Operations Management

1. Capacity Management
Module 3
Operations Management

2. What Is Capacity Management?
Capacity management refers to the act of ensuring a business
maximizes its potential activities and production output—at all
times, under all conditions. The capacity of a business measures
how much companies can achieve, produce, or sell within a
given time period. Consider the following examples:
• A call center can field 7,000 calls per week.
• A café can brew 800 cups of coffee per day.
• An automobile production line can assemble 250 trucks per
month.
• A car service center can attend to 40 customers per hour.
• A restaurant has the seating capacity to accommodate 100
diners.

3. Various businesses and their respective input
and output measures of capacity

4. What Is Capacity Management?
• It helps companies overcome challenges in meeting short- and
mid-term customer demand, managing supply chain operations,
and formulating long-term organizational plans.
• In doing so, an organization must analyze the availability of its
resources to ensure it achieves the production output within the
given period.
• This practice is common in industries like manufacturing, retail,
service, and information technology.

5. Important Points
• Capacity management helps businesses meet consumer demand by cost-
effectively improving their production efficiency over a set period. It is
accomplished by removing bottlenecks in the production process and
utilizing available resources, which leads to maximum output.
• The more commonly used management strategies include lead strategy, lag
strategy, match strategy, and dynamic strategy.
• Using this strategy offers several benefits for businesses, such as
streamlined operations, increased market share, customer retention and
acquisition, and better inventory and supply chain management.
• Aside from being heavily employed in the manufacturing industry, the
strategy is practiced in the retail and commercial, information technology,
and service industries.

6. Determinants of Effective Capacity
• Facilities: The size and provision for expansion are key in the design of facilities.
Other facility factors include locational factors, such as transportation costs,
distance to market, labor supply, and energy sources. The layout of the work area
can determine how smoothly work can be performed.
• Product and Service Factors: The more uniform the output, the more
opportunities there are for standardization of methods and materials . This leads
to greater capacity.
• Process Factors: Quantity capability is an important determinant of capacity, but
so is output quality. If the quality does not meet standards, then output rate
decreases because of need of inspection and rework activities. Process
improvements that increase quality and productivity can result in increased
capacity. Another process factor to consider is the time it takes to change over
equipment settings for different products or services.

7. Determinants of Effective Capacity
• Human Factors: the tasks that are needed in certain jobs, the array of
activities involved, and the training, skill, and experience required to
perform a job all affect the potential and actual output. Employee
motivation, absenteeism, and labour turnover all affect the output rate
as well.
• Policy Factors: Management policy can affect capacity by allowing or
disallowing capacity options such as overtime or second or third shifts
• Operational Factors: Scheduling problems may occur when an
organization has differences in equipment capabilities among different
pieces of equipment or differences in job requirements. Other areas of
impact on effective capacity include inventory stocking decisions, late
deliveries, purchasing requirements, acceptability of purchased materials
and parts, and quality inspection and control procedures.

8. Determinants of Effective Capacity
• Supply Chain Factors: Questions include: What impact will the changes
have on suppliers, warehousing, transportation, and distributors? If
capacity will be increased, will these elements of the supply chain be
able to handle the increase? If capacity is to be decreased, what impact
will the loss of business have on these elements of the supply chain?
• External Factors: Minimum quality and performance standards can
restrict management’s options for increasing and using capacity.

10. Benefits
1.Optimized Resource Allocation: Capacity planning helps organizations
allocate their resources efficiently, ensuring that they are utilized optimally and
eliminating bottlenecks.
2.Cost Reduction: By accurately forecasting demand and aligning capacity
accordingly, organizations can avoid unnecessary costs associated with
overcapacity or last-minute capacity adjustments.
3.Improved Customer Satisfaction: Capacity planning enables organizations
to meet customer demands promptly and consistently, leading to enhanced
customer satisfaction and loyalty.
4.Effective Decision-Making: By having a clear understanding of their capacity
needs, organizations can make informed decisions about resource
investments, expansion plans, and production schedules.
5.Operational Efficiency: Capacity planning helps streamline operations by
identifying process inefficiencies and optimizing resource utilization, leading to
improved productivity and overall efficiency.

11. Capacity Management Strategies

12. #1 – Lag Strategy
• Using this conservative approach, a manager determines the
capacity and then waits until there is an actual steady increase
in demand. Then, the manager raises the production
capabilities to a level to fulfill the current market need.
• The main drawback of this option is that the business will lose
the chance to sell more if the demand goes up too quickly, as
increasing production often takes time. Also, a shortage of
inventory might result in customer attrition.

13. #2 – Lead Strategy
• Unlike the lag strategy, this strategy is very aggressive and
much riskier. The business decides to increase the capacity
before there is an actual demand and anticipates that this will
suffice if it goes up. It is used in cases where a company
expands or in industries where sales demand goes up quickly.
So, small firms usually avoid this kind of strategy.
• However, there are a few issues with this approach. For
instance, if the actual demand does not go up, it could increase
the inventory storage costs and the risk of inventory wastage.

14. #3 – Dynamic Strategy
• This forecast-driven strategy focuses on relying on market
trends to increase capacity. The manager analyzes the sales
forecast data and actual demand and then makes adjustments
to production in advance.
• It is one of the safest approaches as managers have accurate
forecast data that will qualify their capacity targets. Also, it
decreases the risk of shortage or wastage of inventory.

15. #4 – Match Strategy
• This strategy mixes up lead and lag strategies. It uses small yet
significant additions in the capacity of the company by following
the market demand. Whenever it is clear that demand will rise,
the company boosts its production in small amounts.
• If the demand goes up quickly, the company can at least grow
its sales a bit. If it does not, the company will not suffer huge
losses. However, the business will never fully enjoy a significant
spike in demand or escape unharmed from a sudden recession
in the market.

16. Capacity Management Examples
• Todd is the manager of a company that produces paper sheets.
He evaluates the company sales and notices that the company
is constantly selling 500,000 packages every month, which is its
maximum capacity.
• So, he decides to use a lead strategy and bets on growth. Todd
increases the production to sell 600,000 packages monthly, so
the company will not lose the chance to enjoy any spike in
demand.

17. Capacity Management Examples
Clair, on the other hand, is the manager of another company in
the same industry. Sales here are very different each month,
ranging from 300,000 in some months to 500,000 in others.
Unlike Todd, she uses a lag strategy. If demand skyrockets, she
will upgrade the production. She does not have the same
incentives to enhance production so quickly.

18. Types of Capacity Planning
• Short-Term Capacity Planning: This type focuses on meeting
immediate demand by adjusting resources, workforce, and
production schedules in the short term, typically ranging from a few
days to several months.
• Medium-Term Capacity Planning: Medium-term capacity planning
spans several months to a few years and involves decisions
regarding workforce planning, facility expansions, and process
improvements to align capacity with forecasted demand.
• Long-Term Capacity Planning: Long-term capacity planning
extends beyond the medium term, usually covering several years to
decades. It involves strategic decisions such as new facility
construction, technology investments, and market analysis to
support long-term growth and sustainability.

19. Reconciling Capacity and Demand
• Level Capacity
• Chase Demand
• Demand Management

20. Level Capacity
• Leveling capacity means fixing capacity (production) at a constant level
(generally the average demand) throughout a period regardless of
fluctuations in forecast demand.
• During periods of low demand any overproduction can be held in
anticipation of later time period.
• The downside of this approach is the potential for holding costs and
obsolete inventory.
“The level capacity plan satisfies high demand from existing stocks. When
demand goes below capacity, overproduction is stored as inventory in
anticipation of higher demand in later months. The disadvantage of this
approach is that this tends to build in high stock levels and hence high levels
of working capital are required. “Companies can be left with excess stocks
on their hands”.

21. Level Capacity
• An example of level capacity management could be the first step of the
production of salt by evaporation (in Italy there is one industry like this in
Salina).
• In hot countries, salt is produced by allowing the sun to evaporate sea
water in shallow pools or ‘pans’; the steps are in order: Evaporation, Wash,
Centrifugation, Grinding, Drying, Sack, Packaging, Shipping.
• All the salt product by evaporation is accumulate in big pile and used when
needed.
• Normally, they produce much more salt then they need as, in this specific
case, there isn’t the problem for the company to stock or to be left with
excess stocks on their hand, as the cost of stocking and the raw material is
zero.

22. Chase Demand
• Chasing demand means altering production capacity to match the
demand over time.
• This approach requires balancing a variety of resource availability
(staff availability, equipment levels, etc.).
• This approach is risky in terms of availability of resources when
needed, the cost of readying, and the loss of control.
Opposite to the level capacity management is the chase capacity,
“organisations could decide to match capacity and demand by altering
the availability of resources. This might be achieved by employing
more people when it is busy and adopting strategies such as overtime
and additional shifts. The amount of planning does increase, but this is
compensated by better utilisation of resources”.

23. Chase Demand
• An example of chase capacity management could be all
kind of work with seasonal cycle.
• Example. -the management of a restaurant in a seaside
resort, during the winter there are few costumers and
therefore there are few waiters; only during the
weekends (not always) and the summer the restaurant
will be full of clients. During this period staff with a time
contract will be taken to speed up the services.

24. Demand Management
• Demand management adjusts demand to meet available capacity.
Demand Management strategies include:
• Varying the Price – Raising or lowering price will alter
customer/consumer demand.
• Selective Marketing - The amount of marketing affects demand.
Increased marketing effort to product lines with excess capacity and
reduce marketing with lower capacity.
• Repurpose Capacity - Use the existing capacity to develop
alternative product during low demand periods.
• Operational Modification - Change operations to add benefits that
generate increased demand. (E.g., Offer instant delivery of product
during low demand periods. – Use an appointment system to level
out demand).

25. Importance of demand capacity planning
• Reducing waste: This planning can help companies understand
exactly how much of their goods or services to produce in order
to satisfy demand, which can help reduce waste.
• Monitoring costs: By measuring demand and capacity,
companies can monitor production costs and budget
appropriately for areas where they may require additional
resources.

26. Importance of demand capacity planning
• Identifying fluctuations: Continually measuring the demand capacity
can help businesses identify fluctuations in capacity or demand
cycles, such as increased demand during the holiday season.
• Increasing customer trust: This process can help businesses ensure
they're meeting customer demand by having enough inventory
available, which can help increase customers' trust in the business.
• Streamlining inventory management: By effectively managing the
demand capacity, businesses can make sure they're producing
enough inventory without creating excess stock, which can
streamline inventory management.