COURSE OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT

COURSE This course deals with designing, managing, and controlling business
DESCRIPTION processes, including acquisition and utilization of resources and
distribution of its goods/services. Topics include a review of the activities
and responsibilities of operations management, the tools and techniques
available to assist in running the operation, and the factors considered in the
design of the system.

The course will discuss common business applications in capacity planning,

production scheduling, plant lay-out and location decisions, inventory
management, work measurement, quality management, supply chain
management concepts, along with the techniques for solving commonly
occurring problems for manufacturing systems as well as to service
industries. The course will also introduce total quality management, its
philosophy, methodology and system of tools aimed to create and maintain
mechanism of organization’s continuous improvement. As it relates to
operations management by involving all departments and employees into
efforts of improvement of processes and products.
COURSE 1. The Production and Operations Function
OUTLINE 2. Forecasting
3. Capacity Planning
4. Plant Layout, Handling and Location Decisions
5. Inventory Management
6. Work Measurement Techniques
7. Total Quality Management
CHAPTER NO. 3
TITLE Capacity Planning
I. RATIONALE

This module covers the topics on capacity management and capacity planning, emphasizing the topic
on capacity measurement, queuing or waiting line management, managing demand and break-even
analysis.

INSTRUCTION TO THE USERS

This module covers Capacity Planning. In its developmental activities section, it provides substantial
discussions of the topics. It discusses the concepts, nature, scope and principles of the topics. Ample
examples, illustrations with suggested solutions are provided for the application of concepts and
practical exercises. To evaluate what the students have learned, this module provides work exercises
at the closure activities section. To ensure that learning objectives are attained at the end of the
semester, the learner / students are evaluated based on attendance, portfolio journal, formative
assessment and summative assessment. See evaluation section for the details. For further readings,
see assignment / agreement section.

LEARNING OBJECTIVES
1. Define and explain capacity management and capacity planning
2. Enumerate the objectives of capacity management
3. Solve and compute for the capacity utilization and efficiency of production
4. Match and balance discrepancies between demand and capacity
5. Perform break even analysis to achieve profitability (single product)
6. Explain and evaluate queueing management as part of capacity management
7. Define and explain characteristics of a waiting line system
8. Solve and compute for queueing performance using single- channel queueing method.
II. CONTENT
A. PREPARATORY ACTIVITIES

Please refer to the discussion below

B. DEVELOPMENTAL ACTIVITIES
 Please refer to the discussion below

CAPACITY PLANNING

1. What Capacity Planning?

Capacity planning refers to determining what kind of labor and equipment capacities are required and
when they are required. Capacity is usually planned on the basis of labor or machine hours available
within the plant. Thus, capacity planning is planning for quantity or scale of output.

Capacity planning is the process of determining the production capacity needed by an organization to
meet changing demand for its products.

2. What is Capacity?

Capacity is defined under 3 categories; design capacity, effective capacity and actual capacity. The
operations utilization of resources and the efficiency of its processes can then be calculated using these.

• Design Capacity - This is a theoretical number and not one that is applied to the daily
production of an operation. Design capacity is the output that an operation can produce
continuously, at maximum rate without stopping for any shift changeovers, maintenance or any
other delays. What the process is capable of producing under perfect conditions. In some cases,
this might be interpreted as maximum capacity.

• Effective Capacity - This considers how the operation will run on a long-term basis, how it
will be staffed and how it will be maintained. All planned stoppages under the normal working
time frame are taken into consideration. This can also be known as available capacity. These
stoppages may include shift changeovers, lunch breaks, set up times and many other
operational factors.

• Actual Capacity - This is the same as effective capacity but contains unplanned losses as well
as planned ones. These could include poor work rate, absenteeism or new staff training for
example.

3. What is the concept of capacity constraint?

A constraint on capacity is a resource that is less capable, of increasing its throughput over the given
time period, than other parts of the operation. A number of machines may be in sequence on a
manufacturing line yet one may not be able to process as many units per hour as the other machines.
The capacity will be constrained by this under producing machine and this may create a ‘bottle neck’
in the process. By increasing the capacity of this machine, the capacity of the overall facility will also
increase.
 Capacity is always constrained by the lowest producing part of the process. In layman’s terms an
operation will ‘always go at the pace of the slowest walker’. Identifying a restrictive part of the process
and adding resources that can increase its capacity will improve the overall capacity of the operation.

The resource mix that can be potentially constraining to an operation could include;
• Staff/Skill levels: Staff can be trained over time to be more flexible in their contribution to the
process. The operation can benefit from the learning curve, where a new employee can become
more efficient at a given process and therefore be quicker at their job, which can increase the
capacity of the operation.
• IT facilities/Technology: This can be a small or very significant improvement to a process.
The investment in ICT can reduce process time or even completely change the nature of the
process itself. Online banking has been a significant improvement in the finance sector by
reducing the number of staff required to process a transaction and therefore massively
increasing the capacity of the bank to deal with its customers.
• Materials availability: A change in the supply of raw materials can increase the capacity
potential of an operation. If there is a restriction in availability of materials or a timing problem
and this is released, the capacity could be improved.
• Product or service mix: Adjustments in the other products or services made by the facility
can restrict the capacity of the operation. This is because different products and services may
use different quantities of resources per unit; therefore, a change in the product mix may result
in a change in capacity.
• Storage: This can affect the capacity of an operation if there is a resource constraint that is
affected by timing in the process. If the operation has the ability to store work in progress or
finished goods it can improve the capacity of the process in the short term. The swings and
fluctuations in demand can be mitigated by the ability to store products and allow the full
capacity of the operation to flow.
• Working schedules and access to facilities: This can also dictate the full availability of
capacity. A lecture theatre that can accommodate 100 students at a time could operate beyond
a standard working day; however, both staff and students may have an issue regarding 6am
lectures!

These factors should be considered in a short-term, medium-term and long-term time frame to establish
their ability to be changed over time. A short term strategy for expanding capacity in a cafe, would be
to put a few extra tables outside or extend the staff working hours to cope with the extra demand, in the
medium term the cafe owner would have more options available to increase the capacity, such as hiring
more staff of having additional cooking facilities in the kitchen to cope with extra demand. In the long-
term the possibilities can be much greater, the premises could be expanded, better equipment, more
staff and so on. The options available to an operation are greater the more time it has to plan them.

4. What is the concept of the Theory of Constraints (TOC)?

The theory of constraints was first proposed in 1986 by Goldratt. The theory is the practical results of
Goldratt’s work on ‘how to think’. TOC is a philosophy that suggests that any system must have at
least one constraint otherwise it would generate an infinite amount of output and that constraints
generally determine the pace of an organization’s ability to achieve its goal which is profit.

Goldratt emphasizes that constraints pose a significant threat to the wellbeing of an organization and
must be identified. He suggests that constraints may be labor availability, staff skills, machine
availability, and capital or time available. They may however be more difficult to identify such as;
organizational policies, guiding principles or rate of innovation.

He identifies that there is rarely an equal flow of work within each work center in a process. The
constraint should therefore be the control of the pace of the process. This theory reduces the emphasis
on maximizing all resources within the process and prioritizes the management of the bottleneck. The
theory he advocates is called ‘drum, buffer, rope’ where the bottleneck is the ‘drum’ which marks the
time through the process – due to insufficient capacity this should be working the most. The ‘buffer’
principle is required to make sure that the bottleneck is never short of work and therefore the front end
of the process should stockpile inventory to maximize output. The ‘rope’ element is the communication
device to make sure the front part of the process does not overproduce.

Goldratt’s five focusing steps

 The theory identified a process to follow in order to free the system from the bottleneck that slowed it
down. By following the steps, the operation identifies and clears the blockage, this will then in turn
reveal a new bottleneck and the 5 steps can start again.

• identify the systems constraints

• exploit the systems constraints
• subordinate everything else to the above decision
• elevate the systems constraints (identify the next constraint)
• if in a previous step, a constraint has been removed, go back to step 1 but do not allow inertia
to become the systems constraints.

Goldratt advises that any constraint having been identified is only transitional. As this constraint is
exploited, another will appear in its place. Without identifying the real constraints, Goldratt suggests
that management may not be able to find the real causes that restrict capacity so will take actions to
work around the problem rather than solve the real cause.

Constraint analysis is a subject that is larger than the subject of Capacity Management. However, it
does offer an important perspective on the question; ‘is all capacity equally important?’

5. What are the objectives of capacity management?

The decisions taken by operations managers in devising their capacity plans will affect several
different aspects of performance:

• Costs will be affected by the balance between capacity and demand (or output level if that is
different). Capacity levels in excess of demand could mean under-utilization of capacity and
therefore high unit costs.
• Revenues will also be affected by the balance between capacity and demand, but in the
opposite way. Capacity levels equal to or higher than demand at any point in time will ensure
that all demand is satisfied and no revenue lost.
• Working capital will be affected if an operation decides to build up finished goods inventory
prior to demand. This might allow demand to be satisfied, but the organization will have to
fund the inventory until it can be sold.
• Quality of goods or services might be affected by a capacity plan which involved large
fluctuations in capacity levels, by hiring temporary staff for example. The new staff and the
disruption to the routine working of the operation could increase the probability of errors being
made.
• Speed of response to customer demand could be enhanced, either by the build-up of inventories
(allowing customers to be satisfied directly from the inventory rather than having to wait for
items to be manufactured) or by the deliberate provision of surplus capacity to avoid queuing.
• Dependability of supply will also be affected by how close demand levels are to capacity. The
closer demand gets to the operation’s capacity ceiling, the less able it is to cope with any
unexpected disruptions and the less dependable its deliveries of goods and services could be.
• Flexibility, especially volume flexibility, will be enhanced by surplus capacity. If demand and
capacity are in balance, the operation will not be able to respond to any unexpected increase in
demand.

6. The steps of capacity management

The sequence of capacity management decisions which need to be taken by operations managers is
illustrated in the figure below. Typically, operations managers are faced with a forecast of demand
which is unlikely to be either certain or constant. They will also have some idea of their own ability to
meet this demand. Nevertheless, before any further decisions are taken, they must have quantitative
data on both capacity and demand. So, the first step will be to measure the aggregate demand and
capacity levels for the planning period. The second step will be to identify the alternative capacity plans
 which could be adopted in response to the demand fluctuations. The third step will be to choose the
most appropriate capacity plan for their circumstances.

7. How is capacity measured:

Forecasting demand fluctuations

Although demand forecasting is usually the responsibility of the sales and/or marketing functions, it
is a very important input into the capacity management decision, and so is of interest to operations
managers. After all, without an estimate of future demand it is not possible to plan effectively for
future events, only to react to them. It is therefore important to understand the basis and rationale for
these demand forecasts. As far as capacity planning and control is concerned, there are three
requirements from a demand forecast:
• It is expressed in terms which are useful for capacity management. If forecasts are expressed
only in money terms and give no indication of the demands that will be placed on an
operation’s capacity, they will need to be translated into realistic expectations of demand,
expressed in the same units as the capacity (for example, machine hours per year, operatives
required, space, etc.).
• It is as accurate as possible. In capacity management, the accuracy of a forecast is important
because, whereas demand can change instantaneously, there is a lag between deciding to
change capacity and the change taking effect. Thus, many operations managers are faced with
a dilemma. In order to attempt to meet demand, they must often decide output in advance,
based on a forecast which might change before the demand occurs, or worse, prove not to
reflect actual demand at all.
• It gives an indication of relative uncertainty. Decisions to operate extra hours and recruit
extra staff are usually based on forecast levels of demand, which could in practice differ
considerably from actual demand, leading to unnecessary costs or unsatisfactory customer
service. For example, a forecast of demand levels in a supermarket may show initially slow
business that builds up to a lunchtime rush. After this, demand slows, only to build up again
for the early evening rush, and it finally falls again at the end of trading. The supermarket
manager can use this forecast to adjust (say) checkout capacity throughout the day. But
although this may be an accurate average demand forecast, no single day will exactly
conform to this pattern. Of equal importance is an estimate of how much actual demand could
differ from the average. This can be found by examining demand statistics to build up a
 distribution of demand at each point in the day. The importance of this is that the manager
now has an understanding of when it will be important to have reserve staff, perhaps filling
shelves, but still on call to staff the checkouts should demand warrant it. Generally, the
advantage of probabilistic forecasts such as this is that it allows operations managers to make
a judgement between possible plans that would virtually guarantee the operation’s ability to
meet actual demand, and plans that minimize costs. Ideally, this judgement should be
influenced by the nature of the way the business wins orders: price sensitive markets may
require a risk-avoiding cost-minimization plan that does not always satisfy peak demand,
whereas markets that value responsiveness and service quality may justify a more generous
provision of operational capacity.

8. Seasonality of demand

Most markets are influenced by some kind of seasonality – that means that they vary depending on the
time of year. Sometimes the causes of seasonality are climatic (holidays), sometimes festive (gift
purchases), sometimes financial (tax processing), or social, or political; in fact, there are many factors
that affect the volume of activity in everything from construction materials to clothing, from health care
to hotels. It may be demand seasonality or supply seasonality, but in many organizations, capacity
management is largely about coping with these seasonal fluctuations. These fluctuations in demand or
supply may be reasonably forecastable, but some are usually also affected by unexpected variations in
the weather and by changing economic conditions.

Consider the four different types of operation described previously: a woolen knitwear factory, a city
hotel, a supermarket and an aluminum producer. Their demand patterns are shown in the figure below.
The woolen knitwear business and the city hotel both have seasonal sales demand patterns, but for
different reasons: the woolen knitwear business because of climatic patterns (cold winters, warm
summers) and the hotel because of demand from business people, who take vacations from work at
Christmas and in the summer. The retail supermarket is a little less seasonal but is affected by pre-
vacation peaks and reduced sales during vacation periods. The aluminum producer shows virtually no
seasonality but is showing a steady growth in sales over the forecast period.

9. Weekly and daily demand functions

Seasonality of demand occurs over a year, but similar predictable variations in demand can also occur
for some products and services on a shorter cycle. The daily and weekly demand patterns of a
supermarket will fluctuate, with some degree of predictability. Demand might be low in the morning,
higher in the afternoon, with peaks at lunchtime and after work in the evening. Demand might be low
 on Monday and Tuesday, build up during the latter part of the week and reach a peak on Friday and
Saturday. Banks, public offices, telephone sales organizations and electricity utilities all have weekly
and daily, or even hourly, demand patterns which require capacity adjustment. The extent to which an
operation will have to cope with very short-term demand fluctuations is partly determined by how long
its customers are prepared to wait for their products or services. An operation whose customers are
incapable of waiting, or unwilling to wait, will have to plan for very short-term demand fluctuations.
Emergency services, for example, will need to understand the hourly variation in the demand for their
services and plan capacity accordingly.

10. Measuring capacity

When measuring capacity, the unit of measure can be either an input or an output to the process. The
key is to take the most logical unit that reflects the ability of the operation to create its product or
service. However, where the input is more complicated to measure, such as machine hours on a process
layout, then output is a more suitable measure. The unit of time could be a minute, an hour, a day or a
week, or whatever time scale fits the operation, but the unit of output and time scale needs to be
consistent.

Input measures of capacity

When using input measures of capacity, the measure selected is defined by the key input into the
process. Where the provision of capacity is fixed, it is often easier to measure capacity by inputs, for
example; rooms available in a hotel or seats at a conference venue. Input measures are most appropriate
for small processes or where capacity is relatively fixed, or for highly customized or variable outputs
such as complicated services.

Output measures of capacity

The output measures count the finished units from the process such as mobile phones produced in a
day or cars manufactured per week. This measure is best used where there is low variety in the product
mix or limited customization.

Capacity can be measured from looking at the operation as a whole and then calculated on the
resources and facilities available and process time. The table above shows the alternatives that can
be used for input/output measures.

A simple formula for capacity can be:

 Time Available
Capacity =
Time of Task

For example, a service provider works an eight-hour day, takes two fifteen-minute coffee breaks
and has a half hour lunch break. The time available for work is seven hours per worker per day.

If this particular worker was a fitness instructor and he spend 70 minutes with each customer (10
minutes for the consultation and booking and 1 hour for the gym session), how many clients could
the instructor process during a five-day week?

(7 hours per day x 60 minutes per hour)x 5

= 30 clients per week\
70 minutes per client

This is a simplified measure as it presumes that the fitness instructor doesn’t have time off sick or
do any other activities such as maintain the gym equipment or diversify into other areas such as
taking classes. Most processes will not have just one activity; many will have interlinking
processes with different capacity constraints on each.

Here the operation will have to consider the capacity of the whole process and not individual
constituent processes. Also, the individual process durations may differ. If the first part of the
process takes 10 minutes but stage 2 takes 20 minutes and stage three takes 10 minutes then a
backlog will appear at stage 2.

The diagram shows that the output of a process will be constrained by the slowest point. This is
referred to as a ‘bottleneck’ in the process.

However, it is not always possible to accurately predict how long each stage is actually going to
take. A hair dresser, for example, may allocate thirty minutes to each haircut, forty minutes to each
hair colorant and ten minutes to styling, but individual customers may take more time and others
less. In such circumstances it may not be possible to accurately locate the bottleneck in variable
processes.

This shows an important feature of capacity planning, assumptions must be made as to what the
process is capable of in order to understand the output of the operation. However, although
assumptions are needed to plan the process, often in reality these assumptions can be found to be
inaccurate.

11. Efficiency and utilization calculations

For the efficient use of the resources available, efficiency is output shown as a percentage of available
capacity.
 Actual Output
Efficiency=
Effective Capacity

For an operation that has been well designed, there will be minimal planned losses. This allows the
resources to be used to the best of their ability. Capacity utilization is the measure of how much of the
available capacity is used. Utilization is output shown as a percentage of the facilities or designed
capacity.

Actual output
Utilization=Design capacity

For example, if the fitness trainer in the previous example only had 24 clients who arrive at their
appointments on time, the calculation would be:
24
Utilization= x 100
30

= 80%

Therefore, the utilization rate is 80%.

These measures of capacity can tell an operation how well they are utilizing their resources and how
efficient the manufacturing process is.

Example:
You are managing a group of 10 Electricians. These individuals undertake in-home servicing of
electrical systems and are called by telephone for either emergency or prearranged visits. They charge
a minimum call out fee that covers the first 15 minutes of their visit plus travelling time. Beyond the
first fifteen minutes they charge in minimum blocks of 15 minutes plus any materials that might be
necessary to carry out the job. The average callout takes 1 hour.

The workers usually work for 7 hours a day. Taking time off and illness into account reduces the
electricians’ available time by 20%. This means the 7 hours per day is reduced to a 5 hour and 36-
minute day (5.6 hours)

If actual work is only 200 hours billed in the week then (a) What is the capacity utilization of the team?
(b) What is their efficiency?

Approach: First, you need to calculate (a) the design capacity and (b) the effective capacity. Then use
the actual output given above to calculate the capacity utilization and efficiency.

Solution:

10 workers x 7 hours per day

Design Capacity = x 5 days working week
1 hour per customer call out

Design Capacity = 350 customers per week

10 workers x 5.6 hours per day

Effective Capacity = x 5 days working week
1 hour per customer call out

Effective Capacity = 280 customers per week

Actual Output 200

Efficiency = x 100
Effective Capacity 280

Efficiency of the process is 71%

actual output 200

Utilization = x 100
design capacity 350
 Utilization of the process is 57%

Note: for this example, capacity is determined by the difference between actual hours of work measured
against available or attended hours multiplied by an efficiency factor that takes into account current
conditions.

12. Capacity depends on activity mix

The hospital measures its capacity in terms of its resources, partly because there is not a clear
relationship between the number of beds it has and the number of patients it treats. If all its patients
required relatively minor treatment with only short stays in hospital, it could treat many people per
week. Alternatively, if most of its patients required long periods of observation or recuperation, it could
treat far fewer. Output depends on the mix of activities in which the hospital is engaged and, because
most hospitals perform many different types of activities, output is difficult to predict. Certainly, it is
difficult to compare directly the capacity of hospitals which have very different activities.

Example:

Suppose an air-conditioner factory produces three different models of air-conditioner unit: the deluxe,
the standard and the economy. The deluxe model can be assembled in 1.5 hours, the standard in 1 hour
and the economy in 0.75 hours. The assembly area in the factory has 800 staff hours of assembly time
available each week.

If demand for deluxe, standard and economy units is in the ratio 2:3:2, the time needed to assemble 2
+ 3 + 2 = 7 units is:

The number of units produced per week is:

If demand changes to a ratio of deluxe, economy, standard units of 1:2:4, the time needed to assemble
1 + 2 + 4 = 7 units is:

Now the number of units produced per week is:

13. Overall equipment effectiveness

The overall equipment effectiveness (OEE) measure is an increasingly popular method of judging the
effectiveness of operations equipment. It is based on three aspects of performance:

• the time that equipment is available to operate

• the quality of the product or service it produces
• the speed, or throughput rate, of the equipment.

Overall equipment effectiveness is calculated by multiplying an availability rate by a performance (or

speed) rate multiplied by a quality rate. Some of the reduction in available capacity of a piece of
equipment (or any process) is caused by time losses such as set-up and changeover losses (when the
equipment or process is being prepared for its next activity), and breakdown failures when the machine
is being repaired. Some capacity is lost through speed losses such as when equipment is idling (for
example, when it is temporarily waiting for work from another process) and when equipment is being
run below its optimum work rate. Finally, not everything processed by a piece of equipment will be
error free. So, some capacity is lost through quality losses.
Taking the notation in the figure above:

For equipment to operate effectively, it needs to achieve high levels of performance against all three of
these dimensions. Viewed in isolation, these individual metrics are important indicators of plant
performance, but they do not give a complete picture of the machine’s overall effectiveness. This can only
be understood by looking at the combined effect of the three measures, calculated by multiplying the three
individual metrics together. All these losses to the OEE performance can be expressed in terms of units of
time – the design cycle time to produce one good part. So, a reject of one part has an equivalent time loss.
In effect, this means that an OEE represents the valuable operating time as a percentage of the design
capacity.

Example:

In a typical 7-day period, the planning department programmed a particular machine to work for 150 hours
– its loading time. Changeovers and set-ups take an average of 10 hours and breakdown failures average 5
hours every 7 days. The time when the machine cannot work because it is waiting for material to be
delivered from other parts of the process is 5 hours on average and during the period when the machine is
running, it averages 90 per cent of its rated speed. Three per cent of the parts processed by the machine are
subsequently found to be defective in some way.
14. Coping with demand fluctuation

With an understanding of both demand and capacity, the next step is to consider the alternative
methods of responding to demand fluctuations. There are three ‘pure’ options available for coping
with such variation:
• Ignore the fluctuations and keep activity levels constant (level capacity plan).
• Adjust capacity to reflect the fluctuations in demand (chase demand plan).
• Attempt to change demand to fit capacity availability (demand management).

15. Level Capacity Plan

In a level capacity plan, the processing capacity is set at a uniform level throughout the planning
period, regardless of the fluctuations in forecast demand. This means that the same number of
staff operate the same processes and should therefore be capable of producing the same aggregate
output in each period. Where non-perishable materials are processed, but not immediately sold,
they can be transferred to finished goods inventory in anticipation of sales at a later time. Thus,
this plan is feasible (but not necessarily desirable) for our examples of the woolen knitwear
company and the aluminum producer.

Level capacity plan could also be used by the hotel and supermarket, although this would not be
the usual approach of such organizations, because it usually results in a waste of staff resources,
reflected in low productivity. Because service cannot be stored as inventory, a level capacity plan
would involve running the operation at a uniformly high level of capacity availability. The hotel
would employ sufficient staff to service all the rooms, to run a full restaurant, and to staff the
reception even in months when demand was expected to be well below capacity. Similarly, the
supermarket would plan to staff all the checkouts, warehousing operations, and so on, even in quiet
periods
16. Chase demand plan

The opposite of a level capacity plan is one which attempts to match capacity closely to the varying
levels of forecast demand. This is much more difficult to achieve than a level capacity plan, as
different numbers of staff, different working hours, and even different amounts of equipment may
be necessary in each period. For this reason, pure chase demand plans are unlikely to appeal to
operations which manufacture standard, non-perishable products. Also, where manufacturing
operations are particularly capital-intensive, the chase demand policy would require a level of
physical capacity, all of which would only be used occasionally. It is for this reason that such a
plan is less likely to be appropriate for the aluminum producer than for the woolen garment
manufacturer (see Figure below). A pure chase demand plan is more usually adopted by operations
which cannot store their output, such as customer-processing operations or manufacturers of
perishable products. It avoids the wasteful provision of excess staff that occurs with a level capacity
plan, and yet should satisfy customer demand throughout the planned period. Where output can be
stored, the chase demand policy might be adopted in order to minimize or eliminate finished goods
inventory.

Methods of Adjusting Capacity

The chase demand approach requires that capacity is adjusted by some means. There are a number
of different methods for achieving this, although they may not all be feasible for all types of
operation. Some of these methods are listed below.

• Overtime and Idle time

Often the quickest and most convenient method of adjusting capacity is by varying the
number of productive hours worked by the staff in the operation. When demand is higher
than nominal capacity, overtime is worked, and when demand is lower than nominal
capacity the amount of time spent by staff on productive work can be reduced. In the latter
case, it may be possible for staff to engage in some other activity such as cleaning or
maintenance. This method is only useful if the timing of the extra productive capacity
matches that of the demand.

• Varying size of the workforce

If capacity is largely governed by workforce size, one way to adjust it is to adjust the size
of the workforce. This is done by hiring extra staff during periods of high demand and
laying them off as demand falls or hire and fire. However, there are cost and ethical
implications to be taken into account before adopting such a method. The costs of hiring
 extra staff include those associated with recruitment, as well as the costs of low
productivity while new staff go through the learning curve. The costs of lay-off may
include possible severance payments but might also include the loss of morale in the
operation and loss of goodwill in the local labor market.

• Using Part-time Staff

A variation on the previous strategy is to recruit part-time staff; that is, for less than the
normal working day. This method is extensively used in service operations such as
supermarkets and fast-food restaurants but is also used by some manufacturers to staff an
evening shift after the normal working day. However, if the fixed costs of employment for
each employee, irrespective of how long he or she works, are high, then using this method
may not be worthwhile.

• Subcontracting
In periods of high demand, an operation might buy capacity from other organizations,
called subcontracting. This might enable the operation to meet its own demand without the
extra expense of investing in capacity which will not be needed after the peak in demand
has passed. Again, there are costs associated with this method. The most obvious one is
that subcontracting can be very expensive. The subcontractor will also want to make
sufficient margin out of the business. A subcontractor may not be as motivated to deliver
on time or to the desired levels of quality. Finally, there is the risk that the subcontractors
might themselves decide to enter the same market.

17. Manage Demand Plans

The most obvious mechanism of demand management is to change demand through price.
Although this is probably the most widely applied approach in demand management, it is less
common for products than for services. For example, some city hotels offer low-cost ‘city break’
vacation packages in the months when fewer business visitors are expected. Skiing and camping
holidays are cheapest at the beginning and end of the season and are particularly expensive during
school vacations. Ice-cream is ‘on offer’ in many supermarkets during the winter. The objective is
invariably to stimulate off-peak demand and to constrain peak demand, in order to smooth demand
as much as possible. Organizations can also attempt to increase demand in low periods by
appropriate advertising. For example, turkey farmers in the UK and the USA make vigorous
attempts to promote their products at times other than Christmas and Thanksgiving.

18. Yield Management Concept

In operations which have relatively fixed capacities, such as airlines and hotels, it is important to
use the capacity of the operation to maximize its potential to generate profit. One approach used by
such operations is called yield management. It is really a variety of methods and analytical tools.
The term is used in many service operations to mean techniques that can be used to allocate limited
resources, among different categories of customers, such as business or leisure travelers. Because
these techniques are used by operations with services that cannot be stored, yield management is
sometimes called ‘perishable asset revenue management’ or simply ‘revenue management’. But
whatever name it goes by, the basic concept of yield management is based on the economic
principle of supply and demand. When supplies are short, prices go up; when supply is high, prices
go down. Yield management simply provides a systematic method for positioning customers within
the supply–demand spectrum in such a way that they can obtain the highest yield for their services
or products. So, a customer who has relatively little flexibility in his or her travel plans is the
customer who is most likely to pay a higher price for airline tickets and hotel rooms. The customer
with a great deal of flexibility is not as inclined to pay a higher price. Yield management is
especially useful where:

• Capacity is relatively fixed

• The market can be fairly clearly segmented
• The service cannot be stored in any way
• The services are sold in advance
• The marginal cost of making a sale is relatively low

The 3 key strategies for maximizing revenue through yield management are as follows:
 • Overbooking – this is where the operation books more customers than it can accommodate
and presumes that there will be some ‘no show’. It has the rather obvious disadvantage of
what will happen if all the customers do turn up! A policy of overbooking can only be
effective if the take up rate for the service is predictable, and if the costs of compensating
a customer if they are unable to have their booked service are not too high. The advantages
for the operation include maximum revenue and full capacity. This has been a popular
policy of many airlines, where flights are overbooked. Airlines have a large volume of data
from previous flights to predict rates of no shows on various routes, customers who miss
flights because of this policy are then compensated with alternative flights and possible
upgrades. However recent legislation that requires airlines to financially compensate
passengers as well as finding alternative flights and this extra cost has led to many of the
budget airlines discontinuing this policy

• Price discounting – this is similar to a demand management policy to try to optimize the
capacity at non-peak times. In the case of price discounting the top price that can be charged
is set for the time of highest demand and then reduced for less attractive time periods. A
high peak time price may also be used to deter those booking at peak times to control
demand. It helps smooth demand over a time period and maximizes revenue. A good
example of this is the holiday market – with a finite number of holidays available in Europe,
peak time such as school holidays may incur heavy premiums yet there are many bargains
to be had ‘off peak’.

• Varying the service type - this allows an operation to grade what service they are selling
and charge different prices accordingly. This allows them to charge those who are prepared
to pay more, the extra with some justification. Seats in a theatre will be grouped in order
of quality and price, such as the dress circle seats being the best and most expensive and
the stalls being the cheapest. Upgrading a service can differentiate it from the standard
service and therefore higher prices can be charged. The advantage of this policy is that it
is flexible in the short term; if an airline has over demand for economy seats for a flight
but does not sell all its business class seats, then a business class seat on a flight can be
‘converted’ to an economy seat to maximize revenue.

19. Queuing or ‘waiting line’ management

Several of the strategies mentioned above for the management of capacity, require the ability to be
able to store products and sell out of stock in order to follow the demand line. In low demand times
the product can be stockpiled yet in peak times the rise in demand can be satisfied from stock.

However sometimes it is not possible to build a product in advance, this is especially true of
services, where by the very nature of a service the production and consumption are simultaneous.
In these cases, queuing theory is a more appropriate strategy. Queuing theory works on the basis
that where the flow of consumers into a process is not regular then there will be an element of
waiting involved where customers will have to queue.

The waiting line or queue effectively regulates the flow of customers into the process and turns the
uneven demand into a manageable flow.

An example of this is a theme park; customers are free to walk around the theme park and take a
trip on any of the rides on offer. The customers will arrive at the rides in an irregular fashion so
there will be peaks and troughs in demand all day long. If a roller coaster can accommodate 100
passengers on a 20-minute ride and 600 customers arrive then they will be processed in 20-minute
batches of 100 and the queue will be cleared in 2 hours. However, the customers will arrive in
varying groups and batch sizes in different timing this is known as the arrival rate of customers.

The customers entering into the process is called ‘the calling population’. The number of customers
may be known and can be a known (finite) where for example a number of tickets have been sold
in advance – an example of this maybe a theatre show, or can be completely unknown (infinite)
where there is no advance warning of arrival number, an example of this maybe a post office.

When joining a queue, the customer is not usually engaged in the process but waiting to start the
process, this leaves the customer free to either not join the queue, which is known as ‘balking’ or
queue for a time and then leave the queue which is referred to as ‘reneging’. The operation itself
 also is able to prevent customers entering the queue, this may occur if there is too much demand
for the service at the given time, this is where the customer is ‘rejected’ by the queue.

The arrival rate – is the rate at which customers needing to be served arrive at the server or
servers. Rarely do customers arrive at a steady and predictable rate. Usually there is variability in
their arrival rate. Because of this it is necessary to describe arrival rates in terms of probability
distributions. The important issue here is that, in queuing systems, it is normal that at times no
customers will arrive and at other times many will arrive relatively close together.

The queue – customers waiting to be served form the queue or waiting line itself. If there is
relatively little limit on how many customers can queue at any time, we can assume that, for all
practical purposes, an infinite queue is possible. Sometimes, however, there is a limit to how
many customers can be in the queue at any one time.

Rejecting – if the number of customers in a queue is already at the maximum number allowed,
then the customer could be rejected by the system. For example, during periods of heavy demand
some websites will not allow customers to access part of the site until the demand on its services
has declined.

Balking – when a customer is a human being with free will (and the ability to get annoyed) he or
she may refuse to join the queue and wait for service if it is judged to be too long. In queuing
terms this is called balking.

Reneging – this is similar to balking but here the customer has queued for a certain length of time
and then (perhaps being dissatisfied with the rate of progress) leaves the queue and therefore the
chance of being served.

Queue discipline – this is the set of rules that determine the order in which customers waiting in
the queue are served.

Servers – a server is the facility that processes the customers in the queue.

20. Balancing capacity and demand

The dilemma in managing the capacity of a queuing system is how many servers to have available
at any point in time in order to avoid unacceptably long queuing times or unacceptably low
utilization of the servers. Because of the probabilistic arrival and processing times, only rarely will
the arrival of customers match the ability of the operation to cope with them. Sometimes, if several
customers arrive in quick succession and require longer-than-average processing times, queues will
build up in front of the operation. At other times, when customers arrive less frequently than
average and also require shorter-than-average processing times, some of the servers in the system
will be idle. So even when the average capacity (processing capability) of the operation matches
the average demand (arrival rate) on the system, both queues and idle time will occur.
 If the operation has too few servers (that is, capacity is set at too low a level), queues will build up
to a level where customers become dissatisfied with the time they are having to wait, although the
utilization level of the servers will be high. If too many servers are in place (that is, capacity is set
at too high a level), the time which customers can expect to wait will not be long but the utilization
of the servers will be low. This is why the capacity planning and control problem for this type of
operation is often presented as a trade-off between customer waiting time and system utilization.
What is certainly important in making capacity decisions is being able to predict both of these
factors for a given queuing system. The supplement to this chapter details some of the simpler
mathematical approaches to understanding queue behavior.

21. Break-even analysis

One of the most common tools used in evaluating the economic feasibility of a new enterprise or
product is the break-even analysis. The break-even point is the point at which revenue is exactly
equal to costs. At this point, no profit is made and no losses are incurred. The break-even point can
be expressed in terms of unit sales or dollar sales. That is, the break-even units indicate the level of
sales that are required to cover costs. Sales above that number result in profit and sales below that
number result in a loss. The break-even sales indicate the dollars of gross sales required to break-
even.

Costs, which may be linear or non-linear, usually include two components:

Fixed costs (FC) – Includes costs such as buildings, insurance, fixed overhead, equipment capital
recovery, etc. These costs are essentially constant for all values of the decision variable

Variable costs (VC) – Includes costs such as direct labor, materials, contractors, marketing,
advertisement, etc. These costs change linearly or non-linearly with the decision variable, e.g.
production level, workforce size, etc. For the analysis to be followed here, the variation will
generally be assumed to be linear.

The basic equation for determining the break-even units is:

The basic equation for determining the break-even sales is:

 Example: A local livestock producer utilizes compost waste to develop an organic fertilizer
product. The fertilizer is prepared for retail sale in 50-pound bags. The retail sales price is $5.00
per bag. The average variable cost per bag is $2.80 and average annual fixed costs are $60,000.
These three pieces of information are:

The above assumption can be utilized to calculate the number of bags that must be sold in order to
break-even as well as the total dollar of sales needed to break-even. Using the formulas explained
earlier, the following calculations can be made:

Therefore, no profits are made from the sale of this product until more than 27,273 bags are sold
or more than $136,365 in gross sales is generated.

III. SYNTHESIS / GENERALIZATION

What is capacity planning and control?

• It is the way operations organize the level of value-added activity which they can achieve
under normal operating conditions over a period of time.
• It is usual to distinguish between a long-, medium- and short-term capacity decisions. Medium-
and short-term capacity management where the capacity level of the organization is adjusted
within the fixed physical limits which are set by long-term capacity decisions is sometimes
called aggregate planning and control.
• Almost all operations have some kind of fluctuation in demand (or seasonality) caused by some
combination of climatic, festive, behavioral, political, financial or social factors.

How is Capacity measured?

• Either by the availability of its input resources or by the output which is produced. Which of
these measures is used partly depends on how stable is the mix of outputs? If it is difficult to
aggregate the different types of output from an operation, input measures are usually
preferred.
• The usage of capacity is measured by the factors, ‘utilization’ and ‘efficiency’. A more recent
measure is that of overall equipment effectiveness (OEE).

How can operations plan their capacity level?

• Representing demand and output in the form of cumulative representations allows the
feasibility of alternative capacity plans to be assessed.

IV. EVALUATION

The student / learner’s performance in this module is evaluated as follows:

5% Attendance (Active participation in the class)

5% Portfolio Journal (Answers to work exercises)
40 % Formative Examination (One online/ offline written quiz covering Topic 1)
 50% Summative Examination (This topic is included in the Online / Offline Written Midterm
Examination)

V. ASSIGNMENT / AGREEMENT

For further reading: Slack, Nigel. Operations Management. 7th Edition.

The next topic is Plant Layout and Location Decisions. Learner / student is advised to read in
advance the topic in the book of Slack, Nigel. Operations Management. 7th Edition.

VI. REFERENCES

Slack, Nigel. Operations Management. 7th Edition.

https://www.slideshare.net/aarish9696/capacity-planning-3652764
https://accountlearning.com/notes-on-capacity-planning-importance-procedure-determinants/