CBMSEC1 Operations Management Midterm Handouts PDF

CBMEC 1 | OPERATIONS MANAGEMENT WITH TQM MIDTERM TOPICS STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND SERVICES INTRODUCTION ▪ Capacity refers to an upper limit or ceiling on an operating unit's load. the number of physical units produced, the number of s...

CBMEC 1 | OPERATIONS MANAGEMENT WITH TQM MIDTERM TOPICS STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND SERVICES INTRODUCTION ▪ Capacity refers to an upper limit or ceiling on an operating unit's load. the number of physical units produced, the number of services performed ▪ The goal of strategic capacity planning is to achieve a match between the long-term supply capabilities of an organization and the predicted level of long-term demand. CAPACITY DECISIONS ARE STRATEGIC Capacity decisions have a tangible impact on the ability of the organization to meet future demands for products and services. 1. Capacity decisions affect operating costs. 2. Capacity is usually a major determinant of initial cost. Typically, the greater the capacity of a productive unit, the greater its cost. 3. Capacity decisions often involve long-term commitment of resources and the fact that, once they are implemented, those decisions may be difficult or impossible to modify without incurring significant costs. 4. Capacity decisions can affect competitiveness. 5. Capacity affects the ease of management. 6. Because capacity decisions often involve substantial financial and other resources, planning for them far in advance is necessary. Defining and Measuring Capacity Design capacity: The maximum output rate or service capacity for which an operation, process, or facility is designed. Effective capacity: Design capacity minus allowances such as personal time, maintenance, and scrap EFFICIENCY AND UTILIZATION Efficiency is usually expressed as a percentage of the actual output to the expected output. On the other hand, capacity utilization is a measure of how well an organization uses its productive capacity. It's the relationship between potential or theoretical maximum output and production output. EXAMPLE Given the following information, compute the efficiency and utilization of the vehicle repair department: Design capacity = 50 trucks per day Effective capacity = 40 trucks per day Actual output = 36 trucks per day DEMAND AND CAPACITY MANAGEMENT DEMAND MANAGEMENT attempts to shift demand, while CAPACITY MANAGEMENT is a response to demand. This is a large area of study, encompassing several topics within operations and marketing. Both long and short‐term decisions are required to manage demand and capacity fully. CAPACITY MANAGEMENT Refers to ensuring a business always maximizes its potential activities and production output—, under all conditions. The capacity of a business measures how much companies can achieve, produce, or sell within a given time period. Consider the following examples: ▪ A call center can field 5,000 calls per week. ▪ A café can brew 600 cups of coffee per day. ▪ An automobile production line can assemble 350 trucks per month. ▪ A car service center can attend to 50 customers per hour. ▪ A restaurant has the seating capacity to accommodate 200 diners. Companies that poorly execute capacity management may experience diminished revenues due to unfulfilled orders, customer attrition, and decreased market share. As such, a company that rolls out an innovative new product with an aggressive marketing campaign must commensurately plan for a sudden spike in demand. The inability to replenish a retail partner's inventory in a timely manner is bad for business. CAPACITY PLANNING PROCESS 1. FORECAST DEMAND. It is a technique for estimating probable future demand for a product or service. It is based on analyzing past demand for that product or service in the present market condition. Demand forecasting should be done scientifically, and facts and events related to forecasting should be considered. For example, suppose we sold 200, 250, and 300 units of product X in the months of January, February, and March, respectively. Now we can say that there will be a demand for 250 units of product X in April if the market condition remains the same. 2. COMPUTE RATED CAPACITY. Capacity utilization is calculated using a formula: the capacity utilization rate is equal to the ratio of the actual output level over the maximum output level multiplied by a hundred percent. That is capacity utilization rate = actual output/optimal output. 3. COMPUTE NEEDED CAPACITY. To calculate the capacity utilization rate, use the formula capacity utilization = (100,000 / potential output) x 100 and follow the steps below:... Capacity utilization = (100,000 / potential output) x 100. Capacity utilization = (100,000 / 225,000) x 100 = (0.44) x 100. 4. DEVELOP ALTERNATIVE PLANS. Once a company has identified its capacity requirements for the future, the next step is to develop alternative ways to modify its capacity. One alternative is to do nothing and reevaluate the situation in the future. With this alternative, the company could not meet any demands that exceed current capacity levels. Choosing this alternative and the time to reevaluate the company's needs is a strategic decision. 5. EVALUATE CAPACITY PLANS. There are several tools that we can use to evaluate our capacity alternatives. Recall that these tools are only decision-support aids. Ultimately, managers have to use many different inputs and their judgment to make the final decision. One of the most popular of these tools is the decision tree. Quantitative e.g. cost, and qualitative factors e.g. skills, are both considered crucial in evaluation planning. 6. SELECT BEST CAPACITY PLANS. Having formulated and evaluated plans, it is now the time to select and choose the best plan that works best. Assumptions and Predictions ▪ the growth rate and variability of demand, ▪ the costs of building and operating facilities of various sizes, ▪ the rate and direction of technological innovation, ▪ the likely behavior of competitors, ▪ availability of capital and other inputs. Key decisions of capacity planning relate to: ▪ The amount of capacity needed. ▪ The timing of changes. ▪ The need to maintain balance throughout the system. CAPACITY CUSHION ▪ is an amount of capacity more than expected demand when there is some uncertainty about demand. ▪ the reserve capacity a firm maintains to handle sudden increases in demand or temporary losses of production capacity. ▪ It measures how much the average utilization(in terms of effective capacity) falls below 100 percent. Capacity cushion = 100% – Utilization extent of facilities and workforce flexibility. For example, if the expected monthly demand on a facility is P 500,000 worth of goods or services and it can produce as much as P 550,000 it has a 10 per cent capacity cushion. Unused capacity generally is expensive. Capacity Cushion Formula The following two example problems outline the steps and information needed to calculate the Capacity Cushion. CC = SC / TC * 100 Variables: CC is the Capacity Cushion (%) SC is the spare capacity TC is the total capacity How to Calculate Capacity Cushion? The following steps outline how to calculate the Capacity Cushion. First, determine the spare capacity. Next, determine the total capacity. Next, gather the formula from above = CC = SC / TC * 100. Finally, calculate the Capacity Cushion. Use the following variables as an example problem to test your knowledge. A manufacturing plant has a spare capacity of 100 and total capacity of 200. How much is the capacity cushion? CC = 100/200*100 = 0.5*100 = 50 CAPACITY AND DEMAND Capacity as defined refers to the level of output that a company can produce over a certain time period. When the demand for a company's product falls below the capacity, it can result in a company producing more inventory than it requires. If the demand exceeds capacity, it may lead to a shortage of resources Why Demand Capacity Planning is Important? Capacity planning helps businesses with budgeting and scaling so they can identify optimal levels of operations: Budgeting benefits: Capacity planning helps determine how services are offered, and the appropriate time frames and staff required to meet current demand and cover all operational costs STRATEGIES TO MATCH DEMAND AND CAPACITY ▪ Shifting demand and capacity ▪ Vary the service offering ▪ Communicate with customers ▪ Modify timing and location of service delivery ▪ Differentiate on price ▪ Flexing capacity to meet demand ▪ Rent or share facilities or equipment ▪ Schedule downtime during periods of low demand DEMAND MANAGEMENT Demand management is a planning methodology. Companies use it to forecast and plan how to meet demand for services and products. Demand management improves connections between operations and marketing. The result is tighter coordination of strategy, capacity and customer needs. Demand Management activities include demand (sales) forecasting, customer order promising, customer order management, and communication within and outside the company in efficient and effective ways. TYPES OF DEMAND 1. Competitive Demand Commodities are substitutes if one can be used in place of the other. Substitute goods serve the same purpose and therefore compete for the consumers’ income. They are said to have competitive demand because of the fact that they compete for the consumers’ income. Examples of substitute goods are Milo and Ovaltine, butter and margarine, and others. A change in the price of one affects the demand for the other. If for instance there is an increase in the price of butter, demand for margarine will increase which will ultimately increase the price of margarine, provided the supply of margarine does not change. On the other hand a decrease in the price of butter will lead to a decrease in the demand for margarine, and hence a fall in its price, given the supply. 2. Joint or Complementary Demand Two or more goods are said to be jointly demanded when they must be consumed together to provide a given level of satisfaction. Some examples are cars and fuel, compact disc players and CD. There are perfect complementary goods and imperfect or poor complementary goods. For perfect complementary goods, the consumer practically cannot do without the other. An example is cars and fuel. On the other hand, for imperfect complementary goods, a consumer can do without the other, so long as a substitute is obtained. For complementary demand, a change in the price of one good affects the demand for the other. If there should be an increase in the price of compact disc players, there will be a decrease in the demand for discs, other things being equal. 3. Derived Demand When the demand for a commodity is derived from the demand for the final commodity, that commodity is said to have derived demand. Wood may be demanded for the purpose of manufacturing furniture and not for its own sake. Here, the demand for wood is derived from the demand for furniture. Demand for wood is therefore a derived demand. Factors of production such as land, labor, and capital have derived demand. This is because an increase in the demand for a commodity will result in an increase in the factors of production used in producing the goods. The price of the factors of production will increase, other things being equal. 4. Composite Demand Composite demand applies to commodities that have several uses or are demanded for several different purposes, as mentioned in the example boxwood, is used for furniture – tables, chairs, beds, windows, doors, and others. BENEFITS OF ESTIMATING DEMAND 1. Demand estimation helps make accurate financial forecasts. This may seem like a no-brainer, but it’s one of the strongest reasons to estimate demand. Having a good idea of how much revenue your business can bring in, it can set more accurate budgets for labor, supplies, and marketing. It can prepare in advance for incurring the cost of goods sold. It makes life all-around easier. 2. With better estimation, there will be a leaner supply chain. Better estimates mean less waste. This makes it possible to have a much leaner supply chain. Good estimates can prevent making too much inventory and thus wasting money and supplies. 3. Staffing will be easier. The holidays are notoriously tough for many industries. People work a lot simply because they have to meet demand. Having a clear sense of how much demand there will be for your products, can avoid two awful scenarios. The first being where under-staffing, and everybody has to work at a burnout pace to cope. The second being where over-staffing and people standing around wondering what to do next. 4. Easier to create a sales and promotion strategy. Having a clear sense of how much market demand will help decide how much to market own products. This is the foundation of a well-crafted sales and promotion strategy. 5. Business plans will generally be more accurate. Having clear estimates for demand will impact every single area of the business. Overall goals become more well-defined, and departments can create strategies to meet those goals. Without estimates of demand, business plans contain more conjecture than tactical advice. 6. Gain peace of mind. All the reasons above ultimately lead up to this one. The simple fact is that having a defined plan will make the business owner feel better, which is reason enough to focus on accurately estimating demand. 7. Company will signal competence and control to stakeholders. Lastly, there is a general expectation that companies of a certain size have the ability to forecast their revenues. It makes stakeholders nervous when a company cannot. You must be able to estimate demand in order to attract investors. WAYS TO ESTIMATE DEMAND The benefits of estimating demand are clear. However, estimating demand can seem like a tall order. Fortunately, because this is such a vitally important business function, many methods can be used to estimate demand. 1. Use past sales to estimate future demand. One of the easiest ways to estimate demand is by looking at previous sales figures. Sales revenue follows patterns based on the industry and the company’s actions. For this reason, historical patterns are a reasonably good predictor of future patterns. This isn't a perfect method, though. For one, Historical data doesn't tell what it can make, it merely tells what has already been made. Lastly, any investor has had the axiom “past performance is no guarantee of future results” drilled into their head. The same principle applies here. 2. Use publicly available market data. All kinds of rich data sources will help you get started. There are scores of government papers and trade magazines that can help you find data tailored to your industry. 3. Take surveys and hold focus groups. Not every industry comes with easy-to-collect market data, though. Sometimes, you create a product in an emerging industry. Some methods of doing this include issuing surveys and holding focus groups. Self-reported data is not perfect, but it’s often a great starting point! 4. Conduct market studies Looking for something less subjective than surveys or focus groups, one can always look to market studies. Market studies allow a direct estimate of demand by using scientific principles to test demand under certain situations. Market studies are time-consuming, and they're not for everyone. But if there is a need for something more robust than the other methods of estimating demand, consider them. 5. Run a regression analysis If there is a lot of data about demand and unsure how to parse it, consider running a regression analysis. A working knowledge of statistics will help to get started, but it’s not necessarily required. The basic idea of regression analyses is to take a cross-section of real market data, define variables, and figure out how variables relate. That is to say, it can figure out how specific changes to the product or business will affect demand. 6. Ask sales staff Many salespeople have a deep, hard-earned knowledge of their numbers and can provide reasonably accurate estimates even without more statistically rigorous methods. 7. Ask outside experts Even after analyzing available data, asking customers directly, and checking with the sales staff, it is possible to walk away with an unclear sense of demand. That’s okay. Outside experts can often provide a good sense of market demand in situations like that even when hard data is unclear, contradictory, or absent. When Demand Is Too High Use signage to communicate busy days and times: Inform customers about peak periods to encourage them to visit during less crowded times. Offer incentives to customers for usage during non-peak times: Provide discounts or promotions to motivate customers to utilize your services during off-peak hours. Take care of loyal or regular customers first: Prioritize service for loyal customers to maintain customer satisfaction. Advertise peak usage times and benefits of non-peak use: Educate customers about when demand is highest and highlight the advantages of using your services during quieter hours. Charge full price for the service - no discounts: Maintain regular pricing during peak times to discourage congestion. When Demand Is Too Low Use sales and advertising to increase business from current market segments: Implement marketing efforts to attract more customers from existing market segments. Modify the service offering to appeal to new market segments: Adapt your services to cater to new customer groups or niches. Offer discounts or price reductions: Attract customers during periods of low demand by offering reduced prices or promotions. Modify hours of operation: Adjust your operating hours to align with customer preferences and encourage more visits. Bring the service to the customer: Offer mobile or on-demand services to reach customers where they are and increase demand. These strategies aim to optimize capacity utilization by either encouraging customers to shift their usage to less crowded times or by attracting new customers and increasing demand during periods of low utilization. It's a dynamic approach to balancing capacity and demand in various business scenarios. When Demand Is Too High 1. Stretch time, labor, facilities, and equipment: This involves maximizing the use of existing resources to meet increased demand. It may mean extending working hours or operating at maximum capacity. 2. Cross-train employees: Cross-training employees allows them to perform multiple roles, making it easier to allocate resources efficiently during high-demand periods. 3. Hire part-time employees: Bringing in part-time staff can help handle the increased workload without committing to full-time positions. 4. Request overtime work from employees: Asking current employees to work overtime can temporarily boost capacity to meet high demand. 5. Rent or share facilities: If additional space is needed, renting or sharing facilities with other businesses can provide a flexible solution. 6. Rent or share equipment: Similar to facilities, sharing or renting equipment can help businesses access necessary resources without significant capital investment. 7. Subcontract or outsource activities: Outsourcing certain tasks or processes to third-party providers can relieve internal capacity constraints during peak demand periods. When Demand Is Too Low 1. Perform maintenance or renovations: During periods of low demand, it's an opportune time to perform maintenance and renovations to improve efficiency or update facilities. 2. Schedule vacations: Encouraging employees to take vacations during low-demand times can reduce labor costs and help balance capacity. 3. Schedule employee training: Allocate downtime for training and skill development to enhance employee capabilities for future demands. 4. Lay off employees: If demand remains consistently low, businesses may need to temporarily reduce their workforce to align with capacity needs. These strategies allow businesses to adapt to changing demand conditions, whether by increasing capacity during high demand or optimizing resources during periods of low demand, ultimately ensuring operational efficiency and flexibility in response to market fluctuations.