Operations Management – Capacity Planning And Control Notes

Capacity Planning and Control

WHAT IS CAPACITY MANAGEMENT

• The capacity of an operation is the maximum level of value added activity over a period of time that the process can achieve under normal operating conditions.

Capacity Constraints

• Many organisations operate at below their maximum processing capacity either because there is insufficient demand completely to fill their capacity or as a deliberate policy so that the operation can respond quickly to every new order.

• However, organisations find themselves with some parts of their operation operating below their capacity level whole other parts are operating at their capacity ceiling.

• It is the parts of the operation that are operating at their capacity ceiling which are the capacity constraint for the whole operation.

• Unless extra resources are provided to increase the capacity of the micro operation it would constrain the capacity of all other operations.

Planning and Controlling Capacity

• Capacity planning and control is the task of setting the effective capacity of the operation so that it can respond to the demands placed upon it. This usually means deciding how the operation should react to fluctuations in demand.

• Medium and short term capacity

  • Having established long term capacity operations managers must decide how to adjust the capacity of the operation in the medium term.

  • This usually involve an assessment of the forecasts over a period of 2-18 months ahead during which time planned output can be varied.

  • However, very few forecasts are accurate and most operations also need to respond to changes in demand which occur over a shorter timescale.

  • Operations managers also have to make short term capacity adjustments which enable them to flex output for a short period either on a predicted basis or at short notice.

• Aggregate demand and capacity

  • The important characteristic of planning and control is that it is concerned with setting capacity levels over the medium and short term in aggregated terms.

  • That is, it is making overall broad capacity decisions, but is not concerned with all of the detail of the individual products and services offered.

  • Aggregated means different products and services are bundled together in order to get a broad view of demand and capacity.

  • This may mean some degree of approximation is needed.

• The objectives of capacity planning and control

  • The decisions taken by operations managers in devising their capacity plans will affect several different aspects of performance:

    • Costs will be affected by balance between capacity and demand. Capacity levels in excess of demand could mean underutilisation of capacity and therefore high unit cost,

    • Revenues will also be affected by the balance between capacity and demand but in the opposite way. Capacity levels equal or higher than demand at any point in time will ensure that all demand is satisfied and no revenue lost.

    • Working capital will be affected if an operation decides to build up finished goods inventory prior to demand. This might allow demand to be satisfied but the organisations will have to fund the inventory until it can be sold.

    • Quality of goods or services might be affected by a capacity plan which involved large fluctuations in capacity levels by hiring temporary staff for example. The new staff and the disruption to the routine working of the operation could increase the probability of errors being made.

    • Speed of response to customer demand could be enhanced, either by the build-up of inventories or by the deliberate provision or surplus capacity to avoid queuing.

    • Dependability of supply will also be affected by how close demand levels are to capacity. The closer demand gets to the operations capacity ceiling the less able it is to cope with any unexpected disruptions and the less dependable its deliveries of goods and services could be.

    • Flexibility especially volume flexibility will be enhanced by surplus capacity. If demand and capacity are in balance the operation will not be able to respond to any unexpected increases in demand.

• Typically operations managers are faced with a forecast of demand which is unlikely to be either certain or constant. They will also have some idea of their ability to meet this demand.

• Before any further decisions are taken they must have quantitative dada on both capacity and demand.

• So the first step will be to measure the aggregate demand and capacity levels for the planning period.

• The second step will be to identify the alternative capacity plans which could be adopted in response to demand fluctuations.

• The third step will be to choose the most appropriate capacity plan for their circumstances.

MEASURING DEMAND AND CAPACITY

Forecasting Demand Fluctuations

• Without an estimate of future demand it is not possible to plan effectively for future events, only to react to them.

• As far as capacity planning and control is concerned there are three requirements from a demand forecast:

  • It is expressed in terms which are useful for capacity planning and control

    • If forecasts are expressed only in money terms and give no indication of the demands that will be placed on an operations capacity they will need to be translated into realistic expectations of demand, expressed in the same units as capacity.

  • It is as accurate as possible

    • The accuracy of the forecast is important as whereas demand can change instantaneously, there is a lag between deciding to change capacity and the change taking effect.

    • In order to attempt to meet demand they must often decide output in advance based on a forecast which might change before the demand occurs or worse prove not to reflect actual demand at all.

  • It gives an indication of relative uncertainty

    • Decisions to operate extra hours and recruit extra staff are usually based on forecast levels of demand, which could in practice be different from actual demand leading to unnecessary costs or unsatisfactory customer service.

• Seasonality of demand

  • Capacity...

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