CHAPTER 8
CAPACITY MANAGEMENT
Capacity - is the capability of manufacturing or service resource such as a facility, process, workstation, or piece of
equipment to accomplish its purpose over a specified time period
CAPACITY CAN BE VIEWED IN ONE OF TWO WAYS
1. As the maximum rate of output per unit of time; or
2. As units of resource availability
Capacity Decisions – are often influenced by economies and diseconomies of scale
1. Short-term capacity decisions – usually involved adjusting schedules or staffing levels
2. Longer-term capacity decisions – typically involved major capital investments
Economies of Scale - are achieved when the average unit cost of a good or service decreases as the capacity and/or
volume of throughput increases.
Diseconomies of Scale - occur when the average unit cost of the good or service begins to increase as the capacity
and/or volume of throughput increases.
Focused Factory - is a way to achieve economies of scale without extensive investments in facilities and
capacity, by focusing on a narrow range of goods or services, target market segments, and/or dedicated processes
to maximize efficiency and effectiveness
5 ways to maximize efficiency:
1. a few key products
2. Specific technology
3. A certain process design and capability
4. Specific competitive priority objectives such as next-day delivery
5. Particular market segments or customers and associated volumes
Capacity Measurement in Operation Management
a) Safety capacity (capacity cushion) - amount of capacity reserved for unanticipated events such as demand
surges, material shortages, and equipment breakdowns.
b) Capacity Measurement
Work order is a specification of work to be performed for a customer or a client.
c) Using Capacity Measures for Operating Management
Long-term Capacity Strategies
a) COMPLEMENTARY GOODS AND SERVICES
ARE GOODS AND SERVICES THAT CAN BE PRODUCED OR DELIVERED USING THE SAME
RESOURCES AVAILABLE TO THE FIRM, BUT WHOSE SEASONAL DEMAND PATTERNS ARE OUT OF
PHASE WITH EACH OTHER
b) Capacity expansion
Capacity straddle strategy – strategy of matching capacity additions with demands as closely as possible.
Capacity lead expansion - Capacity expansion strategy with the goal of maintaining sufficient capacity to
minimize the chances of not meeting demand.
Capacity lagged strategy – result in constant capacity shortages, such strategy waits until demand has
increased to a point where additional capacity is necessary.
Short term capacity management
Managing capacity by adjusting short term capacity level
o Add or share equipment
o Sell unused capacity
o Change labor capacity and schedules
o Change labor skill mix
o Shift work to slack periods
Managing capacity by shifting and stimulating demand
o Vary the price of goods or services
o Provide customers with information
o Advertising and promotion
o Add peripheral goods and/or services
o Provide reservations
Reservation – is a promise to provide a good or service at a future time and place.
Revenue Management System (RMS)
Revenue Management System - consists of dynamic methods to forecast demand, allocate
perishable assets across market segments, decide when to overbook and by how much, and
determine what price to charge different customers (price) classes.
Theory of Constraint - is a set of principles that focuses on increasing total process throughput by maximizing the
utilization of all bottleneck work activities and workstations.
Throughput - is the amount of money generated per time period through actual sales.
Constraint –anything in an organization that limits it from moving forward or achieving its goal.
Physical Constraints - associated with a capacity of a resource such as a machine,
employee or workstation.
BOTTLENECK (BN) - work activity is one that effectively limits the capacity of
the entire process.
NONBOTTLENECK (NBN) - work activity is one in which idle capacity exists
Non-Physical Constraints - environmental or organizational, such as low product demand
or an inefficient management policy or procedure.
Chapter 9
Managing Inventories in Supply Chains
Inventory - is any asset held for future use or sale.
Inventory Management – involves planning, coordinating, and controlling the acquisition, storage,
handling, movement, distribution, and possible sale of raw materials, component parts and sub-assemblies,
supplies and tools, replacement parts, and any asset that is needed to meet customer wants and needs.
Raw materials, component parts, subassemblies, and supplies - are inputs to manufacturing and service-delivery
processes.
Work-in-process (WIP) inventory - consists of partially finished products in various stages of completion that are
awaiting further processing.
Finished-goods inventory - is completed products ready for distribution or sale to customers.
Safety stock inventory is an additional amount that is kept over and above the average amount required to meet
demand.
Environmentally Preferable Purchasing (EPP), often referred to as green purchasing, which is the affirmative
selection and acquisition of products and services that most effectively minimize negative environmental impacts over
their life cycle of manufacturing, transportation, use, and recycling or disposal.
Inventory Managerial deals with Two fundamental decisions:
When to order items from a supplier or when to initiate production runs if the firm makes its own items.
How much to order or produce each time a supplier or production order is placed.
Inventory cost can be classified into four major categories:
Ordering or Setup costs. - are incurred as a result of the work involved in placing orders with uppliers or configuring
tools, equipment, and machines within a factory to produce an item.
Inventory-holding costs - are the expenses associated with carrying inventory.
Shortage costs - are costs associated with inventory being unavailable when needed to meet demand.
Unit cost of the SKUs - is the price paid for purchased goods or the internal cost of producing them.
Inventory Characteristics
Number of Items
stock-keeping unit (SKU) - is a single item or asset stored at a particular location.
Nature of Demand
Demand can be classified as independent or dependent, constant or uncertain, and
dynamic or static:
Independent demand - is demand for an SKU that is unrelated to the demand for other
SKUs and needs to be forecasted. This type of demand is directly related to customer (market) demand.
SKUs are said to have dependent demand - if their demand is directly related to the
demand of other SKUs and can be calculated without needing to be forecasted.
Stable demand is usually called static demand.
Demand that varies over time is referred to an dynamic demand.
Number and Duration of Time Periods
Lead Time - is the time between placement of an order and its receipt.
Stockouts - is the inability to satisfy the demand for an item. When stockouts occur, the is either back-ordered or a
sale is lost.
Backorder - occurs when a customer is willing to wait for the item.
Lost Sale - occurs when the customer is unwilling to wait and purchases the item elsewhere.
One useful method for defining inventory value is ABC analysis. It is an application of the Pareto Principle, named
after an Italian economist who studied the distribution of wealth in Milan during the 1800s.
Fixed-Quantity System (FQS), the order quantity or lot size is fixed; that is, the same amount, Q is ordered every
time.
Inventory position (IP) - is defined as the on-hand quantity (OH) plus any orders placed but which have not
arrived (called scheduled receipts, SR), minus backorders (B0), or
IP = OH +SR – BO.
Reorder Point - is the value of the inventory position that triggers a new order.
Economic Order Quantity (EOQ) model - is a classic economic model developed in the early 1900s that minimizes
the total cost, which is the sum of the inventory-holding cost and the ordering cost.
Cycle inventory (also called order or lot size inventory) - is inventory that results from purchasing or
producing in larger lots than are needed for immediate consumption or sale.
Safety stock - is additional, planned on-hand inventory that acts as a buffer to reduce the risk of a stockout.
Service level - is the desired probability of not having a stockout during a lead-time period.
An alternative to a fixed-order-quantity system is a fixed-period system (FPS) - sometimes called a periodic review
system-in which the inventory position is checked only at fixed intervals of time T rather than on a continuous basis.
Two principal decisions in an FPS:
1. The time interval between in an FPS.
2. The replenishment levels.
A single period inventory problem is sometime referred to as the newsvendor problem.
The newsvendor problem can be solved using a technique called marginal economic analysis.
