CAPACITY PLANNING
Objectives:
By the end of the chapter the student should be able to:
(i) Define the term capacity
(ii) Explain the components of capacity planning
(iii) Evaluate capacity plans
(iv) Explain the various demand management strategies
Introduction
Capacity comprises the resources to serve customers, process information or make products and is a mix of the people, systems, equipment and facilities needed to meet the services or products involved. A definition of capacity should take into account both the volume and the time over which capacity is available. T hus capacity can be taken as a measure of an organisation‟s ability to provide customers with services or goods in the amount requested at the time requested. Capacity decisions should be taken by firstly identifying capacity requirements and then evaluating the alternative capacity plans generated.
Identifying Capacity Requirements This stage consists of both estimating future customer demand but also determining current capacity levels to meet that demand.
Measuring Demand
In a capacity planning context the business planning process is driven by two elements; the company strategy and forecasts of demand for the product/service the organisation is offering to the market. Demand forecasts will usually be developed by the marketing department and their accuracy will form an important element in the success of any capacity management plans implemented by operations. The demand forecast should express demand requirements in terms of the capacity constraints applicable to the organisation. This could be machine hours or worker hours as appropriate. The demand forecast should permit the operations manager to ensure that enough capacity is available to meet demand at a particular point in time, whilst minimising the cost of employing too much capacity for demand needs. The amount of capacity supplied should take into account the negative effects of losing an order due to too little capacity and the increase in costs on the competitiveness of the product in its market. Organisations must develop forecasts of the level of demand they should be prepared to meet. The forecast provides a basis for co-ordination of plans for activities in various parts of the organisation. For example personnel employ the right amount of people, purchasing order the right amount of material and finance can estimate the capital required for the business. Forecasts can either be developed through a qualitative approach or a quantitative approach.
Measuring Capacity
When measuring capacity it must be considered that capacity is not fixed but is a variable that is dependent on a number of factors such as the product mix processed by the operation and machine setup requirements. When the product mix can change then it can be more useful to measure capacity in terms of input measures, which provides some indication of the potential output. Also for planning purposes when demand is stated in output terms it is necessary to convert input measures to an estimated output measure. For example in hospitals which undertake a range of activities, capacity is often measured in terms of beds available (an input) measure. An output measure such as number of patients treated per week will be highly dependent on the mix of activities the hospital performs. The theoretical design capacity of an operation is rarely met due to such factors as maintenance and machine setup time between different products so the effective capacity is a more realistic measure. However this will also be above the level of capacity which is
available due to unplanned occurrences such as a machine breakdown.
Evaluating Capacity Plans
The organisation‟s ability to reconcile capacity with demand will be dependent on the amount of flexibility it possesses. Flexible facilities allow organisations to adapt to changing customer needs in terms of product range and varying demand and to cope with capacity shortfalls due to equipment breakdown or component failure. The amount of flexibility should be determined in the context of the organisation‟s competitive strategy. Methods for reconciling capacity and demand can be classified into three „pure‟ strategies of:
(i) level capacity
(ii) chase demand and
(iii) demand management
In practice a mix of these three strategies will be implemented.
Level Capacity
This approach fixes capacity at a constant level throughout the planning period regardless of fluctuations in forecast demand. This means production is set at a fixed rate, usually to meet average demand and inventory is used to absorb variations in demand. During periods of low demand any overproduction can be transferred to finished goods inventory in anticipation of sales at a later time period. The disadvantage of this strategy is the cost of holding inventory and the cost of perishable items that may have to be discarded. To avoid producing obsolete items firms will try to create inventory for products which are relatively certain to be sold. This strategy has limited value for perishable goods. For a service organisation output cannot be stored as inventory so a level capacity plan involves running at a uniformly high level of capacity. The drawback of this approach is the cost of maintaining this high level of capacity although it could be relevant when the cost of lost sales is particularly high, for example in a high value retail outletsuch as a luxury car outlet where every sale is very profitable.
Chase Demand
This strategy seeks to change production capacity to match the demand pattern over time. Capacity can be altered by various policies such as changing the amount of part-time staff, changing the amount of staff availability through overtime working, changing equipment levels and subcontracting. The chase demand strategy is costly in terms of the costs of changing staffing levels and overtime payments. The costs may be particularly high in industries in which skills are scarce. Disadvantages of subcontracting include reduced profit margin lost to the subcontractor, loss of control, potentially longer lead times and the risk that the subcontractor may decide to enter the same market. For these reasons a pure chase demand strategy is more usually adopted by service operations which cannot store their output and so make a level capacity plan less feasible.
Demand Management
While the level capacity and chase demand strategies aim to adjust capacity to match demand, the demand management strategy attempt to adjust demand to meet available capacity. There are many ways this can be done, but most will involve altering the marketing mix and will require co-ordination with the marketing function. Demand
Management strategies include:
– Varying the Price – During periods of low demand price discounts can be used to stimulate the demand level. Conversely when demand is higher than the capacity limit, price could be increased.
– Provide increased marketing effort to product lines with excess capacity.
– Use advertising to increase sales during low demand periods.
– Use the existing process to develop alternative product during low demand periods.
– Offer instant delivery of product during low demand periods.
– Use an appointment system to level out demand.
Review questions
1. Define the term capacity
2. Outline the steps involved in capacity planning
3. Outline the demand management strategies you are familiar with
4. Discuss five demand management strategies
5. Distinguish between chase demand and level capacity strategies
References
Fitzsimmons, J.A. and Fitzsimmons, M.J.(2008) Service Management: Operations, Strategy and Information Technology, 6th edn, McGraw-Hill.
Hayes, R.H. and Wheelwright, S.C. (1984) Restoring our Competitive Edge, John Wiley & Sons Ltd.
Hill, T 2005, Operations Management, 2 nd edn, Palgrave Macmillan, Basingstoke.
