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Coursework on the Module, ‘Operations Management’


Course Code: MAN4045M
UB Number: XXXXXXX

I certify that this assignment is the result of my own work and does not exceed the
word count noted below.

Number of Words: 3500.


(Excluding Table of Content/Appendices/References, the Title page, table data and
graphs, figure captions, header and footer notes)

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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

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A critical review on adopting capacity planning by understanding the


importance of forecasting
Introduction:

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.

Later in this assignment, Slack’s model of determination of capacity is used to define


and understand the importance of sales forecasting, different strategy of Capacity
planning and finally, the methods of choosing the best suited Capacity Planning
method.

Capacity

A dictionary definition of ‘capacity’ is the ability to hold, receive, store or


accommodate (Chase, Jacobs, Aquilano 2004). The word ‘capacity’ is often used in a
very static or physical sense measuring or describing the volume of production,
storage or output. For example, a carbonated drink bottler can produce 45,000 cans
a day, a health care centre has 250-bed capacity, a multiplex has a capacity of 2500
seats. All the above have shown their ‘capacity’ at a given point of time. However, in
real life, capacity is measured over a period. If the carbonated drink bottler operates
220 days in a year, its operating capacity will be 9.9 million cans a year, similarly if a

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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.

Therefore, the capacity of an operation can be defined as the maximum level of


value-added activity over a period of time that the process can achieve under
normal operating conditions (Slack, Chamber and Johnston 2007). Chase, Jacobs and
Aquilano in their Operation Management for Competitive Advantage (2004), gives a
similar definition about capacity saying, “An operations management views on the
time dimension of the capacity. That is, capacity must also be sated relative to some
period of time”.

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.

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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).

 George Mikelsons, American Trans Air Chairman, President and CEO


attributed negative profit during the year 2004, for excess capacity and high
fuel prices (The Travels Insider, 2004)

2. Effects Revenue, Capacity levels equal or higher than current demand


makes sure that the demand is met and resulting in no revenue loss (Slack, Chamber
and Johnston 2007).

 In the year 1967, the state-of-the-art Honeywell replaced Revenue’s


Computers due to the insufficient capacity of Revenue (the organization) to
deal with the volume of business (Revenue: Irish Tax and Customs, ND). The
loss in the business is definitely regarded as loss in revenue.

 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).

3. Delivery speed or response to a customers needs can also be enhanced by


increasing inventory (which in turn demands for capacity management) and
minimizing queuing (Slack, Chamber and Johnston 2007). Robert and Roland, in their
Empirical Study of Delivery Speed and Reliability, says, to gain the confidence of the

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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”

 In an experiment conducted by the students of the supply chain & Logistics


Institution, Georgia Institute of Technology, to know why customers, in spite
of heavy service cost, choose FedEx (Logistics and Delivery service
organization) over DHL, UPS and USPS for delivering things to Australia. They
discovered that, FedEx was quickest of all to deliver (The Great Package Race,
2008).

 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).

Why capacity planning and control is required?

“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).

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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 )

Measuring Aggregate Demand:

Measuring aggregate demand is about forecasting demand fluctuations, although


the word ‘forecasting’ sound as in Marketing terminology, it keeps significant
important in capacity planning, thus above, we have mentioned that capacity
planning should work in accordance with various departments. Unrealistic
forecasting can cause severe problems to an organization by loss in cost, revenue
and most importantly in retaining customers trust. Capacity managers use this
forecast to evaluate the current available capacity. If the sales forecast (or future
demand) is satisfied by the current capacity, then step 2 and step 3, can be omitted
(however, this leaves us with a concern of under-utilization of current capacity).

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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.

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Figure 3: Delphi Method

 Pattaya, is the second most tourist-visited destination in Thailand after


Bangkok. Located 165 Km southeast of Bangkok, attracted over 14.13 million
tourist during the year 2010, from around the world (thaiwebsites.com) and
is expected to grow in 15% in 2011. The State Railways of Thailand recognized
the need of extra capacity to comprehend the rise of tourist population and
introduced ‘Special Tourist Rail Trips’ from Bangkok to Pattaya and many
other tourist destination (thairailways.com). Similarly activities can be seen
by the Indian Railways on special occasion like Pushkaralu (an event that
happens once in 12 years), Sabarimala (each year in the month of December).

 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).

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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.

Figure 4: Product Life Cycle (Source: Griffiths and Wall)

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.

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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.

The Alternative Capacity Plans:

Alternative Capacity Plans are introduce by any organization to respond to the


fluctuating demand. Slack, Chamber, Johnston and Betts has identified three
methods to this and they are Level Capacity Plan, Chase Demand Plan and Demand
Management. Evans (1997) mentioned the same three by name: Matching Capacity
with Demand, Excess Capacity Policy and Capacity Shortage policy. We shall discuss
each of this plan by the names suggested by Slack.

Level Capacity Plan (or Level Production Strategy) recommends a uniform


level of output throughout the production phase regardless of the fluctuation in
demand. Such a capacity plan achieves stable employment patters, high process
utilization and high productivity with low unit cost (Slack, Chamber, Johnston and
Betts, 2007). However, this plan has a trade-off in excessive inventories, when
demand is low and possibly lost of sales (Evans, 1997). An established healthcare
centre can be a good example, which can practise Level Capacity of Plan. Increasing
its operating capacity in an existing location could not be possible as it may involve
high capital investment, and the fixed-cost could be shared among the existing beds,
which is not desired. Hotels, can also be considers to use Level Capacity Plan
because (as in the case of health care centres), services cannot not be stored as
inventories cost (Slack, Chamber, Johnston and Betts, 2007). Any hotel would

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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.

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Figure 6: Chase-Demand Plan (Source: Slack, Chamber, Johnston and Betts, 2007)

Manage Demand Plan is the most widely adopted demand management


though price, although, this capacity planning strategy is more popular among
service industry than among manufacturing industry (Slack, Chamber, Johnston and
Betts, 2007). Let us consider the example of hotel industry again, often people get
cheap deals when at the beginning and at the end of vacation season and the prices
shoots-up during the vacation. This is to balance the available capacity with the
demand. It is similar with aviation industry, it is believed that airlines tickets are
available cheaper when booked a month in advance, the price of the ticket rises as
the departure date approaches. The objective of this strategy is to boost off-peak
demand and constrain peak demand in order to smooth demand as much as
possible (Slack, Chamber, Johnston and Betts, 2007). Sometime, organizations take a
tangential approach to utilize their available capacity, for example, in a country like
India, the sale of coffee is maximum during winter, however, coffee manufactures,
though advertising, influence customer psychology by promoting cold-coffee and
boost sales in summer. The same product is sold for two different purpose. Slack
has referred such a strategy Alternate Product and Service. However, such a strategy
could sometime challenge the core competence of an organization.

Not every industry uses the above-mentioned planning strategies as a whole. In


today’s competitive market environment, ever industry wants to reduce overheads,

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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.

Choosing a capacity planning and control approach.

It is important for an organization to choose among the three available planning


options as each of it has its own consequences. There are two methods that assess
the consequence or the level of risk involved with each of the three approaches.
1. Cumulative representation
2. Queuing Theory

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).

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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.

Mathematically, when the cumulative under-capacity (A + C) is greater than


cumulative over-capacity (B), then no additional investment in expanding capacity in
needed. However, this approach is very hypnotically in nature. It assume that the
organization operates at its optimum production level every day and this model is
not applicable for perishable goods (short self-life goods).

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

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manager can decide the adequacy of plan by simply looking at the cumulative
representation (Slack, Chamber, Johnston and Betts, 2007).

Queuing or ‘Waiting line’ Management:

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.

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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

 A wait of unknown duration is perceived as more tedious than a wait whose


duration is known

 An unexplained wait is perceived as more tedious than a wait that is


explained

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 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.

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Abbreviations Used:

GBPS: Gigabytes per second

SLA’s: Service Level Agreements

ND: No Date

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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

Cisco, (ND), The Business Case for Cisco ACE Application Control Engine
http://www.cisco.com/en/US/prod/collateral/modules/ps2706/ps6906/White_Pape
r_Business_Case_for_Cisco_ACE_Application_Control_ps7027_Products_White_Pap
er.html [Accessed on 12/12/2010]

Evans, James R., (1995), Production/Operations Management: Quality, Performance


and Value, West Publishing Company, 5th Edition, pp. 218-222

Griffiths, A., Wall, S. (2005), Economics for Business and Management, Pearson
Education Limited, pp. 160

Hill, T. (2000), Operations Management: Strategic Context and Managerial Analysis,


Macmillan Press LTD, pp. 181

Logistics Management (2010), First 2011 Truck Forecast,


http://www.logisticsmgmt.com/view/first_2011_truck_forecast_tighter_capacity_co
ming_as_equipment_shortages_dr/motorfreight [Accessed on 16/12/2010]

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
and Reliability", International Journal of Operations & Production Management, Vol.
12 Iss: 2, pp.58 – 72

Slack, N., Chamber, S., Johnston, R., (2007), Operation Management, Pearson
Education Limited, 5th edition, pp 322

Slack, N., Chamber, S., Johnston, R., Betts, A., (2006), Operations and Process
Management Principles and Practice for strategic impact, Pearson Education Limited,
5th edition, pp 242

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Thairailways.com(ND), http://thairailways.com/special-train-service.html [Accessed


on 16/12/2010]

Thaiwebsite.com (ND), http://thairailways.com/special-train-service.html [Accessed


on 16/12/2010]

The Great Package Race (2008), http://www2.isye.gatech.edu/~jjb/wh/package-


race/2008/2008.html [Accessed on 12/12/2010]

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]

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