Module 3 Session 4 Capacity management

Operations Management

1. Capacity Management Module 3 Operations Management

2. What Is Capacity Management? Capacity management refers to the act of ensuring a business maximizes its potential activities and production output—at all times, under all conditions. The capacity of a business measures how much companies can achieve, produce, or sell within a given time period. Consider the following examples: A call center can field 7,000 calls per week. A café can brew 800 cups of coffee per day. An automobile production line can assemble 250 trucks per month. A car service center can attend to 40 customers per hour. A restaurant has the seating capacity to accommodate 100 diners.

3. Various businesses and their respective input and output measures of capacity

4. What Is Capacity Management? It helps companies overcome challenges in meeting short- and mid-term customer demand, managing supply chain operations, and formulating long-term organizational plans. In doing so, an organization must analyze the availability of its resources to ensure it achieves the production output within the given period. This practice is common in industries like manufacturing, retail, service, and information technology.

5. Important Points Capacity management helps businesses meet consumer demand by cost-effectively improving their production efficiency over a set period. It is accomplished by removing bottlenecks in the production process and utilizing available resources, which leads to maximum output. The more commonly used management strategies include lead strategy, lag strategy, match strategy, and dynamic strategy. Using this strategy offers several benefits for businesses, such as streamlined operations, increased market share, customer retention and acquisition, and better inventory and supply chain management. Aside from being heavily employed in the manufacturing industry, the strategy is practiced in the retail and commercial, information technology, and service industries.

6. Determinants of Effective Capacity Facilities : The size and provision for expansion are key in the design of facilities. Other facility factors include locational factors, such as transportation costs, distance to market, labor supply, and energy sources. The layout of the work area can determine how smoothly work can be performed. Product and Service Factors : The more uniform the output, the more opportunities there are for standardization of methods and materials . This leads to greater capacity. Process Factors : Quantity capability is an important determinant of capacity, but so is output quality. If the quality does not meet standards, then output rate decreases because of need of inspection and rework activities. Process improvements that increase quality and productivity can result in increased capacity. Another process factor to consider is the time it takes to change over equipment settings for different products or services.

7. Determinants of Effective Capacity Human Factors: the tasks that are needed in certain jobs, the array of activities involved, and the training, skill, and experience required to perform a job all affect the potential and actual output. Employee motivation, absenteeism, and labour turnover all affect the output rate as well. Policy Factors: Management policy can affect capacity by allowing or disallowing capacity options such as overtime or second or third shifts Operational Factors: Scheduling problems may occur when an organization has differences in equipment capabilities among different pieces of equipment or differences in job requirements. Other areas of impact on effective capacity include inventory stocking decisions, late deliveries, purchasing requirements, acceptability of purchased materials and parts, and quality inspection and control procedures.

8. Determinants of Effective Capacity Supply Chain Factors: Questions include: What impact will the changes have on suppliers, warehousing, transportation, and distributors? If capacity will be increased, will these elements of the supply chain be able to handle the increase? If capacity is to be decreased, what impact will the loss of business have on these elements of the supply chain? External Factors: Minimum quality and performance standards can restrict management’s options for increasing and using capacity.

9. Benefits Optimized Resource Allocation:  Capacity planning helps organizations allocate their resources efficiently, ensuring that they are utilized optimally and eliminating bottlenecks. Cost Reduction:  By accurately forecasting demand and aligning capacity accordingly, organizations can avoid unnecessary costs associated with overcapacity or last-minute capacity adjustments. Improved Customer Satisfaction:  Capacity planning enables organizations to meet customer demands promptly and consistently, leading to enhanced customer satisfaction and loyalty. Effective Decision-Making:  By having a clear understanding of their capacity needs, organizations can make informed decisions about resource investments, expansion plans, and production schedules. Operational Efficiency:  Capacity planning helps streamline operations by identifying process inefficiencies and optimizing resource utilization, leading to improved productivity and overall efficiency.

10. Capacity Management Strategies

11. #1 – Lag Strategy Using this conservative approach, a manager determines the capacity and then waits until there is an actual steady increase in demand. Then, the manager raises the production capabilities to a level to fulfill the current market need. The main drawback of this option is that the business will lose the chance to sell more if the demand goes up too quickly, as increasing production often takes time. Also, a shortage of inventory might result in customer attrition.

12. #2 – Lead Strategy Unlike the lag strategy, this strategy is very aggressive and much riskier. The business decides to increase the capacity before there is an actual demand and anticipates that this will suffice if it goes up. It is used in cases where a company expands or in industries where sales demand goes up quickly. So, small firms usually avoid this kind of strategy. However, there are a few issues with this approach. For instance, if the actual demand does not go up, it could increase the inventory storage costs and the risk of inventory wastage.

13. #3 – Dynamic Strategy This forecast-driven strategy focuses on relying on market trends to increase capacity. The manager analyzes the sales forecast data and actual demand and then makes adjustments to production in advance. It is one of the safest approaches as managers have accurate forecast data that will qualify their capacity targets. Also, it decreases the risk of shortage or wastage of inventory.

14. #4 – Match Strategy This strategy mixes up lead and lag strategies. It uses small yet significant additions in the capacity of the company by following the market demand. Whenever it is clear that demand will rise, the company boosts its production in small amounts. If the demand goes up quickly, the company can at least grow its sales a bit. If it does not, the company will not suffer huge losses. However, the business will never fully enjoy a significant spike in demand or escape unharmed from a sudden recession in the market.

15. Capacity Management Examples Todd is the manager of a company that produces paper sheets. He evaluates the company sales and notices that the company is constantly selling 500,000 packages every month, which is its maximum capacity. So, he decides to use a lead strategy and bets on growth. Todd increases the production to sell 600,000 packages monthly, so the company will not lose the chance to enjoy any spike in demand.

16. Capacity Management Examples Clair, on the other hand, is the manager of another company in the same industry. Sales here are very different each month, ranging from 300,000 in some months to 500,000 in others. Unlike Todd, she uses a lag strategy. If demand skyrockets, she will upgrade the production. She does not have the same incentives to enhance production so quickly.

17. Types of Capacity Planning Short-Term Capacity Planning:  This type focuses on meeting immediate demand by adjusting resources, workforce, and production schedules in the short term, typically ranging from a few days to several months. Medium-Term Capacity Planning:  Medium-term capacity planning spans several months to a few years and involves decisions regarding workforce planning, facility expansions, and process improvements to align capacity with forecasted demand. Long-Term Capacity Planning:  Long-term capacity planning extends beyond the medium term, usually covering several years to decades. It involves strategic decisions such as new facility construction, technology investments, and market analysis to support long-term growth and sustainability.

18. Reconciling Capacity and Demand Level Capacity Chase Demand Demand Management

19. Level Capacity Leveling capacity means fixing capacity (production) at a constant level (generally the average demand) throughout a period regardless of fluctuations in forecast demand.  During periods of low demand any overproduction can be held in anticipation of later time period.  The downside of this approach is the potential for holding costs and obsolete inventory.  “The level capacity plan satisfies high demand from existing stocks. When demand goes below capacity, overproduction is stored as inventory in anticipation of higher demand in later months. The disadvantage of this approach is that this tends to build in high stock levels and hence high levels of working capital are required. “Companies can be left with excess stocks on their hands”.

20. Level Capacity An example of level capacity management could be the first step of the production of salt by evaporation (in Italy there is one industry like this in Salina). In hot countries, salt is produced by allowing the sun to evaporate sea water in shallow pools or ‘pans’; the steps are in order: Evaporation, Wash, Centrifugation, Grinding, Drying, Sack, Packaging, Shipping. All the salt product by evaporation is accumulate in big pile and used when needed. Normally, they produce much more salt then they need as, in this specific case, there isn’t the problem for the company to stock or to be left with excess stocks on their hand, as the cost of stocking and the raw material is zero.

21. Chase Demand Chasing demand means altering production capacity to match the demand over time.  This approach requires balancing a variety of resource availability (staff availability, equipment levels, etc.).  This approach is risky in terms of availability of resources when needed, the cost of readying, and the loss of control.  Opposite to the level capacity management is the chase capacity, “ organisations could decide to match capacity and demand by altering the availability of resources. This might be achieved by employing more people when it is busy and adopting strategies such as overtime and additional shifts. The amount of planning does increase, but this is compensated by better utilisation of resources”.

22. Chase Demand An example of  chase capacity management could be all kind of work with seasonal cycle. Example. -the management of a restaurant in a seaside resort, during the winter there are few costumers and therefore there are few waiters; only during the weekends (not always) and the summer the restaurant will be full of clients. During this period staff with a time contract will be taken to speed up the services.

23. Demand Management Demand management adjusts demand to meet available capacity. Demand Management strategies include: Varying the Price  – Raising or lowering price will alter customer/consumer demand. Selective Marketing  - The amount of marketing affects demand. Increased marketing effort to product lines with excess capacity and reduce marketing with lower capacity. Repurpose Capacity  -  Use the existing capacity to develop alternative product during low demand periods. Operational Modification  - Change operations to add benefits that generate increased demand. (E.g., Offer instant delivery of product during low demand periods. – Use an appointment system to level out demand).

24. Importance of demand capacity planning Reducing waste:  This planning can help companies understand exactly how much of their goods or services to produce in order to satisfy demand, which can help reduce waste. Monitoring costs:  By measuring demand and capacity, companies can monitor production costs and budget appropriately for areas where they may require additional resources.

25. Importance of demand capacity planning Identifying fluctuations:  Continually measuring the demand capacity can help businesses identify fluctuations in capacity or demand cycles, such as increased demand during the holiday season. Increasing customer trust:  This process can help businesses ensure they're meeting customer demand by having enough inventory available, which can help increase customers' trust in the business. Streamlining inventory management:  By effectively managing the demand capacity, businesses can make sure they're producing enough inventory without creating excess stock, which can streamline inventory management.