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MGSM890 Operations Management

Facilitator:

Dr. Jonathan Farrell

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This Evenings 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 Definitions

Capacity is the available time for production and / or

the maximum number of items that can be

manufactured or delivered within a given time.

A Bottleneck occurs when capacity is less than thedemand placed on it.

A capacity-constrained resource (CCR)is a resource

where the capacity is close todemand placed it.

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Operations resourcesCustomer requirements

DemandSupply

Availability of capacityto deliver products and

servicesThe operation The market

Capacity planningand control

Required availability

of products and

services

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Capacity Planning Horizons

Long range plans

Facilities major capital expenditures

Locations

Aggregate (Intermediate) plans

Minor equipment purchasing

Materials requirements

Work force size

Production rates

Detailed (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 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 servicesEducation services

Behavioural Political Financial SocialFestiveClimatic

Causes of seasonality

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Not worked

(unplanned)

Quality

losses

Slow

running

equipment

Equipment

idling

Breakdownfailure

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 system

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Time

Time

Low variability -

narrow

distribution of

process times

High variability -

wide distribution

of process times

Simple 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

Inventory

Capacity

level

ShortagesQueues

Inventory

Current

capacity

estimatesUpdated

forecasts

Current

capacity

estimatesUpdated

forecasts

CostsRevenues

Working capital

Customer satisfaction

etc

CostsRevenues

Working capital

Customer 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-time

Idle time

Do nothing Overtime

Hire temporary

staff

Make forinventory

Short-time

Hire and makefor 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 demand

Forecast capacity

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The 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

capacity planning

Macrooperation witha given set ofresources

might produce

6 tables

or

12 chairs

or

somecombination

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Objectives of capacity planning

and control

Step 1 - Measure aggregatecapacity and demand.

Step 2 - Identify the alternativecapacity plans.

Step 3 - Choose the mostappropriate capacityplan.

Time

Estimate of current capacity

Forecast demand

Aggregatedou

tput

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How capacity and demand are measured

Design

capacity168 hoursper week

Effectivecapacity

109 hoursper week

Plannedloss of 59hours

Actualoutput -51 hours

per week

Avoidable

loss - 58hours perweek

Actual outputEffective capacity

Efficiency =

Actual outputDesign capacity

Utilisation =

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Ways of reconciling capacity

and demand

Level capacity

Capacity

Demand

Chase demand

Demand

C apacity

D emand

management

Demand

Capacity

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Cumulative representations

Cumulative demand

Cumulative capacity

Time

Buildingstock

Unable tomeet orders

Capacityan

d

demand

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The dynamics of controlling planning

Short-term outlook

Normal GoodPoor

Normal

Good

Poor

Short-time

working

Make forinventory

Lay offstaff

Donothing

Hire andmake forinventory

Delayany

action

Overtime

Hire staff

Overtime

Long-termo

utlook

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The effect of utilisation on

customer service50.0

40.0

30.0

20.0

10.0

00.5 0.6 0.7 0.8 0.9 1.0

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

Capacity Utilisation

Service target

Reduce variance

Add inventory

Increase capacity

Alternative investments to improve

customer service

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OBJECTIVE

To provide an appropriate amount of

capacity at any point in time.

The appropriateness of capacity

planning in any part of the operationcan be judged by its effect on...

Costs

Revenue

Working Capital

Service Level

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Good forecasts are essential for effective capacityplanning.

But so is an understanding of demand uncertainty

because it allows you to judge the risks to servicelevel.

When demand uncertainty is high the risks to service level

or underprovision of capacity are high.

DEMAND

TIME

Distribution of demand

DEMAND

TIME

Only 5% chance of demandbeing higher than this

Only 5% chance of demandbeing 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

FREQUENCY

TIME TO PROCESS ONE UNIT OF DEMAND

Average processing time

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How do you cope with

fluctuations in demand?

Absorb

demand

Adjust

output to

match

demand

Change

demand

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Absorb

demand

Keep output

level

Make

to

stock

Make

customer

wait

Part finished,

Finished Goods, or

Customer Inventory

Queues

Backlogs

Have

excess

capacity

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Adjust output

to matchdemand

Hire FireTemporary

Labour

Lay off

Overtime

Subcontract

Short time

3rd party work

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Managing Capacity

Change Demand

Pricing

Change pattern of demand

Develop non-peak demand

Develop alternative / complementaryproducts and/or services

Reservation systems

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Take no action Unorganised OK Capacity wasted

queuing

Reduce demand Higher prices - -

Increase demand - - Lower prices

Inventory Demand

- Reservation system Priority for Aim for most -most desirable profitable mix

segments of business

- Queuing Override for Try to avoid -

most desirable bottleneck

segments delays

Excess Demand Sufficient Capacity Excess Capacity

Capacity Relative To DemandApproach Used

To ManageDemand

Alternative Demand Management Strategies

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Managing Capacity

Control 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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ActualDemand

ForecastDemand

ReplanCapacity

Actual

Capacity

Allocate

Capacity

Refine

Forecast

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

Allocate Resources

Over Time

Design Capacity

Control Mechanisms

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?

Do you have realistic work standards?

Do you understand the capacity

constraints of all the necessaryresources?

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?

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Demand for manufacturing operations output

8000

Forecastinaggregatedunitsof

outputperm

onth

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.

Foreca

stcumulativeag

gregated

output(thousand

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 D

P

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 manufacturersforecast

and demand

JAN 2003 JAN 2004

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A European domestic

appliances manufacturersforecast

and demand

Actual demand

JAN 2003 JAN 2004

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Capacity Utilisation &

Service Quality

Best operating point is around 70% of capacity formost service delivery environments

The 70% factor varies varies inversely with thedegree of uncertainty and risk of delivery failure,e.g. emergency services should aim for a loweroperating point

In the critical zone, what do you think happens toservice quality?

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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 Management

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Case Study

British 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 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 Objectives

Low operating costs Affordable, good valueCost

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 processDesign of the product /

service

Performance objective