Capacity Management

• Strategic capacity plan

• Mid term capacity plan
(aggregate Planning)
 Levels of capacity management

• Strategic capacity plan

• Mid term capacity plan
 Is capacity management integrated across levels?

• The capacity of an operation /process is the output

that it can deliver in a defined unit of time.
• It is an operation’s ‘ability to supply’.
• Ice cream manufacturer =10,000kgs/day and its supplier dairy capacity=
7000kgs/day then effective capacity is only 7,000 kgs/day.
• Capacity management related to
– understanding the nature of demand and
– supply (capacity), and
– the mismatches between them.
• A mismatch occur because demand fluctuates over
time or capacity fluctuates over time or both.
Variation can come from demand, supply, or both
Integrating across the levels of capacity
management
 Integrating across the levels of capacity management
At a strategic level,
• How much capacity do we
need in total?
• How should the capacity be
distributed?
• Where should the capacity
be located?
At a medium-term,
• To what extent do we keep
capacity level or fluctuate
capacity levels?
• Should we change staffing
levels as demand changes?
• Should we subcontract or off-
load demand?
At a short-term level,
• Which resources should be
allocated to each set tasks?
• When should tasks be
allocated to resources?
What is the operation’s current capacity?
• All operations and processes need to know
their capacity.
– too little - cannot meet demand,
– too much- paying for more capacity.
• To manage capacity need to measure current
capacity.
• Capacity is a function of
– product/service mix,
– duration and
– product service specification.
a. Capacity depends on product or service mix
• How much an operation can do depends on what
operation activity required to do.
• Output/input measures of capacity
• What is the capacity of cement mill?
• What is the capacity of Hospital?
• No of beds but OPD, Minor treatments, ICU
• Days of stay? Short stay more capacity but longer stay
then less capacity.
• Problems caused by variation mix can be partially
overcome by using aggregated capacity measures.
b. Capacity depends on the duration over which
output is required
• Capacity is the output per unit of time.
• Capacity that is possible to cope with peak
times is not sustainable over long periods.
• Capacity is express on the level of activity or
output that can be sustained over an
extended period of time.
C. Capacity depends on the specification of output

• ‘must do’ elements of the service that should

not be sacrificed and
• ‘nice to do’ parts of the service that can be
omitted or delayed in order to increase
capacity.
 Capacity ‘leakage’
• The theoretical capacity of a process (designed
capacity) is not always achieved in practice.
• Process will need to be stopped while it is
changed over & maintenance.
• Labour shortages, quality problems, delays in the
delivery of bought-in products and services, and
machine or system breakdown, can all reduce
capacity.
• This reduction in capacity is sometimes called
‘capacity leakage’.
 Overall Equipment Effectiveness (OEE)

• This is an popular method of judging the

effectiveness of operations equipment.
• It is based on three aspects of performance:
1. the time that equipment is available to operate;
2. the quality of the product or service it produces;
3. the speed, or throughput rate, of the equipment.

OEE = a × p × q
 Overall equipment effectiveness (OEE)

Not worked Availability rate = a

Loading time (unplanned)
= Total operating time
Set-up and Loading time
change-
Total operating Availability overs
time losses Breakdown
failure Performance rate = p
= Net operating time
Net operating Speed Equipment Total operating time
time losses ‘idling’
Slow running
equipment Quality rate = q
Qualit = Valuable operating time
y Quality Net operating time
losses losses
Valuable
operating
time
In a typical 7-day period, the planning department
programme a particular machine to work for 150 hours,
its loading time.
Changeovers and setups 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.
 Not worked Availability rate = a
Loading( Available) (unplanned)
time =150 = Total operating time
Set-up and
change-
Loading time
Availability overs=10
Total operating
time =135 losses=15 Breakdown
failure=5 Performance rate = p
= Net operating time
Net operating Speed Equipment Total operating time
time=117 losses ‘idling’= 5
=18 Slow running
equipment=13 Quality rate = q
Qualit = Valuable operating time
y Quality Net operating time
losses losses
=117*0.
03=3.51
Valuable operating OEE= 113.49/150= 75.6 %
time =117-3.51
=113.49
What do these two examples have in common?

Both have to cope with fluctuating customer demand. Long term demand
and predictable , short term weather etc arise demand & unpredictable
 How well are demand capacity mismatches
understood?
• Understanding how demand might vary
• Predictable and unpredictable variation in demand
1. When demand is predictable - ‘dependent demand’
– capacity may need adjusting, but the adjustments
can be planned in advance, preferably to minimize
the costs of making the change.
2. When demand is unpredictable, ‘independent
demand, if an operation is to react to it at all, it
must do so quickly; otherwise the change in capacity
will have little effect on the operation’s ability to
cope with the changed demand.
Objectives and task of capacity management depends on the
balance between predictable and unpredictable variation in
demand
 Enhanced market knowledge makes
capacity planning easier
• Deep understanding of the market forces that
will generate demand is important.
• Unpredictable variation by forecasting converts
into predictable variation.
• Managing the changes in demand supply
mismatches is important.
• The greater an operation’s market knowledge,
the more capacity management will focus on
predictable demand–capacity mismatches.
Enhanced demand and supply market knowledge can make
capacity management easier
Making forecasts useful for capacity management
• Without some understanding of future demand and supply
fluctuations, it is not possible to plan effectively for future
events, only to react to them.
• Understanding how forecasting are made is important issue.
• Over-optimistic forecasts could lead the process to committing
itself to unnecessary capital expenditure to increase its
capacity.
• Inaccurate forecasts for a process operating well below its
capacity limit will also result in extra cost, but probably not to
the same extent.
• For effectiveness of the capacity management, better
forecasting ( necessary but not sufficient ) as well as enhanced
market knowledge (of both demand an supply) is desirable.
Better forecasting or better operations responsiveness?
• Too much capacity (thereby increasing costs), or too little capacity
(thereby losing revenue and dissatisfying customers).
• Operations must find some balance between having better forecasts
and being able to cope without perfect forecasts.
• Online retail store, in holiday time, may not able to cope the
demand as forcasted (as having in stock) in the short time due to
labour shortage. Customer may not willing to wait.
• Garment (fashion) industry need fast and flexible process to cope
with uncertainty in market place (short response time from design
to store).
• When the cost of not meeting demand is very high, processes also
have to rely on their responsiveness rather than accurate
forecasts.i.e accident and emergency departments in hospitals must
be responsive even if it means underutilized resources at times.
What should be the operation’s base capacity?
Planning capacity is to decide on a ‘base level’ of
capacity and then adjust it periodically up or
down to reflect fluctuations in demand.
The base level of capacity in any operation is
influenced by many factors:
● The relative importance of the operation’s
performance objectives
● The perishability of the operation’s outputs
● The degree of variability in demand or supply.
 1. The operation’s performance objectives
• Base levels of capacity should be set primarily to reflect
an operation’s performance objectives:
• High base level of capacity (compared to average
demand) will result in relatively high levels of under
utilisation of capacity and therefore high costs.
– true when an operation’s fixed costs are high
• high base levels of capacity result in a capacity ‘cushion’
& responsive customer service will be enhanced.
• High base capacity is higher capital and low base capacity
is higher inventory ( more working capital)
• Building up inventory is risky – product have short shelf
life / output cannot be stored at all (most services).
 2. The perishability of the operation’s outputs
• When either supply or demand is perishable,
base capacity will need to be set at a relatively
high level.
• A factory that produces frozen fruit will need
sufficient freezing, packing and storage capacity
to cope with the rate at which the fruit crop is
being harvested during its harvesting season.
Similarly, a hotel cannot store its
accommodation services.
 3. The degree of variability in demand or
supply

• Variability will reduce its

effective capacity.

• Greater the variability, the

more extra capacity will
need to be provided due
low utilisation.
How can demand–capacity mismatches be managed?

5. How can demand –capacity

mismatches be managed ?

Absorb Adjust Change

demand output to demand
match
Level capacity
demand Demand
management
Chase demand
Three ‘pure’ plans available
• Ignore demand fluctuations and keep nominal
capacity levels constant (level capacity plan).
• Adjust capacity to reflect the fluctuations in
demand (chase demand plan).
• Attempt to change demand (demand
management)

“Although in practice most organizations will use a

mixture of all of them, even if one plan dominates.”
 Ways of reconciling capacity and demand

Demand Demand Demand

Capacity Capacity Capacity

Chase demand Plan: Demand management

Level capacity Plan: Change capacity to Plan- attempt to change
Absorb fluctuations reflect demand demand to reduce
fluctuations fluctuations
 1. Level capacity plan
• Same input- output over the period of time
regardless of the fluctuations in forecast demand.
• This plan is feasible (but not necessarily desirable)
for non perishable product
• This plan have stable employment patterns, high
process utilization, and usually also high
productivity with low unit costs.
• Not suitable for ‘perishable’ products, such as foods
items or for customized products.
 2. Chase demand plan
• Different numbers of staff, different working hours, and
even different amounts of equipment may be necessary
in each period.
• 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.
• difficult task of ensuring that quality standards and safety.
• Where inventory is expensive to hold.
 Methods of adjusting capacity

1. Overtime and Idle time: 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.
2. Varying the size of the workforce: Hire and Fire
3. Using part-time staff
4. Subcontracting
5. Changing capacity when variation is
unpredictable( Flexibility in quantity and speed)
 3. Manage Demand plan
• Demand management is to change demand
through price.
• 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.
• Organizations can also attempt to increase
demand in low periods by appropriate
advertising.
• Alternative products and service( Lawn mover
and Snow mover)
 Mixed plan
• Each of the three ‘pure’ plans is applied only where
its advantages strongly outweigh its disadvantages.
• ‘pure’ capacity plans do not match the
organizational competitive and operational
objectives.
• Most operations managers are required
simultaneously to reduce costs and inventory, to
minimize capital investment, and yet to provide a
responsive and customer-oriented approach at all
times.