question 16

Lesson 9: Capacity Management (Chapter 11) Dr. Suanu B. Wikina

Focus

• What is capacity management?

• Demand and capacity measurement

• Setting the operation’s base capacity

• Handling mismatches between demand and capacity

• Understanding consequences of capacity decisions

What is capacity management?

• Capacity management refers to understanding the nature of supply and demand, and coping with any differences between them. This involves: • Selecting supply-side and demand-side responses to meet the needs of the

customer while maintaining the efficiency of the operation’s resources, i.e., reconciling competing demands of customer satisfaction and resource efficiency

• Planning and controlling capacity in the short-, medium-, and long-term and setting capacity levels in aggregate terms, hence capacity management is often referred to as aggregate planning

Objectives of capacity management

• Decisions taken in developing capacity plans will affect performance in several ways, such as:

• Costs and revenues - the balance between capacity and demand

• Working capital – org will fund inventory until it can be sold

• Quality - if plan involves large fluctuations in capacity levels

• Speed of response to customer demand – avoid or lessen queuing

• Dependability of supply – how close are demand levels to capacity?

• Flexibility – volume flexibility will be enhanced by surplus capacity

The process of managing capacity

• Operations managers need to do the following:

1. Measure aggregate demand and capacity, and understand changes in their levels for the planning period

2. Determine the operation’s base level of capacity from which adjustments up or down will be made

3. Identify and select methods of coping with mismatches between demand and capacity

4. Understand the consequences of different capacity decisions

Demand and capacity measurement

• Understanding the nature of demand is the first task of capacity management

• Demand forecasting is an important input to capacity management decisions; there are three requirements from a demand forecast:

• It should be expressed in terms that are useful for capacity management, ex., machine hours per year

• It should be as accurate as possible

• It should give an indication of relative uncertainty

Understanding capacity

• Capacity depends on: • Service/product mix

• Duration over which the output is required

• Specification of the output

• Capacity management should reflect both predictable and unpredictable variations in capacity and demand

• Capacity leakage – arises due to theoretical capacity being difficult to achieve due to technical constraints, delays from switching, scheduling, labor shortages, quality issues, etc. • Overall equipment effectiveness (OEE) = availability (a) X performance or

speed (p) X quality of product or services created by the process (q)

Setting base capacity

Factors influencing the operation’s base level of capacity are the:

1. Relative importance of the performance objectives – set base capacity levels to reflect operation’s performance objectives

2. Perishability of the output – set to a relatively high level as inputs or outputs cannot be stored for long periods

3. Degree of variability in demand or supply – set base level of capacity relatively high to provide extra capacity if there is high level of variability, either in demand or capacity

Coping with demand and capacity mismatches

• Three pure options are available for dealing with mismatches between demand and capacity, especially in unpredictable variations:

1. Level capacity plan – keep capacity fixed irrespective of forecast demand fluctuations

2. Chase demand plan – match capacity with varying levels of forecast demand

3. Demand management plan – change demand pattern to align it closely to available capacity (stimulate off-peak demand or constrain peak demand)

Yield management – use capacity of the operation for generating revenue to its full potential, ex., airlines, hotels

Understanding consequences of capacity decisions

Before adopting one or more of the three pure capacity plans, use the following three methods to examine their likely consequences by considering:

1. Capacity decisions using cumulative representations

2. Capacity decisions using queuing principles

3. Capacity decisions over time