Capacity Management

Harry Kogetsidis

School of Business

Lecture’s topics

• What is capacity management?
• Why is customer demand important in

capacity management?

• What are the main strategies for

responding to fluctuations in customer
demand?

Capacity

Capacity

is the maximum level of value-

added

activity that a process can achieve over a

period of

time under normal operating conditions.

Examples of Capacity

A car park can process a total of fifty cars

per day

when fully occupied by office workers.

A machine can produce 100 bars of

chocolate in

one hour.

An elevator can carry 6 people at a time.

Capacity Management

Capacity management

is about ensuring

that

sufficient capacity of the right type is

available at

the right time to meet customer demand.

Capacity Management

Capacity management

has two basic parts:

1

. Measure capacity / Measure demand.

2

. Choose an appropriate strategy to

reconcile

capacity and demand.

Measuring Capacity

Capacity can be expressed in the following

forms:

•design capacity
•effective capacity
•actual capacity

design capacity

The capacity of an operation that represents

the

theoretical output of a process as it was

designed.

This level of capacity is rarely met as certain

factors

(both planned and unplanned) can

prevent the operation

producing its full output.

effective capacity

The capacity of an operation that remains

after

loss of output due to planned factors.

activities whose timing can be determined

in advance

actual capacity

The capacity of an operation that remains after
loss of output due to both planned factors and
unplanned factors.

Certain steps must be

events that cannot be predicted

taken to help reduce the

impact of these unplanned

factors (e.g. preventive

maintenance / employee

motivation etc).

Measuring Demand

As customer demand can change

instantaneously,

there will always be a lag between deciding to

change

capacity and the change taking effect.

Measuring Demand

Capacity decisions should therefore be based

on

estimates of customer demand (

demand

forecasting

).

A number of time series forecasting methods

can be

used to produce estimates of customer

demand.

Responding to Demand

Fluctuations

The following strategies (

capacity plans

) can

help

respond to fluctuations in demand:

•level capacity plan
•chase demand plan
•manage demand plan

level capacity plan

This plan sets processing capacity at a uniform
level throughout the planning period regardless

of

fluctuations in forecast demand.

During periods of low demand any

overproduction

can be transferred to finished goods inventory in
anticipation of sales at a later time period.

level capacity plan

level capacity plan

Disadvantages
• considerable inventory has to be financed

and stored

• can only be used for goods but not services
• not suitable for certain types of goods (e.g.

food products)

• future sales may be affected by changes in

fashion or design (e.g. clothes or music)

chase demand plan

This plan attempts to match capacity closely

to the

level of predicted demand.

It is usually adopted by service operations

which

cannot store their output.

chase demand plan

chase demand plan

Disadvantages

• not always easy to achieve large variations in

capacity from period to period

• would normally require part-time or

temporary staff to be employed in busy
periods

• need to maintain customer service levels,

quality standards and safety procedures

manage demand plan

While the previous plans aim to adjust capacity to
match demand, the manage demand plan attempts
to adjust demand to meet available capacity.

The manage demand plan normally involves
altering the marketing mix (e.g. price or promotion).

manage demand plan

While the previous plans aim to adjust capacity to
match demand, the manage demand plan attempts
to adjust demand to meet available capacity.

The manage demand plan normally involves
altering the marketing mix (e.g. price or promotion).

e.g. city hotels offering lower room rates

during specific days or periods.

manage demand plan

While the previous plans aim to adjust capacity to
match demand, the manage demand plan attempts
to adjust demand to meet available capacity.

The manage demand plan normally involves
altering the marketing mix (e.g. price or promotion).

e.g. turkey growers promoting their

products at times other

than Christmas.

manage demand plan