Capacity
Capacity
1. Introduction
The case demonstrates how complicated it can be to deal with the unpredictability of demand and how
difficult this can be to match this to the supply of goods and services and still have an efficiently run
operation. The difficulty of meeting customer shopping patterns (demand) with what the suppliers and
therefore supermarket can provide (capacity) is a complicated timing issue (forecasting). Providing the
right amount of good at the correct time requires careful planning and investment decisions.
There are 3 things an operation must consider when looking at production of goods and services:
Capacity:
• How much can they make?
Demand:
• How much does the market require?
Forecasting:
• How are they going to match what is required with what they can make without
wasting resources?
These factors all impact upon each other; in order to fulfil the requirements of a market, an operation
must be able to evaluate what capacity it can provide and the options it has to increase or decrease
this.
It is not just a case of offering the amount of goods or services wanted; it is also an issue of timing and
when these are required. This can give an operation a number of problems when attempting to plan
capacity.
An operation may experience many changes and fluctuations in the demand for its products or services
and must be able to maximise opportunities of demand without having excess capacity. For example,
the daily demand for a restaurant often peaks in the evening, but this may not be the only pattern in
demand, the weekends may be busier than a weekday and there may be other events like Valentine’s
Day or the Christmas period where demand may be expected to increase.
The provision of capacity is a decision that should not be taken lightly; for once implemented it cannot be
easily reversed and the operation is then left to manage the choice it has made.
This chapter considers how capacity can be provided, adjusted and managed in order to satisfy the
demand of the consumer and meet the objectives of the operation as efficiently as possible.
2 Capacity Management
Capacity management affects all areas of an operation. Capacity measures the rate that the
operation can transform inputs into outputs. Capacity is about the quantity of a product or service
that can be made within a given time period. This, for example, could be;
• The number of passengers per flight on an aeroplane
• The number of patients that can be seen in a surgery session at a doctors
• The number of mobile phones that can be produced a week by a factory.
It is defined as the number of units (goods and/or services) an operation can produce over a given
time period, under normal working conditions, where no additional resources are deployed.
Capacity is usually measured in convenient units such as litres per hour or passengers per taxi. For
instance, a domestic tap may be able to deliver 20 litres per minute of water; a bus may have a capacity
of 53 passengers, a football stadium may be able to seat 50,000 spectators or a McDonalds may be
able to serve 600 customers per hour.
In many instances capacity may be simple to calculate, however more difficult questions might be:
• How many fire engines should an airport have on standby?
• How many operations should a surgeon schedule?
• What service level should be offered to broadband customers?
When planning capacity there are always two sides to consider: - firstly there is the demand – the
amount of the product or service that might be wanted; and secondly there is the provision of the good or
service. In providing products or services the operation must evaluate the costs involved and the trade
off between satisfying customers and the costs of production. Having too little capacity to respond to
customer demand may mean missed opportunities and annoyed customers, however under-utilised
capacity is a waste of resources resulting in higher costs.
Some capacity changes can happen almost instantly, others may take longer time to put in place. The
capacity of an operation is a complicated mix of resources. These resources are inputs to the process
that allow capacity to be expanded or contracted, by changing the inputs into the process. How
flexible the resource is depends on how quickly it can be altered.
Capacity can be increased using a number of methods which involve adjusting the resources and
inputs into an organisation such as:
• Introducing new approaches and materials
• Increasing the number of service providers or machines
• Increasing the number of operational hours
• Acquiring additional facilities.
Decreasing capacity can be more difficult or expensive; it tends to rely on the operations ability to sell or
reduce resources as cost effectively as possible. There are usually costs involved in reducing resources,
for example if the resource is staff there may be redundancy costs, or closing facilities may incur
significant costs.
Therefore the decision to alter capacity has to be taken carefully in line with future predictions of
demand.
Capacity is always constrained by the lowest producing part of the process. In layman’s terms an
operation will ‘always go at the pace of the slowest walker’. Identifying a restrictive part of the
process and adding resources that can increase its capacity will improve the overall capacity of the
operation.
The resource mix that can be potentially constraining to an operation could include;
• Staff/Skill levels: Staff can be trained over time to be more flexible in their contribution to the
process. The operation can benefit from the learning curve, where a new employee can become
more efficient at a given process and therefore be quicker at their job, which can increase the
capacity of the operation.
• Materials availability: A change in the supply of raw materials can increase the capacity
potential of an operation. If there is a restriction in availability of materials or a timing problem
and this is released, the capacity could be improved.
• Product or service mix: Adjustments in the other products or services made by the facility can
restrict the capacity of the operation. This is because different products and services may use
different quantities of resources per unit; therefore a change in the product mix may result in a
change in capacity.
• Storage: This can affect the capacity of an operation if there is a resource constraint that is
affected by timing in the process. If the operation has the ability to store work in progress or
finished goods it can improve the capacity of the process in the short term. The swings and
fluctuations in demand can be mitigated by the ability to store products and allow the full
capacity of the operation to flow.
• Working schedules and access to facilities: This can also dictate the full availability of
capacity. A lecture theatre that can accommodate 100 students at a time could operate
beyond a standard working day; however both staff and students may have an issue
regarding 6am lectures!
These factors should be considered in a short-term, medium-term and long-term time frame to establish
their ability to be changed over time. A short term strategy for expanding capacity in a cafe, would be to
put a few extra tables outside or extend the staff working hours to cope with the extra demand, in the
medium term the cafe owner would have more options available to increase the capacity, such as hiring
more staff of having additional cooking facilities in the kitchen to cope with extra demand. In the long-
term the possibilities can be much greater, the premises could be expanded, better equipment, more
staff and so on. The options available to an operation are greater the more time it has to plan them.
3 Measuring capacity
When measuring capacity the unit of measure can be either an input or an output to the process. The
key is to take the most logical unit that reflects the ability of the operation to create its product or
service. However, where the input is more complicated to measure, such as machine hours on a
process layout, then output is a more suitable measure. The unit of time could be a minute, an hour, a
day or a week, or whatever time scale fits the operation, but the unit of output and time scale needs to
be consistent.
Capacity can be measured from looking at the operation as a whole and then calculated on the
resources and facilities available and process time. Table 7.1 shows the alternatives that can be used
for input/output measures.
For example, the measure of output capacity could be cars per shift or tonnes per hour or customers
per day. However, the capacity of a surgeon or a University Professor may not be measured in this
manner. In these cases, capacity could be shown in the form of working hours per week.
A simple formula for capacity can be:
For example, a service provider works an eight hour day, takes two fifteen minute coffee breaks and
has a half hour lunch break. The time available for work is seven hours per worker per day.
If this particular worker was a fitness instructor and he spends 70 minutes with each customer (10
minutes for the consultation and booking and 1 hour for the gym session), how many clients could the
instructor process during a five day week?
30 Clients per week can be expressed as the capacity of the fitness operation.
This is a simplified measure as it presumes that the fitness instructor doesn’t have time off sick or do
any other activities such as maintain the gym equipment or diversify into other areas such as taking
classes. Most processes will not have just one activity; many will have interlinking processes with
different capacity constraints on each.
Here the operation will have to consider the capacity of the whole process and not individual
constituent processes. Also the individual process durations may differ. If the first part of the process
takes 10 minutes but stage 2 takes 20 minutes and stage three takes 10 minutes then a backlog will
appear at stage 2.
10 20 10
minutes minutes minutes
per unit per unit per unit
bottleneck
The diagram shows that the output of a process will be constrained by the slowest point. This is
referred to as a ‘bottleneck’ in the process.
However it is not always possible to accurately predict how long each stage is actually going to take.
A hair dresser, for example, may allocate thirty minutes to each haircut, forty minutes to each hair
colorant and ten minutes to styling, but individual customers may take more time and others less. In
such circumstances it may not be possible to accurately locate the bottleneck in variable processes.
This shows an important feature of capacity planning, assumptions must be made as to what the
process is capable of in order to understand the output of the operation. However, although
assumptions are needed to plan the process, often in reality these assumptions can be found to be
inaccurate.
3.2 Defining Capacity
Capacity is defined under 3 categories; design capacity, effective capacity and actual capacity. The
operations utilisation of resources and the efficiency of its processes can then be calculated using
these.
This is a theoretical number and not one that is applied to the daily production of an operation. Design
capacity is the output that an operation can produce continuously, at maximum rate without
stopping for any shift changeovers, maintenance or any other delays. W hat the process is capable of
producing under perfect conditions. In some cases this might be interpreted as maximum capacity.
This considers how the operation will run on a long term basis, how it will be staffed and how it will be
maintained. All planned stoppages under the normal working time frame are taken into consideration.
This can also be known as available capacity. These stoppages may include shift changeovers, lunch
breaks, set up times and many other operational factors.
Planned loss
Actual output plus unplanned losses is the same as effective capacity. Therefore the operation which
is working its assets efficiently is minimising unplanned losses.
For the efficient use of the resources available, efficiency is output shown as a percentage of
available capacity.
For an operation that has been well designed, there will be minimal planned losses. This allows the
resources to be used to the best of their ability. Capacity utilisation is the measure of how much of the
available capacity is used. Utilisation is output shown as a percentage of the facilities or designed
capacity.
For example if the fitness trainer in the previous example only had 24 clients who arrive at their
appointments on time, the calculation would be:
= 80%
These measures of capacity can tell an operation how well they are utilising their resources and how
efficient the manufacturing process is.
The workers usually are available for eight hours a day but with 2 coffee breaks of 15 minutes each
and a half hour lunch break, they actually work a 7 hour day. Taking time off and illness into account
reduces the electricians’ available time by 20%. This means the 7 hours per day is reduced to a 5
hour and 36 minute day (5.6 hours)
If actual work is only 200 hours billed in the week then (a) What is the capacity utilisation of the
team? (b) What is their efficiency?
Approach: First, you need to calculate (a )the design capacity and (b) the effective capacity. Then
use the actual output given above to calculate the capacity utilisation and efficiency.
Solution:
;
Then the efficiency of the process is 71%
Note: for this example, capacity is determined by the difference between actual hours of work
measured against available or attended hours multiplied by an efficiency factor that takes into account
current conditions.
4 Capacity Planning
When capacity needs to be increased or decreased, the operation must consider how this is going to
be achieved. This is a key decision as the organisation will have to make investment decisions based
upon what level of capacity is to be selected and when it is to be provided. The operation has several
ways in which it can respond to the changes in demand with its provision of capacity. The decision to
provide capacity depends upon the selected strategy and the ability to store the product or timeliness
of service production. The timing decisions of how and when to provide capacity need to be
determined in line with demand.
However there is a risk of demand not rising and the operation is then left with the wasted costs of
unused capacity.
An example of a capacity leads demand approach would be an extension to a lecture theatre being
built before student numbers were confirmed.
This strategy relies heavily on forecasting and accurate information as investment decisions are made
in line with the forecast. Incorrect forecasting will cause missed opportunities or wasted resources.
This often happens in services where staff are the flexible resource and can be brought in to cover
peak demand yet sent home in quieter times, such as a toy store catering to Christmas demand or a
restaurant expanding and contracting capacity in line with anticipates peaks and troughs in customer
demand.
This is less risky than providing investment ahead of demand; however, it has the disadvantage that
customers may not be prepared to wait for the product or service and opportunities can therefore be
lost.
Producing products on a lead time can be frustrating for customers, it can be almost impossible to buy
a sofa from a store and have it delivered on the day, most have a four week lead time to allow the
manufacturers to plan their capacity ahead of time. This is becoming an increasingly unusual strategy
for consumer goods as consumers are often less tolerant of waiting.
Short-term planning – this is a reactive time scale and can be as immediate as adjusting capacity on
the same day or on a time scale of up to around 3 months (depending on the industry) Here, only
flexible resources can be applied to increase the capacity. It may be costly to the operation as the
speed of readjusting the resources may be higher on short term timescales. In many cases
employees are the most readily available resource. Examples of this may involve measures such as;
• Over time for existing staff
• Having multi-skilled staff who can be reallocated to where a bottle neck has
occurred. An example of this could be the tannoy call in a supermarket
requesting, ‘all till trained staff to report to the checkout’ in order to increase the
capacity for payment, where queues are backing up at the checkout.
Medium-term planning – this time scale is beyond the immediate managing of the operation and has
a horizon of around 3 – 18 months. This gives the operation more time to make plans to adjust
capacity and therefore the changes are more significant than the short term plans.
• Hiring or firing contract staff
• Leasing in facilities, for example if processing calls, additional call centre support
can be hired.
Long-term planning – this planning is a time scale beyond 12- 18 months. Here the investment
decisions tend to be more significant and will link to the strategy of the operation. The changes will
take a long time to implement but are also difficult to reverse. There are many more options available
to consider with long term decisions relating to capacity and the possibilities for increases are far
greater. They could include;
• New trained full time staff or fire existing staff
• New processes that may be faster
• New Machinery on a manufacturing line
• Information systems or technology can be applied to increase efficiency and
capacity
• Additional facilities
With each of these options the ability to utilise the adjustment depends upon the nature of the
individual process, a fast food restaurant may be able to hire and fire staff as training may take
minutes for a new employee and investment is low, however a hospital may not be able to hire and
fire skilled surgeons as they take many years to train and their skills maybe unique to the particular
process they are involved in. Training methods for a car manufacturer rely on the skill of an individual
and are not easily replaced so a hire and fire policy is less effective, however if an operation were to
invest in more technology that could replace many of these skills, then the staff would be more
expendable and the flexibility of capacity would improve.
The stadium used by Manchester City football club was originally designed to be the central arena for
the Manchester bid to host the 1996 Olympics. W hen the games were awarded to Atlanta, the City of
Manchester refocused their efforts on the Commonwealth Games bid for 2002, which they won.
The stadium was originally planned as an 80,000 seat arena for the Olympics. This was revised down
to a 60,000 capacity stadium for the Commonwealth games. However, the Council’s main concern
was that the stadium should have a sustainable future so the plan was revised down again to
accommodate a future for the stadium as the new ground for Manchester City football club to replace
their Main Road Stadium in Moss Side. The revised plan meant that the capacity for the Games in
2002 was 38,000 which then rose to 48,000 in 2003 when it was handed over to Manchester City
football club.
Construction of the stadium took 3,000 workers just over 2 years to complete and was handed over to
the organisers four months ahead of the games. The Commonwealth Games was a spectacular
success both for British athletes and the City of Manchester. However, there was no sentiment shown
when the bulldozers moved in just hours after the closing ceremony. The track was removed, a third
tier of seating was added and the central pitch was lowered. The conversion costs of £30 million were
met by the football club.
This plan was not without criticism, as there were many calls by leading athletes for a large athletics
stadium to be kept. However, the stadium from both Sydney and Atlanta Olympics became rugby and
baseball grounds respectively. The Manchester Stadium has also been used as a concert venue and
has a capacity for 60,000 fans, one of Europe’s largest open air concert venues.
In 2010, an application was granted to expand the capacity to 60,000 for football fans. In 2002 the
Manchester Commonwealth stadium had two tiers of seating, but after the stadium’s conversion to a
football ground, it had three tiers of seating. There are 2,000 parking spaces at the stadium itself with
a further 8,000 spaces provided locally, there are 2 train stations within a half hour walk of the ground
and for concerts and special events a bus service is set up. The stadium is used twice weekly during
the football season, hosts conferences, major sporting events and even weddings.
Sources
http://www.gameslegacy.co.uk/cgi-bin/index.cgi/30
http://www.football-rumours.com/manchester_stadium.htm
Questions
1. How has long-term planning affected the final result of the City of Manchester stadium?
2. Why was the original capacity for the Commonwealth Games stadium reduced from 60,000 to
38,000?
3. What other large facilities have changed use form their original purpose and have they been
as successful as the City of Manchester Stadium?
Demand can be volatile and is something that tends to happen ‘to’ an operation. It exists outside the
organisation and is therefore difficult to control. Demand may change due to a number of factors or
circumstances. As it is in the future and yet to happen and is subject to many influences;
S e a so n a lity
o r C y c lica l p
ro d u cts
S u b stitu te s
Dem a nd
E c o n o m ic
Changes
C o m p le m e n ta ry
p ro d u c ts o r se rv ic e s
G o v e rn m e n t p o lic y
changes
• Tastes changing - these can be hard to plan for. Fashions change and new ideas occur. This
can happen slowly overtime and be a natural trend towards an idea, for example the trend
towards a more environmentally-friendly life style has been a slow but steady evolution and
products and services have been able to follow this trend. Alternatively, they can be sudden
swings or changes that are virtually unpredictable, for example an influential celebrity may
‘adopt’ a product or service and create a sudden increase in demand.
• Competition – the demand for an organisation’s product or service will be highly dependent
on the actions and reactions of its competitors. The product the organisation provides may
have a steady demand but should a competitor bring out a new, improved or even cheaper
version of the product then this will affect the demand horizon. It is important for the
organisation to be aware of their competitors and the impact they may have upon future
demand.
• Substitutes - this can be similar to the affect of competitors, mentioned above, as there may
be an alternative product that will become available and divert the market demand for the
product.
• Seasonality - many products are naturally seasonal. Ice cream, fireworks and fluffy Valentines-
day teddy bears have a time period where demand will peak. This relates to the product or
service use; how specific it is depends on how much it will be demanded at a given time. For
example, sun screen sales in the UK peak in June and July, yet there will be a lower demand
during the rest of the year for travel aboard, whereas Christmas cards only have the short
window of demand in the months up to Christmas (generally August to December these days)
and then demand virtually evaporates outside of this window. With a seasonal event,
the previous year’s demand can be used when predicting future demand patterns.
• Cyclical events are similar to seasonal demand peaks in the fact that they may be known
events, but may not occur in line with a defined calendar time frame.
• Special events- there are one off unique events that have very little or no demand pattern or
history. These are the most complicated to plan or predict demand for.
• The external environment may also affect demand patterns, tax and mortgage rates,
government policy may also affect the demand for a product or service.
• Economic changes will have a significant impact on demand for goods and services and will
affect buying habits and behaviours.
It is most important to try to understand what the demand pattern is likely to be and how reliable it is.
The operation should then be aware of the potential impacts to their demand.
The BBC’s Horizon program screened the results of a study of Boots No7 Protect & Perfect Beauty
Serum. A team of dermatologists lead by Professor Chris Griffiths carried out an independent study
into cosmetic anti-ageing products. The effect of No7 Protect & Perfect was compared against
retinoic-acid, a prescription drug used to treat severe photo ageing of the skin, and the only product
known to have a clinical effect on facial lines and wrinkles. The research revealed that in the
laboratory tests pioneered by the Manchester team, No7 Protect & Perfect Beauty Serum really can
repair the damage in photo - aged skin that is associated with fine wrinkles.
In the days following the airing of the programme the £16.75 Boots serum sold out. The sales volume
– usually 1,000 pots of the lotion a week - reached 60,000 in the first 10 days. Ian Filby, The Beauty
Director of Boots said: "W e have been overwhelmed with the response following BBC Horizon, with
women literally racing each other to get hold of the last product in stores. W e are getting more stock
out to our stores on an hourly basis to manage demand."
To cope with the sudden increase in demand, boots issued a one product per customer policy in order
to dissuade consumers reselling product on auction sites. A waiting list was then introduced where
approximately 50,000 customers signed up for the product; orders were being received from as far
afield as the USA and Australia. Despite the efforts of Boots to supervise sales the product was being
sold on E-bay for up to five times its original price.
It took several months for supply to be fully restored. Despite other more critical studies the product
continues to be a top seller for Boots and the range is sold around the world. Protect and perfect
Beauty serum remains the fastest selling product in Boots history.
Questions;
1. What action did Boots take to cope with this unexpected surge in demand?
2. What risks were there for Boots when undertaking this reaction to demand?
3. Think of other products or services where there has been an unexpected surge in demand.
What have been the successes and failures of the operations dealing with these surges?