Capacity Management
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| Capacity Management |
What is Capacity?
·
Capacity
is the maximum level of output that a company can sustain to make a product or
provide a service. For example, a team of 10 software developers that can produce,
develop & launch the 1000 useable application software in two months.
Capacity Management
·
Capacity
management means the act of ensuring the process where a business maximizes its
potential activities and production output—at all times, under all conditions.
The capacity of a business measures how much the business or company can
achieve, produce, or sell within a given time period. For example, an automobile
production line can assemble 250 trucks per month. Capacity Management has two
parts
1. Capacity Planning (long Term)
Economic and Diseconomy of Scale
Capacity
Timing and sizing strategies
Systematic approach to capacity decisions
2. Constraint Management (Short
Term)
Theory of Constraints
Indentation and management of bottlenecks
Product mix
decision using bottlenecks
Managing constrains in a line process
Measures of Capacity & Utilization
·
Capacity
can be measured by two ways. Like – Output
Measures of Capacity, Input Measures
of capacity.
Output Measures of Capacity is used for high volume
processes where it is the best way to use on firms where they provide a
relatively small number of standardized services and products. For example, a
bike manufacturing company where their capacity would be measured in terms of
the bikes produced per day. But this measurement process is not good for
companies where they produce more than one service or product.
Input Measures
of Capacity is used
for low volume processes where a firm or company provide huge number of
standardized services or products. For example, how many tires, engines, Engine
oils, workers etc. are available for producing bikes in a company. The problem
of this measurement process is that demand is invariably expressed as an output
rate.
· Utilization is defined as the amount of an employee's available time that's used for productive, billable work, expressed as a percentage. Beside that it is a process where a firm can find out their actual used of their capacity like - equipment, space or the workforce through the ratio of average output rate to maximum capacity. The Utilization rate indicates the need for adding extra capacity or eliminating unneeded capacity.
Economies of Scale
· It
refers that the average unit cost of a service or good can be reduced by
increasing the output rate. There are Four principle reasons explain why
economics of scale can drive cost down when output increases.
a. Spreading Fixed Cost: It reduces the per-unit fixed cost. As a result of increased
production, the fixed cost gets spread over more output than before.
b. Reducing Construction Cost: Certain activities and expenses are required to build small
and large facilities where double size of facilities usually does not double
construction costs.
c. Reducing Variable cost: It reduces per-unit variable costs. This occurs as the
expanded scale of production increases the efficiency of the production
process.
d. Finding Process Advantages: Due to reduce the cost, speeding up the learning effect, lowering inventory, improving process and job designs, reducing the number of changeovers.
Diseconomies of Scale
·
Capacity Timing and Sizing Strategies
·
Operation
managers must examine three dimensions of capacity strategy before making
capacity decisions.
a. Sizing Capacity Cushions: Capacity Cushion is the reserved capacity that a firm has to satisfy an unexpected increase in demand or temporary breakdown in production capacity.
b.
Timing & Sizing Expansion: Capacity Expansion is the process of adding facilities
of similar overtime to meet a rising demand for their services. Besides that,
it can be done in response to changing the market trends. For example, Mahindra
Company decided to increase production capacity of the auto geared cars 50000
units to 100000 units because of the public demand & interest. There are two
extreme strategies for expanding capacity:
I.
II.
c.
Linking Capacity & Other Decisions: Capacity decisions should be closely linked to processes
and supply chain throughout the organization where managers must have to think
about the impact of the decisions in the capacity cushions.
Systematic Approach to long term Capital Decisions
·
A
systematic approach is needed to plan for long term capacity decisions where it
follows some steps to build up properly.
I.
Estimate Capacity Requirements: It means how many actual capacities should be required
for some future time period to fulfill the forecasted demand of the firm’s
customers & provide the desired capacity cushion. And this requirement can
be measured by two ways:
·
Using Output Measures: We know that, this technique measures
high volume processes where it is the best way to use on firms where they
provide a relatively small number of standardized services and products. For
example, if a process’s current demand is 50 customers per day, then the demand
in five years would be 100 customers per day. If the desire capacity cushion is
20%, management should plan for enough capacity to serve = {100/ (1-0.20)} =
125 customers in five years.
·
Using Input Measures: We should use input measures because
of some situations.
a) When product variety and process
divergence is high.
b) When the product of service mix is
changing.
c) When the productivity rates are
expected to change.
d) When the significance learning effects are expected.
II.
Identify Gaps: It is the process where identify the difference
between projected capacity requirements and current capacity. And the
difference can be happened positively or negatively.
III.
Develop Alternatives: One alternative is known as a base case where do nothing and simply lose orders from any demand
that exceeds current capacity because capacity is too large. Another
alternative if expected demand exceeds current capacity are various timing
& sizing options for adding new capacity, including the expansionist &
wait-and-see strategies.
IV. Evaluate the Alternatives: Alternatives can be evaluating by two ways: Qualitatively where the managers look how each alternative fits the overall capacity strategy and other aspects of the business not covered by the financial analysis. And the factor would tend to dominate when a business is trying to enter new markets. Quantitatively where the manager estimates the change in cash flows for each alternative over the forecast time horizon compared to the base case.
Tools for Capacity Planning
·
There are three
tools; helped to make capacity planning & analyze the demand uncertainty
& variability. Like,
a)
Waiting – Line Models: Use probability distributions to provide estimates of
average customer wait time, average length of waiting lines, and utilization of
the work center. Manager can use this information to choose the most cost
effective capacity, balancing customer service and the cost of adding capacity.
b)
Simulation: It can identify the process’s bottlenecks and
appropriate capacity cushions, even for complex processes with random demand
patterns and predictable surges in demand during a typical day.
c) Decision Trees: A decision
tree can be particularly valuable for evaluating different capacity expansion
alternatives when demand is uncertain and sequential decisions are involved.
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