Capacity Management (No Background Music)

Summary

This 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

00:00

📊 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.

05:02

⚙️ 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.

10:03

🔮 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.

Keywords

💡Capacity Management

Capacity management refers to the methods an organization uses to ensure its operational resources match demand levels. In the video, it is emphasized as a crucial element in operations planning to prevent issues such as excessive costs from underutilization or lost business from limited capacity. Proper capacity management ensures an organization can meet demand efficiently, especially during fluctuations.

💡Capacity

Capacity is defined as the maximum level of output that an operation can handle under normal circumstances. In the context of the video, it relates to how much demand an operation can manage, whether it be transporting passengers, manufacturing products, or providing services. For example, a bus with 56 seats has a capacity of 56 passengers.

💡Design Capacity

Design capacity refers to the maximum output an operation can achieve without considering any planned or unplanned losses, such as breaks or maintenance. It represents the ideal performance level in the best possible conditions, but it is often unrealistic in real-world scenarios. In the video, it is calculated as the maximum hours a Care Agency’s team can work, assuming no interruptions.

💡Effective Capacity

Effective capacity measures the output of an operation after accounting for planned losses, such as breaks or standard operational downtime. It represents a more realistic measure of what can be achieved under normal working conditions. In the example from the video, effective capacity for the Care Agency is calculated by reducing the maximum working hours due to planned time off.

💡Actual Capacity

Actual capacity refers to the actual output achieved, taking into account both planned and unplanned losses like absenteeism or quality issues. It is the real-world performance level, often lower than design or effective capacity. In the video, actual capacity is demonstrated by the Care Agency's total work hours after accounting for these losses.

💡Capacity Utilization

Capacity utilization is the percentage of design capacity that is actually being used. It is calculated by dividing actual capacity by design capacity. In the video, it is illustrated by the Care Agency using only 57% of its design capacity, indicating there is a significant portion of potential capacity that remains unused.

💡Efficiency Rate

The efficiency rate is a measure of how well an operation utilizes its effective capacity. It is calculated by dividing actual capacity by effective capacity. In the video, the Care Agency’s efficiency rate is 71%, meaning they are using 71% of their adjusted potential output when considering planned downtime.

💡Level Capacity Plan

A level capacity plan keeps capacity constant, regardless of fluctuations in demand. It focuses on efficiency and inventory management, but can lead to overproduction during low demand and shortages during high demand. The video highlights that this method often results in surplus inventory or deficits depending on the demand period.

💡Chase Demand Capacity Plan

The chase demand capacity plan adjusts capacity to match the level of demand by increasing or decreasing production or service levels. This approach requires operational flexibility and careful planning. The video discusses how organizations using this method need to adapt by having multi-skilled staff or flexible machinery to meet fluctuating demand.

💡Demand Management

Demand management refers to strategies aimed at adjusting demand to match a set capacity, instead of changing capacity to meet demand. Organizations might use techniques like price adjustments or marketing to influence demand patterns. In the video, demand management is shown as a way to align customer needs with capacity by promoting services during low-demand periods.

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