CAPACITY PLANNING AND

MANAGEMENT

LECTURE 2
CAPACITY:
 Capability to produce output for a time period
 Level of output for a process or activity over a period of
time
CAPACITY PLANNING
Process of determining the amount of capacity required to
meet market demand for products and services
CHASE CAPACITY STRATEGY
Varies production to meet demand
DEMAND MANAGEMENT STRATEGY:
Modify demand to meet available capacity, e.g. giving
appointment
DISECONOMIES OF SCALE:
Situation when increase in capacity does not lead to fall in
unit cost
ECONOMIES OF SCALE
Drop in the average cost for each unit of output as plant
size increases
BEST OPERATING LEVEL
Capacity for which the average unit cost is a minimum
LEVEL PRODUCTION STRATEGY
Production planning method that maintains resources at a
constant level resulting in a relatively level production rate
STRATEGIC CAPACITY PLANNING
Objective: to specify the overall capacity level of resources
- facilities, equipment and labour – that best supports the
organisation’s long-range competitive strategy
PRODUCTION PLANNING:
Consider the following:
 The forecasted demand

 The available capacity

 The acquired capacity

 Cost of production

 Cost of labour

 Etc.
PLAN1: PRODUCTION PLAN USING LEVEL
PRODUCTION STRATEGY (MAINTAIN RESOURCES AT
A CONSTANT RATE)

The demand forecast for 12 months

Jan 4400 July 4000
Feb 3200 Aug 3000
Mar 4000 Sep 4800
Apr 5400 Oct 6400
May 6600 Nov 7000
June 5000 Dec 6200
60 000
Annual demand = 60 000 units
Average demand = 60 000/12 = 5000 units

Production per month = 2 000 x 25

= 50 000
Opening Inventory = 0
Closing inventory at end of January = 600 units
FEBRUARY:
Opening inventory = 600 units
Production = 5 000 units
Demand = 3 200 units
Closing inventory = 2 400 units
MARCH:
Opening inventory = 2 400
Production = 5 000
Demand = 4 000
Closing Inventory = 3 400 units
Month Opening Producti Demand Closing No. of New staff Redunda
Inventory on forecast inventor employee nt staff
y s

Jan 0 5000 4400 600 25

Feb 600 5000 3200 2400 25
Mar 2400 5000 4000 3400 25
Apr 3400 5000 5400 3000 25
May 3000 5000 6600 1400 25
Jun 1400 5000 5000 1400 25
Jul 1400 5000 4000 2400 25
Aug 2400 5000 3000 4400 25
Sep 4400 5000 4800 4600 25
Oct 4600 5000 6400 3200 25
Nov 3200 5000 7000 1200 25
Dec 1200 5000 6200 0 25
60000 60000 28000 25

Storage charge per unit $1

COST
Inventory storage cost = $ 28 000
Cost of employing new staff = 0
Cost of terminating staff = 0
Total cost for this plan = $ 28 000
PLAN 2: DEVELOP A PRODUCTION PLAN
USING A CHASE CAPACITY STRATEGY
Production rate varies to match the demand pattern.
No. of employees is increased or decreased to match the
production rate
Month Opening Producti Demand Closing No. of New staff Redunda
Inventory on forecast inventory employee nt staff
s

Jan 0 4400 4400 0 22 - 3

Feb 0 3200 3200 0 16 - 6
Mar 0 4000 4000 0 20 4 -
Apr 0 5400 5400 0 27 7 -
May 0 6600 6600 0 33 6 -
Jun 0 5000 5000 0 25 - 8
Jul 0 4000 4000 0 20 - 5
Aug 0 3000 3000 0 15 - 5
Sep 0 4800 4800 0 24 9 -
Oct 0 6400 6400 0 32 8 -
Nov 0 7000 7000 0 35 3 -
Dec 0 6200 6200 0 31 - 4
60 000 60 000 37 31
COST:
 Inventory storage cost = 0
 Cost of employing new staff = 37 x 600

= $ 22 200
 Cost of making an employee redundant = 300 x 31

= $ 9 300
 Total cost = $ 31 500
PLAN 3: DEVELOP A PRODUCTION PLAN USING
SIX MONTHS AT 4 800 AND SIX MONTHS AT 5 200

Same as plan 1:
 For first six months set the production rate at 4 800

 For rest of the year increase rate to 5 200

Month Opening Producti Demand Closing No. of New Redunda
inventory on Forecast Inventor employee employee nt
y s s employee
s

Jan 0 4800 4400 400 24 - 1

Feb 400 4800 3200 2000 24 - -
Mar 2000 4800 4000 2800 24 - -
Apr 2800 4800 5400 2200 24 - -
May 2200 4800 6600 400 24 - -
Jun 400 4800 5000 200 24 - -
Jul 200 5200 4000 1400 26 2 -
Aug 1400 5200 3000 3600 26 - -
Sep 3600 5200 4800 4000 26 - -
Oct 4000 5200 6400 2800 26 - -
Nov 2800 5200 7000 1000 26 - -
Dec 1000 5200 6200 0 26 - -
60000 60000 20800 2 1
 Inventory storage cost = $ 20 800
 Cost of new employee = $ 1200
 Cost of terminating staff = $ 300

Total cost = $ 22 300

YIELD MANAGEMENT
Application of discriminatory pricing to various market
segments so that relatively fixed capacity can be used to
satisfy customer requirements and at the same time
maximise revenue
OBJECTIVE OF YIELD MANAGEMENT
To increase revenues for organisations that operate with
relatively fixed capacity
APPLICATIONS:
(i) Airline industry
(ii) Hotel industry
WHEN IS YIELD MANAGEMENT
EFFECTIVE?
(i) Relatively fixed capacity and the same unit of capacity can be
used in a variety of ways
(ii) Demand can be segmented by market and each segment has
varying needs, behaviour and willingness to pay
(iii) Demand is highly variable (seasonal fluctuations) and uncertain
(iv) Inventory is perishable (hotel room by night, airline seat by
flight)
(v) Product can be sold in advance
(vi) Product can be forecasted with relatively high accuracy
(vii) Fixed costs are high and marginal cost on selling one extra unit
low
(viii) Price is not an indicator of quality
(ix) Producers are profit-oriented and have freedom of action
YIELD MANAGEMENT PROCESS
STEP I: Determine how far in advance the system will look
ahead
STEP II: Segment the market based on future purchasing
behaviour
STEP III: Predict customer demand based on forecast
demand and capacity at each product price level
STEP IV: Optimise the price by mathematically
determining capacity availability and price that maximises
expected profit
STEP IV: Allocate the right capacity to the right customer
at the right time and maximise revenue of the yield
CONDITIONS TO BE PRESENT FOR
SUCCESSFUL YIELD MANAGEMENT
(i) Ability to predict the expected behaviour of specific
market segments in the market
(ii) Ability to continually monitoring and forecasting
changes to demand pattern
(iii) Ability to react to changes in market
OPTIONS TO INFLUENCE DEMAND
(1) Partitioning demand or segmenting the market based
on purchasing behaviour not just current or past
classifications
e.g. segmenting into business and leisure travel
(2) Offering off-peak pricing incentives
(3) Promoting off-peak demand
(4) Developing reservation systems
OPTIONS TO MANAGE SUPPLY
(1) Share capacity with another supplier, e.g. on a route,
the aircraft carries one or more flight numbers
(2) Increase customer participation, e.g. (i) online banking
(ii) ATM
(3) Cross-train employees: Make them multi-skilled to be
able to fulfill changing demand
(4) Employ part-time workers

(5) Create adjustable capacity

Open up the additional capacity only in peak periods.

Close in quiet times.
CAPACITY FLEXIBILITY
Having the capabilities to deliver what the customer wants
within a shorter lead time than competitors can offer
SERVICE CAPACITY:
Must be available to produce a service at the time it is
needed.
e.g. Empty airline seats cannot be transferred from an off-
peak flight to a full-peak flight
QUEUES AND WAITING LINES
In services, the queue acts as the buffer between arrival
rate of customers and the supply and delivery rate of the
actual service
QUEUING THEORY:
Used to manage processes
FACTORS TO BE CONSIDERED IN
STUDYING QUEUES
(i) Source of each customer
(ii) How frequently customers arrive
(iii) How long they can or should wait
(iv) Whether some customers should jump ahead in the
queues
(v) How multiple queues might be formed and managed
(vi) The number of servers required
EXAMPLE: CALL CENTRE
Call centre performance measured by:
(i) Cost per call

(ii) Resolution rate

(iii) Fulfilment rate

(iv) Customer satisfaction

An increase in average call duration increases the queue

WHEN DO CUSTOMERS PERCEIVE
WAITING TO BE LONGER
 Unoccupied time feels longer than occupied time
 Pre-process waits feel longer than in-process wait
 Anxiety makes the wait longer
 Uncertain waits are longer than known, finite waits

 Unexplained waits seem longer than explained waits

 Unfair waits are longer than equitable waits

 The more valuable the service, the longer the customer

waits
 The more valued the service, the longer the customer
waits
 Solo waiting feels longer than group waiting

 Uncomfortable waits feel longer than comfortable waits

 New or infrequent users feel they wait longer