Report on Capacity Management

8/7/2019 Report on Capacity Management

1/21

MBA Course Work: Operations Management

UB: XXXXXXXXX January 13, 2011

Page 1 of 21

Coursework on the Module, Operations Management

Course Code: MAN4045M

UB Number: XXXXXXX

I certify that this assignment is the result of my own work and does not exceed the

word count noted below.

Number of Words: 3500.

(Excluding Table of Content/Appendices/References, the Title page, table data and

graphs, figure captions, header and footer notes)


2/21



Page 2 of 21

Table of Content

Introduction:........................................................................................................................ 3

Capacity .............................................................................................................................. 3

1. Minimize cost.............................................................................................................. 42. Effects Revenue .......................................................................................................... 5

3. Delivery speed ............................................................................................................ 5

Why capacity planning and control is required?................................................................. 6

Measuring Aggregate Demand: .......................................................................................... 7

The Alternative Capacity Plans: ....................................................................................... 11

Level Capacity Plan ...................................................................................................... 11

Chase-Demand Plan...................................................................................................... 12

Manage Demand Plan................................................................................................... 13

Choosing a capacity planning and control approach. ....................................................... 14

Cumulative representation: ........................................................................................... 14

Queuing or Waiting line Management: ...................................................................... 16

Conclusion: ....................................................................................................................... 18

Abbreviations Used:.......................................................................................................... 19

Reference: ......................................................................................................................... 20


3/21


4/21



Page 4 of 21

multiplex screens three show in a day and screens 365 days in an year, its operating

capacity will be 2.73 million seats an year. Capacity measurement are therefore

subjective to every organization, however, we one can measure the utilization of the

unit by Utilizations ration and Efficiency ration.

Utilization is the ration of Actual Output to Design Capacity and Efficiency is the

ration of Actual Output to effective Capacity.

Therefore, the capacity of an operation can be defined as the maximum level of

value-added activity over a period of time that the process can achieve under

normal operating conditions (Slack, Chamber and Johnston 2007). Chase, Jacobs and

Aquilano in their Operation Management for Competitive Advantage (2004), gives a

similar definition about capacity saying, An operations management views on the

time dimension of the capacity. That is, capacity must also be sated relative to some

period of time.

Although there are many factors, which are affected by Capacity Management, the

below are few objectives, which are significantly important for any organization and

Industry:

1. Minimize cost, when capacity is greater than demand, then the cost per unit

(of output produced) is more (Slack, Chamber and Johnston 2007). However, if are

organizations are reluctant to share the excess capacity cost among the demand,

anticipating the loss of (even the) current demand, then it can significantly effect ontheir profitability.

In India, during 2010, despite the cement companies restricting its productionas per demand, there has been continuous drop in the cement prices.


5/21



Page 5 of 21

Cement companies went into deep looses, as their profit margins were

narrowed and as their inability to share the excess capacity to the current

demand (Todays Concrete Technology, 2010).

George Mikelsons, American Trans Air Chairman, President and CEOattributed negative profit during the year 2004, for excess capacity and high

fuel prices (The Travels Insider, 2004)

2. Effects Revenue, Capacity levels equal or higher than current demand

makes sure that the demand is met and resulting in no revenue loss (Slack, Chamber

and Johnston 2007).

In the year 1967, the state-of-the-art Honeywell replaced RevenuesComputers due to the insufficient capacity of Revenue (the organization) to

deal with the volume of business (Revenue: Irish Tax and Customs, ND). The

loss in the business is definitely regarded as loss in revenue.

In San Francisco, bicycle ridership has increased to 84% during the period2006-09, however, during the same period, Caltrain bicycle boarding

increased by on 18% due to the insufficient onboard bike capacity. The

company says, had the company met the required demand, it would have

earned $ 1 million dollar more revenue than what it currently did (Bicycle

Coalition, ND).

3. Delivery speedor response to a customers needs can also be enhanced by

increasing inventory (which in turn demands for capacity management) and

minimizing queuing (Slack, Chamber and Johnston 2007). Robert and Roland, in their

Empirical Study of Delivery Speed and Reliability, says, to gain the confidence of the


6/21



Page 6 of 21

customers a company must deliver more quickly than its competitors or meet a

required delivery date when only some or even none of the competition can do so

In an experiment conducted by the students of the supply chain & LogisticsInstitution, Georgia Institute of Technology, to know why customers, in spite

of heavy service cost, choose FedEx (Logistics and Delivery service

organization) over DHL, UPS and USPS for delivering things to Australia. They

discovered that, FedEx was quickest of all to deliver (The Great Package Race,

2008).

Cisco ACE Application Control Engine has not only improved its response timeby 500 percent but also saved $ 876,000 annually caused due to downtime

and degradation, by increasing the throughput capacity of the server from 4

Gbps (Giga bytes per second) to 16 Gbps. This means less waiting time to get

response from servers (Cisco, ND).

Why capacity planning and control is required?

Capacity Management is the activity of coping with mismatch between the demand

on an operation and its ability to supply. (Slack, Chamber, Johnston, Betts 2006

pp242). Every industry has a fluctuating demand and in competitive markets, it is

pivotal for each industry to satisfy the demand to remain competitive, and this can

be achieved when capacity management work in accord with the business plan,

accounts, finance department of an organization. Additionally, Plant/equipments

capacity, Labour and staff capacity once created are an expensive decision to change

(Hill, 2000).


7/21



Page 7 of 21

Slack, Chamber, Johnston and Betts has identified three steps for capacity planning

and control, they are: Measure aggregate demand and capacity, Identify the

alternative capacity plans, Choose the most appropriate capacity plan.

Figure 1: The Steps in Capacity Planning and Control (Source: Slack, Chamber, Johnston and Betts, 2007 )

Measuring Aggregate Demand:

Measuring aggregate demand is about forecasting demand fluctuations, although

the word forecasting sound as in Marketing terminology, it keeps significant

important in capacity planning, thus above, we have mentioned that capacity

planning should work in accordance with various departments. Unrealistic

forecasting can cause severe problems to an organization by loss in cost, revenue

and most importantly in retaining customers trust. Capacity managers use thisforecast to evaluate the current available capacity. If the sales forecast (or future

demand) is satisfied by the current capacity, then step 2 and step 3, can be omitted

(however, this leaves us with a concern of under-utilization of current capacity).


8/21



Page 8 of 21

According to Evanas (1995), forecasting can be done by two methods, Statisticaland

Judgmental. Statistical forecasting is based on assumption that future demand will

be a reflection of demand peeks shown in the past. One way, an organization

records Statistical forecasting is by Seasonality of demand (Slack, Chamber, Johnstonand Betts, 2007).

Figure 2: Seasonal Demand (Source: Slack, Chamber, Johnston and Betts, 2007)

In Judgmental forecasting, Delphi method (Evanas 1995) is used which says, and

evaluations is done by considering Quantitative forecasting (Historic Data) and

Qualitative forecasting (Management Judgment). This evaluation leads to a forecast,

which is analysed (and reverted to evaluations, if needed) and finally put into

practise.


9/21



Page 9 of 21

Figure 3: Delphi Method

Pattaya, is the second most tourist-visited destination in Thailand afterBangkok. Located 165 Km southeast of Bangkok, attracted over 14.13 million

tourist during the year 2010, from around the world (thaiwebsites.com) and

is expected to grow in 15% in 2011. The State Railways of Thailand recognized

the need of extra capacity to comprehend the rise of tourist population and

introduced Special Tourist Rail Trips from Bangkok to Pattaya and many

other tourist destination (thairailways.com). Similarly activities can be seenby the Indian Railways on special occasion like Pushkaralu (an event that

happens once in 12 years), Sabarimala (each year in the month of December).

Recent recession has not only hit the financial industry, but also the transportindustry along with many others. Schneider National, J.B Hunt and Werner

Enterprises, once know for major truck carriers in the United States of

America, had cut over their on-the-road capacity by 12%-15%. Noel Perry,

economist with Transport Research Consulting Group predicts 2011 and 2012

to be profitable years. However, there is also storage of as many as 300,000

drives out of the total drive pool of 3 million trucks (Logistics Management,

2010).


10/21



Page 10 of 21

In many cases, the demand side forecast alone is not sufficient to judged the

capacity needed, in the above truck example, we have see that, though the

predicted demand to operate these truck carrier is above their current operating

levels, they cannot increase their on-the-road capacity as there is a shortage ofdrives.

Evans (1997), also argues that for Strategic Capacity Planning, capacity evaluation

must consider the stage of the product or service in the Product Life Cycle.

Figure 4: Product Life Cycle (Source: Griffiths and Wall)

For a product moving into the growth stage, goods or services sales volume

increases, hence forecasting in critical, organizations must have (or increase) thecapacity to produce goods and services for the growing demand. Similarly, during

the decline phase, the demand for the goods and services are decreases, hence

capacity managers should try to reduce the operating capacity of the units to reduce

the overhead costs.


11/21



Page 11 of 21

The results of forecast are compared with the current operating capacity of the

manufacturing or service production units and decision are made whether to invest

in to increase capacity or to improve current production process as many

organizations operate below their maximum processing capacity (Slack, Chamber,

Johnston and Betts, 2007). Operating efficiency itself is a wide topic and its

discussion here will not be relevant.

The Alternative Capacity Plans:

Alternative Capacity Plans are introduce by any organization to respond to the

fluctuating demand. Slack, Chamber, Johnston and Betts has identified three

methods to this and they are Level Capacity Plan, Chase Demand Plan and Demand

Management. Evans (1997) mentioned the same three by name: Matching Capacity

with Demand, Excess Capacity Policy and Capacity Shortage policy. We shall discuss

each of this plan by the names suggested by Slack.

Level Capacity Plan (or Level Production Strategy) recommends a uniformlevel of output throughout the production phase regardless of the fluctuation in

demand. Such a capacity plan achieves stable employment patters, high process

utilization and high productivity with low unit cost (Slack, Chamber, Johnston and

Betts, 2007). However, this plan has a trade-off in excessive inventories, when

demand is low and possibly lost of sales (Evans, 1997). An established healthcare

centre can be a good example, which can practise Level Capacity of Plan. Increasing

its operating capacity in an existing location could not be possible as it may involve

high capital investment, and the fixed-cost could be shared among the existing beds,

which is not desired. Hotels, can also be considers to use Level Capacity Plan

because (as in the case of health care centres), services cannot not be stored as

inventories cost (Slack, Chamber, Johnston and Betts, 2007). Any hotel would


12/21



Page 12 of 21

employ enough staff to provide service in all the rooms, but when there is low

demand, the fixed-cost (of staffs salary) should be bore with salaries that can result

in heavy loss for the hotel.

Figure 5: Under-Utilization of Capacity (Source: Slack, Chamber, Johnston and Betts, 2007 )

Chase-Demand Planis the contrast model of Level Capacity Plan, which says

the produce should match the demand forecasted (Evans, 1997). Such a strategy

may not work in service industry as employer cannot hire or fire staff with

fluctuating demands. However, industries which are capital intensive such as real

estate were the premises is utilized occasionally. In such a strategy, the levels of

inventories will reduce along with the lost of sales. However, when the demand in

low the under-utilization of the production unit will result in increased cost per unit,

and efficient use may reduce cost per unit. The below figure shows Chase-Demand

Plan with respect to Hotels and Retail outlets.


13/21



Page 13 of 21

Figure 6: Chase-Demand Plan (Source: Slack, Chamber, Johnston and Betts, 2007)

Manage Demand Plan is the most widely adopted demand management

though price, although, this capacity planning strategy is more popular among

service industry than among manufacturing industry (Slack, Chamber, Johnston and

Betts, 2007). Let us consider the example of hotel industry again, often people get

cheap deals when at the beginning and at the end of vacation season and the prices

shoots-up during the vacation. This is to balance the available capacity with the

demand. It is similar with aviation industry, it is believed that airlines tickets are

available cheaper when booked a month in advance, the price of the ticket rises as

the departure date approaches. The objective of this strategy is to boost off-peak

demand and constrain peak demand in order to smooth demand as much as

possible (Slack, Chamber, Johnston and Betts, 2007). Sometime, organizations take a

tangential approach to utilize their available capacity, for example, in a country like

India, the sale of coffee is maximum during winter, however, coffee manufactures,

though advertising, influence customer psychology by promoting cold-coffee and

boost sales in summer. The same product is sold for two different purpose. Slack

has referred such a strategy Alternate Product and Service. However, such a strategy

could sometime challenge the core competence of an organization.

Not every industry uses the above-mentioned planning strategies as a whole. In

todays competitive market environment, ever industry wants to reduce overheads,


14/21



Page 14 of 21

reduce production cost, minimize inventories (as this effects there liquidity ratios)

and Investment, but the same time each of such organizations want to provide

responsive and customer-oriented approach. Therefore, most organizations use a

mix of all the three planning strategies at different times (Slack, Chamber, Johnstonand Betts, 2007).

Slack, in his Operations and Process Management Principles and Practice for

strategic impact, has discussed a seasonal-Industry which ingeniously turned into a

unseasonal-Industry, the greeting cards market. Earlier, the sales of greeting cards

touched peak during Christmas, Thanksgiving and New year and a regular sale of

birthday cards however, the same industry is offering non-occasion cards on

mothers day, fathers day, Valentines day in addition to Halloween, get-well-soon,

need-a-hug, making it (the greeting cards industry) no more seasonal.

Choosing a capacity planning and control approach.

It is important for an organization to choose among the three available planning

options as each of it has its own consequences. There are two methods that assess

the consequence or the level of risk involved with each of the three approaches.

1. Cumulative representation2. Queuing Theory

Cumulative representation:

Cumulative representation is the graphical representation of the forecast and the

production capacity (we is assumed to be constant through out that period) line

running across the forecast. If the cumulative over capacity of the production is

above the cumulative under capacity during a period, then an organization need not

invest in expanding capacity (Slack, Chamber, Johnston and Betts, 2007).


15/21



Page 15 of 21

Figure 7: Cumulative Representation (Source: Slack, Chamber, Johnston and Betts, 2007)

Region A and C represent the demand for certain goods and service during off-

peak season and region B represents the peak season.

Mathematically, when the cumulative under-capacity (A + C) is greater than

cumulative over-capacity (B), then no additional investment in expanding capacity in

needed. However, this approach is very hypnotically in nature. It assume that the

organization operates at its optimum production level every day and this model is

not applicable for perishable goods (short self-life goods).

The good thing about Cumulative representation is, it show the peak an year and the

demand fluctuation time during. For an organization which has flexible production

capability and employee part time resource during the peak season and restrict

employment during off-peak season.

For any capacity strategy to meet demand, its cumulative demand line must always

above the cumulative production line. Only then we can a production or capacity


16/21



Page 16 of 21

manager can decide the adequacy of plan by simply looking at the cumulative

representation (Slack, Chamber, Johnston and Betts, 2007).

Queuing or Waiting line Management:

It is often observed in banks that a customer is served instantly during on peak hours

and it queued during peak hours and many times, ironically, customers are in queue

even during the off-peak hours. Therefore it is unpredictable from banks point to

predict the demand. Under such circumstances providing additional capacity to

satisfy customers need becomes difficult.

Assuming that there are n service counters available at the bank, customer (who

are line-up in a queue) are offered service on First-Come-First-Server bases (in

computing terms, this is referred as First-In -First-Out or FIFO).

Figure 8: Queuing System (Source: Slack, Chamber, Johnston and Betts, 2007)

Examples of operation which run in parallel are mentioned in the figure below.


17/21



Page 17 of 21

Figure 9: Queuing examples (Source: Slack, Chamber, Johnston and Betts, 2007)

The Arrival Rate, is the rate at which customer needed to server by one of the n

parallel servers available. The customer arrival rate is often unpredictable. The

Queue is the waiting time calculated from the time of customers had arrived and to

get served. Rejection is observed when the queue or the wait-line has reached its

maximum capacity (of course, the queuing also has a capacity). We might often find

customers who leaves the queue either because of disappointment or for any other

reason, such customers are called Reneging. (Slack, Chamber, Johnston and Betts,

2007).

Slack, in his Operations and Process Management Principles and Practice forstrategic impact, mentioned the following perceptions on queuing with respect to

the customer being human.

Time spent idle is perceived as longer than time spent occupied The wait before a service starts is perceived as more tedious than a wait

within the service process

Anxiety and/or uncertainty heightens the perception that time spent waitingis long

A wait of unknown duration is perceived as more tedious than a wait whoseduration is known

An unexplained wait is perceived as more tedious than a wait that isexplained


18/21



Page 18 of 21

The higher the value of the service for the customer, the longer the wait thatwill be tolerated

Waiting on ones own is more tedious than waiting in a group (unless youreally dont like the others in the group)

Conclusion:

For the above discussion we have identified how Capacity management can

influence the performance and effectiveness of an organization. Though, Evan

(2007) argues that production capacity planning poses different problems when

compared with service industry, with the help of help of numerous examples, we

concluded that, Capacity Management is an area of concern with every type of

Industry. We have also seen essentials of capacity planning in term of cost, revenue

and speed.

At the end of this assignment, we can say that forecasting is just limited to the

marketing department, but also to the capacity department. If capacity is not equal

to the demand, problems of over capacity or under capacity may occur which may

incur heavy loss for any organization.

Depending upon the industry and the nature of demand we can select a capacity

model which is applicable in short-term, mid-term and long-term strategy planning.


19/21



Page 19 of 21

Abbreviations Used:

GBPS: Gigabytes per second

SLAs: Service Level Agreements

ND: No Date


20/21



Page 20 of 21

Reference:

Bicycle Coalition: Promoting the Bicycle for Every day Transport, Reduce Cuts-Add

Capacity, http://www.sfbike.org/?cuts, [Accessed on 12/12/2010]

Chase, Richard B., Jacobs, F. R., Aquilano, Nicholas J., (2004), Operations

Management for Competitive Advantage, McGraw-Hill/Irwin, 10th

edition, pp 386

Cisco, (ND), The Business Case for Cisco ACE Application Control Engine

http://www.cisco.com/en/US/prod/collateral/modules/ps2706/ps6906/White_Pape

r_Business_Case_for_Cisco_ACE_Application_Control_ps7027_Products_White_Pap

er.html [Accessed on 12/12/2010]

Evans, James R., (1995), Production/Operations Management: Quality, Performance

and Value, West Publishing Company, 5th

Edition, pp. 218-222

Griffiths, A., Wall, S. (2005), Economics for Business and Management, Pearson

Education Limited, pp. 160

Hill, T. (2000), Operations Management: Strategic Context and Managerial Analysis,

Macmillan Press LTD, pp. 181

Logistics Management (2010), First 2011 Truck Forecast,

http://www.logisticsmgmt.com/view/first_2011_truck_forecast_tighter_capacity_co

ming_as_equipment_shortages_dr/motorfreight [Accessed on 16/12/2010]

Revenue: Irish Tax and Customs (ND), Revenue over the years 1956-1967,

http://www.revenue.ie/en/about/history/1959-1967.html, [Accessed on

12/12/2010]

Robert B. Handfield, Ronald T. Pannesi, (1992) "An Empirical Study of Delivery Speed

and Reliability", International Journal of Operations & Production Management, Vol.

12 Iss: 2, pp.58 72

Slack, N., Chamber, S., Johnston, R., (2007), Operation Management, Pearson

Education Limited, 5th edition, pp 322

Slack, N., Chamber, S., Johnston, R., Betts, A., (2006), Operations and Process

Management Principles and Practice for strategic impact, Pearson Education Limited,

5th edition, pp 242


21/21

Report on Capacity Management

Documents