Capacity and Inventory Management
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Transcript of Capacity and Inventory Management
Operations Management and Organisational Improvement: Session 6
Capacity and Inventory ManagementProfessor David Oglethorpe
Logistics & Supply Chain ManagementCore text for this session:
Slack, Chambers, Johnston and Betts, (2006), Operations and
Process Management, 1st edition, Pearson EducationChapters 8, 9
Session Aims
• To examine the principles of capacity management• To consider the management of inventory and its impact
on operations performance
Diagnostic Question:What is capacity management?
Capacity is “ability to supply”•Any measure of capacity should reflect the ability of the operation to supply demand•Capacity management should respond to variation in demand (predictable and un-predictable)
Demand–capacity mismatches for a domestic appliance repair service and a frozen spinach business
Diagnostic Question:What should be the operations base capacity?
The base level capacity should
reflect the operation’s performance
objectives
The base level capacity factors:
•Importance of Performance
•Perishability of products
•Degree of variability in demand (or supply)
Attempt to improve market information and better
forecasting to make variation more predictable
Attempt to reduce variation by persuading customers to move their
demand to a quieter period
Improving demand and supply market knowledge can make capacity management easier
Managing demand–capacity mismatches using ‘level capacity’, ‘chase demand’ and ‘manage demand’ plans
Overtime Part-time or temporary staff
Annualised hours Skills flexibility (T&L vs .R&D)
Staff scheduling (shiftwork) Sub-contracting (outsourcing)
Hire & Fire Change of output rate (expecting staff to work faster)
Methods of adjusting capacity:
Example: How does the University adjust capacity?
Capacity Planning for Services• Demand and Capacity for services can be difficult to
predict• Service capacity must be available at the right place and
time (labour is usually the biggest constraint)Queuing Theory offers some solutions• Service operations can forecast the average expected
demand pattern• Can establish a distribution of demand but can’t predict
each individual arrival/time requirement • Staffing levels can be varied (peak/off-peak), but each
customer service time can vary
Therefore even when the average service capacity matches the average service demand - queues & idle time can be a problem
Rejecting:when the system turns customers away, e.g. GP’s practice, or web-sites
Balking:customer refuses to join queue
Source of customers
Boundary of system
Queue or “waiting line”
Server 1
Served customers
Reneging: gets sick of waiting
Server 2
Server m
Distribution of arrival times
Distribution of processing times
Simple queuing system
)(See: Slack Chambers & Johnston (2004) Operations Management, Edn.4, p397)
Example Service Capacity Management• Highways demand management;
Example Service Capacity Management• Highways demand management;• Airlines yield management;
Example Service Capacity Management• Highways demand management;• Airlines yield management;• Tourism virtual queuing;
Example Service Capacity Management• Highways demand management;• Airlines yield management;• Tourism virtual queuing;• Healthcare A&E separation;• Banking ‘Queue Rangers’.
• IT & Management must be up to the task!
Inventory Management - the safety net The activity of planning and controlling transformed
resources as they move through supply networks, operations and processes to aid capacity management.
Inventory is created to compensate for the differences in timing between supply & demand that capacity management can’t control
Operations managers are often ambivalent towards Inventory
Against it because:
• Costly…it ties up working capital
• Risky… it can often deteriorate, become obsolete or “go missing”
• Takes up valuable space
• Slows throughput
• Hides problems
For it because:
• Smooths out demand
• Insurance against unexpected demand
• Can reduce processing costs (batch size)
• Fills the pipeline (resource utilisation)
Inventory Management
• Need to hold Inventory will depend on:– Success of capacity management;– Demand variability;– Cost of holding stock;– Item/unit purchase cost;– Item/unit order cost;– Bulk discount on orders.
Inventory-related costs minimize at the ‘economic order quantity’ (EOQ)
Further Factors to consider(for further reading/calculation)
• Re-order points and re-order levels;• Maintenance of Safety Stocks;• Lead-time probabilities;• Classification of ‘most at risk’ items – most
likely to stock out or most valuable to operation.