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MGSM890 Operations ManagementMGSM890 Operations Management

Facilitator:Facilitator:

Dr. Jonathan FarrellDr. Jonathan Farrell

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This Evening’s ProgramThis Evening’s Program

• Capacity Planning & Control– Aggregate Planning

– Capacity versus Demand

– The Planning Process

– Managing Capacity & Demand

• Case Study – British Airways London Eye (pp 393,394)• Exercises – Capacity Management (refer to the Folder of

Readings)

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Some DefinitionsSome Definitions

• CapacityCapacity is the available time for production and / or the maximum number of items that can be manufactured or delivered within a given time.

• A A BottleneckBottleneck occurs when capacity is less than the demand placed on it.

• A capacity-constrained resource (CCR)A capacity-constrained resource (CCR) is a resource where the capacity is close to demand placed it.

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Operations resources Customer requirements

DemandSupplyAvailability of capacity to deliver products and servicesThe operation The market

Capacity planning Capacity planning and controland control

Required availability of products and

services

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Capacity Planning HorizonsCapacity Planning Horizons

Long range plansLong range plans

Facilities – major capital expenditures

Locations

Aggregate (Intermediate) plansAggregate (Intermediate) plans

Minor equipment purchasing

Materials requirements

Work force size

Production rates

Detailed (short-term) schedulesDetailed (short-term) schedules

Daily, weekly schedules

People - machine assignments

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Material Procurement

Overtime Hiring and layoffs

Subcontracting

Ending inventory

Market Demand

Forecast

Aggregate PlansStarting Inventory

Actual Demand

People-Machine Assignment

The Planning ProcessThe Planning Process

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Construction materials

Beverages (beer, cola)

Foods (ice-cream, Christmas cake)

Clothing (swimwear, shoes)

Gardening items (seeds, fertilizer)

Fireworks

Travel services

Holidays

Tax processing

Doctors (influenza epidemic)

Sports services

Education services

Behavioural Political Financial SocialFestiveClimatic

Causes of seasonalityCauses of seasonality

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Not worked (unplanned)

Quality losses

Slow running

equipment

Equipment “idling”

Breakdown failure

Set-up and change-

overs

Loading time

Total operating time

Net operating time

Valuable operating time

Speed losses

Quality losses

Availability rate = a =total operating time / loading time

Performance rate = p =net operating time/total

operating time

Quality rate = q =valuable operating time / net

operating time

Availability losses

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Rejecting Balking

Source of customers

Boundary of system

Queue or “waiting

line”

Server 1

Served customers

Reneging

Server 2

Server m

Distribution of arrival times

Distribution of processing times

Simple queuing systemSimple queuing system

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Time

Time

Low variability - narrow

distribution of process times

High variability - wide distribution of process times

Simple queuing systemSimple queuing system

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Outcome

Actual demand

and actual capacity

Decision

How much capacity

next period?

Outcome

Actual demand

and actual capacity?

Decision

How much capacity

next period?

ShortagesQueues

InventoryCapacity

level

ShortagesQueues

Inventory

Current capacity

estimatesUpdated forecasts

Current capacity

estimatesUpdated forecasts

CostsRevenues

Working capitalCustomer satisfaction

etc

CostsRevenues

Working capitalCustomer satisfaction

etc

Period t - 1 Period t Period t + 1

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Lay off staff Delay any action

Overtime

Hire temporary staff

Short-timeIdle time

Do nothing Overtime

Hire temporary staff

Make for inventory

Short-time

Hire and make for inventory

Start to recruit

Hire staff

POOR

Outlook < 1

NORMAL

Outlook = 1

GOOD

Outlook > 1

POOR

Outlook < 1

NORMAL

Outlook = 1

GOOD

Outlook > 1

Short-term outlook

Long-term outlook

Outlook =Forecast demandForecast capacity

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The nature of aggregate capacityThe nature of aggregate capacity

Aggregate capacity of a hotel:

- rooms per night;

- ignores the numbers of guests in each room.

Aggregate capacity of an aluminium producer:

- tonnes per month;

- ignores types of alloy, gauge and batch variations.

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Long-, medium- and short-term Long-, medium- and short-term capacity planningcapacity planning

Macrooperation witha given set of resources

might produce

6 tables

or

12 chairs

or

some combination

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Objectives of capacity planning Objectives of capacity planning and controland control

Step 1 - Measure aggregate capacity and demand.

Step 2 - Identify the alternative capacity plans.

Step 3 - Choose the most appropriate capacity plan.

Time

Estimate of current capacity

Forecast demand

Ag

gre

gat

ed o

utp

ut

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How capacity and demand are measuredHow capacity and demand are measured

Design capacity

168 hours per week

Effective capacity

109 hours per week

Planned loss of 59 hours

Actual output - 51 hours per week

Avoidable loss - 58 hours per week

Actual outputEffective capacity

Efficiency =

Actual outputDesign capacity

Utilisation =

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Ways of reconcilingWays of reconciling capacity capacity and demandand demand

Level capacity

Capacity

Demand

Chase demand

Demand

Capacity

Demand management

Demand

Capacity

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Cumulative representationsCumulative representations

Cumulative demand

Cumulative capacity

Time

Buildingstock

Unable to meet orders

Cap

acit

y an

dd

eman

d

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The dynamics of controlling planningThe dynamics of controlling planning

Short-term outlookShort-term outlook

Normal GoodPoor

Normal

Good

Poor

Short-time

working

Make for inventory

Lay off staff

Do nothing

Hire and make for inventory

Delay any

action

Overtime

Hire staff

Overtime

Lo

ng

-ter

m o

utl

oo

kL

on

g-t

erm

ou

tlo

ok

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The effect of utilisation on The effect of utilisation on customer servicecustomer service

50.0

40.0

30.0

20.0

10.0

00.5 0.6 0.7 0.8 0.9 1.0

Ave

rag

e cu

sto

mer

bac

klo

g

Capacity Utilisation

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50.0

40.0

30.0

20.0

10.0

00.5 0.6 0.7 0.8 0.9 1.0

Ave

rag

e cu

sto

mer

bac

klo

g

Capacity Utilisation

Service targetReduce variance

Add inventory

Increase capacity

Alternative investments to improve Alternative investments to improve customer servicecustomer service

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OBJECTIVEOBJECTIVE

To provide an “appropriate” amount of capacity at any point in time.

The “appropriateness” of capacity planning in any part of the operation can be judged by its effect on…...

Costs

Revenue

Working Capital

Service Level

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Good forecasts are essential for effective capacity planning.

But so is an understanding of demand uncertainty because it allows you to judge the risks to service level.

When demand uncertainty is high the risks to service level or underprovision of capacity are high.

DE

MA

ND

TIME

Distribution of demand

DE

MA

ND

TIME

Only 5% chance of demand being higher than this

Only 5% chance of demand being lower than this

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It is useful to know not only the average capability of resources but also their variation in capability

FR

EQ

UE

NC

Y

TIME TO PROCESS ONE UNIT OF DEMAND

Average processing time

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How do you cope with fluctuations in demand?

How do you cope with fluctuations in demand?

Absorb demand

Absorb demand

Adjust output to

match demand

Adjust output to

match demand

Change demand

Change demand

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Absorb demand

Absorb demand

Keep output level

Keep output level

Make to

stock

Make to

stock

Make customer

wait

Make customer

wait

Part finished,Finished Goods, orCustomer Inventory

QueuesBacklogs

Have excess

capacity

Have excess

capacity

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Adjust output to match demand

Adjust output to match demand

Hire Fire

Temporary Labour

Lay off

Overtime

Subcontract

Short time

3rd party work

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Managing Managing CapacityCapacity

Change DemandChange Demand

Pricing

Change pattern of demand

Develop non-peak demand

Develop alternative / complementary products and/or services

Reservation systems

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Take no action Take no action Unorganised Unorganised OK OK Capacity wasted Capacity wasted queuingqueuing

Reduce demandReduce demand Higher prices Higher prices - - - -

Increase demandIncrease demand - - - Lower prices - Lower prices

Inventory DemandInventory Demand

- Reservation systemReservation system Priority for Aim for most -Priority for Aim for most - most desirable profitable mixmost desirable profitable mix segments of businesssegments of business

- Queuing Queuing Override for Try to avoid - Override for Try to avoid - most desirable bottleneckmost desirable bottleneck segments delayssegments delays

Excess Demand Sufficient Capacity Excess CapacityExcess Demand Sufficient Capacity Excess Capacity

Capacity Relative To DemandCapacity Relative To DemandApproach Used Approach Used To Manage To Manage

DemandDemand

Alternative Demand Management StrategiesAlternative Demand Management Strategies

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Managing Managing CapacityCapacity

Control SupplyControl Supply

Schedule downtime during periods of low demand

Maximise efficiency during peaks

Use part time employees

Cross-train employees

Increase consumer participation

Rent or share extra capacity

Invest in ability for future expansion

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Actual Demand

Actual Demand

ForecastDemand

ForecastDemand

ReplanCapacity

ReplanCapacity

Actual Capacity

Actual Capacity

AllocateCapacity

AllocateCapacity

RefineForecast

RefineForecast

Key question - “How often do you change capacity in response to deviations from demand forecasts?”

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The tasks of capacity planning Some key questions

Calculate Capability of Operations Resources

Calculate Capability of Operations Resources

Allocate Resources Over Time

Allocate Resources Over Time

Design “Capacity Control” Mechanisms

Design “Capacity Control” Mechanisms

Forecast Demand or Revenue Potential

Forecast Demand or Revenue Potential

Can you predict the most likely demand at any point in time?

Can you predict the uncertainty in demand at any point in time?

Can you predict the most likely demand at any point in time?

Can you predict the uncertainty in demand at any point in time?

Do you have realistic work standards?

Do you understand the capacity constraints of all the necessary resources?

Do you have realistic work standards?

Do you understand the capacity constraints of all the necessary resources?

What are the options for capacity allocation?

What are their cost, revenue, work capital and service level implications?

What are their flexibility implications?

What are the options for capacity allocation?

What are their cost, revenue, work capital and service level implications?

What are their flexibility implications?

Do you monitor actual demand against forecast?

Do you adapt forecasts accordingly?Do you replan capacity accordingly?

Do you monitor actual demand against forecast?

Do you adapt forecasts accordingly?Do you replan capacity accordingly?

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Demand for manufacturing operation’s output

8000

Fo

reca

st in

ag

gre

gat

ed u

nit

s o

f o

utp

ut

per

mo

nth

7000

6000

5000

4000

3000

2000

1000

0J F M A M J J A S O N D

Months

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For capacity planning purposes demand is best considered on a cumulative basis. This allows alternative capacity and output plans to be evaluated for feasibility.

Fo

reca

st c

um

ula

tive

ag

gre

gat

ed

ou

tpu

t (t

ho

usa

nd

s)

60

50

40

30

20

10

00 40 80 120 160 200 240

Cumulative operating days

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SHORT TERM

OUTLOOK

P O O R N O R M A L G O O DP O

O

R

N

O

R

M

A

L

G

O

O

D

Managing demand response

LONG TERM

OUTLOOK

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A European domestic appliances manufacturer’s forecast and demand

JAN 2003 JAN 2004

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A European domestic appliances manufacturer’s forecast and demand

Actual demand

JAN 2003 JAN 2004

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Capacity Utilisation & Capacity Utilisation & Service QualityService Quality

• Best operating point is around 70% of capacity for most service delivery environments

• The 70% factor varies varies inversely with the degree of uncertainty and risk of delivery failure, e.g. emergency services should aim for a lower operating point

• In the critical zone, what do you think happens to service quality?

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In Summary . . .In Summary . . .

• Manage Capacity or Manage Demand?

• What does the organisation want to achieve?

• Most organisations have a mix of both

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Exercise – Capacity ManagementExercise – Capacity Management

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Case Study – Case Study – British Airways London EyeBritish Airways London Eye

• What are the main design issues?• Calculate the capacity of the London Eye• What is the anticipated capacity utilisation? Why is it

less than 100%?• What is the estimated revenue in the first year?

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The London EyeThe London Eye

• See www.londoneye.com for extensive information about the London Eye

• Capacity Analysis:– The wheel rotates on full revolution / 30 minutes– 32 capsules at 25 passengers / capsule– > 1,600 passengers per hour– Available hours – Summer: 10:00 to 22:00 (12 hours) x 7 days

Winter: 10:00 to 18:00 (6 hours) x 7 days– Summer is 24 weeks, Winter is 28 weeks, closed Christmas Day

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Possible Performance ObjectivesPossible Performance Objectives

• Low operating costs • Affordable, good value Cost

• Caters for all ages / abilities • Individual questions answered

• No product flexibility reqd. • Volume flexibility to cope with

seasonal demand

Flexibility

• Boarding as per timed ticket • No unscheduled downtime

• Available as advertised • Completed by target date

Dependability

• No long queues • Clear, fast and fair flows

boarding / disembarking

• Short lead time for the design and construction

Speed

• Resembles air travel • Professional, smart staff • Informative • Capsules regularly cleaned • Clear reservation system

• Exceptional aesthetics • Strong, durable • Good, uninterrupted views • Unquestionably safe • Comfortable ride (no sway)

Quality

Design of the process Design of the product / service

Performance objective