Capacity Management (No Background Music)
Summary
TLDRThis video on operations management discusses capacity management, an essential aspect of operations planning. Capacity is defined as the maximum output an operation can handle under normal conditions. The video explores how organizations manage capacity to meet fluctuating demand through three approaches: Level Capacity, Chase Demand, and Demand Management. It also explains the importance of accurate demand forecasting and measuring capacity using design, effective, and actual categories. The video emphasizes balancing capacity with performance objectives like cost, quality, speed, dependability, and flexibility for efficient operations.
Takeaways
- 📊 Capacity is defined as the maximum output that an operation can deliver under normal conditions.
- 🔧 Capacity management is essential to ensure an operation can meet demand and deliver goods or services efficiently.
- ⏳ Capacity is usually measured in units such as liters per hour or people per unit of time, depending on the industry.
- 🚍 An example of capacity in practice is a 56-seater bus, where the capacity is the number of passengers it can carry under normal circumstances.
- ⚙️ The operations performance objectives—cost, speed, quality, flexibility, and dependability—must be reflected in how capacity is managed.
- 🔍 Forecasting demand accurately is critical for effective capacity management; too much capacity leads to waste, while too little capacity leads to dissatisfied customers.
- 📐 Capacity can be measured in three categories: design capacity (maximum potential output), effective capacity (accounts for planned losses), and actual capacity (accounts for both planned and unplanned losses).
- 📉 Capacity utilization is calculated by dividing actual capacity by design capacity, while efficiency is determined by dividing actual capacity by effective capacity.
- 📈 There are three main capacity management methods: Level Capacity (keeps capacity constant), Chase Demand (adjusts capacity to meet demand), and Demand Management (manipulates demand to match capacity).
- 💡 Organizations can use short-term measures such as pricing strategies or promotions to manage demand fluctuations effectively in the Demand Management method.
Q & A
What is capacity in the context of operations management?
-Capacity is defined as the maximum level of value-added activity over a period of time that a process can achieve under normal operating conditions. It represents the maximum amount of demand that an operation can handle.
Why is capacity management important for operations?
-Capacity management is crucial because it ensures that an operation can meet demand efficiently. Proper capacity management helps avoid excessive costs, maintain quality, respond to customer demand, and manage flexibility in production.
What are the three categories of capacity measurement?
-The three categories are: Design capacity (the maximum output an operation can achieve without interruptions), Effective capacity (the capacity after accounting for planned stoppages and losses), and Actual capacity (the capacity after accounting for both planned and unplanned losses).
How do you calculate capacity utilization?
-Capacity utilization is calculated by dividing the actual capacity by the design capacity and multiplying the result by 100 to get a percentage. This shows how much of the available capacity is being used.
What is the difference between design capacity and effective capacity?
-Design capacity is the maximum possible output without considering any interruptions or breaks, while effective capacity takes into account planned losses, such as breaks and maintenance, providing a more realistic measure of operational output.
How can organizations cope with the mismatch between capacity and demand?
-Organizations can use three methods: Level capacity plan (keeping capacity constant and using inventory to manage demand), Chase demand capacity plan (adjusting capacity to match demand), and Demand management (manipulating demand through strategies like pricing and promotions).
What is capacity utilization, and why is it important?
-Capacity utilization is the measure of how much of an operation’s available capacity is used. It is important because it indicates how efficiently an organization is using its resources, impacting both costs and customer satisfaction.
What factors can lead to unplanned capacity losses?
-Unplanned capacity losses can occur due to issues like quality problems, stockouts, poor work rate, absenteeism, and equipment failures.
What is the Chase demand capacity management method?
-The Chase demand capacity management method involves adjusting the operation’s capacity to closely match demand fluctuations. This requires careful planning, multi-skilled staff, and flexible production capabilities.
What is the purpose of demand management in capacity planning?
-Demand management aims to bring demand closer to capacity by using short-term strategies such as adjusting prices, running promotions, and restricting access to services during certain periods. The goal is to manage fluctuations in demand without changing capacity.
Outlines
📊 Introduction to Capacity Management
The video begins by introducing capacity management as a crucial aspect of operations planning. It defines capacity as the maximum level of value-added activity over time that an operation can achieve under normal conditions. The video emphasizes that understanding capacity is key to delivering goods and services efficiently. It then outlines that capacity measures how inputs are transformed into outputs, and gives an example of a bus company's capacity being measured by passenger seats.
⚙️ Capacity and Operations Performance Objectives
This section connects capacity management to operations performance objectives: cost, quality, speed, flexibility, and dependability. Underutilized capacity increases costs, while excessive fluctuations can harm quality. Speed may require surplus capacity to prevent delays, but this can raise costs. Operating near full capacity makes it harder to handle disruptions, impacting dependability, and running surplus capacity improves flexibility, though at a cost.
🔮 Understanding and Forecasting Demand
This paragraph explains the importance of accurately forecasting demand to manage capacity effectively. It stresses that without accurate demand forecasting, operations risk having too much or too little capacity, leading to either waste or dissatisfied customers. It highlights the role of three capacity measurements: design, effective, and actual capacity, and explains how each one helps organizations manage their capacity.
📏 Measuring Design, Effective, and Actual Capacity
This section explains how organizations measure capacity in three categories: design capacity (maximum possible output), effective capacity (after accounting for planned losses), and actual capacity (considering both planned and unplanned losses). The Care Agency case study is used to illustrate this, calculating design capacity as 350 hours, effective capacity as 280 hours, and actual capacity as 200 hours. This leads to a 57% utilization rate and a 71% efficiency rate.
📉 Calculating Capacity Utilization and Efficiency
In this section, capacity utilization and efficiency are calculated using the Care Agency case. Utilization is found by dividing actual capacity (200 hours) by design capacity (350 hours), resulting in 57%. Efficiency is calculated by dividing actual capacity by effective capacity (280 hours), leading to 71%. The analysis shows that while the agency uses only 57% of its capacity, it is 71% efficient in managing it.
🛠️ Methods for Managing Capacity
The video introduces three methods for managing capacity-demand mismatches: Level capacity plan, Chase demand plan, and Demand management. The level capacity plan keeps capacity constant, which can lead to inefficiency during demand fluctuations. The chase demand plan adjusts capacity to match demand, requiring flexible resources and planning. Demand management manipulates demand using techniques like price changes and promotions to align with constant capacity.
🚀 Recap: Key Takeaways on Capacity Management
The final section summarizes the key points from the video: capacity is the maximum output under normal conditions, and forecasting demand is essential to managing it. Design, effective, and actual capacity were defined, and the three main capacity management methods (level, chase demand, and demand management) were reviewed. The video closes by inviting viewers to reflect on capacity management methods in real-world organizations.
Mindmap
Keywords
💡Capacity Management
💡Capacity
💡Design Capacity
💡Effective Capacity
💡Actual Capacity
💡Capacity Utilization
💡Efficiency Rate
💡Level Capacity Plan
💡Chase Demand Capacity Plan
💡Demand Management
Highlights
Capacity management is a key aspect of operations planning, necessary to meet consumer demand effectively.
Capacity is defined as the maximum level of value-added activity over a period of time that a process can achieve under normal conditions.
Capacity measures the rate at which operations transform inputs into outputs and is usually measured in convenient units such as liters per hour or number of people served.
Underutilization of capacity can lead to higher production costs, which should be avoided for cost efficiency.
Effective capacity planning helps maintain quality by reducing the impact of excessive fluctuations in operations.
Forecasting demand is essential for effective capacity management, as it prevents over- or under-capacity issues.
Three categories of capacity measurement: design capacity (maximum potential output), effective capacity (output accounting for planned losses), and actual capacity (output accounting for both planned and unplanned losses).
Capacity utilization is calculated by dividing actual capacity by design capacity, and efficiency is determined by dividing actual capacity by effective capacity.
In a case study example, a Care Agency with 10 carers shows that its utilization rate is 57% and efficiency rate is 71%, highlighting the importance of balancing capacity management.
Three methods to manage capacity-demand mismatch: Level capacity plan (ignores demand fluctuations), Chase demand capacity plan (adjusts capacity to match demand), and Demand management capacity plan (adjusts demand to fit capacity).
Level capacity planning keeps capacity constant despite demand fluctuations, leading to overproduction during low demand and underutilization during peak periods.
Chase demand planning requires operations to adjust capacity to match fluctuating demand, but it can lead to higher planning complexity.
Demand management involves using short-term strategies like promotions or price adjustments to align demand with fixed capacity.
Effective capacity management can prevent the waste of excessive capacity or loss of business due to insufficient capacity.
The video summarizes that organizations must forecast demand accurately, and use the right capacity management technique—Level, Chase, or Demand management—to optimize their operations.
Transcripts
welcome to another video on operations
Management in this video we will discuss
the topic capacity management which is
an aspect of operations planning
capacity management is an important
topic to consider if an operations is to
deliver its goods and services to the
final consumer or meet demand in this
video we will Define what we mean by
capacity and the methods used by
organizations to manage their capacity
when forecasting
demand so what then is capacity
management
before we get into it we will need to
First Define capacity capacity is
defined as the maximum level of value
added activity over a period of time
that the process can achieve under
normal conditions in other words
capacity is the maximum amount of demand
and operation can handle under normal
operating
circumstances this entire video will now
discuss how capacity is managed within
an
operation capacity measures the rate
that the operation can transform inputs
into out outputs or the quantity of a
product or service that can be made
within a given time period capacity is
usually measured in convenient units
such as liters per hour or per
person take for example a bus company
capacity will be measured by how many
number of passengers can be carried in a
normal circumstance in a bus this will
depend on the number of seats in a bus
let's say the bus is a 56- seater bus
then under normal operating
circumstances the maximum capacity of
the bus will be 56 passengers when the
bus is full we say the bus is running at
full capacity when less passengers board
the bus we say the bus runs below
capacity when planning the capacity of
operations the operations manager must
ensure that the operations performance
objectives must be reflected in the way
capacity is managed in our previous
video we identified operations
performance objectives to be cost speed
quality flexibility and dependability
so how does managing capacity reflect
these performance
objectives costs underutilization of
capacity may lead to high average costs
of production this should be avoided
quality excessive fluctuations in the
capacity might adversely affect the
quality of products produced or services
rendered speed responding to customers
demand as fast as possible might require
building up inventory or providing
Surplus capacity to avoid queuing
although this this might have cost
implications dependability running the
operations close to its maximum capacity
makes it more difficult to respond to
disruptions which might affect the
dependability of the operations and
flexibility running Surplus capacity
makes flexibility of operations
achievable in response to varied demand
however this might also have cost
implications managing capacity to be
able to manage capacity well it is
important to understand the nature and
changes in demand for example the
seasonality of demand it is important to
identify times whereby demand is high
and the times when demand is low after
identifying the high and low periods it
is then possible to plan capacity
accordingly to be able to do this
forecasting is necessary forecasting
demand must be as accurate as much as
possible or else it will be impossible
to plan the operations capacity if
planning fails and the operations ends
up with too much capacity this will lead
to high costs and waste and if the
operations ends up with too little
capacity this will bring about
dissatisfied customers hence loss of
business after forecasting and
determining demand measuring the
operations capacity is the next stage
and this is measured under three main
categories these are design capacity
effective capacity and actual capacity
so how do we measure operations capacity
using these three categories let's
consider them one after the
other design capacity this is the
maximum capacity of an operation which
is determined in the planning stage this
type of capacity is the output that an
operation can produce continuously at
maximum rate without stopping for any
shift change overs brakes maintenance or
any other delays measuring capacity this
way is hardly
realistic effective capacity this
measures capacity of an operation by
taking into consideration stoppage
statutory breaks time frames and normal
working conditions in other word this is
the capacity of the operations after
accounting for Planned
losses actual capacity this measures the
capacity of an operation after
accounting for planned and unplanned
losses these unplanned losses could
include quality issues stockouts staff
poor work rate or absenteeism and so
on understanding capacity utilization is
also important when planning capacity
capity capacity utilization is the
measure of how much of the available
capacity is used utilization is output
shown as a percentage of the designed
capacity to determine the utilization
rate of an operation this is calculated
by dividing actual capacity by Design
[Music]
capacity and to determine the efficiency
of the operations capacity this is
calculated by dividing actual capacity
by effective
capacity let us consider an example a
Care Agency how does the Care Agency
manage its capacity pause the video here
to read through this case
study now you should pick up a pen to
make notes let's now highlight important
points from this case study first we
note that the Care Agency manages a team
of 10 carers or
employees for these carers the actual
work hours for each of them per day is 7
hours over 5 days a
week
when accounting for time off work due to
illnesses hours work per day reduces to
5.6 hours per day we consider this as
the planned
loss we already have the actual work
hours or capacity for the team per week
which is 200 hours the value of the
actual capacity takes into account the
planned and unplanned
losses but we don't have the design and
effective hours or capacity for the team
we will need these to be able to
calculate the utiliz and efficiency rate
of the Care agency's capacity you might
need to rewind the video here to make
note of the formulas for calculating
capacity utilization and efficiency
rates before
proceeding how then do we calculate the
capacity utilization and efficiency
rates here is the approach to get this
done we already have the value of the
actual capacity which is 200 hours
remember this has already taken into
account the planned and unplanned losses
however we will need to calculate the
design capacity and the effective
capacity then use the actual output
given which is 200 hours to calculate
the capacity utilization and
efficiency to calculate design capacity
we have to ignore any planned and
unplanned losses we are trying to
calculate the maximum capacity or output
possible here so we need to multiply the
number of carers which is 10 by the
maximum number of hours workable which
is 7 hours over 5 days per week
this will give us the value of the
design capacity which is 350
hours to calculate the care agency's
effective capacity taking into account
the planned losses needed the planned
loss here is the expect carers time off
from work this reduced the work per day
to 5.6 hours hence we calculate
effective capacity by multiplying the
number of carers which is 10 by the
number of the reduced hours per day
which is 5.6 and multiply this by 5
working days per week this will give us
the value of the effective capacity
which is 280
hours so far we now have the values of
the three categories of capacity
measurements design capacity is 350
hours effective capacity is 280 hours
and actual capacity is 200 hours with
these values we can now calculate the
capacity utilization and efficiency
rates for the Care
Agency to calculate the utilization rate
of the Care Agency we will need to
divide the actual capacity by the design
capacity this will be 200 divided by 350
then multiply this by 100 to get the
percentage the utilization rate will be
57% this implies that out of the
intended 350 hours capacity the agency
is only able to use 57% of its capacity
but is this utilization rate efficient
let's now calculate the efficiency
rate to do this we will need to divide
the actual capacity by the effective
capacity and multiply this by 100 to get
the efficiency rate this will be 200
divided by 280 then multiplied by 100
the efficiency rate will be 71% although
the agency is only using 57% of its
capacity the agency is 71% efficient in
the way it manages its
capacity let's now discuss a little more
about capacity management to be
efficient how then can capacity be
managed capacity management refers to
ways to cope with the mismatch between
capacity and demand there are three
methods of coping with the mismatch of
capacity and demand these are Level
capacity plan Chase demand capacity plan
and demand
management level capacity plan this is
the traditional way to manage capacity
this method ignores demand fluctuations
it focuses more on producing efficiently
and heavy inventory in and storing of
finished goods the downside to this
approach is that during demand off Peaks
there will be excess demand and low
utilization rates and the opposite will
occur during Peak demand period that is
deficit
capacity what you need to bear in mind
for the level capacity management
approach although demand fluctuates as
you can see here the level of capacity
is kept
constant Chase demand capacity
management this method of capacity
management attempts to follow demand
Trends in other words it attempts to
match capacity closely to the varying
levels of demand the operations
increases or decreases capacity to match
fluctuating demand this approach
requires considerable planning of the
operation's capacity this might require
training multi-skilled staff managing
variable employment contracts using
flexible machinery for production and so
on the key point to take away from the
chase demand capacity method is that
demand fluctuates the way it does while
the operations increases or decreases
capacity to match these
fluctuations demand management capacity
plan in this method the strategy is to
use short-term measures to manage
fluctuations in demand instead of
capacity the operations managers here
tries to bring demand closer to capacity
as much as possible using demand
adjustment techniques example of these
techniques include using varying prices
to enhance demand during off peak
periods and reduce demand during Peak
periods using scheduled promotions or
marketing during low demand periods
restricting customer access to the
product or Services During certain
periods such as using reservations and
so
on the key Point here is that capacity
is kept constant and the operations
manipulate demand so that it is at the
same level with capacity similar to
level capacity here capacity also does
not
change it is now time to test what you
you have learned so far in an activity
think of a case organization that uses
either of these capacity management
methods in their
operations this could be either level
capacity Chase demand or demand
Management try to justify your answer
using what you have learned so far from
this video and the explanation provided
for these methods you should also
demonstrate an understanding of types of
demand visit our previous videos if you
have to pause the video at this
point
so what have we learned so far in this
video let's go through it all in bullet
points we first defined capacity we
defined it as the maximum output an
operation is able to deliver under
normal operating conditions we also
discussed that for an organization to be
able to manage its capacity it is
important for it to be able to forecast
demand as accurately as possible this
allows an organization to avoid waste
from excessive capacity and loss of
business due to limited
capacity we also identified and
discussed the three ways of measuring
capacity within
operations design effective and actual
capacity were identified design capacity
is the maximum output an operation is
able to achieve effective capacity
accounts for Planned losses while actual
capacity accounts for both planned and
unplanned
losses finally we identified the three
main capacity management techniques
these are Level Chase demand demand
management where level capacity keeps
capacity constant leaving demand to
fluctuate around it Chase demand tries
to match capacity with demand
fluctuations as for demand management
capacity is kept unchanged while the
operations uses different short-term
strategies to manipulate
demand that will be all for this video
on capacity management we hope you have
learned a lot from this video are there
any operations management Concepts you
like us to explain using our videos
please leave a comment below and don't
forget to subscribe and turn on the
notification Bell thank you for watching
and see you in the next
one
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