Business Systems Operations Management

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Kerry McDaniel
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1 Business Systems Operations Management Facilitator: Dr. Jonathan Farrell 1 This Evening s s Program Capacity Planning & Control Aggregate Planning Capacity versus Demand The Planning Process Managing Capacity & Demand Case Study Holly Farm (pp ) 354) Exercises Capacity Management (refer to the Folder of Readings) 2 1

2 Some Definitions 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 Bottleneck occurs when capacity is less than the placed on it. A capacity-constrained constrained resource (CCR) is a resource where the capacity is close to placed it. 3 Capacity Planning and Control Supply The operation Availability of capacity to deliver products and services Demand The market Operations resources Required availability of products and services Customer requirements 4 2

3 Capacity Planning Horizons Long range plans Facilities major capital expenditures Locations Aggregate (Intermediate) plans Minor equipment purchasing Materials requirements Work force size Production rates Detailed (short-term) term) schedules Daily, weekly schedules People - machine assignments 5 The Planning Process Market Demand Forecast Aggregate Plans Starting Inventory Overtime Hiring and layoffs Ending inventory Subcontracting Actual Demand Material Procurement People-Machine Assignment 6 3

4 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. 7 Long-,, medium- and short-term term capacity planning 6tables Macro operation with a given set of resources might produce or 12 chairs or some combination 8 4

5 Objectives of capacity planning and control Step 1 - Measure aggregate capacity and. Aggregated output Step 2 - Step 3 - Identify the alternative capacity plans. Choose the most appropriate capacity plan. Forecast Estimate of current capacity Time 9 How capacity and are measured Planned loss of 59 hours Efficiency = Actual output Effective capacity Design capacity 168 hours per week Effective capacity 109 hours per week Avoidable loss - 58 hours per week Actual output - 51 hours per week Utilisation = Actual output Design capacity 10 5

6 Ways of reconciling capacity and Demand Demand Demand Capacity Capacity Capacity Level capacity Chase Demand management 11 Cumulative representations Cumulative capacity Capacity and Building stock Cumulative Unable to meet orders Time 12 6

7 The dynamics of controlling planning Short-term term outlook Poor Normal Good Long-term outlook Poor Normal Good Lay off staff Shorttime working Make for inventory Delay any action Do nothing Hire and make for inventory Overtime Overtime Hire staff 13 Simple queuing system Server 1 Distribution of arrival times Distribution of processing times Rejecting Balking Reneging Server 2 Source of customers Boundary of system Queue or waiting line Server m Served customers 14 7

8 Simple queuing system Low variability - narrow distribution of process times Time High variability - wide distribution of process times Time 15 Service Industry Demand Mgt. Queuing Theory Server 1 Server 2 Queue of Customers Server 3 Server n n =? 16 8

9 Queuing Theory The Problem : To balance customer waiting time and system utilisation. To balance customer satisfaction and efficiency. i.e. to find a WIN - WIN solution. 17 Queueing Theory DeBono Cafe A = Arrival Rate of students S = Service rate per server n = Number of Servers Utilization factor = A/Sn Ls = Mean no of customers in system (from tables) Lq = Mean number of customers in queue = Ls - A/S W = Mean waiting time = Lq/A 80 per hr 30 per hr hrs (3 mins) 18 9

10 Queueing Theory DeBono Cafe A = Arrival Rate of students S = Service rate per server n = Number of Servers Utilization factor = A/Sn Ls = Mean no of customers in system (from tables) Lq = Mean number of customers in queue = Ls - A/S W = Mean waiting time = Lq/A 80 per hr 30 per hr hrs (21 secs) 19 Optimising Service Capacity Aggregate Cost Cost Cost of Service Capacity Waiting Line Cost Optimal Capacity 20 10

11 Factors in Balancing Service Optimisation Arrival rate # of servers Waiting line capacity Queue Discipline 21 Queue Discipline Organisations can determine the order of service based on: First come first served (everyone is equal - MacDonalds) Urgency of need (triage in hospitals) Processing time (express checkout in supermarkets) Stratified (economy, business, first class check-in at airports) Value to the organisation (Qantas club, business queues in banks) However, customers need to know the rules and employees need to be able to manage the lines 22 11

12 Capacity Planning Services Services are a real-time consumable can t t build up an inventory of them Service Delivery occurs where the customer is manufacturing, distribution and delivery occur in the same place and at the same time Demand for Services is more volatile than for any products Different customers have different needs, even for the same service Service Delivery can be affected by numerous variables. Many outside the control of the service deliverer or service provider How do manage capacity? 23 Managing Service Capacity Demand exceeds capacity (Business is lost) Maximum available capacity Optimum capacity utilisation Excess capacity (Wasted resources) Demand exceeds optimum capacity (Service quality declines) Low utilisation (May send bad signals) Cycle 1 Cycle 2 TIME 24 12

13 The effect of utilisation on customer service 50.0 Average customer backlog Capacity Utilisation 25 Alternative investments to improve customer service 50.0 Average customer backlog Service target Increase capacity Reduce variance Capacity Utilisation Add inventory 26 13

14 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... Costs Revenue Working Capital Service Level 27 Good forecasts are essential for effective capacity planning. But so is an understanding of uncertainty because it allows to judge the risks to service level. Distribution of Only 5% chance of being higher than this DEMAND TIME DEMAND Only 5% chance of being lower than this TIME When uncertainty is high the risks to service level or underprovision of capacity are high

15 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 29 How do do cope with fluctuations in in? Absorb Adjust output to to match Change 30 15

16 Have excess capacity Absorb Keep output level Make to to stock Part finished, Finished Goods, or Customer Inventory Make customer wait Queues Backlogs 31 Adjust output to to match Hire Temporary Labour Overtime Subcontract Fire Lay off Short time 3rd party work 32 16

17 Managing Capacity Change Demand Pricing Change pattern of Develop non-peak Develop alternative / complementary products and/or services Reservation systems 33 Alternative Demand Management Strategies Approach Used To Manage Demand Capacity Relative To Demand Excess Demand Sufficient Capacity Excess Capacity Take no action Unorganised queuing OK Capacity wasted Reduce Higher prices - - Increase - - Lower prices Inventory Demand - Reservation system Priority for Aim for most - most desirable profitable mix segments of business - Queuing Override for Try to avoid - most desirable bottleneck segments delays 34 17

18 Managing Capacity Control Supply Schedule downtime during periods of low Maximise efficiency during peaks Use part time employees Cross-train employees Increase consumer participation Rent or share s extra capacity Invest in ability for future expansion 35 Forecast Demand Actual Demand Replan Capacity Allocate Capacity Actual Capacity Refine Forecast Key question - How often do change capacity in response to deviations from forecasts? 36 18

19 The tasks of capacity planning Forecast Demand or or Revenue Potential Calculate Capability of of Operations Resources Allocate Resources Over Over Time Time Design Design Capacity Control Mechanisms Some key questions Can Can predict predict the the most most likely likely at at any any point point in in time? time? Can Can predict predict the the uncertainty uncertainty in in at at any any point point in in time? time? Do Do have have realistic realistic work work standards? standards? Do Do understand understand the the capacity capacity constraints constraints of of all all the the necessary necessary resources? resources? What What are are the the options options for for capacity capacity allocation? allocation? What What are are their their cost, cost, revenue, revenue, work work capital capital and and service service level level implications? implications? What What are are their their flexibility flexibility implications? implications? Do Do monitor monitor actual actual against against forecast? forecast? Do Do adapt adapt forecasts forecasts accordingly? accordingly? Do Do replan replan capacity capacity accordingly? accordingly? 37 Common Mistakes Increase wrong kind of capacity Not increasing all around capacity Not considering competitive reaction Undercutting own service 38 19

20 Service Utilisation & Service Quality 100% Mean Arrival Rate Zone of Non-service Critical Zone 70% Zone of Service Mean Service Rate 39 Capacity Utilisation & Service Quality 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 (above 80%), what do think happens to service quality? 40 20

21 In Summary... Manage Capacity or Manage Demand? What does the organisation want to achieve? Most organisations have a mix of both 41 Exercise Capacity Management 42 21

22 Case Study Holly Farm 1. Evaluate Gillian's proposal to increase the number of farm visitors in 2008 by 50 per cent. What are the main capacity constraints within these businesses? Should she promote coach company visits, even if this involves offering a discount on the admission charges? Should she pursue increasing visitors by car, or school parties? In what other ways is Gillian able to manage capacity? What other information would help Gillian to take these decisions? 2. What factors should Gillian consider when deciding to increase the number of flavours from four to 10? Note: : For any calculations, assume that each month consists of four weeks including holidays (statutory holidays should be ignored for the purpose of this analysis)

The lead-time gap. Planning Demand and Supply

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