Operations Management and Organisational

Improvement: Session 6

Capacity and Inventory Management
Professor David Oglethorpe
Logistics & Supply Chain Management
Core text for this session:

Slack, Chambers, Johnston and Betts, (2006), Operations and
Process Management, 1st edition, Pearson Education
Chapters 8, 9


Session Aims
To examine the principles of capacity management
To consider the management of inventory and its impact
on operations performance
Diagnostic Question:
What is capacity management?
Capacity is ability to supply
Any measure of capacity should
reflect the ability of the
operation to supply demand
Capacity management should
respond to variation in demand
(predictable and un-predictable)
Demandcapacity mismatches for a domestic appliance repair service and a
frozen spinach business
Diagnostic Question:
What should be the operations base
capacity?
The base level
capacity should
reflect the operations
performance
objectives
The base level capacity factors:
Importance of Performance
Perishability of products
Degree of variability in demand (or supply)
Attempt to improve market
information and better
forecasting to make variation
more predictable
Attempt to reduce
variation by persuading
customers to move their
demand to a quieter
period
Improving demand and supply market knowledge can make capacity
management easier
Managing demandcapacity mismatches using level capacity, chase demand
and manage demand plans
Overtime Part-time or temporary staff
Annualised hours Skills flexibility (T&L vs .R&D)
Staff scheduling (shiftwork) Sub-contracting (outsourcing)
Hire & Fire Change of output rate
(expecting staff to work faster)
Methods of adjusting capacity:
Example: How does the University adjust capacity?
Capacity Planning for Services
Demand and Capacity for services can be difficult to
predict
Service capacity must be available at the right place and
time (labour is usually the biggest constraint)
Queuing Theory offers some solutions
Service operations can forecast the average expected
demand pattern
Can establish a distribution of demand but cant predict
each individual arrival/time requirement
Staffing levels can be varied (peak/off-peak), but each
customer service time can vary


Therefore even when the average service capacity matches the
average service demand - queues & idle time can be a problem
Rejecting:
when the system
turns customers
away, e.g. GPs
practice, or web-
sites
Balking:
customer
refuses to
join queue
Source of
customers
Boundary
of system
Queue or
waiting line
Server 1
Served
customers
Reneging:
gets sick of
waiting
Server 2
Server m
Distribution of
arrival times
Distribution of
processing times
Simple queuing system
)
(See: Slack Chambers & Johnston (2004) Operations Management, Edn.4, p397)
Example Service Capacity Management
Highways demand management;
Example Service Capacity Management
Highways demand management;
Airlines yield management;
Example Service Capacity Management
Highways demand management;
Airlines yield management;
Tourism virtual queuing;
Example Service Capacity Management
Highways demand management;
Airlines yield management;
Tourism virtual queuing;
Healthcare A&E separation;
Banking Queue Rangers.

IT & Management must be up to the task!

Inventory Management - the safety net
The activity of planning and controlling transformed
resources as they move through supply networks,
operations and processes to aid capacity management.
Inventory is created to compensate for the differences in timing
between supply & demand that capacity management cant control
Operations managers are often
ambivalent towards Inventory
Against it because:
Costlyit ties up working capital
Risky it can often deteriorate,
become obsolete or go missing
Takes up valuable space
Slows throughput
Hides problems
For it because:
Smooths out demand
Insurance against unexpected
demand
Can reduce processing costs
(batch size)
Fills the pipeline (resource
utilisation)
Inventory Management
Need to hold Inventory will depend on:
Success of capacity management;
Demand variability;
Cost of holding stock;
Item/unit purchase cost;
Item/unit order cost;
Bulk discount on orders.
Inventory-related costs minimize at the economic order quantity (EOQ)
Further Factors to consider
(for further reading/calculation)
Re-order points and re-order levels;
Maintenance of Safety Stocks;
Lead-time probabilities;
Classification of most at risk items most
likely to stock out or most valuable to
operation.