ARELLANO UNIVERSITY

Operations Management
Chap. 10. Capacity Management

Professor: Dr. Ronaldo A. Poblete, CFMP

 LEARNING OUTCOMES

1 Explain the concept of capacity

2 Describe how to compute and use capacity
measures
3 Describe long-term capacity expansion
strategies
4 Describe short-term capacity adjustment
strategies
5 Explain the principles and logic of the
Theory of Constraints
 Capacity
 Capability of a manufacturing or
service resource to accomplish its
purpose over a specified time
period
 Viewed as maximum rate of output
per unit of time or units of resource
availability
 Exhibit 10.1
Examples of Short- and Long-Term Capacity Decisions

EXHIBIT 10.1 Examples of Short-and Long-Term Capacity Decisions

Short-Term Capacity Long-Term Capacity

Decisions Decisions
• Amount of overtime scheduled • Construction of a new
for the next week manufacturing plant
• Number of emergency room • Expanding the size and
nurses on call during a number of beds in a hospital
downtown festival weekend • Number of branch banks to
• Number of call center workers to establish in a new market
staff during the holiday season territory
Economies and Diseconomies
of Scale
 Focused Factory

 Achieves economies of scale

without extensive investments in
facilities and capacity by focusing
on:
 Narrow range of goods or services
 Target market segments
 Dedicated processes
 Safety Capacity (or Capacity
Cushion)
 Amount of capacity reserved for
unanticipated events
 Demand surges
 Materials shortages

 Equipment breakdowns

 Averagesafety capacity (%)

= 100% − Average resource utilization
(%)
 Exhibit 10.2
Demand versus Capacity Problem Structure
 Work Order
 Specification of work to be
performed for a customer or a
client
 Includes
 Quantityto be produced
 Processing requirements
 Resources needed
 Capacity Measurement
 Capacity required for one work order (Ci)
= Setup time (Si) + [Processing time (Pi) x
order size (Qi)]
 Where
• Ci = Capacity requirements in units of time for work
order i
• Si = Setup or changeover time for work order i as a
fixed amount that does not vary with volume
• Pi = Processing time for each unit of work order i
 Capacity Measurement
• Qi = Size of order i in number of units
 Total capacity required
ΣCi = Σ[Si + (Pi x Qi)]
 Resources used (capacity) = Utilization (U)
× [service rate × number of servers]
 Where
Long-Term Capacity Planning
 Addresses the trade-off between the cost of
capacity and the opportunity cost of not
having adequate capacity
 Complementary goods and services:
Produced or delivered using the same
resources available to the firm
• Seasonal demand patterns of the resources are out
of phase with each other
• Balance seasonal demand cycles by using available
excess capacity
 Exhibit 10.6
Capacity Expansion Options
 Short-Term Capacity
Management
 Approaches
 Adjusting short-term capacity
levels
 Shifting and stimulating demand
Adjusting Short-Term Capacity
Levels
 Add or share equipment
 Sell unused capacity
 Change labor capacity and
schedules
 Change labor skill mix
 Shift work to slack periods
 Shifting and Stimulating
Demand
 Vary the price of goods or services
 Provide customers with information
 Advertising and promotion
 Add peripheral goods and/or services
 Provide reservations
 Reservation: Promise to provide a good
or service at some future time and place
Revenue Management System
(RMS)
 Consists of dynamic methods to:
 Forecast demand
 Allocate perishable assets across market
segments
 Decide when to overbook and by how
much
 Determine what price to charge different
customer (price) classes
 Theory of Constraints (TOC)
 Focuses on increasing total
process throughput by maximizing
the utilization of bottleneck work
activities and workstations
 Throughput: Amount of money
generated per time period through
actual sales
 Constraint
 Anything that limits an organization from
moving toward or achieving its goal
 Physical constraint: Associated with the
capacity of a resource
• Bottleneck (BN) work activity: Effectively limits the
capacity of the entire process
• Nonbottleneck (NBN) work activity: One in which
idle capacity exists
 Nonphysical constraint: Associated with the
environment or organization
 Exhibit 10.7
Basic Principles of the Theory of Constraints
EXHIBIT 10.1 Examples of Short- and Long-Term Capacity Decisions
Nonbottleneck Management
Principles
Move jobs through nonbottleneck workstations
as fast as possible until the job reaches the
bottleneck workstation.
At nonbottleneck workstations, idle time is
acceptable if there is no work to do, and
therefore resource utilizations may be low.
Use smaller order {also called lot or transfer
batches) sizes at nonbottleneck workstations to
keep work flowing to the bottleneck resources
and eventually to the marketplace to generate
sales.
An hour lost at a nonbottleneck resource has no
effect on total process or factory output and
incurs no real cost.
  Bottleneck Management Principles
Only the bottleneck workstations are critical to
achieving process and factory objectives and
should be scheduled first.
An hour lost at a bottleneck resource is an hour
lost for the entire process or factory output.
Work-in-process buffer inventory should be
placed in front of bottlenecks to maximize
resource utilization at the bottleneck.
Use large order sizes at bottleneck workstations
to minimize setup time and maximize resource
utilization.
Bottleneck workstations should work at all times
to maximize throughput and resource utilization
so as to generate cash from sales and achieve
the company's goal
 KEY TERMS
 Capacity  Revenue management
 Economies of scale system (RMS)
 Diseconomies of scale  Theory of Constraints
 Focused factory  Throughput
 Safety capacity (or  Constraint
capacity cushion)  Physical constraint
 Work order  Bottleneck (BN) work
 Complementary goods activity
and services  Nonbottleneck (NBN)
 Reservation work activity
 Nonphysical constraint
 SUMMARY

 Capacity is the capability of a

manufacturing or service system to
accomplish its purpose over a specified
time period
 Long-term capacity planning involves
adjusting short-term capacity levels and
shifting and stimulating demand
 Utilization of bottleneck work activities and
workstations helps increase the total
process throughput