PBO - Lecture 09 - Capacity

Lecture 9 - Capacity Principles of Business Operations
Principles of Business
Operations
Lecture 9:
Capacity
V1.0 © NCC Education Limited
Capacity Lecture 9 - 9.2
Learning Objectives
On completion of this unit, students will be able to:
• Understand short-term and long-term decisions

relating to capacity and capacity management
• Appreciate the basics of forecasting
Part One: Capacity
V1.0 Visuals Handout – Page 1

Introduction
• Capacity is vital to designing and managing value
chains
• Need to understand:
- Resources available
- How they are organised
- Their efficiency
• Sufficient capacity must exist to ensure smooth flow
of materials or services without excessive delays or
excessive inventory
Understanding Capacity 1
• Capacity is the capability of a resource (may be a
facility, machine, or person, etc.) to accomplish its
purpose over a period of time
• Can be viewed in two ways:
- Maximum rate of output per unit of time (e.g. “10 vehicles
per hour”)
OR
- Units of resource availability (e.g. “number of hospital
beds”)
Key questions:
• Can the facility, process, or equipment
accommodate new goods and services and adapt
to changes to existing ones?
• How large should the facility, process or equipment
capacity be?
• When should capacity changes take place?

Economies and diseconomies of scale:
• Economies of scale are achieved when the average
unit of a good or service cost decreases as capacity
and/or volume increases
• Diseconomies of scale occur when the average unit
of a good or service cost increases as capacity
and/or volume increases
Capacity Measurement 1
Capacity can be measured in a number of ways:
• Theoretical capacity is the maximum output over
time (but doesn’t allow for maintenance or
downtime)
• Effective capacity is actual output that can
reasonably be expected over time under normal
operating conditions
• Thus capacity planning decisions need to be based
on effective, not theoretical, capacity
• Safety capacity – this is the amount of capacity
reserved for unanticipated events such as surges in
demand, materials shortages, equipment
breakdowns, etc.
• The percentage varies from industry to industry
• For service industries, safety capacity ranges from
10%-50%, i.e. utilisation of services is 50%-90%.
This is typical for hospitals and hotels

• Operations planning – capacity must be translated
into specific requirements for equipment and labour
• This leads to questions such as:
- Which type of machinery?
- How many machines?
- How many people are required?
- Etc.
• Also forecasting demand which we look at later in
this lecture …
Long-term Capacity Strategies 1
• Organisations must anticipate growth or decline in

demand and plan capital investments accordingly
• Costing
g should include the initial investment and
annual operating and maintenance costs
• Long term capacity decisions are linked to the
organisation’s business strategy
Long-term Capacity Strategies 2
• Capacity expansion:
- Organisations can choose to increase capacity in small
scale increments
• e.g. by adding new staff or machinery
- Or through large scale expansion
• e.g. by opening new facilities, etc.

Short-term Capacity Strategies 1

• When short-term demand is stable and sufficient capacity is
available, managing operations to satisfy demand is easy
• When demand fluctuates organisations can:
- Change internal resources and capabilities
OR
- Manage capacity by shifting and stimulating demand
• However, for many service operations resources cannot be
increased – hotels for example have fixed capacity

Adjusting short-term capacity levels to meet
demand better can be achieved by:
• Adding or sharing equipment
• Selling unused capacity
• Changing labour capacity and schedules
• Changing labour skill mix
• Moving work to slack periods

Shifting and stimulating demand can be achieved
by:
• Varying the price of goods or services
• Providing customer information
• Advertising and promotion
• Adding peripheral goods and/or services
• Providing reservations

Revenue Management Systems 1

Used to:
• Forecast demand
• Allocate perishable assets across market segments
• Determine when and by how much to overbook
• Determine pricing strategies for different market
segments
• Objective is to maximise revenue by optimising
pricing strategies and capacity utilisation across
market segments

• Service capacity is perishable
• Once a service goes unused (e.g. a doctor’s
appointment time, cinema seat, etc.) it cannot be
recaptured and the revenue is lost forever
• Service capacity trade-offs are used to determine
pricing strategies for different market segments to
maximise revenue, e.g. seats on low-cost airlines
are more expensive on the day of travel

• Overbooking strategies are used to make better
capacity management decisions – but are prone to
two types of errors:
- Insufficient overbooking
g resulting
g in idle resources and
lost revenue
- Too much overbooking resulting in customers being
turned away even though they had a reservation

Class Activity
• Work in groups of about 5
• What different short-term capacity strategies might

a cinema need to use when showing a new
“blockbuster” movie?
• 15 minutes
• Feedback to the class

• 5 minutes
Part Two: Forecasting
Forecasting
• Forecasting is used to project the value of one or
more variables in the future
• Good forecasting and demand planning results in:
- Higher capacity utilisation
- Reduced inventories and costs
- More efficient process performance
- Increased flexibility
- Improved customer service
- Increased profits

Forecasting and Demand Planning

Demand planning offers capabilities in:
• Multilevel planning
• Data analysis
• Statistical forecasting
• Promotion support
• Collaborative demand planning
Concepts in Forecasting 1
• Senior management use longer-range forecasts,

whereas operational
p managers
g use shorter horizons
to determine demand for their products and
services
• Data patterns – time series analyses can be used to

show how forecast has changedg historically
y – this
can be used for predicting demand in the future

• Trends – measure the underlying pattern of growth

or decline over a period of time
• Generally used over longer periods of time to “miss

out” short-term fluctuations in demand
• Seasonal patterns – show repeatable patterns of

demand over short pperiods of time,, e.g.
g ppizza
delivery peaks at weekends. Conversely, not many
Christmas trees are sold in June!
• Other variances to consider:
- Cyclical patterns
- Random variations
- Irregular variations
• Organisations use statistical forecasting models to
help them with their predictions
• Finally – remember forecasting is “predicting the
future” thus it is prone to errors & issues of
accuracy

Class Activity
• Work in groups of about 5
• How might a pizza parlour use forecasting to help

with demand planning?
• 10 minutes
• Feedback to the class

• 5 minutes
Conclusions
• Capacity planning is used by all organisations to try
to maximise value, reduce inventory and increase
profits
• Forecasting g helps
p organisations
g p
plan for future
demand of their products and services – but it is
prone to error and must be used with caution. For
example, nobody predicted the recent global
financial crisis and how it would impact on their
organisation.
References
• Evans & Collier (2007) “Operations Management:
An Integrated Goods & Services Approach”,
Thomson

Lecture 9 – Capacity
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Lecture 9 - Capacity Principles of Business Operations

V1.0 © NCC Education Limited

Capacity Lecture 9 - 9.2

• Understand short-term and long-term decisions

• Appreciate the basics of forecasting

V1.0 © NCC Education Limited

Capacity Lecture 9 - 9.3

Part One: Capacity

V1.0 © NCC Education Limited

V1.0 Visuals Handout – Page 1

Capacity Lecture 9 - 9.4

V1.0 © NCC Education Limited

Capacity Lecture 9 - 9.5

V1.0 © NCC Education Limited

Capacity Lecture 9 - 9.6

V1.0 © NCC Education Limited

V1.0 Visuals Handout – Page 2

Capacity Lecture 9 - 9.7

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Capacity Lecture 9 - 9.8

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Capacity Lecture 9 - 9.9

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V1.0 Visuals Handout – Page 3

Capacity Lecture 9 - 9.10

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Capacity Lecture 9 - 9.11

Long-term Capacity Strategies 1

• Organisations must anticipate growth or decline in

V1.0 © NCC Education Limited

Capacity Lecture 9 - 9.12

Long-term Capacity Strategies 2

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V1.0 Visuals Handout – Page 4

Capacity Lecture 9 - 9.13

Short-term Capacity Strategies 1

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Capacity Lecture 9 - 9.14

Short-term Capacity Strategies 2

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Capacity Lecture 9 - 9.15

Short-term Capacity Strategies 3

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V1.0 Visuals Handout – Page 5

Capacity Lecture 9 - 9.16

Revenue Management Systems 1

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Capacity Lecture 9 - 9.17

Revenue Management Systems 2

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Capacity Lecture 9 - 9.18

Revenue Management Systems 3

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V1.0 Visuals Handout – Page 6

Capacity Lecture 9 - 9.19

• What different short-term capacity strategies might

• Feedback to the class

V1.0 © NCC Education Limited

Capacity Lecture 9 - 9.20

Part Two: Forecasting

V1.0 © NCC Education Limited

Capacity Lecture 9 - 9.21

V1.0 © NCC Education Limited