Capacity Management PDF

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Capacity Management...

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Capacity Management Maximum level of value added over a period of time that the process can achieve under normal operating condition.  Capacity management must incorporate both time and scale Operations operating at full capacity leads to capacity constraints over the whole operation.

Planning and controlling capacity Task of setting the effective capacity of the operations so that it can respond to the demands placed upon it – deciding how the operations should react to fluctuations in demand. Long-term capacity strategy: Concerned with introducing or deleting major increments of physical capacity. Medium and short-term capacity Decision must be made how to adjust the capacity of the operation in the medium term. Includes…  Assessment of the demand forecasts over a period of 2-18 months  Planned output can be varied (ex. The number of hours equipment is used)  Short term adjustments must also be made to enable them to flex output for a short period either predicted or on short notice. Aggregate demand and capacity The most important characteristic is setting capacity levels over the medium and short terms in an aggregate way.  Broad capacity decisions not with the detail of the individual products and services offered. Aggregate: different products and services are bundled together in order to get a broad view of demand and capacity.  Necessary  Some degree of approximation – especially with significantly varied goods/services Objectives Decisions regarding capacity plans will affect different performance aspects… 1. Costs: Affected by the balance between capacity and demand  Capacity < Demand – underutilization & high unit cost 2. Revenues: Affected by the balance between capacity and demand (opposite to cost)  Capacity = OR > than demand  all demand is satisfied and no revenue lost. 3. Working capital: Affected if an operation decided to build up finished goods inventory prior to demand  Demand to be satisfied BUT funding for the inventory before it is sold is needed

4. Quality: Affected by a capacity plan involving large fluctuations in capacity (ex. temporary staff)  New staff/disruptions to routine can increase the chances of error. 5. Speed of response to demand: Enhanced by build-up of inventory OR deliberate provision of surplus capacity to avoid queuing. 6. Dependability of supply: Affected by how close demand levels are to capacity.  Closer the demand to max. capacity the less able to cope with any unexpected disruptions & less dependable its deliveries of goods and services could be. 7. Flexibility: Enhanced by surplus capacity  If demand = capacity the operation cannot respond to any unexpected increase in demand. Steps of capacity management Step 1 – Measure aggregate demand and capacity (for the planning period) Step 2 – Identify the alternative capacity plans (adopted in response to demand fluctuations) Step 3 – Choose the most appropriate capacity plan (for the circumstances) How is capacity measured? Demand forecasting is important to capacity management decisions – there are 3 requirements… 1. It is expressed in terms which are useful for capacity management  Cannot just be expressed in money terms – it gives no indication of the demands that will be placed on capacity 2. It is accurate as possible  Due to the time lag associated with implementation – must decide output in advance based on the forecast. 3. It gives an indication of relative uncertainty  Leads to potential for wasted cost and time of staff/opening hours due to forecasting too high.  Probabilistic forecasting – allows managers to make judgement between possible plans that would guarantee operations to meet actual demand and minimise costs.  Judgement is influenced by the way the business wins’ orders; value responsiveness, price sensitive, etc. Seasonality of demand Marketing demand & supply will vary depending on the time of the year as a result of… - Climatic (holidays) - Festive (purchases) - Financial (tax processing) - Social - Political

Seasonality of demand can occur over a year or shorter time period Shorter period: Day/Week/Peak/Non-Peak May have a slight idea about morning demand, afternoon demand, and evening. The time frame chosen depends on the customers willing to wait  Customers unwilling to wait will expect a forecast demand fluctuation for a very short period. Measuring Capacity Output capacity measure is best used when the output from the operation does not vary in nature. Input capacity measures are used when capacity isn’t obvious to measure  Capacity is a function of service/product mix, duration, and produce service specifiacation. Depends on activity mix Output depends on the mix of activities the service is engaged in and the different types of activities. Design Capacity and Effective Capacity The theoretical capacity cannot always be met in real life; the market and technical demands on the operations can cause time to be consumed so production must stop.  Maintenance  Technical scheduling  Quality problems  Absenteeism  Unavoidable problems Effective capacity of demands: the capacity that remains after the losses are accounted for.  Actual output will be lower than the effective capacity The ratio of output achieves by an operation to its design capacity & the ratio of output to effective capacity = the utilization and efficiency

Utilization= Efficiency=

Actual Output Design capacity

ActualOutput Effective capacity

Overall equipment effectiveness OEE is a popular method of judging the effectiveness of operations equipment based on 3 aspects of performance… 1. Time – Availability of the equipment to operate. 2. Quality – Of the product/service produced 3. Speed – (or throughput rate) of the equipment

OEE=availability rate x performance ( ¿ speed ) rate x quality rate

For equipment to work effectively it needs to achieve high performance against all three dimensions.  By multiplying all together, you get a complete picture of ALL effectiveness  Cannot get this by looking at each metric separately.

Coping with demand fluctuations There are 3 pure options for coping with demand variations 1. Level capacity plan - Ignore the fluctuations and keep activity levels constant 2. Chase demand plan – Adjust capacity to reflect fluctuations in demand 3. Demand management – Attempt to change demand to fit capacity availability.

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Capacity planning will use some mix of the 3

Level capacity plan The processing capacity is set at a uniform level throughout the planning period regardless of the fluctuations in forecast demand. - Same number of staff operate the same processes and produce the same aggregate output in each period. Effects? - Helps to achieve objectives of stable employment patterns, high utilization, low unit costs, and high productivity. - Creates inventory to be financed and stored - Only create sales for inventory where future sales are certain – will not fluctuate with time and fashion (not applicable for perishable items such as services) - During times of demand exceeding the level planned customer service may falter.

Using this plan for services would be to running at high levels of capacity potentially wasting staff and resulting in low productivity. - Low utilization making this plan expensive for these situations

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The higher the base level of capacity the less capacity fluctuation is needed to satisfy demand

Chase demand plan Attempts to match capacity closely to the varying levels of forecast demand - Different numbers of staff, working hours, and equipment amounts for each period. Effects? - Not applicable for non perishable, manufacture standard products and operations that are capital intensive. - Applicable for operations that cannot store output (customer processing operations & perishable goods). - Can be adopted to minimize or eliminate finished goods inventory - Difficulty in maintaining quality and safety procedures. Adjusting capacity 1. Overtime & Idle time Varying the number of productive hours worked by the staff in the operation.  Demand > nominal capacity: Overtime w/ extra payment  Demand < nominal capacity: Productive hours are reduced Adhere to the annualized hours approach where there is a limit to the amount of extra hours before productivity levels decrease. 2. Varying the size of the workforce  High demand: Hire extra staff (costs of recruitment & low productivity during training)  Low demand: Fire staff (severance payments, loss of morale, loss of goodwill in the marketplace) Building flexibility into job design and demarcation to allow staff to transfer over to areas stained by demand. 3. Using part time staff Extensively used in services & some manufacturing evening jobs – not worthwhile if fixed costs are high for employing each employee. 4. Subcontracting Buying capacity from other organizations when demand is high enabling the firm to meet their own demand without the extra expense of buying more capacity unneeded after this peak.  Very expensive  Subcontractor may not be as motivated to deliver on time & with the desired quality.  Risk the subcontractor decides to enter the same market

Manage demand plan Change demand through price to stimulate off peak demand and constrain peak demand to smooth it across these times. Effects? - Preferred in services rather than products - Advertising is often adopted alongside this Can also adopt alternative products and services from the originals during off peak times; use of student accommodation during non-term time, ski resorts in the summer, etc. Mixed plans When pure approaches don’t match required combination of competitive and operation objectives managers can use a mixture to tailor to their needs. Yield management Techniques that can be used to allocate limited resources among different categories of customers such as business and leisure customers; a variety of methods and analytical tools.  Based on demand and supply theory Effects? - Used by services – perishable asset revenue management/revenue management - When supplies are short prices go up and vis versa - Use of various methods to maximize yield… Overbooking capacity: Not everyone will show up to a service so overbooking reduces the risk of loosing revenue from that missing customer; when overbooking in done inefficiently then financial compensation can be offered or revenue is lost. Price discounting: Reducing costs during off peak times to stimulate demand Varying service types Useful when? - Capacity is fixed - The market can be clearly segmented - Services cannot be stored - Services are sold in advance - The marginal cost of making a sale is low How can operations plan their capacity levels? Two methods are used to asses the consequences of adopting particular capacity plans 1. Cumulative representations Effects? - Shows when total demand peaks relative to productive hours. - Shows demand per productive day

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Plots capacity on the same graph as demand and allows for the feasibility and consequences of the capacity plan to be assessed. Must judge the area between the cumulative production and demand curves – representing the amount of inventory carried over a period.

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Traditionally assessment of the degree of over capacity and of under capacity - If over capacity > under capacity = adequate to satisfy demand fully Problems? - Not each month/time period has the same amount of productive time. - A capacity level which seems adequate may only be available to supply products after the demand for them has occurred; if under capacity occurred at the beginning of the year and inventory hasn’t been accumulated yet.

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For any capacity plan to meet demand as it occurs it cumulative production line must always lie above the cumulative demand line.

Comparing plans on a cumulative basis Chase plans can be used for cumulative representation – having a varying gradient representing the production rate at any point in time.  Cumulative production line would match the cumulative demand line; the gap & inventory is zero.  Inventory costs are zero although changing the capacity will incur costs depending on the size required; the higher the change in capacity required the more expensive the process. Ex. 5% change: Overtime 15% change: Hire temporary workers 15% + change: Subcontracting work 

The cost of the change also depends on the direction of the change; less expensive to change capacity to move in the direction of normal capacity levels rather than below or above it.

Problems? - Tells little about when products/services cannot be produced before demand for them has occurred - Where operations cannot store output (services) capacity planning is best suited using queuing theory. 2. Queuing or waiting line management When demand is difficult to predict & the time to produce the product/service is uncertain customers will have to wait. - Customers arrive and are processed using probability distribution. The common set of elements that define queuing behavior… Source of customers/supply (population) - either finite or infinite  Finite: A known number of customers & the probability of a customer arriving depends on the number of customers already being serviced.  Infinite: Large number of potential customers so that its always possible for another customer to arrive no matter how many are being serviced.

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most systems that deal with outside markets have infinite customer source

Arrival rate – Rate at which customer need to be served (rarely steady and predictable)  Necessary to describe in terms of probability distribution The Queue – Can range from being limited to infinite Rejecting – Customers may be rejected by the system if the queue has reached the max. allowed Balking – Customers may refuse to join the queue/wait if perceived too long. Reneging – When a customer queues for a period of time but then withdraws Queue discipline – Set of rules that determine the order in which customers waiting in the queue are served; first come first serve, etc. Servers – Facility that processes the customers in the queue and there may be any number.  Can be complex with a series of parallel connections  Likely to be a variation in how long it takes to process customers (processing time is also described by probability distribution) Balancing capacity and demand The probabilistic arrival and processing times only rarely matches the ability of operations to cope.  Even when capacity matches demand queues and idle time will still occur due to other variables (needs of the customer, server attitude, etc.) Too many servers – low waiting time BUT low utilization Too few servers – high waiting time BUT high utilization (trade off between waiting time and system utilization) Variability in demand or supply Variability in both reduces the ability to process its inputs & reduce effective capacity.  Greater the variability the higher the throughput times & reduce utilization (long throughput times leads to queue build ups)  Higher variability will lead to setting the base level of capacity high to provide extra. 

Variability either in demand or supply will reduce effective capacity

Perceptions of queueing Management of queuing systems attempts to manage customer’s perceptions and expectations of their queueing experience.  If you are told it will be a longer wait, then it actually is the customer will have a positive queuing experience. Elements that influence the queuing system… - Time idle is perceived longer than time occupied - Wait before the service is perceived more tedious than during - Anxiety and uncertainty increases the perception of waiting linger. - A wait with an unknown duration is more tedious then one with a duration set - An unexplained wait is longer than a known wait

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Higher the value of the service the longer the wait will be tolerated Waiting alone is more tedious than waiting in a group

Dynamics of capacity management Capacity management is dynamic in controlling and reacting to actual demand and actual capacity  Capacity control processes are a sequence of reactive capacity decisions; the way a new forecast reacts to the previous events of last period. Capacity management success is measured by a combination of costs, revenues, working capital, and customer satisfaction  Influenced by actual capacity available & demand Capacity management is forward thinking to plan the short and long term outlook for demand volumes  When long term demand is good (higher than the current capacity can handle) its unlikely that poor short term demand will cause the firm to make large/difficult capacity cuts.  When long term demand is poor (it is lower than current capacity can handle) it is unlikely that good short term demand would cause the firm to take on large/extra capacity....