Case Study Info

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Business Systems - Operations ManagementSession 6 Capacity Planning & Control

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Business Systems Business Systems ––Operations ManagementOperations Management

Facilitator:Facilitator:Dr. Jonathan FarrellDr. Jonathan Farrell

Session 6 Capacity Planning & Control

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This EveningThis Evening’’s Programs Program

•• Capacity Planning & ControlCapacity Planning & Control–– Aggregate PlanningAggregate Planning–– Capacity versus DemandCapacity versus Demand–– The Planning ProcessThe Planning Process–– Managing Capacity & Demand Managing Capacity & Demand

•• Case Study Case Study –– Holly Farm (pp 352Holly Farm (pp 352--354)354)•• Exercises Exercises –– Capacity Management (refer to the Folder of Capacity Management (refer to the Folder of

Readings) Readings)

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Some DefinitionsSome Definitions

•• CapacityCapacity is the available time for production and / or is the available time for production and / or the maximum number of items that can be the maximum number of items that can be manufactured or delivered within a given time.manufactured or delivered within a given time.

•• A A BottleneckBottleneck occurs whenoccurs when capacity is less than the capacity is less than the demand placed on demand placed on itit..

•• A capacityA capacity--constrained resource (CCR)constrained resource (CCR) is a resource is a resource where the capacity is close towhere the capacity is close to demand placed demand placed itit. .

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Operations resources Customer requirements

DemandSupplyAvailability of capacity to deliver products and servicesThe operation The market

Capacity Planning Capacity Planning and Controland Control

Required availability of products and

services

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Capacity Planning HorizonsCapacity Planning Horizons

Long range plansLong range plansFacilities Facilities –– major capital expendituresmajor capital expendituresLocationsLocations

Aggregate (Intermediate) plansAggregate (Intermediate) plansMinor equipment purchasingMinor equipment purchasingMaterials requirementsMaterials requirementsWork force sizeWork force sizeProduction ratesProduction rates

Detailed (shortDetailed (short--term) schedulesterm) schedulesDaily, weekly schedulesDaily, weekly schedulesPeople People -- machine assignmentsmachine assignments

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Material Procurement

Overtime Hiring and layoffs

Subcontracting

Ending inventory

Market Demand

Forecast

Aggregate PlansStarting Inventory

Actual Demand

People-Machine Assignment

The Planning ProcessThe Planning Process

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The nature of aggregate capacityThe 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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LongLong--, medium, medium-- and shortand short--term term capacity planningcapacity planning

Macrooperation witha given set of resources

might produce

6 tables

or

12 chairs

or

some combination

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Objectives of capacity planning Objectives of capacity planning and controland control

Step 1 - Measure aggregate capacity and demand.

Step 2 - Identify the alternative capacity plans.

Step 3 - Choose the most appropriate capacity plan.

Time

Estimate of current capacity

Forecast demand

Agg

rega

ted

outp

ut

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How capacity and demand are measuredHow capacity and demand are measured

Design capacity

168 hours per week

Effectivecapacity

109 hours per week

Planned loss of 59 hours

Actual output -51 hours per week

Avoidable loss - 58 hours per week

Actual outputEffective capacity

Efficiency =

Actual outputDesign capacity

Utilisation =

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Ways of reconcilingWays of reconciling capacity capacity and demandand demand

Level capacity

Capacity

Demand

Chase demand

Demand

Capacity

Demand management

Demand

Capacity

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Cumulative representationsCumulative representations

Cumulative demand

Cumulative capacity

Time

Buildingstock

Unable to meet orders

Cap

acity

and

dem

and

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The dynamics of controlling planningThe dynamics of controlling planning

ShortShort--term outlookterm outlook

NormalNormal GoodGoodPoorPoor

NormalNormal

GoodGood

PoorPoor

Short-time

working

Make for inventory

Lay off staff

Do nothing

Hire and make for inventory

Delay any

action

Overtime

Hire staff

Overtime

Long

Long

-- term

out

look

term

out

look

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Rejecting Balking

Source of customers

Boundary of system

Queue or “waiting

line”

Server 1

Served customers

RenegingServer 2

Server m

Distribution of arrival times

Distribution of processing times

Simple queuing systemSimple queuing system

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Time

Time

Low variability -narrow

distribution of process times

High variability -wide distribution of process times

Simple queuing systemSimple queuing system

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Service Industry Demand Mgt.Service Industry Demand Mgt.Queuing TheoryQueuing Theory

Queue of Queue of CustomersCustomers

Server 1Server 1

Server nServer n

Server 2Server 2

Server 3Server 3

n = ?

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Queuing TheoryQueuing Theory

The Problem : To balance customer waiting time The Problem : To balance customer waiting time and system utilisation.and system utilisation.

To balance customer satisfaction To balance customer satisfaction and efficiency.and efficiency.

i.e. to find a WIN i.e. to find a WIN -- WIN solution.WIN solution.

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QueueingQueueing TheoryTheoryDeBonoDeBono CafeCafe

A = Arrival Rate of studentsA = Arrival Rate of students

S = Service rate per serverS = Service rate per server

n = Number of Serversn = Number of Servers

Utilization factor = A/Utilization factor = A/SnSn

Ls = Mean no of customers in system (from tables)Ls = Mean no of customers in system (from tables)

LqLq = Mean number of customers in queue = Ls = Mean number of customers in queue = Ls -- A/SA/S

W = Mean waiting time = W = Mean waiting time = LqLq/A /A

80 per hr80 per hr

30 per hr 30 per hr

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0.880.88

77

4.344.34

.05 hrs .05 hrs (3 mins)(3 mins)

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QueueingQueueing TheoryTheoryDeBonoDeBono CafeCafe

A = Arrival Rate of studentsA = Arrival Rate of students

S = Service rate per serverS = Service rate per server

n = Number of Serversn = Number of Servers

Utilization factor = A/Utilization factor = A/SnSn

Ls = Mean no of customers in system (from tables)Ls = Mean no of customers in system (from tables)

LqLq = Mean number of customers in queue = Ls = Mean number of customers in queue = Ls -- A/SA/S

W = Mean waiting time = W = Mean waiting time = LqLq/A /A

80 per hr80 per hr

30 per hr 30 per hr

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0.660.66

3.13.1

0.50.5

.006 hrs.006 hrs(21 secs)(21 secs)

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Optimising Service CapacityOptimising Service Capacity

CostCost

Optimal CapacityOptimal Capacity

Cost of Cost of Service Service

CapacityCapacity

Waiting Waiting Line CostLine Cost

Aggregate Aggregate CostCost

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Factors in BalancingFactors in BalancingService OptimisationService Optimisation

•• Arrival rateArrival rate

•• # of servers# of servers

•• Waiting line capacityWaiting line capacity

•• Queue DisciplineQueue Discipline

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Queue DisciplineQueue Discipline

•• Organisations can determine the order of service based on:Organisations can determine the order of service based on:

•• First come first served (everyone is equal First come first served (everyone is equal -- MacDonaldsMacDonalds))

•• Urgency of need (triage in hospitals)Urgency of need (triage in hospitals)

•• Processing time (express checkout in supermarkets)Processing time (express checkout in supermarkets)

•• Stratified (economy, business, first class checkStratified (economy, business, first class check--in at airports)in at airports)

•• Value to the organisation (Qantas club, business queues in Value to the organisation (Qantas club, business queues in banks)banks)

However, customers need to know the rules and employees However, customers need to know the rules and employees need to be able to manage the linesneed to be able to manage the lines

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Capacity Planning Capacity Planning –– ServicesServices

•• Services are a realServices are a real--time consumable time consumable –– you canyou can’’t build up an t build up an inventory of theminventory of them

•• Service Delivery occurs where the customer is Service Delivery occurs where the customer is ––““manufacturingmanufacturing””, , ““distributiondistribution”” and delivery occur in the same and delivery occur in the same place and at the same timeplace and at the same time

•• Demand for Services is more volatile than for any productsDemand for Services is more volatile than for any products

–– Different customers have different needs, even for the same servDifferent customers have different needs, even for the same serviceice–– Service Delivery can be affected by numerous variables. Many Service Delivery can be affected by numerous variables. Many

outside the control of the service deliverer or service provideroutside the control of the service deliverer or service provider

How do you manage capacity?How do you manage capacity?

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Managing Service CapacityManaging Service Capacity

Maximum Maximum availableavailablecapacity capacity

Optimum Optimum capacitycapacity

utilisationutilisation

Cycle 1 Cycle 1 Cycle 2 Cycle 2 TIME TIME

Demand exceeds Demand exceeds capacity (Business capacity (Business

is lost) is lost)

Demand exceeds Demand exceeds optimum capacity optimum capacity (Service quality (Service quality

declines) declines)

Excess capacityExcess capacity(Wasted resources) (Wasted resources)

Low Low utilisationutilisation(May send bad signals) (May send bad signals)

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The effect of utilisation on The effect of utilisation on customer servicecustomer service

50.0

40.0

30.0

20.0

10.0

00.5 0.6 0.7 0.8 0.9 1.0

Ave

rag e

cu s

tom

er b

a ckl

og

Capacity Utilisation

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50.0

40.0

30.0

20.0

10.0

00.5 0.6 0.7 0.8 0.9 1.0

Ave

rag e

cu s

tom

er b

a ckl

og

Capacity Utilisation

Service targetReduce variance

Add inventory

Increase capacity

Alternative investments to improve Alternative investments to improve customer servicecustomer service

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OBJECTIVEOBJECTIVETo 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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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.

When demand uncertainty is high the risks to service level or underprovision of capacity are high.

DEM

AND

TIME

Distribution of demand

DEM

AND

TIME

Only 5% chance of demand being higher than this

Only 5% chance of demand being lower than this

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It is useful to know not only the average capability of resources but also their variation in capability

FREQ

UEN

CY

TIME TO PROCESS ONE UNIT OF DEMAND

Average processing time

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How do you cope with fluctuations in demand?How do you cope with

fluctuations in demand?

Absorb demandAbsorb demand

Adjust output to

match demand

Adjust output to

match demand

Change demandChange demand

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Absorb demandAbsorb demand

Keep output level

Keep output level

Make to

stock

Make to

stock

Make customer

wait

Make customer

wait

Part finished,Finished Goods, orCustomer Inventory

QueuesBacklogs

Have excess

capacity

Have excess

capacity

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Adjust output to match demand

Adjust output to match demand

Hire FireTemporary

LabourLay off

OvertimeSubcontract

Short time3rd party work

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Managing CapacityManaging Capacity

Change DemandChange Demand

¾¾ PricingPricing

¾¾ Change pattern of demandChange pattern of demand

¾¾ Develop nonDevelop non--peak demandpeak demand

¾¾ Develop alternative / complementary Develop alternative / complementary products and/or servicesproducts and/or services

¾¾ Reservation systemsReservation systems

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Take no action Take no action Unorganised Unorganised OKOK Capacity wastedCapacity wastedqueuingqueuing

Reduce demandReduce demand Higher pricesHigher prices -- --

Increase demandIncrease demand -- -- Lower pricesLower prices

Inventory DemandInventory Demand

-- Reservation systemReservation system Priority for Aim for most Priority for Aim for most --most desirable most desirable profitable mixprofitable mix

segments segments of businessof business

-- Queuing Queuing Override for Try to avoid Override for Try to avoid --most desirable most desirable bottleneckbottlenecksegments segments delaysdelays

Excess Demand Sufficient Capacity ExcessExcess Demand Sufficient Capacity Excess CapacityCapacity

Capacity Relative To DemandCapacity Relative To DemandApproach Used Approach Used To Manage To Manage

DemandDemand

Alternative Demand Management StrategiesAlternative Demand Management Strategies

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Managing CapacityManaging Capacity

Control SupplyControl Supply

¾¾ Schedule downtime during periods of low demandSchedule downtime during periods of low demand¾¾ Maximise efficiency duringMaximise efficiency during peaks peaks ¾¾ Use part time employeesUse part time employees¾¾ CrossCross--train employeestrain employees¾¾ Increase consumer participationIncrease consumer participation¾¾ Rent or sRent or share hare extra extra capacitycapacity¾¾ Invest in ability for future expansionInvest in ability for future expansion

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Actual DemandActual

DemandForecastDemand

ForecastDemand

ReplanCapacityReplan

Capacity

Actual CapacityActual

CapacityAllocateCapacityAllocateCapacity

RefineForecastRefine

Forecast

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

Calculate Capability of Operations Resources

Calculate Capability of Operations Resources

Allocate Resources Over Time

Allocate Resources Over Time

Design “Capacity Control” Mechanisms

Design “Capacity Control” Mechanisms

Forecast Demand or Revenue Potential

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?

Can you predict the most likely demand at any point in time?Can you predict the uncertainty in demand at any point in time?

Do you have realistic work standards?Do you understand the capacity constraints of all the necessary resources?

Do you have realistic work standards?Do you understand the capacity constraints of all the necessary resources?

What are the options for capacity allocation?What are their cost, revenue, work capital and service level implications?What are their flexibility implications?

What are the options for capacity allocation?What are their cost, revenue, work capital and service level implications?What are their flexibility implications?

Do you monitor actual demand against forecast?Do you adapt forecasts accordingly?Do you replan capacity accordingly?

Do you monitor actual demand against forecast?Do you adapt forecasts accordingly?Do you replan capacity accordingly?

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•• Increase wrong kind of capacityIncrease wrong kind of capacity

•• Not increasing all around capacityNot increasing all around capacity

•• Not considering competitive reactionNot considering competitive reaction

•• Undercutting own serviceUndercutting own service

Common MistakesCommon Mistakes

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Service Utilisation & Service Utilisation & Service QualityService Quality

Mean Mean Arrival Arrival RateRate

Mean Service RateMean Service Rate

Zone of Zone of ServiceService

Zone of Zone of NonNon--serviceservice

Critical Critical ZoneZone

100%100%

70%70%

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Capacity Utilisation & Capacity Utilisation & Service QualityService Quality

•• Best operating point is around 70% of capacity Best operating point is around 70% of capacity for most service delivery environmentsfor most service delivery environments

•• The 70% factor varies varies inversely with the The 70% factor varies varies inversely with the degree of uncertainty and risk of delivery degree of uncertainty and risk of delivery failure, e.g. emergency services should aim for failure, e.g. emergency services should aim for a lower operating pointa lower operating point

•• In the critical zone (above 80%), what do you In the critical zone (above 80%), what do you think happens to service quality? think happens to service quality?

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In Summary . . .In Summary . . .

•• Manage Capacity or Manage Demand?Manage Capacity or Manage Demand?

•• What does the organisation want to achieve?What does the organisation want to achieve?

•• Most organisations have a mix of bothMost organisations have a mix of both

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Exercise Exercise –– Capacity ManagementCapacity Management

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Case Study Case Study –– Holly FarmHolly Farm

1.1. Evaluate Gillian's proposal to increase the number of farm Evaluate Gillian's proposal to increase the number of farm visitors in 2008 by 50 per cent.visitors in 2008 by 50 per cent.–– What are the main capacity constraints within these businesses?What are the main capacity constraints within these businesses?–– Should she promote coach company visits, even if this involves Should she promote coach company visits, even if this involves

offering a discount on the admission charges?offering a discount on the admission charges?–– Should she pursue increasing visitors by car, or school parties?Should she pursue increasing visitors by car, or school parties?–– In what other ways is Gillian able to manage capacity?In what other ways is Gillian able to manage capacity?–– What other information would help Gillian to take these What other information would help Gillian to take these

decisions?decisions?2.2. What factors should Gillian consider when deciding to What factors should Gillian consider when deciding to

increase the number of increase the number of flavoursflavours from four to 10?from four to 10?

NoteNote: For any calculations, assume that each month consists of four : For any calculations, assume that each month consists of four weeks including weeks including holidays (statutory holidays should be ignored for the purpose oholidays (statutory holidays should be ignored for the purpose of this analysis).f this analysis).

Case Study Info

Documents

realistic work standards

monitor actual demand

service level implications

service level

service quality

work capital

flexibility implications

service rate