SUPPLY CHAIN MANAGEMENT IN TOURISM AND HOSPITALITY

CAPACITY PLANNING
CONSIDERATIONS IN CAPACITY PLANNING

Many issues must be considered when adding or decreasing capacity. Here are the three
important factors:

 MAINTAINING SYSTEM BALANCE: In practice, achieving such a perfect design is usually

both impossible and undesirable. One reason is that the best operating levels for each
stage generally differ. Another reason is that variability in product demand and the
processes may lead to imbalance.
Various ways to eliminate imbalance:
1. Add capacity to stages that are bottlenecks. This can be done by temporary
measures, such as scheduling overtime, leasing equipment, or purchasing additional
capacity through subcontracting.
2. Through the use of buffer inventories in front of the bottleneck stage to ensure that
it always has something to work on.
3. Involves duplicating and increasing facilities of one department on which another is
dependent.
 FREQUENCY OF CAPACITY ADDITION OR REDUCTION: There are two types of cost to
consider when adding capacity: the cost of upgrading too frequently and that of
upgrading too infrequently.
-Too frequent means expensive. It includes removing and replacing old equipment and
training employees on new equipment. In addition, the cost of the old equipment is
considerably more than the selling price of the old one. Lastly, there is an opportunity
cost of idling the plant or service site during the changeover period.
-Upgrading capacity too infrequently is also expensive. Infrequent expansion means that
capacity is purchased in large chunks.
 EXTERNAL SOURCES OF OPERATIONS AN SUPPLY CAPACITY: Two common strategies
used by organizations are outsourcing and sharing capacity. An example of outsourcing
is Dell Computer using a Chinese company to assemble its notebook computers. An
example of sharing capacity is two domestic airlines flying different routes with different
seasonal demands exchanging aircrafts when one’s routes are heavily used and the
others’ are not.
Decreasing capacity

Temporary strategies such as scheduling fewer hours or scheduling an extended

shutdown period are often used. More permanent reductions in capacity would typically
require the sale of equipment or possibly even the liquidation of entire facilities.

DETERMINING CAPACITY REQUIREMENTS

To determine, we must address the demands for individual product lines, individual plant
capabilities, and allocation of production throughout the plant network. Typically, this is done
through the following steps:

1. Use forecasting techniques (see previous lesson) to predict sales for individual products
within each product line.
2. Calculate equipment and labor requirements to meet product line forecast.
3. Project labor and equipment availabilities over the planning horizon.

Often the firm then decides on some capacity cushion that will be maintained between the
projected requirements and the actual capacity. It means capacity in excess of expected
demand. For example, if the expected annual demand on a facility is PHP10 million in products
per year and the design capacity is PHP12 million per year, it has a 20% capacity cushion.

When a firm’s capacity design is less than the capacity required to meet its demand, it is
said to have a negative capacity cushion. If, for example, a firm has a demand of PHP12 million
but can only produce PHP10 million per year, it has a negative capacity cushion of 17%.

We now apply these three steps to an example:

The Stewart Company produces two brands of salad dressings: Paul and Newman’s.
Each is available in bottles and single-serving plastic bags. Management would like to
determine equipment and labor requirements for packing their operation in the next 5 years.
The demand for the two flavors and for each packaging option is given in this table. The
company has three machines that can package 150,000 bottles each year (each machine has
two operators). It also has five machines that can package 250,000 plastic bags per year (each
of these machines has three operators). Will the company have enough packaging capacity to
meet future demand?

PRODUCT YEAR
1 2 3 4 5
PAUL’S
Bottles (000s) 60 100 150 200 250
Plastic Bags (000s) 100 200 300 400 500
 NEWMAN’S
Bottles (000s) 75 85 95 97 98
Plastic Bags (000s) 200 400 600 650 680
Note: (000s) represents thousands.

SOLUTION:

Step 1. Use forecasting techniques to predict sales for individual products within each product
line. The marketing department provided the forecast demand values (expressed in thousands)
given in the table above for the next five years. The table of expected future demand is also
presented above.

Step 2. Calculate equipment and labor requirements to meet product line forecasts. Currently,
there are three machines that can operate up to 150,000 bottles each per year. Each machine
requires two operators and can produce both bottles for Paul’s and Newman’s dressings. Six
bottle machine operators are available. (2 for each x 3 machines=6 operators) Also, there are
five machines that can package up to 250,000 plastic bags each year. Three operators are
required for each machine, which can produce Paul’s and Newman’s dressing. (3 for each x 5
machines = 15 operators).

Total product line forecast can be calculated from the preceding table by adding the
yearly demand for bottles and plastic bags as follows:

PRODUCTS YEAR
1 2 3 4 5
Bottles (000s) 135 185 245 297 348
Plastic Bags (000s) 300 600 900 1,050 1,180
Note: (000s) represents thousands.

We can now calculate equipment and labor requirements for the current year (year 1).
Because the total available capacity for packaging bottles is 450,000/year (3 machines x
150,000 each), we will be using 135/450 = 0.3 (30%) of the available capacity for the current
year, 0.3 x 3 (machines) = 0.9 machines. Similarly, we will need 300/1,250 = 0.24 (24%) of the
available capacity for plastic bags for the current year, or 0.24 x 5 = 1.2 machines (How did we
arrive to 1,250? Because of 250,000 x 5 machines). The total number of crew required to
support our forecast demand for the 1st year will equal the crew required for the bottle
machines plus the crew required for the plastic bag machine.

The labor requirement for year 1’s bottle operation is

0.9 bottle machine x 2 operators = 1.8 operators

1.2 bag machines x 3 operators = 3.6 operators
Step 3. Project labor and equipment availabilities over the planning horizon. We repeat the
preceding calculations for the remaining years. (In this step, you just have to plot all your
answers from Year 1 to year 5)

PRODUCT YEAR
1 2 3 4 5
Bottle Operation
Percentage Capacity Utilized 30% 41% 54.40% 66% 77.30%
Machine Requirement .9 1.23 1.63 1.98 2.32
Labor Requirement 1.8 2.46 3.26 3.96 4.64
Plastic Bag Operation
Percentage Capacity Utilized 24% 48% 72% 84% 94%
Machine Requirement 1.2 2.4 3.6 4.2 4.7
Labor Requirement 3.6 7.2 10.8 12.6 14.1

PLANNING SERVICE CAPACITY (SERVICE VS MANUFACTURING)

Service capacity is more time and location dependent. It is subject to more volatile
demand fluctuations and utilization directly impacts service quality.

TIME: Unlike goods, services cannot be stored for later use. As such, in the service
realm, managers must consider time as one of their supplies. The capacity must be available to
produce a service when it is needed. For example, a passenger cannot be given a seat that went
unoccupied on a previous flight if the current flight is full.

LOCATION: In face to face settings, the service capacity must be located near the
customer. In manufacturing, production takes place, and then the goods are distributed to the
customer. With service, the opposite is true. The capacity to deliver the service must first be
distributed to the customer (either physically or through a medium such as telephone), then
the service can be produced. For example, a hotel room or rental car that is available in another
city is not much use to the customer – it must be where the customer is when that customer
needs it.

VOLATILITY OF DEMAND: The volatility of demand in service is much higher than on a

manufacturing production system for three reasons. (1) Service cannot be stored. It cannot
smooth the demand unlike in manufacturing. (2)The customers interact directly with the
production system and these customers have different needs, will have different levels of
experience with the process, and may require different number of transactions. (3) It is directly
affected by consumer behavior. Because of this volatility, service capacity is often planned in
increments as small as 10 to 30 minutes, as opposed to the one-week increments more
common in manufacturing.

Further examples:

Often, services require that capacity be available immediately and that it be near where the
customer resides. For example, a bank needs ATMs close to where the customers want
immediate cash, such as malls, cinemas, and parks, and enough of them so customers will not
have to wait in long lines.

Also, firms that offer services often need to deal with dramatic changes in customer demand
over time. For example, the lunch-hour rush at a bank’s drive-through window.

Reference: F. Robert Jacobs/Richard B. Chase (2017). Operations and Supply Chain

Management. New York, USA