Capacity Management and Demand Measurement
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Questions and Answers

What is the primary goal of inventory management?

  • To produce more goods than are needed
  • To maintain high levels of inventory at all times
  • To balance between minimizing costs and fulfilling customer orders (correct)
  • To ensure customers never have to wait

What defines physical inventory?

  • The accumulation of digital data and records
  • The total number of employees in an organization
  • The collection of physical materials like components and finished goods (correct)
  • The amount of service provided to customers

What happens when the rate of supply exceeds the rate of demand?

  • Customer queues become longer
  • Inventory decreases significantly
  • Inventory remains stable
  • Inventory increases (correct)

In terms of inventory, what is a queue of customers considered?

<p>A form of service inventory (D)</p> Signup and view all the answers

What is the consequence of customers waiting too long in a queue?

<p>Customer irritation and potential loss of business (C)</p> Signup and view all the answers

Which strategy can help to reduce inventory levels?

<p>Matching supply and demand rates effectively (D)</p> Signup and view all the answers

What is the challenge most organizations face regarding supply and demand?

<p>They must cope with unequal supply and demand (A)</p> Signup and view all the answers

Why is it important to minimize inventory?

<p>To avoid paying for holding too much inventory (B)</p> Signup and view all the answers

What is the primary focus of capacity management?

<p>Understanding the nature of demand and reducing mismatches with supply (B)</p> Signup and view all the answers

Which of the following describes a medium-term aspect of capacity management?

<p>Assessing demand forecasts with a time horizon of 2-18 months (D)</p> Signup and view all the answers

What can result from capacity levels being in excess of demand?

<p>Underutilization of capacity leading to high unit costs (D)</p> Signup and view all the answers

How might working capital be affected by a capacity plan?

<p>It increases as finished products are funded until sold (C)</p> Signup and view all the answers

What is one common challenge with forecasting in capacity management?

<p>Most operations must respond to short-term demand changes (B)</p> Signup and view all the answers

What is a potential consequence of large fluctuations in capacity levels?

<p>Possible deterioration in the quality of services (D)</p> Signup and view all the answers

What role does supplier capability play in capacity management?

<p>It affects ability to meet demand and supply capacity (D)</p> Signup and view all the answers

What is one aspect that short-term capacity management provides?

<p>Important feedback for longer-term planning (D)</p> Signup and view all the answers

Why might an organization choose to hire temporary staff?

<p>To cope with fluctuating capacity demands (D)</p> Signup and view all the answers

What is the impact of balancing demand with capacity levels?

<p>It can lead to reduced costs and maximized revenue (D)</p> Signup and view all the answers

What is the primary purpose of overall equipment effectiveness (OEE)?

<p>To provide an assessment of capacity leakage (B)</p> Signup and view all the answers

What would likely cause capacity leakage in an operation?

<p>Unplanned machine breakdowns (D)</p> Signup and view all the answers

What is meant by 'effective capacity planning'?

<p>Capacity after accounting for planned losses (D)</p> Signup and view all the answers

When utilizing a chase capacity plan, what is the main goal?

<p>To closely match fluctuations in demand (B)</p> Signup and view all the answers

How does variability affect the ability of an operation?

<p>It can reduce throughput times and utilization (D)</p> Signup and view all the answers

What should be a key consideration when setting the base capacity level?

<p>The effect of performance objectives on capacity (A)</p> Signup and view all the answers

In terms of perishability, what is required for setting base capacity?

<p>Base capacity needs to be set high due to limited storage (A)</p> Signup and view all the answers

Which of the following is a disadvantage of a level capacity plan?

<p>It creates considerable inventories of products (D)</p> Signup and view all the answers

The effect of high fixed costs on capacity levels is that it can lead to:

<p>Need for consistent high utilization of capacity (D)</p> Signup and view all the answers

What is an example of reducing capacity due to predictability in losses?

<p>Implementing maintenance schedules for machinery (D)</p> Signup and view all the answers

Which of the following is true about the chase capacity plan?

<p>It can increase customer satisfaction by matching demand (C)</p> Signup and view all the answers

The approach that typically requires a higher base capacity is:

<p>Level capacity planning (D)</p> Signup and view all the answers

To increase responsive customer service, an operation should ideally have:

<p>A high level of base capacity cushion (D)</p> Signup and view all the answers

Which type of operations is least likely to use a pure chase plan?

<p>Standard, non-perishable product manufacturers (B)</p> Signup and view all the answers

What is a common issue with capacity management during periods of high demand?

<p>Organizations might have to increase outsourcing (B)</p> Signup and view all the answers

When does a chase capacity plan minimize finished goods inventory?

<p>When production matches future demand (A)</p> Signup and view all the answers

Why is queuing theory important in capacity management decisions?

<p>It helps predict wait times and customer satisfaction (D)</p> Signup and view all the answers

What principle suggests that unoccupied time feels longer to customers?

<p>Occupied waits are perceived as shorter (A)</p> Signup and view all the answers

How can companies best manage their capacity according to customer demand?

<p>Using a mix of demand-side and supply-side strategies (A)</p> Signup and view all the answers

Which statement accurately reflects customer behaviors in a queuing system?

<p>Customers sometimes choose not to join a queue if it seems too long (D)</p> Signup and view all the answers

What can lead to the perception that a service is of higher value?

<p>Longer waiting times (D)</p> Signup and view all the answers

In managing capacity, what can be a consequence of having too few servers?

<p>Queue build-up leading to dissatisfied customers (C)</p> Signup and view all the answers

Which factor does NOT typically influence capacity management decisions?

<p>Cost of materials (C)</p> Signup and view all the answers

When demand is stable and predictable, what capacity management strategy is generally easiest to implement?

<p>Using stable and fixed capacity levels (D)</p> Signup and view all the answers

What describes the cumulative production line in effective capacity management?

<p>It must lie above the cumulative demand line (B)</p> Signup and view all the answers

What strategy should be adopted when future demand is unpredictable?

<p>Adapt the chase demand policy (A)</p> Signup and view all the answers

What is the first step on the demand side in capacity management?

<p>Measure demand for services and products (A)</p> Signup and view all the answers

How does new staff impact operational routines according to capacity management principles?

<p>They cause disruption to existing routines (A)</p> Signup and view all the answers

Which method is best known for its structured approach to forecasting?

<p>Delphi method (C)</p> Signup and view all the answers

What is the focus of qualitative forecasting approaches?

<p>Expert opinions and group discussions (A)</p> Signup and view all the answers

Which forecasting technique modifies historical data to account for seasonality?

<p>Multiplicative seasonal model (D)</p> Signup and view all the answers

What is the primary aim of capacity management according to operational management?

<p>To align capacity with fluctuating demand (D)</p> Signup and view all the answers

Which of the following best describes trend-adjusted exponential smoothing?

<p>It incorporates a smoothing constant for trends (C)</p> Signup and view all the answers

What is the role of forecast error in capacity management?

<p>To measure the accuracy of forecasts (D)</p> Signup and view all the answers

What does managing supply involve in capacity management?

<p>Determining whether to maintain a constant capacity (C)</p> Signup and view all the answers

What challenge is faced when measuring capacity in a hospital?

<p>Unpredictable patient volume fluctuations (D)</p> Signup and view all the answers

Which step follows measuring demand for services in capacity management?

<p>Deciding how to manage demand (D)</p> Signup and view all the answers

What does the level of accuracy in demand forecasting affect?

<p>Capacity change flexibility (A)</p> Signup and view all the answers

Which of the following statements about seasonal patterns in demand is TRUE?

<p>They often follow climatic or festive changes (B)</p> Signup and view all the answers

Flashcards

Physical Inventory

A buildup of materials, parts, or finished products due to differences in supply and demand timing.

Inventory Management

The balance between minimizing inventory to avoid wasting money and ensuring sufficient stock to meet customer orders.

Queue of Customers

Customers waiting in line for a service or product.

Inventory Increase

When the rate of supply exceeds the rate of demand, leading to an increase in inventory.

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Inventory Decrease

When the rate of demand exceeds the rate of supply, leading to a decrease in inventory.

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Matching Supply and Demand

The goal of matching supply and demand rates to minimize or eliminate inventory levels.

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Inventory Accumulation

The accumulation of inventory is a result of differences between supply and demand rates.

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Customer Queue Management

A balance between providing service and ensuring customer satisfaction, both of which impact revenue.

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What is capacity management?

Capacity management attempts to balance supply (capacity) and demand, ensuring customer satisfaction while optimizing resource utilization.

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Why is capacity management important?

Capacity management encompasses decisions made at different time horizons to ensure a balanced supply and demand. These decisions affect costs, revenues, working capital, and quality.

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What is long-term capacity management?

Long-term capacity management is a strategic decision made with long-term goals in mind. It focuses on physical capacity and infrastructure.

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What is short-term capacity management?

Short-term capacity management is largely reactive, adjusting capacity to meet immediate demand changes. This involves using current resources more or less efficiently.

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What is medium-term capacity management?

Medium-term capacity management bridges the gap between long-term plans and short-term reactions. It focuses on optimizing resource utilization within existing capacity.

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How does capacity affect costs?

Excess capacity leads to underutilization of resources and higher unit costs, as fixed costs are spread over a smaller production volume.

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How does capacity affect revenue?

Sufficient capacity ensures meeting customer demand, maximizing revenue. Insufficient capacity can lead to lost sales and lower revenue.

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How does capacity affect working capital?

Building up inventory to meet future demand can require significant working capital investment, impacting cash flow.

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How does capacity affect quality?

Fluctuating capacity levels (e.g., hiring and laying off staff) can affect service quality. Consistent capacity ensures a stable and predictable service experience.

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Why is understanding the impact of capacity decisions important?

Capacity management decisions affect multiple business areas. Understanding these impacts is crucial for effective decision-making.

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Capacity

The maximum output an operation can produce, considering factors like planned and unplanned disruptions.

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Effective Capacity Planning

Aims to predict the amount of capacity an operation will need, taking into account losses due to planned events (e.g., vacations) and unplanned events (e.g., equipment failures).

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Actual Output

The maximum output an operation can realistically achieve after accounting for all types of losses.

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Capacity Leakage

The difference between an operation's theoretical potential and its actual output due to various losses.

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Overall Equipment Effectiveness (OEE)

A metric that measures how effectively an operation uses its resources (availability, performance, quality) to produce output.

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Availability (OEE)

The percentage of time an operation's equipment or resources are available for use. Measured by subtracting downtime (e.g., setup, repairs) from operating time.

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Performance (OEE)

The speed and efficiency of a process, measured against its intended performance. Lower than 100% may occur due to factors like equipment idling or lower-than-optimal speed.

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Quality (OEE)

The quality of the products or services produced during a process. A lower rate means more rework or defective products, leading to capacity loss.

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Level Capacity Plan

A strategy where the operation maintains a consistent production level throughout the planning period, regardless of demand fluctuations. Helps stabilize employment and utilization, but can lead to excess inventory

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Chase Capacity Plan

A strategy where the operation adjusts its production capacity to match demand variations, leading to fluctuating workforce, production, and costs.,

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Capacity Management

The process of deciding the basic level of capacity for an operation and then making adjustments based on demand. Key factors: performance objectives, perishability, and demand/supply variability.

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Capacity Cushion

A buffer that allows an operation to handle fluctuations in demand without compromising customer service. High base capacity often creates a cushion, while low base capacity needs external strategies.

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Capacity Constraint

A situation where the operation has a limited capacity to meet demand, typically due to high fixed costs or perishable products. Companies may adjust pricing to increase demand when it's low.

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Effect of Perishability on Capacity

The impact of product perishability on capacity management. If products are perishable, maintaining a high base capacity is often necessary to avoid waste.

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Effect of Variability on Capacity

The impact of demand or supply variability on capacity planning. High variability requires more capacity to handle fluctuations and reduce throughput times.

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Perishable Products

A scenario where a company cannot store its output and must adjust production to meet demand immediately.

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Capital Intensive Operations

A scenario where a company uses a large amount of physical equipment and facilities to achieve its production.

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Marginal Cost of Capacity Change

The cost associated with changing production capacity levels. This cost increases with the size of the change.

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Queuing Theory

A mathematical technique used to analyze and manage waiting times in services and operations with limited storage capabilities.

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Finite Customer Source

A scenario where a customer source has a limited number of potential customers. The arrival rate depends on the number of customers already being serviced.

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Infinite Customer Source

A scenario where a customer source has an unlimited number of potential customers. The arrival rate is unaffected by the number of customers being serviced.

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Server

A facility in a queuing system that processes customers. Servers can be arranged in parallel (multiple servers working simultaneously) or in a series (customers move through a sequence of servers).

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Arrival Rate

The rate at which customers arrive at the servers in a queuing system. It is often described as a probability distribution due to its variability.

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Queue

A list of customers waiting to be served. Even if a queue is not physically visible, customers may be waiting for a delivery or a service (e.g., a waiting list).

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Queue Discipline

Rules governing the order in which customers are served in a queue. The most common rule is first come first served (FCFS).

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Rejecting

A situation where a customer is rejected from a queue because it is at its maximum capacity. For example, a website may block access due to overload.

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Balking

A situation where a customer chooses not to join a queue because they perceive it to be too long. This decision is based on the customer's free will.

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Reneging

A situation where a customer, after joining a queue for some time, leaves the queue due to a specific reason. This is different from balking, where the customer initially decides not to join.

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Dependability of supply

The ability of an operation to deal with unexpected disruptions in demand.

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Delphi method

A technique used to reduce influences from face-to-face meetings in forecasting, by allowing experts to provide anonymous feedback and revise their predictions iteratively.

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Time series analysis

A forecasting approach that examines past behavior patterns to predict future events.

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Simple moving-average forecasting

A forecasting technique that uses the average demand for the n most recent time periods to estimate future demand.

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Simple exponential smoothing

A forecasting approach that incorporates past and present data to predict future demand, giving more weight to recent information.

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Trend-adjusted exponential smoothing

A forecasting technique that accounts for trends in the data, by adjusting the simple exponential smoothing model to capture a changing average.

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Seasonality

Regularly repeating changes in demand due to various factors such as climate, holidays, or financial cycles.

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Multiplicative seasonal model

A technique used to incorporate seasonality into forecasts by calculating a seasonal index for each period and adjusting the overall demand forecast accordingly.

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Causal Models

Models that try to understand the relationships between variables and their impact on each other, often using complex techniques.

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Simple regression models

A simple method used to determine the best relationship between two variables, often used for forecasting.

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Forecast error

The difference between the actual demand and the predicted demand, used to assess the accuracy of a forecast.

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Relative uncertainty

Describes the extent to which the actual demand can deviate from the average predicted demand.

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Aggregated capacity measures

A type of capacity measure that bundles different products and services together to get a broader view of demand and capacity.

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Peak capacity

The level of activity and output that can be achieved over a short period of time, but not sustainable on a regular basis.

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Study Notes

Capacity Management

  • Capacity management is about understanding demand and supply (capacity).
  • It aims to reconcile competing demands for customer satisfaction and resource efficiency.
  • Capacity decisions have long-term and short-term aspects.
  • Long-term decisions include strategic capacity planning, considering factors like buildings, technology, and long-term supply arrangements.
  • Medium-term capacity decisions involve managing resources over quarters or months, considering aggregate staffing levels and subcontracting.
  • Short-term decisions manage capacity within weeks, days, or hours, such as loading activities on individual processes.
  • Capacity decisions impact costs (excess capacity leads to high costs and low utilization) and revenues (insufficient capacity leads to lost revenue).
  • Demand forecasts are often inaccurate.
  • Operations must respond to changes in demand quickly.

Demand Measurement

  • The first task in capacity management is understanding demand patterns.
  • Qualitative approaches to forecasting, like panel discussions and Delphi methods, gather diverse perspectives.
  • Qualitative approaches aim for consensus (panel), or to reduce influence from face-to-face interactions with the Delphi process.
  • Quantitative approaches, like time series analysis, examine past demand patterns to predict future behavior.
  • Time series analysis considers patterns from past behaviors for future forecasts.
  • Simple moving average and simple exponential smoothing (trend-adjusted exponential smoothing), are methods used to forecast demand.

Capacity Measurement

  • Capacity refers to the maximum level of value-added activity over a period.
  • Capacity measurement considers input levels and output levels.
  • Businesses calculate capacity based on factors like the availability of resources (machine hours, staff) or the number of customers served per unit.
  • An operation's ability to supply depends on the mix of activities.

Demand Side Management

  • Demand management adjusts the demand pattern to match available capacity which can be done via price differentials, scheduling promotions, constraining customer access or service differentials.

Supply Side Management

  • Capacity management decisions involve setting capacity levels and using level capacity plans or chase capacity plans.
  • Base capacity level decisions depends on performance objectives, fixed costs, and flexibility.
  • Perishable goods require higher capacity levels, while those with high fixed costs often require lower base capacity.
  • Variability in demand or supply can effect capacity levels.
  • Variability can cause high throughput times, queues and higher inventory levels.
  • Varying capacity levels to match demand patterns may be needed.

Queue Management

  • Queue discipline (rules for determining waiting customer order).
  • Rejecting (when demand exceeds capacity).
  • Balking (customers refusing to join the queue).
  • Reneging (customers leaving the queue).
  • Considerations include customer behaviour and capacity levels in relation to customer wait times and service quality.

Inventory Management

  • Inventory is the accumulation of materials.
  • Inventories arise when supply and demand rates are unequal.
  • Inventory management involves minimizing costs while meeting customer demand and avoid shortages.
  • Types of inventory include raw materials, components, work-in-progress, and finished goods

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OM Chapter 11: Capacity Management PDF

Description

Explore the principles of capacity management, focusing on the reconciliation of demand and supply. This quiz covers long-term, medium-term, and short-term capacity decisions and their impact on costs and revenues. Understand the importance of accurate demand measurement in effective capacity planning.

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