MGSM890 Operations Management

1. MGSM890 Operations Management Facilitator: Dr. Jonathan Farrell

2. 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) This Evening’s Program

3. Capacity is the available time for production and / or the maximum number of items that can be manufactured or delivered within a given time. A Bottleneckoccurs when capacity is less than the demand placed on it. A capacity-constrained resource (CCR)is a resource where the capacity is close todemand placed it. Some Definitions

4. Capacity planning and control Supply Demand Availability of capacity to deliver products and services The operation The market Required availability of products and services Customer requirements Operations resources

5. Long range plans Facilities – major capital expenditures Locations Aggregate (Intermediate) plans Minor equipment purchasing Materials requirements Work force size Production rates Detailed (short-term) schedules Daily, weekly schedules People - machine assignments Capacity Planning Horizons

6. The Planning Process Market Demand Forecast Starting Inventory Aggregate Plans Ending inventory Overtime Hiring and layoffs Material Procurement Actual Demand Subcontracting People-Machine Assignment

7. Causes of seasonality Financial Climatic Festive Behavioural Political Social Travel services Holidays Tax processing Doctors (influenza epidemic) Sports services Education services Construction materials Beverages (beer, cola) Foods (ice-cream, Christmas cake) Clothing (swimwear, shoes) Gardening items (seeds, fertilizer) Fireworks

8. Not worked (unplanned) Availability rate = a = total operating time / loading time Loading time Set-up and change-overs Availability losses Total operating time Breakdown failure Performance rate = p = net operating time/total operating time Equipment “idling” Speed losses Net operating time Slow running equipment Quality rate = q = valuable operating time / net operating time Quality losses Valuable operating time Quality losses

9. Simple queuing system Server 1 Distribution of processing times Distribution of arrival times Reneging Balking Rejecting Server 2 Source of customers Served customers Queue or “waiting line” Server m Boundary of system

10. Simple queuing system Low variability - narrow distribution of process times Time High variability - wide distribution of process times Time

11. Period t Period t - 1 Period t + 1 Current capacity estimates Current capacity estimates Updated forecasts Updated forecasts Decision How much capacity next period? Decision How much capacity next period? Outcome Actual demand and actual capacity? Outcome Actual demand and actual capacity Shortages Queues Inventory Shortages Queues Inventory Capacity level Costs Revenues Working capital Customer satisfaction etc Costs Revenues Working capital Customer satisfaction etc

12. Long-term outlook Short-term outlook GOOD POOR NORMAL Outlook > 1 Outlook < 1 Outlook = 1 Lay off staff Delay any action Overtime POOR Hire temporary staff Outlook < 1 Overtime Do nothing Short-time Idle time NORMAL Hire temporary staff Outlook = 1 Make for inventory Hire and make for inventory Hire staff GOOD Outlook > 1 Short-time Start to recruit Forecast demand Outlook = Forecast capacity

13. The 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 capacity planning 6 tables or Macro operation with might produce 12 chairs a given set of resources or some combination

15. Objectives of capacity planning and control Step 1 - Measure aggregate capacity and demand. Step 2 - Identify the alternative capacity plans. Forecast demand Step 3 - Choose the most appropriate capacity plan. Aggregated output Estimate of current capacity Time

16. How capacity and demand are measured Efficiency = Actual output Effective capacity Planned loss of 59 hours Design Avoidable capacity loss - 58 Effective hours per 168 hours capacity week per week 109 hours Actual per week output - 51 hours per week Utilisation = Actual output Design capacity

17. Ways of reconciling capacity and demand Demand Demand Demand C apacity Capacity Capacity Level capacity Chase demand D emand management

18. Cumulative representations Cumulative capacity Cumulative demand Unable to Capacity and demand meet orders Building stock Time

19. The dynamics of controlling planning Short-term outlook Poor Normal Good Delay Layoff Poor any Overtime staff action Long-term outlook Short- Do Normal time Overtime nothing working Hire and Make for Good make for Hire staff inventory inventory

20. The effect of utilisation on customer service 50.0 40.0 30.0 Average customer backlog 20.0 10.0 0 0.5 0.6 0.7 0.8 0.9 1.0 Capacity Utilisation

21. Alternative investments to improve customer service 50.0 40.0 Increase capacity 30.0 Average customer backlog 20.0 Service target 10.0 Reduce variance Add inventory 0 0.5 0.6 0.7 0.8 0.9 1.0 Capacity Utilisation

22. Costs OBJECTIVE 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…... 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. Only 5% chance of demand being higher than this Distribution of demand DEMAND DEMAND Only 5% chance of demand being lower than this TIME TIME When demand uncertainty is high the risks to service level or underprovision of capacity are high.

24. It is useful to know not only the average capability of resources but also their variation in capability Average processing time FREQUENCY TIME TO PROCESS ONE UNIT OF DEMAND

25. How do you cope with fluctuations in demand? Adjust output to match demand Change demand Absorb demand

26. Part finished, Queues Backlogs Absorb demand Have excess capacity Keep output level Make customer wait Make to stock Finished Goods, or Customer Inventory

27. Adjust output to match demand Hire Fire Layoff Temporary Labour Overtime Short time Subcontract 3rd party work

28. Pricing Change pattern of demand Develop non-peak demand Develop alternative / complementary products and/or services Reservation systems Managing CapacityChange Demand

29. Alternative Demand Management Strategies Approach Used To Manage Demand Capacity Relative To Demand Excess Demand Sufficient Capacity Excess Capacity • Take no action Unorganised OK Capacity wasted • queuing • Reduce demand Higher prices - - • Increase demand - - Lower prices • Inventory Demand • Reservation systemPriority for Aim for most - • most desirable profitable mix • segments of business • Queuing Override for Try to avoid - • most desirable bottleneck • segments delays

30. 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 Managing CapacityControl Supply

31. Replan Capacity Forecast Demand Actual Demand Refine Forecast Allocate Capacity Actual Capacity Key question - “How often do you change capacity in response to deviations from demand forecasts?”

32. The tasks of capacity planning Some key questions 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? Do you have realistic work standards? Do you understand the capacity constraints of all the necessary resources? Calculate Capability of Operations Resources Allocate Resources Over Time 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? Design “Capacity Control” Mechanisms

33. 8000 7000 6000 5000 Forecast in aggregated units of output per month 4000 3000 2000 1000 0 J F M A M J J A S O N D Months Demand for manufacturing operation’s output

34. 60 50 40 Forecast cumulative aggregated output (thousands) 30 20 10 0 200 240 0 40 80 120 160 Cumulative operating days For capacity planning purposes demand is best considered on a cumulative basis. This allows alternative capacity and output plans to be evaluated for feasibility.

35. SHORT TERM OUTLOOK LONG TERM OUTLOOK Managing demand response P O O R N O R M A L G O O D P O O R N O R M A L G O O D

36. A European domestic appliances manufacturer’s forecast and demand JAN 2003 JAN 2004

37. Actual demand A European domestic appliances manufacturer’s forecast and demand JAN 2003 JAN 2004

38. 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? Capacity Utilisation & Service Quality

39. Manage Capacity or Manage Demand? What does the organisation want to achieve? Most organisations have a mix of both In Summary . . .

40. Exercise – Capacity Management

41. 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? Case Study – British Airways London Eye

42. 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 The London Eye

43. Possible Performance Objectives Performance objective Design of the product / service Design of the process Quality • Exceptional aesthetics • Strong, durable • Good, uninterrupted views • Unquestionably safe • Comfortable ride (no sway) • Resembles air travel • Professional, smart staff • Informative • Capsules regularly cleaned • Clear reservation system Speed • Short lead time for the design and construction • No long queues • Clear, fast and fair flows boarding / disembarking Dependability • Available as advertised • Completed by target date • Boarding as per timed ticket • No unscheduled downtime Flexibility • No product flexibility reqd. • Volume flexibility to cope with seasonal demand • Caters for all ages / abilities • Individual questions answered Cost • Affordable, good value • Low operating costs