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1
MGSM890 Operations ManagementMGSM890 Operations Management
Facilitator:Facilitator:
Dr. Jonathan FarrellDr. Jonathan Farrell
2
This Evening’s ProgramThis Evening’s Program
• Capacity Planning & Control– Aggregate Planning
– Capacity versus Demand
– The Planning Process
– Managing Capacity & Demand
• Case Study – British Airways London Eye (pp 393,394)• Exercises – Capacity Management (refer to the Folder of
Readings)
3
Some DefinitionsSome Definitions
• CapacityCapacity is the available time for production and / or the maximum number of items that can be manufactured or delivered within a given time.
• A A BottleneckBottleneck occurs when capacity is less than the demand placed on it.
• A capacity-constrained resource (CCR)A capacity-constrained resource (CCR) is a resource where the capacity is close to demand placed it.
4
Operations resources Customer requirements
DemandSupplyAvailability of capacity to deliver products and servicesThe operation The market
Capacity planning Capacity planning and controland control
Required availability of products and
services
5
Capacity Planning HorizonsCapacity Planning Horizons
Long range plansLong range plans
Facilities – major capital expenditures
Locations
Aggregate (Intermediate) plansAggregate (Intermediate) plans
Minor equipment purchasing
Materials requirements
Work force size
Production rates
Detailed (short-term) schedulesDetailed (short-term) schedules
Daily, weekly schedules
People - machine assignments
6
Material Procurement
Overtime Hiring and layoffs
Subcontracting
Ending inventory
Market Demand
Forecast
Aggregate PlansStarting Inventory
Actual Demand
People-Machine Assignment
The Planning ProcessThe Planning Process
7
Construction materials
Beverages (beer, cola)
Foods (ice-cream, Christmas cake)
Clothing (swimwear, shoes)
Gardening items (seeds, fertilizer)
Fireworks
Travel services
Holidays
Tax processing
Doctors (influenza epidemic)
Sports services
Education services
Behavioural Political Financial SocialFestiveClimatic
Causes of seasonalityCauses of seasonality
8
Not worked (unplanned)
Quality losses
Slow running
equipment
Equipment “idling”
Breakdown failure
Set-up and change-
overs
Loading time
Total operating time
Net operating time
Valuable operating time
Speed losses
Quality losses
Availability rate = a =total operating time / loading time
Performance rate = p =net operating time/total
operating time
Quality rate = q =valuable operating time / net
operating time
Availability losses
9
Rejecting Balking
Source of customers
Boundary of system
Queue or “waiting
line”
Server 1
Served customers
Reneging
Server 2
Server m
Distribution of arrival times
Distribution of processing times
Simple queuing systemSimple queuing system
10
Time
Time
Low variability - narrow
distribution of process times
High variability - wide distribution of process times
Simple queuing systemSimple queuing system
11
Outcome
Actual demand
and actual capacity
Decision
How much capacity
next period?
Outcome
Actual demand
and actual capacity?
Decision
How much capacity
next period?
ShortagesQueues
InventoryCapacity
level
ShortagesQueues
Inventory
Current capacity
estimatesUpdated forecasts
Current capacity
estimatesUpdated forecasts
CostsRevenues
Working capitalCustomer satisfaction
etc
CostsRevenues
Working capitalCustomer satisfaction
etc
Period t - 1 Period t Period t + 1
12
Lay off staff Delay any action
Overtime
Hire temporary staff
Short-timeIdle time
Do nothing Overtime
Hire temporary staff
Make for inventory
Short-time
Hire and make for inventory
Start to recruit
Hire staff
POOR
Outlook < 1
NORMAL
Outlook = 1
GOOD
Outlook > 1
POOR
Outlook < 1
NORMAL
Outlook = 1
GOOD
Outlook > 1
Short-term outlook
Long-term outlook
Outlook =Forecast demandForecast capacity
13
The nature of aggregate capacityThe nature of aggregate capacity
Aggregate capacity of a hotel:
- rooms per night;
- ignores the numbers of guests in each room.
Aggregate capacity of an aluminium producer:
- tonnes per month;
- ignores types of alloy, gauge and batch variations.
14
Long-, medium- and short-term Long-, medium- and short-term capacity planningcapacity planning
Macrooperation witha given set of resources
might produce
6 tables
or
12 chairs
or
some combination
15
Objectives of capacity planning Objectives of capacity planning and controland control
Step 1 - Measure aggregate capacity and demand.
Step 2 - Identify the alternative capacity plans.
Step 3 - Choose the most appropriate capacity plan.
Time
Estimate of current capacity
Forecast demand
Ag
gre
gat
ed o
utp
ut
16
How capacity and demand are measuredHow capacity and demand are measured
Design capacity
168 hours per week
Effective capacity
109 hours per week
Planned loss of 59 hours
Actual output - 51 hours per week
Avoidable loss - 58 hours per week
Actual outputEffective capacity
Efficiency =
Actual outputDesign capacity
Utilisation =
17
Ways of reconcilingWays of reconciling capacity capacity and demandand demand
Level capacity
Capacity
Demand
Chase demand
Demand
Capacity
Demand management
Demand
Capacity
18
Cumulative representationsCumulative representations
Cumulative demand
Cumulative capacity
Time
Buildingstock
Unable to meet orders
Cap
acit
y an
dd
eman
d
19
The dynamics of controlling planningThe dynamics of controlling planning
Short-term outlookShort-term outlook
Normal GoodPoor
Normal
Good
Poor
Short-time
working
Make for inventory
Lay off staff
Do nothing
Hire and make for inventory
Delay any
action
Overtime
Hire staff
Overtime
Lo
ng
-ter
m o
utl
oo
kL
on
g-t
erm
ou
tlo
ok
20
The effect of utilisation on The effect of utilisation on customer servicecustomer service
50.0
40.0
30.0
20.0
10.0
00.5 0.6 0.7 0.8 0.9 1.0
Ave
rag
e cu
sto
mer
bac
klo
g
Capacity Utilisation
21
50.0
40.0
30.0
20.0
10.0
00.5 0.6 0.7 0.8 0.9 1.0
Ave
rag
e cu
sto
mer
bac
klo
g
Capacity Utilisation
Service targetReduce variance
Add inventory
Increase capacity
Alternative investments to improve Alternative investments to improve customer servicecustomer service
22
OBJECTIVEOBJECTIVE
To provide an “appropriate” amount of capacity at any point in time.
The “appropriateness” of capacity planning in any part of the operation can be judged by its effect on…...
Costs
Revenue
Working Capital
Service Level
23
Good forecasts are essential for effective capacity planning.
But so is an understanding of demand uncertainty because it allows you to judge the risks to service level.
When demand uncertainty is high the risks to service level or underprovision of capacity are high.
DE
MA
ND
TIME
Distribution of demand
DE
MA
ND
TIME
Only 5% chance of demand being higher than this
Only 5% chance of demand being lower than this
24
It is useful to know not only the average capability of resources but also their variation in capability
FR
EQ
UE
NC
Y
TIME TO PROCESS ONE UNIT OF DEMAND
Average processing time
25
How do you cope with fluctuations in demand?
How do you cope with fluctuations in demand?
Absorb demand
Absorb demand
Adjust output to
match demand
Adjust output to
match demand
Change demand
Change demand
26
Absorb demand
Absorb demand
Keep output level
Keep output level
Make to
stock
Make to
stock
Make customer
wait
Make customer
wait
Part finished,Finished Goods, orCustomer Inventory
QueuesBacklogs
Have excess
capacity
Have excess
capacity
27
Adjust output to match demand
Adjust output to match demand
Hire Fire
Temporary Labour
Lay off
Overtime
Subcontract
Short time
3rd party work
28
Managing Managing CapacityCapacity
Change DemandChange Demand
Pricing
Change pattern of demand
Develop non-peak demand
Develop alternative / complementary products and/or services
Reservation systems
29
Take no action Take no action Unorganised Unorganised OK OK Capacity wasted Capacity wasted queuingqueuing
Reduce demandReduce demand Higher prices Higher prices - - - -
Increase demandIncrease demand - - - Lower prices - Lower prices
Inventory DemandInventory Demand
- Reservation systemReservation system Priority for Aim for most -Priority for Aim for most - most desirable profitable mixmost desirable profitable mix segments of businesssegments of business
- Queuing Queuing Override for Try to avoid - Override for Try to avoid - most desirable bottleneckmost desirable bottleneck segments delayssegments delays
Excess Demand Sufficient Capacity Excess CapacityExcess Demand Sufficient Capacity Excess Capacity
Capacity Relative To DemandCapacity Relative To DemandApproach Used Approach Used To Manage To Manage
DemandDemand
Alternative Demand Management StrategiesAlternative Demand Management Strategies
30
Managing Managing CapacityCapacity
Control SupplyControl Supply
Schedule downtime during periods of low demand
Maximise efficiency during peaks
Use part time employees
Cross-train employees
Increase consumer participation
Rent or share extra capacity
Invest in ability for future expansion
31
Actual Demand
Actual Demand
ForecastDemand
ForecastDemand
ReplanCapacity
ReplanCapacity
Actual Capacity
Actual Capacity
AllocateCapacity
AllocateCapacity
RefineForecast
RefineForecast
Key question - “How often do you change capacity in response to deviations from demand forecasts?”
32
The tasks of capacity planning Some key questions
Calculate Capability of Operations Resources
Calculate Capability of Operations Resources
Allocate Resources Over Time
Allocate Resources Over Time
Design “Capacity Control” Mechanisms
Design “Capacity Control” Mechanisms
Forecast Demand or Revenue Potential
Forecast Demand or Revenue Potential
Can you predict the most likely demand at any point in time?
Can you predict the uncertainty in demand at any point in time?
Can you predict the most likely demand at any point in time?
Can you predict the uncertainty in demand at any point in time?
Do you have realistic work standards?
Do you understand the capacity constraints of all the necessary resources?
Do you have realistic work standards?
Do you understand the capacity constraints of all the necessary resources?
What are the options for capacity allocation?
What are their cost, revenue, work capital and service level implications?
What are their flexibility implications?
What are the options for capacity allocation?
What are their cost, revenue, work capital and service level implications?
What are their flexibility implications?
Do you monitor actual demand against forecast?
Do you adapt forecasts accordingly?Do you replan capacity accordingly?
Do you monitor actual demand against forecast?
Do you adapt forecasts accordingly?Do you replan capacity accordingly?
33
Demand for manufacturing operation’s output
8000
Fo
reca
st in
ag
gre
gat
ed u
nit
s o
f o
utp
ut
per
mo
nth
7000
6000
5000
4000
3000
2000
1000
0J F M A M J J A S O N D
Months
34
For capacity planning purposes demand is best considered on a cumulative basis. This allows alternative capacity and output plans to be evaluated for feasibility.
Fo
reca
st c
um
ula
tive
ag
gre
gat
ed
ou
tpu
t (t
ho
usa
nd
s)
60
50
40
30
20
10
00 40 80 120 160 200 240
Cumulative operating days
35
SHORT TERM
OUTLOOK
P O O R N O R M A L G O O DP O
O
R
N
O
R
M
A
L
G
O
O
D
Managing demand response
LONG TERM
OUTLOOK
36
A European domestic appliances manufacturer’s forecast and demand
JAN 2003 JAN 2004
37
A European domestic appliances manufacturer’s forecast and demand
Actual demand
JAN 2003 JAN 2004
38
Capacity Utilisation & Capacity Utilisation & Service QualityService Quality
• Best operating point is around 70% of capacity for most service delivery environments
• The 70% factor varies varies inversely with the degree of uncertainty and risk of delivery failure, e.g. emergency services should aim for a lower operating point
• In the critical zone, what do you think happens to service quality?
39
In Summary . . .In Summary . . .
• Manage Capacity or Manage Demand?
• What does the organisation want to achieve?
• Most organisations have a mix of both
40
Exercise – Capacity ManagementExercise – Capacity Management
41
Case Study – Case Study – British Airways London EyeBritish Airways London Eye
• What are the main design issues?• Calculate the capacity of the London Eye• What is the anticipated capacity utilisation? Why is it
less than 100%?• What is the estimated revenue in the first year?
42
The London EyeThe London Eye
• See www.londoneye.com for extensive information about the London Eye
• Capacity Analysis:– The wheel rotates on full revolution / 30 minutes– 32 capsules at 25 passengers / capsule– > 1,600 passengers per hour– Available hours – Summer: 10:00 to 22:00 (12 hours) x 7 days
Winter: 10:00 to 18:00 (6 hours) x 7 days– Summer is 24 weeks, Winter is 28 weeks, closed Christmas Day
43
Possible Performance ObjectivesPossible Performance Objectives
• Low operating costs • Affordable, good value Cost
• Caters for all ages / abilities • Individual questions answered
• No product flexibility reqd. • Volume flexibility to cope with
seasonal demand
Flexibility
• Boarding as per timed ticket • No unscheduled downtime
• Available as advertised • Completed by target date
Dependability
• No long queues • Clear, fast and fair flows
boarding / disembarking
• Short lead time for the design and construction
Speed
• Resembles air travel • Professional, smart staff • Informative • Capsules regularly cleaned • Clear reservation system
• Exceptional aesthetics • Strong, durable • Good, uninterrupted views • Unquestionably safe • Comfortable ride (no sway)
Quality
Design of the process Design of the product / service
Performance objective