Capacity management
Capacity: The upper limit or ceiling on the load that
an operating unit can handle.
-The maximum level of value-added activity over a period of time that the process can achieve under normal operating conditions
- Capacity decisions have a real impact on the ability of the organization to meet future demands for products & services
- Capacity decisions affect operating costs
- Capacity is usually a major determinant of initial cost
- Capacity decisions often involve long-term commitment of resources
- Capacity decisions can affect competitiveness
- Capacity affects the ease of management
Planning & controlling capacity
Capacity planning & control is the task of setting the effective capacity of the operation so that it can respond to the demands placed upon it
- Long-term capacity planning & control
- Medium-term capacity planning & control
- Short-term capacity planning & control
Steps of capacity planning & control
- Estimate future capacity requirements
- Evaluate existing capacity & facilities & identify gaps
- Identify alternatives for meeting requirements
- Conduct financial analyses of each alternative
- Assess key qualitative issues for each alternative
- Select the alternative to pursue that will be best in the long term
- Implement the selected alternative
- Monitor results
Measuring demand & capacity
Forecasting demand fluctuations
Forecasting is a key input & three requirements of a
demand forecast
- Expressed in terms which are useful for capacity planning & control
- Gives an indication of relative uncertainty
- As accurate as possible
Aggregate demand fluctuations for four organization
Measuring capacity
- Capacity depends on activity mix
- Design capacity: The maximum output rate or service capacity an operation, process, or facility is designed for
- Effective capacity: Design capacity minus allowances such as personal time, quality problems, machine breakdowns, absenteeism, maintenance etc.
Means that the actual output of the line will be even lower
than the effective capacity
These different measures of capacity are useful in defining
two measures of system effectiveness: efficiency & utilization.
- Efficiency is the ratio of actual output to effective capacity
- Capacity utilization is the ratio of actual output to design capacity
Capacity plans
There are three ‘pure’ options available for coping with
demand fluctuations
- Level capacity plan
- Chase demand plan
- Demand management
Level capacity plan
Ignore the fluctuations & keep activity levels constant
- Capacity is set at a uniform level throughout the planning period, regardless of the fluctuations in forecast demand
- Same number of staff operate & produce same output in each period
Chase demand plan
Adjust capacity to reflect the fluctuations in demand,
opposite of level capacity plan
- Attempts to match capacity closely to the varying levels of forecast demand
- Difficult to achieve, as different numbers of staff, working hours & even amounts of equipment may be necessary in each period
There are a number of different methods for adjusting
capacity
- Overtime & idle time
- Varying the size of the workforce (hire & fire)
- Using part-time staff
- Subcontracting
Manage demand plan
Attempt to change demand to fit capacity availability, the
mechanism is to change demand through price
Mixed plans
- To reduce costs & inventory
- To minimize capital investment
- To provide a responsive & customer-oriented approach at all times
Most organizations choose to follow a mixture of the three
approaches
Yield management
To use the capacity of the operation for generating revenue
to its full potential
- A collection of methods, which can be used to ensure that an operation maximizes its potential to generate profit
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.
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