Capacity planning and its planning What is service capacity? •“..defined as the maximum level of value-added activity over a period of time that a service process can consistently achieve under normal operating conditions” (Johnston et al., p.285); e.g. • Ø No of calls customer service agents can handle over the course of a shift Ø No of meals served by a restaurant during the lunchtime period Ø No of repair calls made by a computer service engineer during an 8-hour day •“..ensuring the service process has ‘sufficient resources' to deal with the anticipated levels of customer demand in such a way that quality of service meets pre-set targets in the most cost effective way” •Restaurant may encourage customers to leave their table when they have completed their meal,, but customers may feel service is ‘rushed’ and has deteriorated ... Is increased productivity and desired service concept maintained? The coping zone •The coping zone is a point where managers find it difficult to cope with increasing demand. At these levels of resource utilization, things get too busy: •Staff gets stressed •Everything becomes a problem •Perceived quality (customer satisfaction) declines • •This breakpoint is usually reached before 100% utilization: •1.It is not possible to run a resource to 100% (at least not human) •2.Several resources may be involved • •Also, too low levels of utilization affect staff and customer satisfaction. Difficulties in the assessment of service capacity a)service mix b)the impact of location c)the extent of intangibility in the service d)The ease of identification of resource constraints • (Johnston et al., p.287) Difficulties in the assessment of service capacity a)service mix (if mix contains fluctuate in volumes of repeaters and strangers, routine versus complex calls in the call centre) b)the impact of location (a service engineer operating in the city and in countryside) c)the extent of intangibility in the service (knowledge workers differ in their abilities. so managers cannot easily assess their capacity) d)The ease of identification of resource constraints (in complex tasks, the identification of key resource constraint may not be seen from the beginning) • (Johnston et al., p.287) In determining capacity, a number of factors make the assessment of service capacity difficult: Service mix.If the service mix is made up of high volumes of 'runners', and fluctuating volumes of 'repeaters' and 'strangers The impact of location.There is considerable difference between operating in a major city and rural communities. The extent of intangibility in the service.Services with low degrees of intangibility are relatively easy to deal with. The number of short transactions per hour in a fast-food restaurant is relatively consistent. However, the customer-facing staff in a gourmet restaurant may have greater discretion as to how to carry out their task. They may perhaps spend time with customers in 'building relationships', with the result that the individual's capacity becomes more difficult to define. The ease of identification of resource constraints. The capacity of a process is determined by resource constraints or bottlenecks. For more complex systems, the identification of the key resource constraints may be rather harder. •Predictable Cycles of Demand Levels •day •week •month •year •other • •Underlying Causes of •Cyclical Variations •employment •billing or tax payments/refunds •pay days •school hours/holidays •seasonal climate changes •public/religious holidays •natural cycles • (e.g., coastal tides) Predictable Demand Patterns and Their Underlying Causes From Excess Demand to Excess Capacity Variations in Demand Relative to Capacity VOLUME DEMANDED TIME CYCLE 1 TIME CYCLE 2 Maximum Available Capacity Optimum Capacity (Demand ≈ Supply) Low Utilization (may send bad signals) Demand > Capacity (business is lost) Demand > optimum capacity (quality declines) Excess capacity (wasted resources) CAPACITY UTILIZED Purpose of capacity planning & control Long-range plans (over one year) Capacity decisions critical to long range plans Issues: Research and Development New product plans Capital investments Facility location/expansion Intermediate-range plans (3 to 18 months) Issues: Sales and operations planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans Short-range plans (up to 3 months) Scheduling techniques Issues: Job assignments Ordering Job scheduling Dispatching Overtime Part-time help Top executives Operations managers with sales and operations planning team Operations managers, supervisors, foremen Responsibility Planning tasks and time horizons Items Product lines or families Individual products Components Manufacturing operations Resource Level Plants Individual machines Critical work centers Production Planning Capacity Planning Resource requirements plan Rough-cut capacity plan Capacity requirements plan Input/ output control Aggregate production plan Master production schedule Material requirements plan Shop floor schedule All work centers Hierarchical Nature of Planning Short- to medium-term term decisions taken to ensure sufficient capacity of the right type is available at the right time to meet demand It involves: • Measuring demand • Measuring capacity • Reconciling capacity and demand Aggregate Planning •Determine the resource capacity needed to meet demand over an intermediate time horizon •Aggregate refers to product lines or families •Aggregate planning matches supply and demand •Objectives •Establish a company wide game plan for allocating resources •Develop an economic strategy for meeting demand • •Objectives - examples •Restaurants - Aggregate planning is directed toward smoothing production rate and finding the size of workforce to be employed • •Airline industry - Aggregate planning consists of schedules for number of flights in and out of each city, number of flights on all routes, number of passengers and number of personnel at each airport • Aggregate Planning in Services •Most services use combination strategies and mixed plans •Controlling the cost of labor is critical 1.Accurate scheduling of labor-hours to assure quick response to customer demand 2.An on-call labor resource to cover unexpected demand 3.Flexibility of individual worker skills 4.Flexibility in rate of output or hours of work Level Production vs. Chase Demand vs. Demand management Inventory? Absorb demand Adjust output to match demand Change demand Short-to medium-term capacity strategies •LEVEL CAPACITY (also PEEK DEMAND) Scarce or expensive resources are maintained at a constant level •CHASE STRATEGY match supply to demand as much as possible by building flexibility into the operating system, AND maintain fast response times/avoid Queues •DEMAND MANAGEMENT Rather than change capacity of the service operation, encourage customers to alter their demand patterns to take the pressure off the resources. Level Strategy •Aims to set processing capacity at a uniform level (usually to meet average demand levels) regardless of fluctuations in demand • Ø In manufacturing, inventory (stock) is used to absorb variations in demand Ø In services, queue management is used to absorb variations in demand Ø Ø • • https://encrypted-tbn1.gstatic.com/images?q=tbn:ANd9GcSXPSCNhGzg822jIIcKaf0AQpH0zULtwUs8NTzJ5lz_i2G n9kEMQA https://encrypted-tbn2.gstatic.com/images?q=tbn:ANd9GcRTjDcG6zQ-M6xjQSsXsHtgdCT2P_HN97rTAC0eLXTWXdf wOpLY Level strategy example (Johnston et al., p.291) •Resource utilisation goals are frequently achieved at the expense of customer satisfaction •Customers may receive inconsistent service levels •Customers (patients) accept (or suffer) this poor level of service because the service is valuable to them and there may be no or few alternatives •There is a danger that the service provider may become complacent and not make attempts to cut the emotional cost of waiting for the customer, making it potentially vulnerable to competition (in this case private healthcare). • •Solution: queue management/yield management Base level of capacity should reflect the relative importance of the operations’ performance objectives •Stretch and shrink: •Offer inferior extra capacity at peaks (e.g., bus/train standees) •Use facilities for longer/shorter periods •Reduce amount of time spent in process by minimizing slack time •Adjusting capacity to match demand • Chase - Adjust output to match demand Chase strategy – example (Johnston et al., p.293) Ways of reconciling capacity and demand Level capacity Demand Capacity Chase demand Demand management Capacity Capacity Demand Demand Managing Demand •Interventionist approach •Reduce demand in peak periods / Increase demand when there is excess capacity (change in price and other nonmonetary costs ) •Restricted servise at peek times •Specialist service channles •Advertising and promotion •Inventorying demand until capacity becomes available •Formal wait and queuing system •Reservation system •Produce products with complementary demand patterns • Bh = business travelers in high season Bl = business travelers in low season Th = tourist in high season Tl = tourist in low season Bh Bh Bl Bl Th Th Tl Tl Price per room night Quantity of rooms demanded at each price by travelers in each segment in each season Note: hypothetical example Sequencing and allocation of capacity •Most organizations have rules or policies for allocation of capacity, either informal or formal. It is impossible to satisfy all possible customer demands and remain a viable organization. To deal with this issue, sequencing rules are created to manage the prioritization of allocation: •FIFO –consumer service usually •LIFO – unusual (driving out parcels e.g.) •Most valuable customer first •Most critical first –emergency services e.g. •Least work content first (When demand >> supply, this approach makes it possible to satisfy many customers quickly •Most work content firsto (Using this rule alone usually - poor performance) Queue management – perceptions Good /bad real life examples, experience? •1.Unoccupied time feels longer than occupied time •2.Pre-process waits feel longer than in-process waits •3.Anxiety makes the wait feel longer •4.Uncertain waits are longer than known, finite waits •5.Unexplained waits seem longer than explained •6.Unfair waits are longer than equitable waits •7.The more valuable the service, the longer will the customer wait •8.Solo waiting feels longer than group waiting •9.Uncomfortable waits feel longer than comfortable waits •10.New/infrequent users feel they wait longer than frequent user Managing Waiting Lines •Rethink design of queuing system •Install a reservations system •Tailoring the queuing system to different market segments •Manage customer behavior and perceptions of wait •Redesign processes to shorten transaction time PPTD0 Queuing Systems can be Tailored to Market Segments •Urgency of job •Emergencies vs. non-emergencies •Duration of service transaction •Number of items to transact •Complexity of task •Payment of premium price •Importance of customer •Frequent users/high volume purchasers vs. others • Improving resource utilization •Yield/Revenue management •Building flexibility •Reducing capacity leakage •Getting organizational support for resource utilization (Many issues need to be resolved by the organization as a whole) Building flexibility •New product flexibility •Product mix flexibility •Delivery flexibility •Volume flexibility • •Things to consider •Range –how much flexibility is required •Response –how quickly must the change be made •Effectiveness across the range –most processes have an optimum range •Cost of providing the flexibility • •Approaches to building flexibility: •Flexible employee contracts •Overtime •Short-term outsourcing •Menu-driven service (standardization) •Creation of runner activitie so“Dell” approach •Teamwork/ Multi-functional teams Reducing capacity leakage - reasons •Absenteeism •Due to overload? •Labor underperformance •Insufficient training? •Employee “churn” –employees leaving just when they are becoming effective •Scheduling losses - Overutilization/underutilization from time to time because: •Demand profiles not fully understood •Demand profiles too volatile •Staff preferences for work patterns do not fit with the business needs •Cost of complexity •The more “unusual” tasks, the more inefficiencies and rework •Quality failures •Having to deal with poor quality is loss of resources Revenue Management •Allocating resources to customers at prices that will maximize revenue 1.Service or product can be sold in advance of consumption 2.Demand fluctuates 3.Capacity is relatively fixed 4.Demand can be fairly clearly segmented 5.The service cannot be stored in any way 6.Variable costs are low and fixed costs are high/ the marginal cost of making a sale is relatively low. 7. Demand Curve Revenue Management Example Figure 13.5 Passed-up contribution Money left on the table Potential customers exist who are willing to pay more than the $15 variable cost of the room, but not $150 Some customers who paid $150 were actually willing to pay more for the room Total $ contribution = (Price) x (50 rooms) = ($150 - $15) x (50) = $6,750 Price Room sales 100 50 $150 Price charged for room $15 Variable cost of room Total $ contribution = (1st price) x 30 rooms + (2nd price) x 30 rooms = ($100 - $15) x 30 + ($200 - $15) x 30 = $2,550 + $5,550 = $8,100 Demand Curve Revenue Management Example Figure 13.6 Price Room sales 100 60 30 $100 Price 1 for room $200 Price 2 for room $15 Variable cost of room Revenue Management Approaches •Airlines, hotels, rental cars, etc. •Tend to have predictable duration of service and use variable pricing to control availability and revenue • Movies, stadiums, performing arts centers •Tend to have predicable duration and fixed prices but use seating locations and times to manage revenue •Restaurants, golf courses, ISPs •Generally have unpredictable duration of customer use and fixed prices, may use “off-peak” rates to shift demand and manage revenue •Health care businesses, etc. •Tend to have unpredictable duration of service and variable pricing, often attempt to control duration of service • Making Revenue Management Work 1.Multiple pricing structures must be feasible and appear logical to the customer 2.Forecasts of the use and duration of use 3.Changes in demand