Capacity planning and control Chapter 11 Capacity planning and control Source: Arup

Capacity planning and control Capacity planning and control Operations strategy The market requires … the availability of products and services Operations management Design Improvement The operation supplies ... the capacity to deliver products and services Planning and control

To provide an ‘appropriate’ amount of capacity at any point in time Objective To provide an ‘appropriate’ amount of capacity at any point in time The ‘appropriateness’ of capacity planning in any part of the operation can be judged by its effect on … Costs Revenue Working capital Service level Source: British Airways London Eye

Objectives of capacity planning and control Measure aggregate capacity and demand Identify the alternative capacity plans Time Aggregated output Choose the most appropriate capacity plan Forecast demand Estimate of current capacity

The nature of aggregate capacity Aggregate capacity of a hotel: – rooms per night – ignores the numbers of guests in each room Aggregate capacity of an aluminium producer: – tonnes per month – ignores types of alloy, gauge and batch variations

Causes of seasonality Construction materials Travel services Climatic Festive Behavioural Political Financial Social Source: Alamy/Medical-on-line Construction materials Travel services Beverages (beer, cola) Holidays Foods (ice-cream, Christmas cake) Tax processing Clothing (swimwear, shoes) Doctors (influenza epidemic) Gardening items (seeds, fertilizer) Sports services Fireworks Education services

Demand fluctuations in four operations

Good forecasts are essential for effective capacity planning … … but so is an understanding of demand uncertainty, because it allows you to judge the risks to service level Only 5% chance of demand being higher than this Distribution of demand DEMAND TIME DEMAND TIME Only 5% chance of demand being lower than this When demand uncertainty is high, the risks to service level of under-provision of capacity are high

Operating equipment effectiveness (OEE) Not worked (unplanned) Breakdown failure Set-up and changeovers Total operating time Availability losses Loading time Availability rate = a = total operating time/ loading time Performance rate = p = net operating time/ total operating time Slow-running equipment Equipment ‘idling’ Net operating time Speed losses Quality rate = q = valuable operating time/ net operating time Quality losses Valuable operating time

How capacity and demand are measured Efficiency Actual output Effective capacity = Design capacity 168 hours per week Effective capacity 109 hours per week Planned loss of 59 hours Actual output – 51 hours per week Avoidable loss – 58 hours per week Utilization Actual output Design capacity =

Ways of reconciling capacity and demand Level capacity Chase demand Demand management Demand Demand Demand Capacity Capacity Capacity

Ways of reconciling capacity and demand How do you cope with fluctuations in demand? Absorb demand Adjust output to match demand Change demand Demand management Level capacity Chase demand

Absorb demand Have excess capacity Keep output level Make to stock Make customer wait Source: Madam Tussaud’s Part finished Queues Finished goods, or Backlogs Customer inventory

Adjust output to match demand Hire Fire Source: Corbis/Photocuisine Temporary labour Lay-off Overtime Short time Subcontract Third-party work

Change pattern of demand Change demand Change pattern of demand Develop alternative products and/or services Source: Empics

Moving a peak in demand can make capacity planning easier

Capacity planning and control as a dynamic sequence of decisions Actual demand and actual capacity Period t – 1 Outcome How much capacity next period? Current capacity estimates Updated forecasts Period t Decision How much capacity next period? Current capacity estimates Updated forecasts Period t + 1 Decision Shortages Queues Inventory Actual demand and actual capacity Costs Revenues Working capital Customer satisfaction etc. Outcome Shortages Queues Inventory Capacity level Costs Revenues Working capital Customer satisfaction etc.

Demand for manufacturing operation’s output 8000 7000 6000 5000 Forecast in aggregated units of output per month 4000 3000 2000 1000 J F M A M J J A S O N D Months

For capacity planning purposes, demand is best considered on a cumulative basis. This allows alternative capacity and output plans to be evaluated for feasibility 60 50 40 Forecast cumulative aggregated output (thousands) 30 20 10 40 80 120 160 200 240 Cumulative operating days

Cumulative representations Cumulative capacity Cumulative demand Unable to meet orders Capacity and demand Building stock Time

Simple queuing system Server 1 Server 2 Server m Distribution of processing times Distribution of arrival times Rejecting Balking Reneging Source of customers Queue or ‘waiting line’ Served customers Boundary of system

Simple queuing system Low variability – narrow distribution of process times Time High variability – wide distribution of process times Time

Key Terms Test Capacity The maximum level of value-added activity that an operation, or process, or facility, is capable of over a period of time. Aggregated planning and control A term used to indicate medium-term capacity planning that aggregates different products and services together in order to get a broad view of demand and capacity. Design capacity The capacity of a process or facility as it is designed to be; often greater than effective capacity.

Key Terms Test Effective capacity The useful capacity of a process or operation after maintenance, changeover and other stoppages and loading have been accounted for. Utilization The ratio of the actual output from a process or facility to its design capacity. Overall equipment effectiveness (OEE) A method of judging the effectiveness of how operations equipment is used.

Key Terms Test Level capacity plan An approach to medium-term capacity management that attempts to keep output from an operation or its capacity constant, irrespective of demand. Chase demand plan An approach to medium-term capacity management that attempts to adjust output and/or capacity to reflect fluctuations in demand. Demand management An approach to medium-term capacity management that attempts to change or influence demand to fit available capacity.

Key Terms Test Hire and fire A (usually pejorative) term used in medium-term capacity management to indicate varying the size of the workforce through employment policy. Subcontracting When used in medium-term capacity management, a term that indicates the temporary use of other operations to perform some tasks, or even produce whole products or services, during times of high demand. Demand management An approach to medium-term capacity management that attempts to change or influence demand to fit available capacity.

Key Terms Test Yield management A collection of methods that can be used to ensure that an operation (usually with a fixed capacity) maximizes its potential to generate profit. Queuing theory A mathematical approach that models random arrival and processing activities in order to predict the behaviour of queuing systems (also called waiting line theory).