Lecture 8: Maximum Capacity, Capacity and inventory management

Learning outcomes
 Explain what is meant by capacity management and the key decision areas involved
 Describe the role of demand forecasting
 Measure and evaluate capacity performance
 Evaluate and apply capacity management strategies
-Long-term
-Medium/short-term
 Assess the impact of variability on capacity and flow
 Critique capacity management in services
 Explain what is meant by inventory management and key decision areas involved
 Describe the purpose of inventory and its potential disbenefits
 Assess when and how much inventory to order
 Apply appropriate techniques to control and manage inventory
 Evaluate queue (waiting line) management
1.WHAT IS CAPACITY MANAGEMENT?
When are people going to demand our service and in what quantity.
Involves the study of likely demand, capacity required and the development
of strategies for the deployment of resources and management of demand.
Adapted from Wild (2002: 306)
Capacity is ‘the maximum level of value-added activity over a period of time that the process
can achieve under normal operating conditions’
Slack and Brandon-Jones(2018: 200)
Capacity is ‘the “throughput,” or number of units a facility can hold, receive, store, or
produce in a period of time
Heizer et al (2020: 340)
Capacity in terms of processing capability rather than static number
2.IMPACT OF CAPACITY MANAGEMENT?
 Cost: not using our resources enough
 Speed and dependability: too little capacity may increase lead times and or reduce
dependability
 Quality: Overloaded capacity may decrease customer experience/increase risk of
errors. Excess capacity may lead to an un-engaging customer experience in some
services (Wagamama)
 Flexibility
3 levels of capacity management: decision making

UNDERSTANDING DEMAND: Forecasting and patterns of demand

 The reason they do that is to understand how much capacity they'll need to serve that
demand, or how they're going to implement those strategies and the medium and short
term.
 Forecasts should take into account our own intentions:
 – New product launches
 – Product withdrawals
 – Product promotions

LONG TERM CAPACITY

MANAGEMENT: Leading and lagging capacity strategies
Planning and controlling a company's production capabilities over an extended period.
Goal of long-term capacity management is to ensure that a company's production capacity is
aligned with its business goals and anticipated demand for its products or services.
Concerned with adding (or removing) major capacity increments:
– Design and implement new production process
– Add (or sell existing) long lead-time
equipment
– Acquire or sell facilities
– Acquire competitors
Key decision areas: Location, timing of
capacity changes.

Capacity leading vs lagging

Leading:
- company proactively increases its production
capacity ahead of anticipated demand growth.
-investing in new equipment, expanding
facilities, hires more staff
-aggressive approach, helps companies to
capture more market share, meet customer
demand more effectively, and generate higher
profits.
Lagging:
-Company waits until demand has already increased before expanding its production capacity
-conservative, stops companies overinvesting
MEASURING CAPACITY
1. Output measures (i.e. throughput rate) are usual for demand forecasts and for
capacity calculations in
high-volume, standardised processes, e.g.:
– Automotive production line: number of cars per week
– Brewery: litres per week
2. Input measures are usual for low-volume, flexible processes and for many service
operations, e.g.:
– Consulting: consultant hours
– Hospital: beds available
3. Challenges: how to relate input measures to output (demand) measures for capacity
planning:
– 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!
Design and effective capacity
Utilisation = actual output/design capacity x 100%
Efficiency = actual output/effective capacity x 100%
Expected output = effective capacity * (historical) efficiency

MEDIUM-TERM CAPACITY
MANAGEMENT
Concerned with managing capacity to achieve required performance:
– Add or reduce personnel
– Add or reduce shifts
– Add (buy or lease) or sell equipment
– More or improved training (improve productivity)
– Subcontract

MANAGING CAPACITY DEMAND

3 generic strategies:
Chase demand: ability to adjust
Manage demand: restaurants (Wagamama)
-constraining customer access: reservations only between particular hours.
-scheduled promotions

CAPACITY MANAGEMENT IN SERVICES

 Heterogeneity: variation in customer needs and staff capabilities, processing times
 Inseparability of production and consumption: timing, location, interaction of capacity
and service quality
 Perishability – can’t store outputs: hotel room that does sell on one night cannot be
stored and sold the next night. Chase demand capacity strategies, demand
management strategies

WHAT IS INVENTORY? (approaching 200 word question in bb test)

Defining it, its location and purpose:
Inventory [or stock] is the accumulations of transformed resources materials, customers or
information – as they flow through processes, operations or supply networks
Slack and Brandon-Jones (2018: 236)
 Inventory management. Simply answers the question of how much inventory is
needed to buffer against the fluctuations in forecast customer demand a supplier
deliveries
 Key decision areas: how much to order to satisfy demand, when we need to order it
(when stocks run low), how to manage and control inventory within our organisation.
How much to order? EOQ and the volume decision
EOQ: The Economic Order Quantity

CONTROLLING INVENTORY: Equation

BB test advice: 200 word question
Example question: Flow focusses on the process and how to optimise the flow of elements
through the process (Carlborg et al, 2013).
-Explain why flow is important in operations and how the theory and practice of Lean
thinking can be used to improve flow through a process?
Pull apart question:
- Instructional words- what you have to do (analyse, discuss, evaluate)
- Topic words- the general topic/ subject of the question (what is the focus topic were
looking at in this question)
- Focus/ constraint- the boundaries/ focus of the question (where should you keep your
focus and what are they asking you to dive in on?)
SO.. why flow is important in light of lean thinking
Feedback: Instructional word wasn’t being identified, go back to that instructional word.
Example 2: ‘The general notion is that inventory should be avoided where possible, as it
causes costs and problems’ (Holweget et al, 2018)
Critically evaluate this statement and explain how organisations can ensure inventory
holding are kept at appropriate levels.
Instructional word: critically evaluate
Topic words: inventory holding
Focus/ constraint: 2 ways that inventory can be a good or bad thing?