Capacity Management and Its Impact on Business Essay

Excerpt from Essay :

Capacity planning has seen an increased emphasis due to the financial benefits of the efficient use of capacity plans within material requirements. This is particularly true as international competitors are using more efficient and productive means of managing their own capacity. Toyota is prime example of how short-term capacity management can be used to help improve profitability, shareholder return and costs. Insufficient capacity can quickly lead to deteriorating delivery performance, unnecessarily increase work-in-process, and frustrate sales personnel and those in manufacturing. Frustrated customers often quickly elect to purchase a competitor's product when other products are not available. This is also true as Americans elected to purchase Japanese cars as oppose to America cars due to their high quality and high profitability. However, excess capacity can be costly and unnecessary. We have realized this concept with housing production. Excess production has created a large amount of inventory which needs to be purchased before new construction can resume. With so much availability pricing and home values have declined. The inability to properly manage capacity can be a barrier to the achievement of maximum firm performance. In addition, capacity is an important factor in the organization's choice of technology.

Capacity is usually assumed to mean the maximum rate at which a transformation system produces or processes inputs. Sometimes, this rate may actually be "all at once" -- as with the capacity of an airplane. A more usable definition of capacity would be the volume of output per elapsed time and the production capability of a facility. Going back to our car example, capacity could be defined as the amount of cars produced over a certain amount of time. The production capacity of the facility would therefore be the maximum amount of cars produced from a particular facility. Having a strong understanding of these numbers is critical as a facility approaching its maximum capacity may need upgrades or enhancements to meet demand. Further, during periods of mass pessimism, max capacity could mean that a firm is producing products that are not demanded by society at all. Capacity management is critical in this regard as fixed costs are a large determinant of success or failure for a business.

Capacity planning is the process used to determine how much capacity is needed in order to manufacture greater product or begin production of a new product. A number of factors can affect capacity. Many of which are in the company's or management control. Examples, in regards to capacity management include, number of workers, ability of workers, number of machines, waste, scrap, defects, errors, productivity, suppliers, government regulations, and preventive maintenance. In many instances, process improvements over the short-term can improve all of the above mentioned examples. Short-term capacity management can help to reduce waste by making production more efficient. It can reduce defects by using Lean Six Sigma and other types of process improvements. Productivity can be improved by allowing workers to have more autonomy and say within the process. Toyota allowed any worker within the assembly line to stop the process if they saw a defect in a product or system. This short-term process capacity management ultimately allowed these individuals to produce higher quality and more productive merchandise. Capacity planning is relevant in both the long-term and the short-term. However, there are different issues at stake for each.

Capacity decisions are also required in short-term situations. In a grocery store, the number of customers that need to pay for their groceries at any one point during the day will vary significantly. To provide good customer service, managers must make sure that sufficient cash registers and employees are on-hand to meet check-out demand at any given time.

Similarly, hotels must make sure that they have enough employees to register arriving guests, clean hotel rooms, and provide food and beverages to customers. These decisions must be made carefully to avoid excessive labor costs that result from having an excess of employees available for the number of customers being served.

The first job of the capacity management team is to identify what capacity management work is already being carried out -- in some large organisations, separate teams are carrying out capacity planning for servers, networks and mainframes. The capacity management team needs to document existing procedures and carry out an inventory of the capacity management and monitoring tools already being used. It's important to identify early on the skills required to carry out capacity management.

A key part of capacity management is determining the service level requirements of the business. It's essential to identify which systems do which work, and to quantify users' expectations for how this work gets done. From there, you can analyse the current capacity of your systems and determine how well they are meeting the needs of users, and decide whether you can reduce capacity in some areas or add it in others.

In the short-term, capacity planning concerns issues of scheduling, labor shifts, and balancing resource capacities. The goal of short-term capacity planning is to handle unexpected shifts in demand in an efficient economic manner. Unexpected shifts in demand can occur for a litany of reasons. A primary concern today is that of interest rates, and monetary policy. Going back to our car production example earlier, if interest rates suddenly raise, the purchase of a car suddenly becomes more expensive. Consumers, who have very stagnant wages to begin with, may elect to not purchase a car due to the increased costs. Producers must therefore be weary of interest rate rises on the demand for their products. If consumers demand less vehicles, over production may occur that lowers prices while increasing inventory. Another unexpected shift in demand may be technological improvements. We have already discussed Toyota and their ability to create a more efficient process to improve both quality and production. However, alternative energy vehicles have proved to be a threat to short-term capacity managers. Tesla, and other electric vehicle providers are reducing demand for the traditional gas producing vehicles. Environmentalists are also creating a community centered on environment safety. In many instances, this safety, can lead to increased costs, lower demand, and higher defaults of suppliers. Short-term capacity managers must be aware of sudden shifts in consumer sentiment and purchasing behavior. Shifts in purchasing behavior that go unnoticed; can lead to cost production mistakes. We saw this in 2008, we shifts in the economy led to massive defaults that hampered demand for autos within country. The time frame for short-term planning is frequently only a few days but may run as long as six months.

Alternatives for making short-term changes in capacity are fairly numerous and can even include the decision to not meet demand at all. The easiest and most commonly-used method to increase capacity in the short-term is working overtime. This is a flexible and inexpensive alternative. While the firm has to pay one and one half times the normal labor rate, it foregoes the expense of hiring, training, and paying additional benefits. This has become a very contentious issue of late due primary to the increase in minimum wage in many states. Paying time and half has now become even more costly. As a result, using labor to fix short-term capacity problems has become more expensive. It will therefore be more efficient to automate processes, and not hiring other workers. When not used abusively, most workers appreciate the opportunity to earn extra wages and are therefore more productive. However, the costs to the business can outweigh the benefit. If overtime does not provide enough short-term capacity, other resource-increasing alternatives are available. These include adding shifts, employing casual or part-time workers, the use of floating workers, leasing workers, and facilities subcontracting.

The third concept of short-term capacity management is also straight forward. Firms may also increase capacity by improving the use of their resources. The most common alternatives in this category are worker cross training and overlapping or staggering shifts. Most manufacturing firms inventory some output ahead of demand so that any need for a capacity change is absorbed by the inventory buffer. From a technical perspective, firms may initiate a process design intended to increase productivity at work stations. Manufacturers can also shift demand to avoid capacity requirement fluctuation by backlogging, queuing demand, or lengthening the firm's lead times. Service firms accomplish the same results through scheduling appointments and reservations.

A more creative approach is to modify the output. Standardizing the output or offering complimentary services are examples. Complementary services are becoming more profound in the manufacturing sector as a method of differentiation. In services, one might allow customers to do some of the process work themselves (e.g., self-service gas stations and fast-food restaurants). Another alternative -- reducing quality -- is an undesirable yet viable tactic. Walmart for example, requires customer to bag their own groceries. This is a stark shift from what occurred in years past where baggers, bag customers groceries but added an increased cost to the firm.

Finally, the firm may attempt to modify demand. Changing the price…

Sources Used in Document:


Cochran, Jeffery K., and Alberto Marquez Uribe. "A Set Covering Formulation for Agile Capacity Planning Within Supply Chains." International Journal of Production Economics 95, no. 2 (2005): 139 -- 149.

Jonsson, Patrik, and Stig-Arne Mattsson. "Use and Applicability of Capacity Planning Methods." Production and Inventory Management Journal 43, no. 3-4 (2002): 89 -- 95.

Meredith, Jack R., and Scott M. Shafer. Operations Management for MBAs. 2nd Edition. New York: John Wiley and Sons, Inc., 2002.

Vollmann, Thomas E., William L. Berry, D. Clay Whybark, and Robert F. Jacobs. Manufacturing Planning and Control Systems. Boston: McGraw-Hill, 2005.

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