Presentation by

Dr Anabela
UMMDNX-15-2
Operations & Supply
Soares

Senior
Lecturer in
Strategy &
Operations
Management
Management

Lecture 6a
Capacity & Demand
 Weekly lecture topics:
1. Introduction to Operations and Supply Chain Management
(SCM)
2. Operations and Supply Chain Strategies
3. Developing Products and Services
4. Process Design & Technology
5. Process Choice and Layout Decisions in Manufacturing and
Services
6. Capacity & Demand Management
7. Inventory Management
8. Operation improvement (1): Quality Management
9. Operation improvement (2): JIT / Lean Production
[Link] & Supply chain relationships
[Link] issues in Operations & SCM
 Lecture 6: objectives
• To explain what demand management is & why it
is needed
• To examine capacity & how it can be managed
• To briefly discuss forecasting
• To illustrate the different types of demand &
capacity strategies
• Explain what capacity is, how firms measure
capacity, and the difference between theoretical
and rated capacity.
• Describe the pros and cons associated with three
different capacity strategies: lead, lag, and
match.
 Introduction
• Strategic decisions that managers face about capacity:
– How much capacity do we need?
– When do we need it?
– What form should the capacity take?
• Important points about capacity:
– Capacity can take many different forms, and capacity
planning is an important activity in both service and
manufacturing organizations.
– While there are many quantitative tools to help
managers make informed capacity decisions, there is
some degree of risk inherent in nearly all such
decisions.
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Definitions
• Demand = The quantity demanded of a good or
service is the amount that consumers plan to buy
during a particular time period, and at a particular
price.

• Capacity = the maximum level of value-added

activity that a worker, a machine, a workcenter, a
plant, an operation, or process, or facility©is
2016 APICS Dictionary

capable of producing over a period of time.

The market requires… The operation supplies...
the availability of the capacity to deliver
products and services products and services

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Reconciling Capacity &
Demand
Effective operations need information on resources and
information on demand
 The nature of
aggregate capacity
• Aggregate capacity of a hotel
o rooms per night
o Ignores number of guests in
each room

• Aggregate capacity of an
aluminium producer:
o tones per month
o Ignores types of alloy, gauge
and batch variations
 Capacity management
• Capacity management =
achieve balance in the
utilisation of resources
within financial and
operational constraints.

• Capacity planning =
determining the capacity
level

• Capacity scheduling = how

to utilise the existing
predetermined capacity
Capacity constraints

• Staff (Numbers/ skills /

availability)

• Resources:
• Amount of space
• Money
• Speed of technology
• Equipment

• Legislation:
• Environmental
• Health & safety
Balancing capacity & demand: long
term
• Location decisions
Facilities costs, wages, region, customer contact, supply-side & demand-side
factors

• Capacity decisions
How big should the facility be? Costs/forecast demand
(exceed demand forecast; build to forecast; plan not to meet forecast demand)

• Capability
Problem: size and nature of available facilities.

• Resilience or flexibility
Key questions for
operations managers
demand & capacity management:

• How is it measured?

• Which factors affect capacity?

• What are the ways of coping with demand fluctuation?

• How can operations plan their capacity level?

• The impact of the supply chain on the organization’s

effective capacity.

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Capacity management objectives
• 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, in terms of:
– Quality
– Speed
– Dependability
– Flexibility

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 Capacity planning & control
objectives
• Measure aggregate capacity and demand
• Identify the alternative capacity plans
• Choose the most appropriate capacity plan
Aggregated output

Forecast demand

Estimate of current capacity

Time
The steps in capacity management
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 Measures of capacity
 Theoretical capacity – The maximum output
capability, allowing for no adjustments for preventive
maintenance, unplanned downtime, or the like.

 Rated capacity – The long-term, expected output

capability of a resource or system.
© 2016 APICS Dictionary

An example of capacity for a product: A car production company (

Nissan’s Sunderland plant) (BMW’s Mini Production at Cowley, Oxfordshire)
([Link], 2017)

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 ‘Planned ‘Planned
Loss’ Loss’
‘Avoidable
Design Loss’
Capacity
(1 service
Effective Actual
every 15 Capacity Output
minutes)
(1 service
(1 service
every 20
every 25
minutes)
minutes)

Adapted from Slack et al (2001) by Cox (1996)

This Photo by Unknown Author is licensed under CC BY-SA
Input and output capacity
measures for different
operations
Operation
Input measure of capacity
Output measure of capacity

Air- Number of units per week

Machine hours available
conditioner
plant
Hospital Number of patients treated per
Beds available
week
Theatre Number of customers
Number of seats
entertained per week
University Students graduated per year
Number of students
Retail store Number of items sold per day
Sales floor area
Airline Number of passengers per
Number of seats
week
available on the sector

Input and output capacity measures for different operations

Note: The most commonly used measure is shown in bold.
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Examples of capacity
measures

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Why is this relevant?
• Overcrowded trains/tube

• University
(classroom/exam)

• NHS

• Heathrow airport
“Heathrow operates at close to 99 per
cent capacity. Every day, 213,000
passengers land or depart, with a
plane taking off or landing every 45
seconds. And a third runway isn't
going to release the pressure”
(Kobie, 2018) This Photo by Unknown Author is licensed under CC BY-SA
Capacity &
sustainabilit
y?
Factors that Affect
Capacity
Many factors affect capacity and many assumptions
must be made:
 Number of lines used
 Number of shifts operating
 Number of temporary workers used
 Number of public storage facilities used
 Product variations
 Conformance quality
 Quality improvement

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 How do you cope with
fluctuations in demand?

Absorb Adjust output to Change

demand match demand demand

Level Chase Demand

capacity demand management
Demand Demand Demand

Capacity Capacity Capacity

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 Level
capacity
Absorb
demand
Have
excess
capacity Keep output
level

Make
Make to
customer
stock
wait
Part finished Queues
Finished goods, or Backlogs
Customer inventory
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 Chase
demand
Adjust output to
match demand

Hire Fire

Temporary labour Lay-off

Overtime Short time

Subcontract 3rd party work

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 Demand
management Change
demand

Change pattern of demand

Develop alternative products and/or services

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Causes of seasonality
Climatic Festive Behavioural Political Financial Social

Construction materials Travel services

Beverages (beer, cola) Holidays
Foods (ice-cream) Tax processing
Clothing (swimwear, shoes) Doctors (influenza epidemic)
Gardening items (seeds) Sports services
Fireworks Education services

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Demand fluctuations in four
operations

Figure 11.3 Aggregate demand fluctuations for four organizations

Sources: Shutterstock/Cuiphoto, Shutterstock/yuyangc, Shutterstock/Light & Magic, Shutterstock/Lucky Photo
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Three Common Capacity Strategies

 Lead capacity strategy – A capacity strategy in

which capacity is added in anticipation of demand.

 Lag capacity strategy – A capacity strategy in which

capacity is added only after demand has
materialized.

 Match capacity strategy – A capacity strategy that

strikes a balance between the lead and lag capacity
strategies by avoiding period of high under or
overutilization.
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Three Common Capacity Strategies:
Figure 6.1 When to Add Capacity: Lead, Lag, and Match Strategies

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Summary:
Absorb Adjust output to Change
demand match demand demand

Level Chase Demand

capacity demand management

Copyright © 2020 Pearson Education, Ltd. All Rights Reserved.