11.

Chapter 11

Capacity Management

Photodisc. Photolink

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.1
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
 Capacity planning and control
11.2

Operations
strategy

Design Improvement

Capacity Planning and

control
management

The market requires…

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

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.2
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.3

Key operations questions

In Chapter 11 – Capacity Management – Slack et al.

identify the following key questions:
•What is capacity management?
•How is capacity measured?
•What are the alternative ways of coping with demand
fluctuation?
•How can operations plan their capacity level?
•How can queuing theory be used to plan capacity?

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.4

Introduction
•Providing sufficient capability to satisfy
current and future demand is a fundamental
responsibility of operations management.
•Get the balance right between the capacity
of an operation and the demand it is subjected
to and it can satisfy its customers cost-
effectively.
•Get it wrong and it could both fail to satisfy
demand and have excessive costs.
•Capacity planning and control is also
sometimes referred to as aggregate planning
and control.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.5

What is capacity management?

•The definition of the capacity of an operation is the
maximum level of value-added activity over a period of
time that the process can achieve under normal
operating conditions.

•Capacity in the static, physical sense means the

scale of an operation.
•However, this may not reflect the operation’s
processing capability.
•Hence, we must incorporate a time dimension
appropriate to the use of assets.
–For example, 24,000 litres per day;
–10,000 calls per day;
–57 patients per session;
–Etc.
Slack, Chambers and Johnston, Operations Management, 6th Edition,
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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.6

Capacity constraints
•Any measure of capacity should reflect the ability of an
operation or process to supply demand.

•Many organisations operate at below their maximum

processing capacity, either because their is insufficient
demand completely to ‘fill’ their capacity.

•For example, a retail superstore might offer a gift-wrapping

service which at normal times can cope with all requests for
its services without delaying customers unduly.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.7

Capacity constraints

•At Christmas, however, the demand for gift-

wrapping might increase proportionally far more than
the overall increase in custom for the store as a
whole.

•Unless extra resources are provided to increase

the capacity of this micro-operation, it could
constrain the capacity of the whole store.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.7
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.8

Planning and controlling capacity

•Capacity planning and control is the task of setting the
effective capacity of the operation so that it can respond to
the demands placed upon it.
•This usually means deciding how the operation should
react to fluctuations in demand.

•Medium and short-term capacity

•Having established long-term capacity, operations
managers must decide how to adjust the capacity of the
operation in the medium term.
•This usually involves an assessment of the demand
forecasts over a period of 2-18 months ahead, during which
time planned output can be varied.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.9

Planning and controlling capacity

•Medium and short-term capacity
•Most operations also need to respond to changes in
demand which occur over a shorter timescale.

•Hotels and restaurants have unexpected and apparently

random changes in demand form night to night, but also
know from experience that certain days are on average
busier than others.

•So operations managers also have to make short-term

capacity adjustments, which enable them to flex output for a
short period, either on a predicted basis.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.10

Planning and controlling capacity

•Medium and short-term capacity
•For example, bank checkouts are always busy at
lunchtimes or at short notice (for example, a sunny
warm day at a theme park).

•Capacity management decisions should reflect

both predictable and unpredictable variations in
capacity and demand.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.10
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.11

Planning and controlling capacity

•Aggregate demand and capacity
•The important characteristic of capacity management is
that it is concerned with setting capacity levels over the
medium and short terms in aggregated terms.
•That is, it is making overall, broad capacity decisions, but
not concerned with all of the detail of the individual products
and services offered.
•This is what ‘aggregated’ means –different products and
services are bundled together in order to get a broad view of
demand and capacity.
•For example, a hotel might think of demand and capacity
in terms of ‘room nights per month’.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.11
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
 The objectives of capacity management
11.12

The decisions taken by operations managers in devising their

capacity plans will affect several different aspects of
performance:
Costs
Revenues
Working capital
Quality
Speed
Dependability
Flexibility

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.12
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.13

The objectives of capacity management

•Costs
•Capacity levels in excess of demand could mean under-
utilization of capacity and there fore high unit costs.

•Revenues
•Capacity levels equal to or higher than demand at any
point in time will ensure that all demand is satisfied and no
revenue lost.

•Working capital
•Working capital will be affected if an operation decides to
build up finished goods inventory prior to demand.
•This might allow demand to be satisfied, but the
organisation will have to fund the inventory until it can be
sold.
Slack, Chambers and Johnston, Operations Management, 6th Edition,
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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.14

The objectives of capacity management

•Quality
•Quality of goods or services might be affected by a
capacity plan which involved large fluctuations in capacity
levels, by hiring temporary staff for example.
•The new staff and the disruption to the routine working of
the operation could increase the probability of errors being
made.

•Speed
•Speed of response to customer demand could be
enhanced, either by the build-up of inventories or by the
deliberate provision of surplus capacity to avoid queuing.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.14
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.15

The objectives of capacity management

•Dependability
•Dependability of supply will also be affected by how close
demand levels are to capacity.

•Flexibility
•Especially volume flexibility, will be enhanced by surplus
capacity.
•If demand and capacity are in balance, the operation will
not be able to respond to any unexpected increase in
demand.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.15
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.16

The steps of capacity management

•The sequence of capacity management decisions which
need to be taken by operations managers is illustrated in
figure on next slide.

•Typically, operations managers are faced with a forecast of

demand which is unlikely to be either certain or constant.
•They will also have some idea of their own ability to meet
this demand.

•Nevertheless, before any further decision are taken, they

must have quantitative data on both capacity and demand.
So:

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.16
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.17
The Objectives of capacity planning and control (Continued)

Step 1: Measure aggregate

capacity and demand.
Step 2: Identify the
alternative capacity plans.
Step 3: Choose the most
Aggregated output

appropriate capacity plan. Forecast demand

Estimate of current capacity

Time

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.17
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.18

The steps of capacity management

•The first step
•will be to measure the aggregate demand and capacity
levels for the planning period.

•The second step

•will be to identify the alternative capacity plans which could
be adopted in response to the demand fluctuations

•The third step

•will be to choose the most appropriate capacity plan for
their circumstances.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.18
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
 The nature of aggregate capacity
11.19

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.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.19
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.20

How is Capacity measured?

•Forecasting demand fluctuations
•There are three requirements from a demand forecast:
•1. It is expressed in terms which are useful for
capacity management.
•Example, expressed in units as the capacity such as
machine hours per year, operatives required, space, etc.

•2. It is as accurate as possible

•In capacity management, the accuracy of a forecast is
important because, whereas demand can change
instantaneously, there is a lag between deciding to change
capacity.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.20
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.21

How is Capacity measured?

•Forecasting demand fluctuations
•3. It gives an indication of relative uncertainty
•Decisions to operate extra hours and recruit extra staff are
usually based on forecast levels of demand, which could in
practice differ considerably from actual demand, leading to
unnecessary costs or unsatisfactory customer service.

•It allows operations managers to make a judgement

between possible plans that would virtually guarantee the
operation’s ability to meet actual demand, and plans that
minimize costs.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
 How is Capacity measured?
11.22

•Seasonality of demand
•Most markets are influenced by some kind of
seasonality – that means that they vary depending
on the time of year.

•Some of the causes of seasonality are climatic

(holidays), festive (gift purchases), financial (tax
processing), or social, or political.

•If fact there are many factors that affect the

volume of activity in everything from construction
materials to clothing, from health care to hotels.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.22
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.23
How is Capacity measured?
•Seasonality of demand
•It may be demand seasonality or supply
seasonality, but in many organisations, capacity
management is largely about coping with these
seasonal fluctuations.

•These fluctuation in demand or supply may be

reasonably forecastable, but some are usually also
affected by unexpected variations in the weather and
by changing economic conditions.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.24

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.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
 How is Capacity measured?
11.25

•Seasonality of demand

•Consider the four different types of operation: a woolen

knitwear factory, a city hotel, a supermarket and an
aluminium producer.

•Their demand patterns are shown in Figure on next slide.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.26

Demand fluctuations in four operations

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.27

How is Capacity measured?

•Weekly and daily demand fluctuations
•Seasonality of demand occurs over a year, but similar
predictable variations in demand can also occur for some
products and services on a shorter cycle.
•The daily and weekly demand patterns of a supermarket
will fluctuate, with some degree of predictability.
•Demand might be low in the morning, higher in the
afternoon, with peaks at lunchtime and after work in the
evening.
•Demand might be low on Monday and Tuesday, build up
during the latter part of the week and reach a peak on /Friday
and Saturday.
•Banks, public offices, telephone sales organisations and
electricity utilities all have weekly and daily, or even hourly,
demand patterns which require capacity adjustment.
Slack, Chambers and Johnston, Operations Management, 6th Edition,
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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.28

Measuring Capacity
•The main problem with measuring capacity is the
complexity of most operations.
•Only when the operation is highly standardized and
repetitive is capacity easy to define unambiguously.
•Input capacity measures are frequently used to define
capacity.

•Capacity depends on activity mix

•Capacity is a function of service/product mix, duration, and
product service specification.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.29

Worked example
•Suppose an air-conditioner factory produces three different
models of air-conditioner unit, the deluxe, the standard and
the economy.
•The deluxe model can be assembled in 1.5 hours, the
standard in 1 hour and the economy in 0.75 hours.
•The assembly area in the factory has 800 staff hours of
assembly time available each week.
•If demand for deluxe, standard and economy units is in the
ratio 2:3:2, the time needed to assemble 2 + 3 + 2 = 7 units
is:
•(2 x 1.5) + (3 x 1) + (2 x 0.75) = 7.5 hours
•The number of units produced per week is:
•800 x 7 = 746.7 units
•7.5

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.30

Worked example

•If demand changes to a ratio of deluxe, economy, standard

units of 1:2:4, the time needed to assemble 1 + 2 + 4 = 7
units is:
•(1 x 1.5) + (2 x 1) + (4 x 0.75) = 6.5 hours

•Now the number of units produced per week is:

•800 x 7 = 861.5 units
•6.5

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.30
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.31

Design capacity and effective capacity

•The theoretical capacity of an operation –the capacity which its
technical designers had in mind when they commissioned the
operation -cannot always be achieved in practice.

•For example, maintenance will need to be performed on the line,

which will take out further productive time.

•Technical scheduling difficulties might mean further lost time.

•Not all of these losses are the operations manager’s fault. They
have occurred because of the market and technical demands on
the operation.
•The actual capacity which remains, after such losses are
accounted for, is called the effective capacity of operation.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.32

Design capacity and effective capacity

•Not that these causes of reduction in capacity will be the only
losses in the operation.
•Such factors as quality problems, machine breakdowns,
absenteeism and other avoidable problems will all take their toll.
•This means that the actual output of the line will be even lower
than the effective capacity.
•The ratio of the output actually achieved by an operation to its
design capacity, and the ratio of output to effective capacity, are
called, respectively, the utilization and the efficiency of the plant.

•Utilization = actual output

• design capacity

•Efficiency = actual output

• effective capacity

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.33

Design capacity and effective capacity

•Worked example
•Suppose the photographic paper manufacturer has a coating line with
a design capacity of 200 square metres per minute, and the line is
operated on a 24-hour day, 7 days per week (168 hours per week) basis.
•Design capacity is 200 x 60 x 24 x 7 = 2.016 million square metres per
week. The records for a week’s production show the following lost
production time:
•1. Product changeovers (set-ups) 20 hrs
•2. Regular preventative maintenance 16 hrs
•3. No work scheduled 8hrs
•4. Quality sampling checks 8 hrs
•5. Shift change times 7 hrs
•6. Maintenance breakdown 18hrs
•7. Quality failure investigation 20 hrs
•8. Coating material stockouts 8 hrs
•9. Labour shortages 6 hrs
•10. Waiting for paper rolls 6 hrs

Slack, Chambers and Johnston, Operations Management, 6th Edition,

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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.34

Design capacity and effective capacity

•During this week the actual output was only 582,000 square metres.
•The first five categories of lost production occur as a consequence of
reasonably unavoidable, planned occurrences and amount to a total of 59
hours.
•The last five categories are unplanned, and avoidable, losses and
amount to 58 hours.
•Measured in hours of production:
•Design capacity = 168 hours per week
•Effective capacity = 168 – 59 = 109 hrs
•Actual output = 168 – 59 – 58 = 51 hrs

•Utilization = actual output = 51 hrs = 0.304 = 30%

• design capacity 168 hrs

•Efficiency = actual output = 51 hrs = 0.468 = 47%

• effective capacity 109 hrs

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.34
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.35

How capacity and demand are measured

Actual output
Efficiency =
Effective capacity

Planned loss
Design of 59 hours
capacity

Avoidable loss –
Effective
58 hours per week
capacity

168 hours 109 hours Actual output –

per week per week 51 hours per
week

Actual output
Utilization=
Design capacity

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.35
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.36

Overall equipment effectiveness (OEE)

•The overall equipment effectiveness (OEE) measure is an
increasingly popular method of judging the effectiveness of
operations equipment.
•it is based on three aspects of performance:
•1. The time that equipment is available to operate;
•2. The quality of the product or service it produces;
•3. The speed, or throughput rate, of the equipment.

•Overall equipment effectiveness is calculated by multiplying an

availability rate by a performance (or speed) rate multiplied by a
quality rate.
•Please refer to figure on next slide.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.36
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.37

Operating equipment effectiveness (OEE)

Not worked Availability rate = a

Loading time (unplanned)
= Total operating time
Set-up and Loading time
change-overs
Total operating Availability
time losses Breakdown
failure Performance rate = p
= Net operating time
Net operating Speed Equipment Total operating time
time losses ‘idling’
Slow running
equipment Quality rate = q
Quality = Valuable operating time
losses Quality Net operating time
losses
Valuable
operating
time

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.37
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.38

Overall equipment effectiveness (OEE)

•Some of the reduction in available capacity of a piece of
equipment is caused by time losses such as set-up and
changeover losses, and breakdown failures when the machine is
being repaired.
•Some capacity is lost through speed losses such as when
equipment is idling (e.g when it is temporarily waiting for work from
another process) and when equipment is being run below its
optimum work rate.
•Finally, not everything processed by a piece of equipment will be
error free.
•So some capacity is lost through quality losses.
•Taking the notation in figure on previous slide:
•OEE = a x p x q
•Overall Equipment Effectiveness (OEE) =Availability rate (a) x
Performance rate (p) x Quality rate (q)

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.38
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.39

Overall equipment effectiveness (OEE)

•Worked example
•In a typical 7-day period, the planning department programme a
particular machine to work for 150 hours –its loading time.

•Changeovers and set-ups take an average of 10 hours and

breakdown failures average 5 hours every 7 days.

•The time when the machine cannot work because it is waiting

for material to be delivered from other parts of the process is 5
hours on average and during the period when the machine is
running, it averages 90 percent of its rated speed.

•Three percent of the parts processed by the machine are

subsequently found to be defective in some way.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.39
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.40

Overall equipment effectiveness (OEE)

•Worked example
•Maximum time available = 7 x 24 hours
• =168 hours
•Loading time =150 hours
•Availability losses = 10 hours (set-ups) + 5 hrs (breakdowns)
• =15 hours
•So, total operating time = Loading time – Availability
• =150 hours – 15 hours
• =135 hours
•Speed losses = 5 hour (idling) + (135 – 5) x 0.1) (10% of remaining
time)
• = 18 hours
•So, net operating time = Total operating time – Speed losses
• =135 – 18
• = 117 hours
•Quality losses = 117 (Net operating time) x 0.03 (Error rate)
• =3.51 hours

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.40
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.41

Overall equipment effectiveness (OEE)

•Worked example
•So, valuable operating time = Net operating time – Quality losses
• = 117 – 3.51
• = 113.49 hours
•Therefore, availability rate = a = Total operating time
• Loading time
• = 135 = 90%
• 150
•and Performance rate = p = Net operating time
• Total operating time
• 117 = 86.67%
• 135
•And Quality rate = q = Valuable operating time
• Net operating time
• = 113.49 = 97%
• 117
•OEE (a x p x q) = 75.6%

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.41
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.42

Coping with demand fluctuation

•With an understanding of both demand and capacity, the next
step is to consider the alternative methods of responding to
demand fluctuations.
•There are three ‘pure’ options available for coping with such
variations:
•1. Level capacity plan (Ignore the fluctuations and keep activity
levels constant)
•2. Chase demand plan (Adjust capacity to reflect the fluctuations
in demand)
•3. Demand management (Attempt to change demand to fit
capacity availability)
•In practice, most organisations will use a mixture of all of these
‘pure’ plans.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.42
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.43

Ways of reconciling capacity and demand

Demand Demand Demand

Capacity Capacity Capacity

Demand
Level capacity Chase demand
management

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.43
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.44

Ways of reconciling capacity and demand (Continued)

How do you cope with

fluctuations in demand?

Absorb Adjust output Change

demand to match demand
demand
Level capacity Demand
management
Chase demand

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.44
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
 Absorb demand
11.45

Absorb
demand
Have
excess
capacity Keep output
level

Make
Make to
customer
stock
wait
Part finished Queues
Finished goods, or Backlogs.
Customer inventory
Slack, Chambers and Johnston, Operations Management, 6th Edition,
11.45
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.46

Coping with demand fluctuation

•1. Level capacity plan (Ignore the fluctuations and
keep activity levels constant)
•In a level capacity plan, the processing capacity is set at a
uniform level throughout the planning period, regardless of
the fluctuations in forecast demand.
•This means that the same number of staff operate the
same processes and should therefore be capable of
producing the same aggregate output in each period.
•Level capacity plans of this type can achieve the objectives
of stable employment patterns, high process utilisation, and
usually also high productivity with low unit costs.
•Unfortunately, they can also create considerable inventor
which has to be financed and stored.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.46
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.47

Coping with demand fluctuation

•1. Level capacity plan (Ignore the fluctuations and
keep activity levels constant)
•Perhaps the biggest problem, is that decisions have to be
taken as to what to produce for inventory rather than for
immediate sale.
•Most firms operating this plan, therefore, give priority to
only creating inventory where future sales are relatively
certain and unlikely to be affected by changes in fashion or
design.
•Clearly, such plans are not suitable for ‘perishable’
products, such as foods and some pharmaceuticals, for
products where fashion changes rapidly and unpredictably or
for customized products.
•The benefits of Level Capacity Plan to the organisation of
stability and productivity may outweigh the disadvantages of
upsetting some customers.
Slack, Chambers and Johnston, Operations Management, 6 Edition,
th

11.47
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
 Adjust output to match demand
11.48

Adjust output to
match demand

Hire Fire

Temporary labour Lay-off

Overtime Short time

Subcontract 3rd party work

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.48
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.49

Coping with demand fluctuation

•2. Chase demand plan (Adjust capacity to reflect the
fluctuations in demand)
•The opposite of a level capacity plan is one which attempts
to match capacity closely to the varying levels of forecast
demand.
•This is much more difficult to achieve than a level capacity
plan, as different numbers of staff, different working hours,
and even different amounts of equipment may be necessary
in each period.
•Where manufacturing operations are particularly capital-
intensive, the chase demand policy would require a level of
physical capacity all of which would only be used
occasionally.
•A pure chase demand plan is more usually adopted by
operations which cannot store their output, such as customer-
processing operations orChambers
Slack, manufacturers of perishable
and Johnston, Operations Management, 6 Edition,
th

11.49 products. © Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.50

Coping with demand fluctuation

•2. Chase demand plan (Adjust capacity to reflect the
fluctuations in demand)
•It avoids the wasteful provision of excess staff that occurs
with a level capacity plan, and yet should satisfy customer
demand throughout the planned period.
•The chase demand policy might be adopted in order to
minimize or eliminate finished goods inventory.
•Sometimes it is difficult to achieve very large variations in
capacity from period to period.
•For example, if the changes in forecast demand are as
large as those in the hotel, significantly different levels of
staffing will be required throughout the year.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

11.50
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.51

Coping with demand fluctuation

•2. Chase demand plan (Adjust capacity to reflect the
fluctuations in demand)
•This would mean employing part-time and temporary staff,
requiring permanent employees to work longer hours, or even
bringing in contract labour.
•The operations managers will then have the difficult task of
ensuring that quality standards and safety procedures are still
adhered to and that the customer service levels are
maintained.

•Methods of adjusting capacity

•1. Overtime and idle time
•2. Varying the size of the workforce
•3. Using part-time staff
•4. Subcontracting
Slack, Chambers and Johnston, Operations Management, 6th Edition,
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© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
11.52

Coping with demand fluctuation

•2. Chase demand plan (Adjust capacity to reflect the
fluctuations in demand)
•Methods of adjusting capacity
•i. Overtime and idle time
•Often the quickest and most convenient method of
adjusting capacity is by varying the number of productive
hours worked by the staff in the operation.
•When demand is higher than nominal capacity, overtime is
worked, and when demand is lower than nominal capacity the
amount of time spent by staff on productive work can be
reduced.
•In may be possible for staff to engage in some other
activity such as cleaning or maintenance.

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11.53

Coping with demand fluctuation

•2. Chase demand plan (Adjust capacity to
reflect the fluctuations in demand)
•Methods of adjusting capacity
•ii. Varying the size of the workforce
•If capacity is largely governed by workforce size,
one way to adjust it is to adjust the size of the
workforce.
•This is done by hiring extra staff during periods of
high demand and laying them off as demand falls, or
hire and fire.
•However, there are cost and ethical implications to
be taken into account before adopting such a
method.
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11.54

Coping with demand fluctuation

•2. Chase demand plan (Adjust capacity to
reflect the fluctuations in demand)
•Methods of adjusting capacity
•iii. Using part-time staff
• A variation on the previous strategy is to recruit
part-time staff.
•That is, for less than the normal working day.
•This method is extensively used in service
operations such as supermarkets and fast-food
restaurants but is also used by some manufacturer
to staff an evening shift after the normal working day.

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11.55

Coping with demand fluctuation

•2. Chase demand plan (Adjust capacity to reflect the
fluctuations in demand)
•Methods of adjusting capacity
•iv. Subcontracting
•In periods of high demand, an operation might buy
capacity from other organisations, called subcontracting.
•This might enable the operation to meet its own demand
without the extra expense of investing in capacity which will
not be needed after the peak in demand has passed.
•Again, there are costs associated with this method.
•The most obvious one is that subcontracting can be very
expensive.
•Finally, there is the risk that the subcontractors might
themselves decide to enter the same market.

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11.56

Change demand

Change
demand

Change pattern of demand.

Develop alternative products and/or services.

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11.57

Coping with demand fluctuation

•3. Management Demand Plan or Demand management
(Attempt to change demand to fit capacity availability)
•The most obvious mechanism of demand management is to
change demand through price.
•For example, some city hotels offer low-cost ‘city break’ vacation
packages in the months when fewer business visitors are
expected.
•Skiing and camping holidays are cheapest at the beginning and
end of the season and are particularly expensive during school
vacations
•Ice-cream is ‘on offer’ in many supermarkets during the winter.
•The objective is invariably to stimulate off-peak demand and to
constrain peak demand, in order to smooth demand as much as
possible.
•Organisations can also attempt to increase demand in low
periods by appropriate advertising.

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11.58

Coping with demand fluctuation

•3. Management Demand Plan or Demand
management (Attempt to change demand to fit
capacity availability)
•Alternative products and services
•Sometimes, a more radical approach is required to fill
periods of low demand, such as developing alternative
products or services which can be produced on existing
processes, but have different demand patterns
throughout the year.
•Most universities fill their accommodation and lecture
theatres with conferences and company meetings during
vacations.
•Ski resorts provide organize mountain activity
holidays in the summer.
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11.59

Coping with demand fluctuation

•3. Management Demand Plan or Demand
management (Attempt to change demand to fit
capacity availability)
•Mixed plans
•Most operations manages are required
simultaneously to reduce costs and inventory, to
minimize capital investment, and yet to provide a
responsive and customer-orientated approach at all
times.
•For this reason, most organisations choose to
follow a mixture of the three approaches.

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11.60

Coping with demand fluctuation

•Yield Management
•In operations which have relatively fixed capacities, such
as airlines and hotels, it is important to use the capacity of the
operation to maximize its potential to generate profit.
•One approach used by such operations is called yield
management.
•It is really a variety of methods and analytical tools.
•The term is used in many service operations to mean
techniques that can be used to allocate limited resources,
among different categories of customers, such as business or
leisure travelers.
•Because these techniques are used by operations with
services that cannot be stored, yield management is
sometimes called ‘perishable asset revenue management’ or
simply ‘revenue management.
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Coping with demand fluctuation

•Yield Management
•The basic concept of yield management is based on the
economic principle of supply and demand.
•When supplies are short, prices go up; when supply is
high, prices go down.
•Yield management simply provides a systematic method
for positioning customers within the supply-demand spectrum
in such a way that they can obtain the highest yield for their
services or products.
•So, a customer who has relatively little flexibility in his or
her travel plans is the customer who is most likely to pay a
higher price for airline tickets and hotel rooms.
•The customer with a great deal of flexibility is not as
inclined to pay a higher price.

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Coping with demand fluctuation

•Yield Management
•Yield management is especially useful where:
•-Capacity is relatively fixed
•-The market can be fairly clearly segmented
•-The service cannot be stored in any way
•-The services are sold in advance
•-The marginal cost of making a sale is relatively low
•Airlines, for example, fit all these criteria.
•They adopt a collection of methods to try to maximize the
yield (i.e profit) form their capacity. these include:
•1. Over-booking capacity
•2. Price discounting
•3. Varying service types

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Coping with demand fluctuation

•Yield Management
•1. Over-booking capacity
•Not every passenger who has booked a place on a flight
will actually show up for the flight.
•If the airline did not fill this seat it would lose the revenue
from it.
•Because of this, airlines regularly book more passengers
onto flights that the capacity of the aircraft can cope with.
•If they over-book by the exact number of passengers who
fail to show up, they have maximized their revenue under the
circumstances.
•Of course, if more passengers how up than they expect,
the airline will have a number of upset passengers to deal
with (although they may be able to offer financial
inducements for the passengers to take another flight).
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11.64

Coping with demand fluctuation

•Yield Management
•1. Over-booking capacity
•If they fail to over-book sufficiently, they will have
empty seats.
•By studying past data on flight demand, airlines try to
balance the risks of over-booking and under-booking.
•2. Price discounting
•At a quiet times, when demand is unlikely to fill
capacity, airline will also sell heavily discounted tickets to
agents who then themselves take the risk of finding
customers for them.
•If effect, this is using the price mechanism to affect
demand.

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Coping with demand fluctuation

•Yield Management
•3. Varying service types
•Discounting and other methods of affecting
demand are also adjusted depending on the
demand for particular types of service.
•For example, the relative demand for first,
business and economy class seats varies
throughout the year.
•There is no point discounting tickets in a class for
which demand will be high.

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Demand for a manufacturing operation’s output

8000

7000
Forecast in aggregated units

6000
of output per month

5000

4000

3000

2000

1000

0
J F M A M J J A S O N D
Months

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11.67 For capacity planning purposes demand is best considered on a cumulative basis.
This allows alternative capacity and output plans to be evaluated for feasibility

For any capacity plan to meet demand as it occurs, its cumulative production
line must always lie above its cumulative demand line.

60
Forecast cumulative aggregated

But will not satisfy demand at

50 all points throughout the year
output (thousands)

40

Producing at average demand

30
allows inventory to be accumulated
20

Producing at
10
average demand
0
0 40 80 120 160 200 240
Cumulative operating days
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 Cumulative representations
11.68

Capacity and demand

Cumulative demand
Cumulative capacity
Unable to
Building meet orders
stock

Time

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 Simple queuing system
11.69

Low variability –
narrow distribution
of process times

Time

High variability –
wide distribution of
process times

Time

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Queuing or ‘Waiting line’ management

•Looking at the issue as a queuing problem (‘waiting line’)
accepts that, while sometimes demand may be satisfied
instantly, at other times customers may have to wait.
•This is true when the arrival of individual demands on an
operation are difficult to predict, or the time to produce a
product or service is uncertain, or both.
•These circumstances make providing adequate capacity at
all points in time particularly difficult.
•Figure on next slide shows the general form of this
capacity issue.
•Customers arrive according to some probability distribution
and wait to be processed.
•When they have reached the front of the queue, they are
processed by one of the n paraller ‘servers’, after which they
leave the operation.
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 Simple queuing system (Continued)
11.71

Distribution of Distribution of
arrival times Server 1
processing times

Rejecting Balking Reneging

Server 2

Source of
customers
Queue or Served
‘waiting line’ customers
Server m

Boundary
of system

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