CAPACITY AND DEMAND

SESSION 5

CAPACITY& DEMAND THREE DIVERGENT INTERESTS

MARKETING;
WANT GOODS AND SERVICES AVAILABLE AT ALL TIMES AND IN THE PROPER MIX TO PREVENT ANY POSSIBILITY OF A LOST SALE FROM INABILITY TO DELIVER OR PROVIDE

FINANCE;
WANT ACCURATE FORECASTS TO PREPARE BUDGETS AND PROFIT ESTIMATES AND WANT ZERO OR MINIMUM INVENTORY TO KEEP CARRYING COSTS LOW AND RETURN ON INVESTMENT UP

PRODUCTION;
WANT TO KEEP ONE PRODUCT OR SERVICE SCHEDULE AND MIX RUNNING AS LONG AS POSSIBLE

CAPACITY& DEMAND
HEALTH SERVICES

MANUFACTURING

HOTELS

CAPACITY& DEMAND
OPERATIONS MANAGERS MUST :
HAVE SUFFICIENT PRODUCTION OR SERVICE CAPACITY (MACHINES, SPACE, STAFF SKILLS AND HOURS, STOCKS, VEHICLES ETC.) TO BE ABLE TO SUPPLY THE RIGHT QUANTITY AT THE RIGHT TIME AND STILL BE ABLE TO OPTIMISE THE UTILISATION OF RESOURCES.

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AFTER DECIDING WHAT PRODUCTS OR SERVICES SHOULD BE OFFERED AND THE WAY THAT THEY SHOULD BE MADE, OPERATIONS MANAGERS MUST PLAN THE CAPACITY OF THEIR PROCESSES

CAPACITY CAN BE DEFINED AS;

THE MAXIMUM RATE OF OUTPUT (OR SERVICE PROVISION) FOR ANY GIVEN PROCESS.

CAPACITY& DEMAND
ORGANISATIONS OFTEN HAVE A GIVEN CAPACITY

AND MAY OR MAY NOT HAVE THE FLEXIBILITY TO EXPAND/REDUCE THIS IN RESPONSE TO DEMAND.

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CAPACITY PLANS ARE MADE AT THREE LEVELS; LONG TERM WHICH LOOK AT INVESTMENT IN NEW FACILITIES AND EQUIPMENT

MEDIUM TERM WHICH LOOK AT SUPPLY CHAIN DECISIONS, MARKET DEMAND AND CAPACITY CONSTRAINTS
SHORT TERM WHICH FOCUSES ON LABOUR FORCE, INVENTORIES, OVERTIME BUDGETS AND OTHER DAY TO DAY DECISIONS

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CAPACITY MEASURES ARE DIVERSE AND DEPEND UPON THE TYPE OF BUSINESS THAT YOU ARE IN A RETAILER MAY MEASURE CAPACITY AS POUNDS GENERATED PER SQUARE METRE A CINEMA MEASURES IT AS THE NUMBER OF SEATS A MANUFACTURING COMPANY MAY MEASURE THE AVAILABLE MACHINE HOURS

CAPACITY& DEMAND
GENERALLY CAPACITY IS MEASURED IN TERMS OF OUTPUT MEASURES THESE ARE USUALLY USED FOR HIGH VOLUME PROCESSES A CAR COMPANY MAY MEASURE CAPACITY IN VEHICLES PER YEAR (NISSAN UK is 450,000 PER ANNUM)

INPUT MEASURES THESE ARE USUALLY USED FOR LOW VOLUME MORE FLEXIBLE PROCESSES A PIZZA PARLOUR MAY MEASURE IT IN AVAILABLE TABLES.

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PEAK CAPACITY IS THE MAXIMUM THAT CAN BE ACHIEVED UNDER IDEAL CONDITIONS. IT CAN ONLY BE SUSTAINED FOR SHORT PERIODS, AND MAY RELY ON OVERTIME, CONTRACT STAFF, EXTRA SHIFTS. EFFECTIVE CAPACITY IS THE MAXIMUM OUTPUT THAT A PROCESS CAN ECONOMICALLY SUSTAIN UNDER NORMAL CONDITIONS. IT MAY ONLY BE SINGLE SHIFT WORKING, WITH MINIMAL OR NO OVERTIME

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UTILISATION IS THE DEGREE TO WHICH EQUIPMENT, SPACE OR LABOUR IS CURRENTLY BEING USED;

UTILISATION =

AVERAGE OUTPUT RATE

MAXIMUM CAPACITY

X 100%

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AVERAGE OUTPUT MUST BE MEASURED IN THE SAME TERMS; TIME UNITS CUSTOMERS MONEY THE UTILISATION RATE INDICATES THE NEED TO ADD EXTRA CAPACITY OR REMOVE EXCESS CAPACITY. THE BIGGEST PROBLEM IS DEFINING THE MAXIMUM CAPACITY - THE DENOMINATOR

CAPACITY& DEMAND
EXERCISE; THE PEAK CAPACITY OF A CAR FACTORY IS 100 VEHICLES PER DAY. MANAGEMENT BELIEVE THAT THE MAXIMUM LEVEL OF OUTPUT THAT CAN BE SUSTAINED ECONOMICALLY OVER A PERIOD OF TIME IS 45 CARS PER DAY CURRENTLY THE FACTORY IS PRODUCING AN AVERAGE OF 50 CARS PER DAY. CALCULATE THE UTILISATION FOR PEAK CAPACITY AND EFFECTIVE CAPACITY

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UTILISATION (PEAK) =
= AVERAGE OUTPUT RATE PEAK CAPACITY 50

100

X100% = 50%

UTILISATION (EFFECTIVE) =
= 50

AVERAGE OUTPUT RATE EFFECTIVE CAPACITY X100% = 111%

45

SOME OPERATIONS CANNOT INCREASE THEIR CAPACITY IN THE SHORT OR MEDIUM TERMS AND THEREFORE MUST HAVE A HIGH LEVEL OF BASE CAPACITY.
SETTING THE BASE LEVEL TOO HIGH MIGHT MEAN THAT YOUR NEVER HAVE TO INCREASE CAPACITY IN TERMS OF EXPERIENCED DEMAND BUT THIS APPROACH IS COSTLY AND THERE IS A RISK OF UNDERUTILISED CAPACITY. HOWEVER, HOTELS, FOR EXAMPLE, SET THEIR CAPACITY (THE NUMBER OF ROOMS THEY HAVE) AT A RELATIVELY HIGH LEVEL COMPARED TO AVERAGE DEMAND BECAUSE THEY ARE RELUCTANT TO TURN AWAY POTENTIAL BUSINESS.

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THE ROOT OF MOST BUSINESS DECISIONS IS THAT OF FORECASTING DEMAND. THIS IS DIFFICULT DUE TO THE VARIANCE IN THE

DEMAND OF GOODS AND SERVICES.

A CLASSIC CASE IS ICE-CREAM SALES A GOOD

SUMMER AND THEY ARE HIGH A COOL SUMMER AND THEY ARE LOW.

DEMAND FORECASTING IS OF CENTRAL CONCERN IN CAPACITY MANAGEMENT. WE NEED TO DISTINGUISH BETWEEN PREDICTABLE AND UNPREDICTABLE VARIATION IN DEMAND. PREDICTABLE VARIATIONS IN DEMAND MAY CAUSE AN OPERATION SOME PROBLEMS, BUT AT LEAST IF DEMAND VARIATION IS KNOWN, THE OPERATION CAN PLAN FOR IT. UNPREDICTABLE VARIATION IN DEMAND IS SIGNIFICANTLY MORE DIFFICULT TO DEAL WITH. IT USUALLY MEANS HAVING TO KEEP SOME SPARE CAPACITY IN RESERVE TO BE DEPLOYED AS AND WHEN IT IS NEEDED AND USUALLY THIS IS EXPENSIVE.

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FIVE PATTERNS OF DEMAND HORIZONTAL - FLUCTUATES AROUND A CONSTANT

AVERAGE
TREND SYSTEMATIC INCREASE OR DECREASE OVER TIME

SEASONAL REPEATABLE PATTERN DUE TO DAY, MONTH OR SEASON

CYCLICAL GRADUAL INCREASE OR DECREASE OVER LONG PERIODS OF TIME (YEARS OR DECADES) RANDOM UNFORECASTABLE

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HORIZONTAL

TREND

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

SEASONAL

CYCLICAL

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CAPACITY/DEMAND PLANNING TAKES ONE OF THREE FORMS; CAPACITY LEAD PREDICT DEMAND

CAPACITY LAG FOLLOW DEMAND

AVERAGE CAPACITY STEADY LEVEL OF OUTPUT

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CAPACITY LEAD

IS WHERE CAPACITY IS EXPANDED IN ANTICIPATION OF DEMAND GROWTH.

THIS AGGRESSIVE STRATEGY IS USED TO LURE CUSTOMERS FROM COMPETITORS WHO ARE CAPACITY CONSTRAINED OR TO GAIN A FOOTHOLD IN A RAPIDLY EXPANDING MARKET.

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90 80 70 60 50 40 30 20 10 0 J F M A M J J A S O N D Demand Capacity

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CAPACITY LAG IS WHERE CAPACITY IS INCREASED AFTER AN INCREASE IN DEMAND HAS BEEN NOTICED. THIS CONSERVATIVE STRATEGY PRODUCES A HIGHER RETURN ON INVESTMENT, BUT MAY LOSE CUSTOMERS IN THE PROCESS IT IS USED IN INDUSTRIES WITH STANDARD PRODUCTS OR THE COMPETITION IS WEAK IT ASSUMES THAT LOST CUSTOMERS WILL RETURN

CAPACITY LAG

90 80 70 60 50 40 30 20 10 0 J F M A M J J A S O N D Demand Capacity

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AVERAGE CAPACITY IS WHERE CAPACITY IS EXPANDED TO COINCIDE WITH AVERAGE EXPECTED DEMAND.

THIS IS A MODERATE STRATEGY IN WHICH MANAGERS ARE CERTAIN THEY WILL BE ABLE TO SELL AT LEAST SOME PORTION OF ADDITIONAL OUTPUT
DOES NOT REALLY APPLY TO SERVICES YOU CANNOT STORE SERVICE PROVISION

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DEMAND VOLUME
BASE LEVEL OF CAPACITY SELL FROM STOCK

MAKE TO STOCK