Capacity Management

Capacity: The maximum level of value-added activity over a period of time that
the process can achieve under normal operating conditions.
Capacity is most commonly used in the static, physical sense of the fixed volume
of a container, or the space of a building.
Capacity Constraints
Many organizations operate at below their maximum processing capacity
There is insufficient demand completely to fill their capacity or
As a deliberate policy, so that the operation can respond quickly to every new order.

Often organizations find themselves with some parts of their operation operating
below the capacity while other parts are at their capacity ceiling.
It is these parts of the operation that are pushed to the capacity ceiling that act as
the constraint on the whole operation.
Example: A retail superstore with gift wrapping service.
Planning and Controlling Capacity
Capacity planning and control is the task of setting the effective capacity of the
operation so that it can respond to the demands placed upon it.
Deciding how the operation should react to fluctuations in demand.
Long-term capacity strategy
Medium- and short-term Capacity
Strategy
Medium term This usually involves an assessment of the demand forecasts over
a period of 2-18 months ahead, during which time planned output can be varied.
Examples: Hotels and Restaurants

Short term These are the capacity adjustments which enable them to flex output
for a short period, either on a predicted basis or at a short notice.
Examples: A bank at lunchtimes, A sunny day for a theme park etc.,
Aggregate Demand and Capacity
Making overall, broad capacity decisions, but is not concerned with all of the detail
of the individual products and services offered.
Aggregate Different products and services are bundled together in order to get a
broad view of demand and capacity.
Some degree of approximation, especially if the mix of products or services being
produced varies significantly.
Aggregation is the first step in planning and control.
The Objectives of Capacity Planning and
Control
Costs Will be affected by the balance between capacity and demand. Under-
utilization of capacity leads to high unit cost.
Revenues Capacity levels equal to or higher than demand at any point in time
will ensure that all demand is satisfied and no revenue is lost.
Working Capital Will be affected if an operation decides to build up finished
goods inventory prior to demand.
Quality The new staff and the disruption to the routine working of the operation
could increase the probability of errors being made.
Speed The speed of response to customer demand could be enhanced, either by
the build-up of inventories, or by the deliberate provision of surplus capacity to
avoid queuing.
Contd.
Dependability The closer demand gets to the operations capacity ceiling, the
less able it is to cope with any unexpected disruptions and the less dependable its
deliveries of goods and services could be.
Flexibility Especially volume flexibility, will be enhanced by surplus capacity. If
demand and capacity are in balance, then operations will not be able to respond to
any unexpected increase in demand.
The steps of Capacity Planning and
Control
Measuring Demand and Capacity
Forecasting Demand Fluctuations
It is expressed in terms which are useful for capacity planning and control
It is as accurate as possible
It gives an indication of relative uncertainty
Seasonality of Demand
Measuring Capacity
Output capacity measure
Input capacity measure
Measuring Capacity
Capacity depends on activity mix
Design capacity and effective capacity
Overall equipment effectiveness
OEE measure is an increasingly popular method of judging the effectiveness of
operations equipment.
It is based on 3 aspects of performance
The time that equipment is available to operate
The quality of the product or service it produces
The speed, or throughput rate, of the equipment

OEE can be calculated as

The alternative capacity plans
The 3 options available for coping with such variations
Level Capacity Plan - Ignore the fluctuations and keep activity levels constant.
Chase Demand Plan - Adjust capacity to reflect the fluctuations in demand.
Demand Management Attempt to change demand to fit capacity availability.

Usually in practice a mix of all these will be used.

Level Capacity Plan
Level Capacity Plan: The processing capacity is set at a uniform level throughout
the planning period, regardless of the fluctuations in forecast demand.
The same number of staff operates the same processes and should therefore be
capable of producing the same aggregate output in each period.
Level capacity plans can achieve the objectives of
Stable employment patterns
High process utilization
High productivity with low unit costs

This is for non-perishable goods which can be sold later.

Level capacity plans which use anticipation
inventory to supply future demand
Level capacity plans with under-utilization
of capacity
Chase Demand Plan
It attempts to match capacity closely to the varying levels of forecast demand.
This is more difficult to achieve than a level capacity plan
Different number of staff
Different working hours
Different amounts of equipment are necessary

A pure chase demand plan is more usually adopted by operations which cannot
store their output
Customer processing operations
Manufacturers of perishable products
Methods of Adjusting capacity
The chase demand plan requires the capacity to be adjusted by some means which
are mentioned as follows
Overtime and idle time
Overtime
Idle time
Annualized hours

Varying the size of the workforce

Hire and fire

Using Part-time staff

Subcontracting
Manage demand plan
Demand Management: Managed by changing demand through price.
The objective
To stimulate off-peak demand
Constrain peak demand
Mixed Plans
Most operational managers are required to
Reduce costs and inventory
Minimize capital investment
Provide a customer-oriented approach
Yield Management
Yield Management: It is one of the approach in operations which have relatively
fixed capacities, it is important to use the capacity of the operation for generating
revenue to its full potential.
It is 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
Example
Airlines use multiple methods to maximize the yield from their capacity like
Over-booking capacity
Price discounting
Varying service types
Capacity planning as a queuing problem
The arrival rate The rate at which customers needing to be served arrive at the
server. Rarely do customers arrive a steady and predictable rate.
The Queue The customers waiting to be served form the queue or waiting line
itself.
Rejecting If the number of customers in a queue is already at the maximum
number allowed, then the customer could be rejected by the system.
Baulking When a customer is a human being with free will (and the ability to get
annoyed) he or she may refuse to join the queue and wait for service if it is judged
to be too long. In queuing terms it is called Baulking.
Contd..
Reneging This is similar to Baulking but here the customer has queued for a
certain length of time and then (perhaps being dissatisfied with the rate of
progress) leaves the queue and therefore the chance of being served.
Queue discipline This is the set of rules that determine the order in which
customers waiting in the queue are served.
Servers A server is a facility that processes the customers in the queue. In any
queueing system there may be any number of servers configured in different
ways.