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I certify that this assignment is the result of my own work and does not exceed the
word count noted below.
Table of Content
Introduction:........................................................................................................................ 3
Capacity .............................................................................................................................. 3
1. Minimize cost.............................................................................................................. 4
2. Effects Revenue .......................................................................................................... 5
3. Delivery speed ............................................................................................................ 5
Why capacity planning and control is required?................................................................. 6
Measuring Aggregate Demand: .......................................................................................... 7
The Alternative Capacity Plans: ....................................................................................... 11
Level Capacity Plan ...................................................................................................... 11
Chase-Demand Plan...................................................................................................... 12
Manage Demand Plan ................................................................................................... 13
Choosing a capacity planning and control approach. ....................................................... 14
Cumulative representation: ........................................................................................... 14
Queuing or ‘Waiting line’ Management:...................................................................... 16
Conclusion: ....................................................................................................................... 18
Abbreviations Used:.......................................................................................................... 19
Reference: ......................................................................................................................... 20
Capacity Management has always been considered as an integral and essential part
of an organization, be it a production industry or a serves industry. Effective capacity
planning can be profitable to a company on the other had, ineffective capacity can
cause severe problems.
In this assignment, we will begin with the industrial definition of ‘capacity’ and
‘operating capacity’ and examining the importance of it in Cost, Revenue and Speed
of operations with various examples.
Capacity
multiplex screens three show in a day and screens 365 days in an year, its operating
capacity will be 2.73 million seats an year. Capacity measurement are therefore
subjective to every organization, however, we one can measure the utilization of the
unit by Utilizations ration and Efficiency ration.
Utilization is the ration of Actual Output to Design Capacity and Efficiency is the
ration of Actual Output to effective Capacity.
Although there are many factors, which are affected by Capacity Management, the
below are few objectives, which are significantly important for any organization and
Industry:
1. Minimize cost, when capacity is greater than demand, then the cost per unit
(of output produced) is more (Slack, Chamber and Johnston 2007). However, if are
organizations are reluctant to share the excess capacity cost among the demand,
anticipating the loss of (even the) current demand, then it can significantly effect on
their profitability.
In India, during 2010, despite the cement companies restricting its production
as per demand, there has been continuous drop in the cement prices.
Cement companies went into deep looses, as their profit margins were
narrowed and as their inability to share the excess capacity to the current
demand (Today’s Concrete Technology, 2010).
In San Francisco, bicycle ridership has increased to 84% during the period
2006-09, however, during the same period, Caltrain bicycle boarding
increased by on 18% due to the insufficient onboard bike capacity. The
company says, had the company met the required demand, it would have
earned $ 1 million dollar more revenue than what it currently did (Bicycle
Coalition, ND).
customers a company must “deliver more quickly than its competitors or meet a
required delivery date when only some or even none of the competition can do so”
Cisco ACE Application Control Engine has not only improved its response time
by 500 percent but also saved $ 876,000 annually caused due to downtime
and degradation, by increasing the throughput capacity of the server from 4
Gbps (Giga bytes per second) to 16 Gbps. This means less waiting time to get
response from servers (Cisco, ND).
“Capacity Management is the activity of coping with mismatch between the demand
on an operation and its ability to supply”. (Slack, Chamber, Johnston, Betts 2006
pp242). Every industry has a fluctuating demand and in competitive markets, it is
pivotal for each industry to satisfy the demand to remain competitive, and this can
be achieved when capacity management work in accord with the business plan,
accounts, finance department of an organization. Additionally, Plant/equipments
capacity, Labour and staff capacity once created are an expensive decision to change
(Hill, 2000).
Slack, Chamber, Johnston and Betts has identified three steps for capacity planning
and control, they are: Measure aggregate demand and capacity, Identify the
alternative capacity plans, Choose the most appropriate capacity plan.
Figure 1: The Steps in Capacity Planning and Control (Source: Slack, Chamber, Johnston and Betts, 2007 )
According to Evanas (1995), forecasting can be done by two methods, Statistical and
Judgmental. Statistical forecasting is based on assumption that future demand will
be a reflection of demand peeks shown in the past. One way, an organization
records Statistical forecasting is by Seasonality of demand (Slack, Chamber, Johnston
and Betts, 2007).
Figure 2: Seasonal Demand (Source: Slack, Chamber, Johnston and Betts, 2007)
In Judgmental forecasting, Delphi method (Evanas 1995) is used which says, and
evaluations is done by considering Quantitative forecasting (Historic Data) and
Qualitative forecasting (Management Judgment). This evaluation leads to a forecast,
which is analysed (and reverted to evaluations, if needed) and finally put into
practise.
Recent recession has not only hit the financial industry, but also the transport
industry along with many others. Schneider National, J.B Hunt and Werner
Enterprises, once know for major truck carriers in the United States of
America, had cut over their on-the-road capacity by 12%-15%. Noel Perry,
economist with Transport Research Consulting Group predicts 2011 and 2012
to be profitable years. However, there is also storage of as many as 300,000
drives out of the total drive pool of 3 million trucks (Logistics Management,
2010).
In many cases, the demand side forecast alone is not sufficient to judged the
capacity needed, in the above truck example, we have see that, though the
predicted demand to operate these truck carrier is above their current operating
levels, they cannot increase their on-the-road capacity as there is a shortage of
drives.
Evans (1997), also argues that for Strategic Capacity Planning, capacity evaluation
must consider the stage of the product or service in the Product Life Cycle.
For a product moving into the growth stage, goods or services sales volume
increases, hence forecasting in critical, organizations must have (or increase) the
capacity to produce goods and services for the growing demand. Similarly, during
the decline phase, the demand for the goods and services are decreases, hence
capacity managers should try to reduce the operating capacity of the units to reduce
the overhead costs.
The results of forecast are compared with the current operating capacity of the
manufacturing or service production units and decision are made whether to invest
in to increase capacity or to improve current production process as many
organizations operate below their maximum processing capacity (Slack, Chamber,
Johnston and Betts, 2007). Operating efficiency itself is a wide topic and its
discussion here will not be relevant.
employ enough staff to provide service in all the rooms, but when there is low
demand, the fixed-cost (of staff’s salary) should be bore with salaries that can result
in heavy loss for the hotel.
Figure 5: Under-Utilization of Capacity (Source: Slack, Chamber, Johnston and Betts, 2007 )
Chase-Demand Plan is the contrast model of Level Capacity Plan, which says
the produce should match the demand forecasted (Evans, 1997). Such a strategy
may not work in service industry as employer cannot hire or fire staff with
fluctuating demands. However, industries which are capital intensive such as real
estate were the premises is utilized occasionally. In such a strategy, the levels of
inventories will reduce along with the lost of sales. However, when the demand in
low the under-utilization of the production unit will result in increased cost per unit,
and efficient use may reduce cost per unit. The below figure shows Chase-Demand
Plan with respect to Hotels and Retail outlets.
Figure 6: Chase-Demand Plan (Source: Slack, Chamber, Johnston and Betts, 2007)
reduce production cost, minimize inventories (as this effects there liquidity ratios)
and Investment, but the same time each of such organizations want to provide
responsive and customer-oriented approach. Therefore, most organizations use a
mix of all the three planning strategies at different times (Slack, Chamber, Johnston
and Betts, 2007).
Slack, in his Operations and Process Management Principles and Practice for
strategic impact, has discussed a seasonal-Industry which ingeniously turned into a
unseasonal-Industry, the greeting cards market. Earlier, the sales of greeting cards
touched peak during Christmas, Thanksgiving and New year and a regular sale of
birthday cards however, the same industry is offering non-occasion cards on
mother’s day, father’s day, Valentine’s day in addition to Halloween, ‘get-well-soon’,
’need-a-hug’, making it (the greeting cards industry) no more seasonal.
Cumulative representation:
Cumulative representation is the graphical representation of the forecast and the
production capacity (we is assumed to be constant through out that period) line
running across the forecast. If the cumulative over capacity of the production is
above the cumulative under capacity during a period, then an organization need not
invest in expanding capacity (Slack, Chamber, Johnston and Betts, 2007).
Figure 7: Cumulative Representation (Source: Slack, Chamber, Johnston and Betts, 2007)
Region ‘A’ and ‘C’ represent the demand for certain goods and service during off-
peak season and region ‘B’ represents the peak season.
The good thing about Cumulative representation is, it show the peak an year and the
demand fluctuation time during. For an organization which has flexible production
capability and employee part time resource during the peak season and restrict
employment during off-peak season.
For any capacity strategy to meet demand, its cumulative demand line must always
above the cumulative production line. Only then we can a production or capacity
manager can decide the adequacy of plan by simply looking at the cumulative
representation (Slack, Chamber, Johnston and Betts, 2007).
It is often observed in banks that a customer is served instantly during on peak hours
and it queued during peak hours and many times, ironically, customers are in queue
even during the off-peak hours. Therefore it is unpredictable from banks point to
predict the demand. Under such circumstances providing additional capacity to
satisfy customers need becomes difficult.
Assuming that there are ‘n’ service counters available at the bank, customer (who
are line-up in a queue) are offered service on First-Come-First-Server bases (in
computing terms, this is referred as First-In -First-Out or FIFO).
Figure 8: Queuing System (Source: Slack, Chamber, Johnston and Betts, 2007)
Examples of operation which run in parallel are mentioned in the figure below.
Figure 9: Queuing examples (Source: Slack, Chamber, Johnston and Betts, 2007)
The Arrival Rate, is the rate at which customer needed to server by one of the ‘n’
parallel servers available. The customer arrival rate is often unpredictable. The
Queue is the waiting time calculated from the time of customers had arrived and to
get served. Rejection is observed when the queue or the wait-line has reached its
maximum capacity (of course, the queuing also has a capacity). We might often find
customers who leaves the queue either because of disappointment or for any other
reason, such customers are called Reneging. (Slack, Chamber, Johnston and Betts,
2007).
Slack, in his Operations and Process Management Principles and Practice for
strategic impact, mentioned the following perceptions on queuing with respect to
the customer being human.
Time spent idle is perceived as longer than time spent occupied
The wait before a service starts is perceived as more tedious than a wait
within the service process
Anxiety and/or uncertainty heightens the perception that time spent waiting
is long
The higher the value of the service for the customer, the longer the wait that
will be tolerated
Waiting on one’s own is more tedious than waiting in a group (unless you
really don’t like the others in the group)
Conclusion:
For the above discussion we have identified how Capacity management can
influence the performance and effectiveness of an organization. Though, Evan
(2007) argues that production capacity planning poses different problems when
compared with service industry, with the help of help of numerous examples, we
concluded that, Capacity Management is an area of concern with every type of
Industry. We have also seen essentials of capacity planning in term of cost, revenue
and speed.
At the end of this assignment, we can say that forecasting is just limited to the
marketing department, but also to the capacity department. If capacity is not equal
to the demand, problems of over capacity or under capacity may occur which may
incur heavy loss for any organization.
Depending upon the industry and the nature of demand we can select a capacity
model which is applicable in short-term, mid-term and long-term strategy planning.
Abbreviations Used:
ND: No Date
Reference:
Bicycle Coalition: Promoting the Bicycle for Every day Transport, Reduce Cuts-Add
Capacity, http://www.sfbike.org/?cuts, [Accessed on 12/12/2010]
Chase, Richard B., Jacobs, F. R., Aquilano, Nicholas J., (2004), Operations
Management for Competitive Advantage, McGraw-Hill/Irwin, 10th edition, pp 386
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http://www.cisco.com/en/US/prod/collateral/modules/ps2706/ps6906/White_Pape
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Griffiths, A., Wall, S. (2005), Economics for Business and Management, Pearson
Education Limited, pp. 160
Revenue: Irish Tax and Customs (ND), Revenue over the years 1956-1967,
http://www.revenue.ie/en/about/history/1959-1967.html, [Accessed on
12/12/2010]
Robert B. Handfield, Ronald T. Pannesi, (1992) "An Empirical Study of Delivery Speed
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Management Principles and Practice for strategic impact, Pearson Education Limited,
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The Travel Insider (2004), The Over Capacity Excuse (and others, too),
http://thetravelinsider.info/2004/overcapacityexcuse.htm, [Accessed on
12/12/2010]
Today’s Concrete Technology (2010), India Cement prices taking hit with excess
capacity, http://www.todaysconcretetechnology.com/india-cement-prices-taking-
hit-with-excess-capacity.html, [Accessed on 12/12/2010]