Capacity and Inventory Management

Capacity Management

• Capacity = Maximum Output Rate (how many products can be produced or how much service can be provided when system is running at full tilt)

• What is the capacity of:– Theatre– Coffee Shop– Mechanic Shop– Factory– Human Brain

Factors Impacting Capacity

Manual and

Automated

Skilled and

Unskilled

Technology and

Infrastructure

Consistent and

Variant

Regulations and

Policies

Capacity Forecast

Modifying Capacity

Selecting the right capacity

• Essentially a Decision Making Problem

• Can be objective or subjective

• Find optimal solution using multiple capacity variables and constraints

• Use decision trees

30%

70%

60%

Inventory Management

• Why is Inventory required?

• What will happen if we have too little inventory?

• What will happen if we have too much inventory?

• When can we say that we have optimum inventory?

Inventory is required as a cover for all kinds of variations and

uncertainties in the production process and supply chain

Inventory allows economies of scale to kick in

Inventory Types

Inventory Costs

EOQ Model – Wilson Model• Underlying assumptions

– The ordering cost is constant.– The rate of demand is known, and spread evenly throughout the

year.– The lead time is fixed.– The purchase price of the item is constant i.e. no discount is

available– The replenishment is made instantaneously, the whole batch is

delivered at once.– Only one product is involved.– EOQ is the quantity to order, so that ordering cost + carrying

cost finds its minimum. (A common misunderstanding is that the formula tries to find when these are equal.)

EOQ Model – Author Ken Homa

Microsoft PowerPoint 97-2003 Presentation

Reorder Point/ Level

ABC Analysis

Class A 70 – 80% expenditure Usually small in number

Class B 10-15% expenditure Medium to large in number

Class C 5-10% expenditure Maybe large in number

Classify all items in inventory into ABC classes or categories as per Pareto principle