Capacity Management

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Capacity Management

• Chapter 10
• Operations Management Goods, Services, and
  Value Chains, by D. A. Collier and J. R. Evans

2
Matching Supply to Demand(easier said than done)

• McDonalds restaurants in Britain apologized to
  millions of unhappy customers for running out of
  Big Macs during a weekend 2-for-1 promotion to
  celebrate its 25th anniversary in Britain.
• The demand generated by the promotion far
  exceeded forecasts. The promotion caused many of
  the nations 922 outlets to turn away long lines
  of customers.

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Matching Supply to Demand(easier said than done)

• What do you mean, you have run out of
  refrigera-ted storage room? Ive got two
  refrigerated rail-road cars of pears heading to
  your facility
• Sir, we got a surge in demand for our
  refrigerated storage and we are full. Im really
  sorry but we cannot kick out our existing
  customers products.
• So what am I suppose to do with millions of fresh
  pears headed to the northeast coast
• Id rent the refrigerated rail cars for a few
  more days until we can get you in our
  refrigerated warehouse. Cool-It Storage will pay
  for rail car or public storage.

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Understanding Capacity

• Capacity is the capability of a manufa-cturing or
  service resource such as a facility, process,
  workstation, or piece of equipment to accomplish
  its purpose over a specified time period.
• Measured as
• Maximum rate of output per unit of time
• Units of resource available

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Short Term FlexibilityAiming Well for Long Term
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Short Term Flexibility
Units/period
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Choosing Right TargetFor Long Term
Units/period
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Capacity Measurement

• Theoretical (Design) Capacity is the maximum
  output per unit of time the process can achieve
  for a short period of time under ideal operating
  conditions.
• Effective Capacity is the actual output per unit
  of time that the organization can reasonably be
  expected to sustain in the long run under normal
  operating conditions.
• Safety Capacity (Capacity Cushion) is defined as
  an amount of capacity reserved for unanticipated
  events such as demand surges, materials
  shortages, and equipment breakdowns.

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Demand and Capacity Matching
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Capacity MeasurementWhen Batching

• Setup time
• part.130min, part.260min
• Processing time
• part.120min/part, part.230min/part
• Daily Production Requirement
• part.115 , part.23
• Schedule without batching
• AM part.1 (10), NOON part.2 (3), PM part.1 (5)
• Setup time 306030 120 min, Processing
  30090 390
• Schedule with batching
• AM - NOON part.1 (15), PM part.2 (3)
• Setup time 30 60 90 min , Processing
  30090 390

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Capacity Allocation

• What changes if an assistant is hired?

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Long Term Capacity Strategies
13
Capacity Expansion Options
14
Capacity Decision Analysis
15
Sequential Capacity Decisions
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Roll Back Decision Tree
17
New Product Introduction
18
Airline Discount-Fare Request
.75x560.25x0 420
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Short-Term Capacity Management

• Supply Side
• Add/share equipment
• Sell (subcontract) unused capacity
• Change labor capacity
• Part-timers
• Vacations
• Overtime
• Reallocate multifunctional workers
• Shift work to slack periods

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Short-Term Capacity Management

• Demand Side
• Change Price
• Coupons
• Specials
• Focus customer attention
• Advertising / Promotion
• Change Customer Benefit Package
• Reservations / Backlogs

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Revenue Management Systems

• Manage demand using continuously changing prices
  so that capacity utilization is optimized for
  perishable resources
• Hotel room generates value only if a customer
  uses it. High prices may lead to zero revenue.
• However, if room price is set too low, then low
  profitability customers get service and high
  profitability customers do not.
• Key is to forecast demand well and offer low
  prices in slow periods but high prices during
  strong demand.

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Overbooking

• Booking more units (e.g. hotel rooms) than
  capacity to compensate for no-shows
• If everybody shows up, then provide incentives so
  that some customers use alternatives
• Note that no-shows result even when there are
  penalties (no refund of ticket).
• Could make company look greedy - cheap.
• May lead more customers to fixed-price
  competitors

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Theory of Constraints

• All real-world systems have at least one
  constraint otherwise they would be capable of
  infinite throughput.
• If people are instructed to leave the auditorium,
  the rate at which people can walk through the
  door is the same, regardless of the number of
  people in the auditorium. The particulars of the
  doorway set the rate (/time) at which people can
  exit.

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TOC Principles

• Identify the system's constraint(s).
• Decide how to exploit the constraint(s).
• Subordinate everything else to the above
  decision.
• Elevate the constraint.
• If, in any of the above steps, the constraint has
  been broken, go back to Step 1.