Jones & Robinson: Operations Management

• All operations need to know the likely customer demand for their goods or services on any given day, week or year so that they can ensure that they have sufficient resources to fulfill the demand in time.

This is Capacity Management• It involves forecasting the likely demand• and providing sufficient resources to meet the

demand

Capacity Management

Jones & Robinson: Operations Management

• Capacity can be defined as the maximum possible output in a given time.

• Different operations will use different units: - Manufacturers often use the aggregate weight or number

of products capable of being made or stored over time.

- Hospitals use the number of available beds- Airlines use the number of available seats

Too much capacity - there will be staff, machinery or facilities idle, costing extra money

Too little capacity – may lead to lost orders

Capacity Management

Jones & Robinson: Operations Management

• There are 3 main types of capacity• Design capacity – The theoretical maximum

capacity of an operation. This assumes that the operation is used at full capacity at all times. This unlikely due to inefficiencies in the system.

• Effective capacity - The potential capacity that can be achieved on a ‘typical’ day, taking into account planned maintenance and product changeovers for example.

Managing Capacity in Materials Processing Operations (MPOs)

Jones & Robinson: Operations Management

• Achieved capacity – The actual output of an operation may be less than the effective capacity as there may be additional unplanned non-working time, due to machinery breakdowns or staff shortages for example.

Operations managers need two key measurements of any operation

• Utilization – the proportion of the design capacity that is actually achieved in any operation

• Efficiency – the proportion of the effective capacity that is actually achieved in any operation

Managing Capacity in Materials Processing Operations (MPOs)

Jones & Robinson: Operations Management

Managing Capacity - Worked Example

Jones & Robinson: Operations Management

Managing Capacity - Worked Example

Consider a food canning machine which is designed to operate 24 hours a day, 7 days a week, but has planned downtime of 28 hours due to product changeovers and maintenance. In addition there is a further loss of output due to quality concerns and material shortages totalling a further 40 hours. The utilization and the efficiency of the operation are calculated as follows (in terms of time): 

Design capacity = 24 x 7 = 168 hours Effective capacity = Design capacity – Planned downtime  = (168 - 28) = 140 hours Achieved capacity = Effective capacity - Avoidable downtime 

= (140 – 40) = 100 hours

Jones & Robinson: Operations Management

Machine Utilization = Achieved capacity / Design capacity 

= (100 / 168) x 100 % = 59.5%  Efficiency = Achieved capacity / Effective capacity 

= (100 / 140) x 100% = 71.4%

Operations managers always seek to ensure that their operations are efficient on a day-to-day basis, and in the longer term plan to maximise utilization.

NOTE – this example is calculated using time. You can also measure capacity, utilization and efficiency using output quantity.

Managing Capacity - Worked Example

Jones & Robinson: Operations Management

Matching supply and demand in CPOs is challenging because most CPOs:•are in a fixed location•produce services which are consumed at the same time as they are produced (simultaneity)•Have inflexible infrastructure (buildings, fixtures, fittings etc.) so that capacity is fixed•are difficult to predict demand for•are difficult to predict the flow through the system as they offer a variety of services with variable service times

Managing Capacity in Customer Processing Operations (CPOs)

Jones & Robinson: Operations Management

Reservations - designed to ensure a smooth flow of customers into the operation•e.g. doctors, hairdressers or solicitors often require appointments to be made beforehand.•Restaurants, theatres, airplanes and ferries usually require pre-booking (sometimes with price incentives)

Problem with reservations is ‘no-shows’ – customers who pre-book but cancel at the last minute or simply do not turn up. Some services now charge for this to compensate for lost business.

Managing Capacity in Customer Processing Operations (CPOs)

Jones & Robinson: Operations Management

Forecasting – where it is not possible to reserve a service, such as a retail shop or a fast food restaurant, the likely demand still needs to be predicted.

A number of quantitative techniques can be used:•Simple moving average•Weighted moving average•Exponential smoothing

The table on the next slide shows how these techniques may produce varying forecast demand figures.

Managing Capacity in Customer Processing Operations (CPOs)

Jones & Robinson: Operations Management

Managing Capacity in Customer Processing Operations (CPOs)

Jones & Robinson: Operations Management

Qualitative approaches to forecasting can also be employed:•Expert panel – small group of experts meet to determine their best guess to predict the likely demand

•Delphi technique - uses a questionnaire to gain information from a larger group of experts, then a consensus is reached for the prediction of the likely demand

•Scenario planning – a group of experts who look at a number of various possible scenarios and gauge the associated risks before coming up with a prediction for the likely demand

Managing Capacity in Customer Processing Operations (CPOs)

Jones & Robinson: Operations Management

Three main strategies available:

•Level Capacity strategy

•Chase Demand strategy

•Demand Management strategy

Alternative Strategies to Manage Capacity

Jones & Robinson: Operations Management

Level Capacity strategy – inputs are kept constant during periods of low demand to create inventory to meet periods of high demand

Alternative Strategies to Manage Capacity

Jones & Robinson: Operations Management

Chase Demand strategy – inputs are adjusted so that outputs match demand

Alternative Strategies to Manage Capacity

Jones & Robinson: Operations Management

Additional machinery can be made available (either from within the company or by outsourcing) or turned off, to suit demand

Labour flexibility – 4 types according to Atkinson (1986)•External numerical flexibility•Internal numerical (Temporal) flexibility•Functional flexibility (Multi-skilling)•Financial (Wage) flexibility

Alternative Strategies to Manage Capacity

Jones & Robinson: Operations Management

Demand Management strategy – influencing demand so that inputs and outputs are closely matched

Alternative Strategies to Manage Capacity

Jones & Robinson: Operations Management

Revenue (Yield) Management

A system for managing advanced reservations through pricing to maximize profitability.

Commonly used in many sectors with fixed capacity, such as hotels and airlines.

Revenue Management