Operations Management and

Total Quality Management

Capacity Planning
 What is Capacity Planning?
 Capacity planning refers to determining what kind of
labor and equipment capacities are required and
when they are required.
 Capacity is usually planned on the basis of labor or
machine hours available within the plant.
 What is Capacity?
 Design Capacity
 Effective Capacity
 Actual Capacity
 Concept of Capacity Constraint
 A constraint on capacity is a resource that is less
capable, of increasing its throughput over the given
time period, than other parts of the operation.

• Staff/Skills Level • Storage

• IT Facilities/Technology • Working Schedules and
• Materials Availability Access to Facilities
• Product or Service Mix
 Theory of Constraints (TOC)
 identify the systems constraints
 exploit the systems constraints
 subordinate everything else to the above decision
 elevate the systems constraints (identify the next constraint)
 if in a previous step, a constraint has been removed, go back to
step 1 but do not allow inertia to become the systems constraints.
 Objective of Capacity Management
 Costs
 Revenues
 Working Capital
 Quality
 Speed
 Dependability
 Flexibility
Steps in Capacity Management
 How capacity is measured?
 It is expressed in terms which are useful for capacity
management.
 It is as accurate as possible.
 It gives an indication of relative uncertainty.
Seasonality of Demand
 Weekly and Daily Demand Functions
 Seasonality of demand occurs over a year, but similar
predictable variations in demand can also occur for some
products and services on a shorter cycle
 Measuring Capacity
 Input Measures
 Output Measures
 Measuring Capacity
Time Available
 Capacity =
Time of Task

 For example, a service provider works an eight-hour day, takes

two fifteen-minute coffee breaks and has a half hour lunch break.
If this particular worker was a fitness instructor and he spend 70
minutes with each customer (10 minutes for the consultation and
booking and 1 hour for the gym session), how many clients could
the instructor process during a five-day week?
 Efficiency and utilization calculations

Actual Output
 Efficiency=
Effective Capacity

Actual output
 Utilization=
Design capacity
 Sample Problem
You are managing a group of 10 Electricians. These
individuals undertake in-home servicing of electrical systems
and are called by telephone for either emergency or
prearranged visits. They charge a minimum call out fee that
covers the first 15 minutes of their visit plus travelling time.
Beyond the first fifteen minutes they charge in minimum
blocks of 15 minutes plus any materials that might be necessary
to carry out the job. The average callout takes 1 hour.
 Sample Problem
The workers usually work a 7-hour day. Taking time off
and illness into account reduces the electricians’ available time
by 20%. This means the 7 hours per day is reduced to a 5 hour
and 36-minute day (5.6 hours)

If actual work is only 200 hours billed in the week then

(a) What is the capacity utilization of the team? (b) What is
their efficiency?
 Capacity Depends on Activity Mix
Suppose an air-conditioner factory produces three different
models of air-conditioner unit: the deluxe, the standard and the
economy. The deluxe model can be assembled in 1.5 hours, the
standard in 1 hour and the economy in 0.75 hours. The
assembly area in the factory has 800 staff hours of assembly
time available each week. How many units can be produced
weekly,
a. If the demand is 1:1:1?
b. If the demand is 2:3:2?
c. If the demand is 1:2:4?
 Overall Equipment Effectiveness
The overall equipment effectiveness (OEE) measure is an
increasingly popular method of judging the effectiveness of
operations equipment. It is based on three aspects of
performance:
 the time that equipment is available to operate
 the quality of the product or service it produces
 the speed, or throughput rate, of the equipment
Overall Equipment Effectiveness
 Overall Equipment Effectiveness
In a typical 7-day period, the planning department
programmed a particular machine to work for 150 hours – its
loading time. Changeovers and set-ups take an average of 10 hours
and breakdown failures average 5 hours every 7 days. The time when
the machine cannot work because it is waiting for material to be
delivered from other parts of the process is 5 hours on average and
during the period when the machine is running, it averages 90 per
cent of its rated speed. Three per cent of the parts processed by the
machine are subsequently found to be defective in some way.
Overall Equipment Effectiveness
Overall Equipment Effectiveness
 Coping with Demand Fluctuation
 Ignore the fluctuations and keep activity levels
constant (level capacity plan).
 Adjust capacity to reflect the fluctuations in demand
(chase demand plan)
 Attempt to change demand to fit capacity availability
(demand management)
Level Capacity Plan
Chase Demand Plan
 Methods of Adjusting Capacity
 Overtime and Idle Time
 Varying Size of Workforce
 Using Parttime Staffs
 Subcontracting
 Manage Demand Plans

Change demand through price

 Yield Management Concept
Useful where:
 Capacity is relatively fixed
 The market can be fairly clearly segmented
 The service cannot be stored in any way
 The services are sold in advance
 The marginal cost of making a sale is relatively low
 Yield Management Concept (cont)
3 key strategies for maximizing revenue
 Overbooking
 Price Discounting
 Varying the service type
 Queuing or ‘waiting line’ management

• The Arrival Rate

• The Queue
• Rejecting
• Balking
• Reneging
• Queue Discipline
• Servers
 Balancing Capacity and Demand
The dilemma in managing the capacity of a queuing
system is how many servers to have available at any
point in time in order to avoid unacceptably long
queuing times or unacceptably low utilization of the
servers.
 Balancing Capacity ang Demand
 If the operation has too few servers (that is, capacity is set at
too low a level), queues will build up to a level where
customers become dissatisfied with the time they are having
to wait, although the utilization level of the servers will be
high.
 If too many servers are in place (that is, capacity is set at too
high a level), the time which customers can expect to wait
will not be long but the utilization of the servers will be low.
 Breakeven Analysis
 Cost
 Fixed
 Variable
 Revenue
 Breakeven Analysis

 The basic equation

for determining the
break-even units:

 The basic equation

for determining the
break-even sales:
 Breakeven Analysis
 A local livestock producer utilizes compost waste to
develop an organic fertilizer product. The fertilizer is
prepared for retail sale in 50-pound bags. The retail sales
price is $5.00 per bag. The average variable cost per bag
is $2.80 and average annual fixed costs are $60,000.
These three pieces of information are: