantages of capacity-lagging strategies?

Answer 22

• 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

Question 23

What is medium-term capacity management?

Answer 23

Concerned with managing capacity to achieve required performance, time frame of 2-18 months

Question 24

What are features of medium capacity management?

Answer 24

• Add or reduce personnel
• Add or reduce shifts
• Buy, lease or sell equipment
• More or improved training (improve productivity)
• Subcontracting

Question 25

What are key decision areas in medium-term capacity management?

Answer 25

- Base level of capacity - Coping with variability

Question 26

What factors tend to increase the base level of capacity?

Answer 26

- Low fixed costs - Need for high levels of customer service - High perishability (most services, food, fashion) - inability to adjust capacity or manage demand

Question 27

What factors tend to decrease the base level of capacity?

Answer 27

- High fixed costs (high cost of underutilisation) - Need for high capacity utilisation - Ability to store output - Ability to adjust capacity or manage demand

Question 28

What is the objective of level capacity planning?

Answer 28

Maintaining fixed level of capacity regardless of forecast demand fluctuations

Question 29

What are methods of level capacity planning?

Answer 29

- Maintain some excess capacity (e.g. for essential or emergency services) - Used finished good stocks to meet demand peaks - Accept queuing/loss of trade

Question 30

What are objectives of chase demand planning?

Answer 30

Adjust capacity to meet expected or actual demand fluctuations

Question 31

What are methods of Chase demand planning?

Answer 31

Overtime, Workforce scheduling, Annualising hours, Part-time/seasonal staff, multi-skilling, subcontract/outsource/lease, postpone planned holidays/maintenance/training, etc

Question 32

What are objectives of managing demand?

Answer 32

Change customer demand to align with available capacity

Question 33

What are methods of managing demand?

Answer 33

– Constraining customer access – Price differentials – Scheduling promotions – Service differentials – Alternative products/services – Yield (revenue) management

Question 34

Measuring capacity: What are output measures?

Answer 34

(i.e. throughput rate) are usual for demand forecasts and for capacity calculations in high-volume, standardised processes

Question 35

Examples of output measures:

Answer 35

– Automotive production line: number of cars per week – Brewery: litres per week

Question 36

Measuring capacity: What are input measures?

Answer 36

– Consulting: consultant hours – Hospital: beds available

Question 37

How to relate input measures to output (demand) measures for capacity planning:

Answer 37

– 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!

Question 38

Utilisation =

Answer 38

actual output/design capacity x 100

Question 39

Efficiency =

Answer 39

actual output/effective capacity x 100

Question 40

Expected output =

Answer 40

effective capacity x (historical) efficiency

Question 41

What is stock in the definition of Slack and Brandon-Jones?

Answer 41

Inventory [or stock] is the accumulations of transformed resources – materials, customers or information – as they flow through processes, operations or supply networks

Question 42

What are examples of inventory?

Answer 42

- Raw materials - Work-in-progress - Finished goods - Maintenance, repair and operating supplies

Question 43

Inventory and performance objectives: Quality

Answer 43

+ 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

Question 44

Inventory and performance objectives: Speed

Answer 44

+ 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

Question 45

Inventory and performance objectives: Dependability

Answer 45

+ 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

Question 46

Inventory and performance objectives: Flexibility

Answer 46

+ Range of goods/products to meet customer needs - High stock levels can reduce responsiveness(e.g. long lead times to introduce new products)

Question 47

Inventory and performance objectives: Cost

Answer 47

+ 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

Question 48

What is inventory management?

Answer 48

Answers the question of how much inventory is needed to buffer against the fluctuations in forecast, customer demand and supplier deliveries

Question 49

What are inventory related costs?

Answer 49

Inventory holding costs: Working capital, storage and obsolescence costs Inventory ordering costs: costs of placing and shipping orders

Question 50

Order Quantity

Answer 50

Q

Question 51

Demand

Answer 51

D

Question 52

Average inventory

Answer 52

Q/2

Question 53

Slope =

Answer 53

Demand rate

Question 54

Instantaneous deliveries at a frequency of:

Answer 54

D/Q per period

Question 55

What is Economic Order Quantity (EOQ)?

Answer 55

Is the quantity of inventory items to be ordered that aims to minimise the total cost of inventory ordering and holding.

Question 56

EOQ =

Answer 56

√2CoD/Ch

Question 57

Co =

Answer 57

Ordering cost

Question 58

D =

Answer 58

Demand in period

Question 59

Ch =

Answer 59

Holding cost

Question 60

What are assumptions of the EOQ model?

Answer 60

- Demand is constant and deterministic - Purchase (or set-up) and holding costs are fixed/known - Single product with no interactions with other products

Question 61

What are critiques of the EOQ model?

Answer 61

- Unrealistic assumptions (more sophisticated versions address some) - Holding costs may be unrealistic - EOQ-type models focus attention on optimisation rather than improvement