Operations Management and Organisational Improvement: Session 6

Capacity and Inventory ManagementProfessor David Oglethorpe

Logistics & Supply Chain ManagementCore text for this session:

Slack, Chambers, Johnston and Betts, (2006), Operations and

Process Management, 1st edition, Pearson EducationChapters 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)

Demand–capacity 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 operation’s 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 demand–capacity 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 can’t 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. GP’s 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 can’t control

Operations managers are often ambivalent towards Inventory

Against it because:

• Costly…it 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.