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