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MGSM890 Operations Management
Facilitator: Dr. Jonathan Farrell
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This Evening’s Program
Capacity Planning & Control Aggregate Planning Capacity versus Demand The Planning Process Managing Capacity & Demand Case Study – British Airways London Eye (pp 393,394) Exercises – Capacity Management (refer to the Folder of Readings)
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Some Definitions Capacity is the available time for production and / or the maximum number of items that can be manufactured or delivered within a given time. A Bottleneck occurs when capacity is less than the demand placed on it. A capacity-constrained resource (CCR) is a resource where the capacity is close to demand placed it. 10
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Capacity planning and control
Supply Demand Availability of capacity to deliver products and services The operation The market Required availability of products and services Customer requirements Operations resources
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Capacity Planning Horizons
Long range plans Facilities – major capital expenditures Locations Aggregate (Intermediate) plans Minor equipment purchasing Materials requirements Work force size Production rates Detailed (short-term) schedules Daily, weekly schedules People - machine assignments
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Overtime Hiring and layoffs People-Machine Assignment
The Planning Process Market Demand Forecast Starting Inventory Aggregate Plans Overtime Hiring and layoffs Ending inventory Material Procurement Actual Demand Subcontracting People-Machine Assignment
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Causes of seasonality Climatic Festive Behavioural Political Financial
Social Construction materials Beverages (beer, cola) Foods (ice-cream, Christmas cake) Clothing (swimwear, shoes) Gardening items (seeds, fertilizer) Fireworks Travel services Holidays Tax processing Doctors (influenza epidemic) Sports services Education services
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Not worked (unplanned) Availability rate = a =
total operating time / loading time Loading time Set-up and change-overs Availability losses Total operating time Breakdown failure Performance rate = p = net operating time/total operating time Equipment “idling” Speed losses Net operating time Slow running equipment Quality rate = q = valuable operating time / net operating time Valuable operating time Quality losses Quality losses
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Simple queuing system Server 1 Distribution of processing times
Distribution of arrival times Reneging Rejecting Balking Server 2 Source of customers Queue or “waiting line” Served customers Server m Boundary of system
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Simple queuing system Low variability - narrow distribution of process times Time High variability - wide distribution of process times Time
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Actual demand and actual capacity Decision
Period t - 1 Period t Period t + 1 Current capacity estimates Current capacity estimates Updated forecasts Updated forecasts Outcome Actual demand and actual capacity Decision How much capacity next period? Outcome Actual demand and actual capacity? Decision How much capacity next period? Shortages Queues Inventory Shortages Queues Inventory Capacity level Costs Revenues Working capital Customer satisfaction etc Costs Revenues Working capital Customer satisfaction etc
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Hire and make for inventory Hire staff
Short-term outlook POOR NORMAL GOOD Outlook < 1 Outlook = 1 Outlook > 1 Lay off staff Delay any action Overtime POOR Outlook < 1 Hire temporary staff Long-term outlook Short-time Idle time Do nothing Overtime NORMAL Outlook = 1 Hire temporary staff Make for inventory Hire and make for inventory Hire staff GOOD Outlook > 1 Short-time Start to recruit Forecast demand Outlook = Forecast capacity
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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.
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Long-, medium- and short-term capacity planning
6 tables or Macro operation with might produce 12 chairs a given set of resources or some combination
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Objectives of capacity planning and control
Step 1 - Measure aggregate capacity and demand. Step 2 - Identify the alternative capacity plans. Forecast demand Step 3 - Choose the most appropriate capacity plan. Aggregated output Estimate of current capacity Time
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How capacity and demand are measured
Efficiency = Actual output Planned Effective capacity loss of 59 hours Design Avoidable capacity loss - 58 Effective hours per 168 hours capacity week per week 109 hours Actual per week output - 51 hours per week Utilisation = Actual output Design capacity
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Ways of reconciling capacity and demand
Level capacity Chase demand D emand management
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Cumulative representations
Cumulative capacity Cumulative demand Capacity and demand Unable to meet orders Building stock Time
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The dynamics of controlling planning
Short-term outlook Poor Normal Good Delay Lay off Poor any Overtime staff action Long-term outlook Short- Do Normal time Overtime nothing working Hire and Make for Good make for Hire staff inventory inventory
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The effect of utilisation on customer service Average customer backlog
50.0 40.0 30.0 Average customer backlog 20.0 10.0 0.5 0.6 0.7 0.8 0.9 1.0 Capacity Utilisation
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Alternative investments to improve customer service
50.0 40.0 Increase capacity 30.0 Average customer backlog 20.0 Service target 10.0 Reduce variance Add inventory 0.5 0.6 0.7 0.8 0.9 1.0 Capacity Utilisation
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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
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Distribution of demand
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 DEMAND Only 5% chance of demand being lower than this TIME TIME When demand uncertainty is high the risks to service level or underprovision of capacity are high.
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Average processing time TIME TO PROCESS ONE UNIT OF DEMAND
It is useful to know not only the average capability of resources but also their variation in capability Average processing time FREQUENCY TIME TO PROCESS ONE UNIT OF DEMAND
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How do you cope with fluctuations in demand?
Adjust output to match demand Absorb demand Change demand
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Absorb demand Have excess capacity Keep output level Make to stock Make customer wait Part finished, Queues Finished Goods, or Backlogs Customer Inventory
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Adjust output to match demand
Hire Fire Temporary Labour Lay off Overtime Short time Subcontract 3rd party work
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Managing Capacity Change Demand
Pricing Change pattern of demand Develop non-peak demand Develop alternative / complementary products and/or services Reservation systems
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Alternative Demand Management Strategies
Approach Used To Manage Demand Capacity Relative To Demand Excess Demand Sufficient Capacity Excess Capacity Take no action Unorganised OK Capacity wasted queuing Reduce demand Higher prices Increase demand Lower prices Inventory Demand Reservation system Priority for Aim for most most desirable profitable mix segments of business Queuing Override for Try to avoid most desirable bottleneck segments delays
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Managing Capacity Control Supply
Schedule downtime during periods of low demand Maximise efficiency during peaks Use part time employees Cross-train employees Increase consumer participation Rent or share extra capacity Invest in ability for future expansion
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Actual Demand Forecast Replan Capacity Allocate Refine
Key question - “How often do you change capacity in response to deviations from demand forecasts?”
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The tasks of capacity planning Some key questions
Forecast Demand or Revenue Potential Can you predict the most likely demand at any point in time? Can you predict the uncertainty in demand at any point in time? Calculate Capability of Operations Resources Do you have realistic work standards? Do you understand the capacity constraints of all the necessary resources? Allocate Resources Over Time What are the options for capacity allocation? What are their cost, revenue, work capital and service level implications? What are their flexibility implications? Design “Capacity Control” Mechanisms Do you monitor actual demand against forecast? Do you adapt forecasts accordingly? Do you replan capacity accordingly?
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Demand for manufacturing operation’s output
8000 Forecast in aggregated units of output per month 7000 6000 5000 4000 3000 2000 1000 J F M A S O N D Months
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For capacity planning purposes demand is best considered on a cumulative basis. This allows alternative capacity and output plans to be evaluated for feasibility. Forecast cumulative aggregated output (thousands) 60 50 40 30 20 10 80 120 160 200 240 Cumulative operating days
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Managing demand response
SHORT TERM OUTLOOK P O O R N O R M A L G O O D P O O R LONG TERM OUTLOOK N O R M A L G O O D
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A European domestic appliances manufacturer’s
forecast and demand JAN 2003 2004
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A European domestic appliances manufacturer’s
forecast and demand Actual demand JAN 2003 2004
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Capacity Utilisation & Service Quality
Best operating point is around 70% of capacity for most service delivery environments The 70% factor varies varies inversely with the degree of uncertainty and risk of delivery failure, e.g. emergency services should aim for a lower operating point In the critical zone, what do you think happens to service quality? 27
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In Summary . . . Manage Capacity or Manage Demand?
What does the organisation want to achieve? Most organisations have a mix of both
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Exercise – Capacity Management
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Case Study – British Airways London Eye
What are the main design issues? Calculate the capacity of the London Eye What is the anticipated capacity utilisation? Why is it less than 100%? What is the estimated revenue in the first year?
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The London Eye See for extensive information about the London Eye Capacity Analysis: The wheel rotates on full revolution / 30 minutes 32 capsules at 25 passengers / capsule > 1,600 passengers per hour Available hours – Summer: 10:00 to 22:00 (12 hours) x 7 days Winter: 10:00 to 18:00 (6 hours) x 7 days Summer is 24 weeks, Winter is 28 weeks, closed Christmas Day
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Possible Performance Objectives
Design of the product / service Design of the process Quality • Exceptional aesthetics • Strong, durable • Good, uninterrupted views • Unquestionably safe • Comfortable ride (no sway) • Resembles air travel • Professional, smart staff • Informative • Capsules regularly cleaned • Clear reservation system Speed • Short lead time for the design and construction • No long queues • Clear, fast and fair flows boarding / disembarking Dependability • Available as advertised • Completed by target date • Boarding as per timed ticket • No unscheduled downtime Flexibility • No product flexibility reqd. • Volume flexibility to cope with seasonal demand • Caters for all ages / abilities • Individual questions answered Cost • Affordable, good value • Low operating costs
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