Summary advanced operations management

3) HOW IS THE DEMAND SIDE MANAGED?

Demand management involves changing the pattern of demand by stimulating off-peak demand or constraining

peak demand.it attempts to modify demand patterns to make them compatible with capacity.

There are a number of methods used to manage demand:

• Price differentials – adjusting price to reflect demand. For example, skiing and camping holidays are cheapest

at the beginning and end of the season and are particularly expensive during school vacations.

• Scheduling promotion – varying the degree of market stimulation through promotion and advertising in order to

encourage demand during normally low periods.

• Constraining customer access – customers may only be allowed access to the operation’s products or services

at particular times. For example, reservation and appointment systems in various settings.

• Service differentials – allowing service levels to reflect demand (implicitly or explicitly) by letting service

deteriorate in periods of high demand and increase in periods of low demand.

• Creating alternative products or services – developing services or products aimed at filling capacity in quiet

periods

• Identifying markets with complementary trends or complementary seasonality

Yield management

In operations that have relatively inflexible capacities, such as airlines and hotels, it is important to use the capacity

of the operation for generating revenue to its full potential to generate profits . One approach used by such

operations is called yield management, useful where:

 Capacity is relatively fixed

 The market can be fairly clearly segmented

 The service cannot be stored in any way

 the services are sold in advance

 The marginal cost of making a sale is relatively low

Methods :

 over-booking capacity

 Price discounting

 Varying service types

4) HOW IS THE SUPPLY SIDE MANAGED

The most common starting point in managing the supply side is to decide the ‘base level’ of capacity and then

adjust it periodically up or down to reflect fluctuations in demand.

Three factors are important to consider in setting this base level:

 The operation’s performance objectives .

 Perishability of the operation’s outputs: base capacity will need to be set at a relatively high level because

inputs to the operation or outputs from the operation cannot be stored for long periods.

 Variability in demand or supply: the greater the variability, the more extra capacity will need to be provided to

compensate for the reduced utilisation of available capacity. 25

Capacity utilization

Here, decisions include setting the base capacity level, and then using two key methods of managing supply:

a) Level capacity plans, where nominal capacity is kept constant;

 absorb demand

 Ignores demand fluctuation and keep output level constant

 Capacity is fixed throughout the entire horizon of planning, independently from forecasts demand

fluctuations

 Excess capacity builds up inventories, that will be used when capacity is below the demand level

 High risks of underutilization of equipments and of high costs

Advantages:

 Stable workforce

 High productivity, high utilization rates, operations stability

Disadvantages

 Inventories build up

 Risk of unsold product (warning: not appropriate for perishable products)

b) Chase capacity plans, where capacity is adjusted to ‘chase’ fluctuations in demand over time.

 Adjust output to match demand

 Adjusting capacity according to forecasts demand fluctuations

 Quite complex plan: dynamic adjustments of resources, workforce, turns, working hours, and all other

transforming resources

Advantages:

 Less inventories and lower risks of low utilization rates 26

 Guarantees that capacity is enough to meet demand

Disadvantages:

 Poor stability in operations, less productivity, costs associated with turnover

Not appropriate for firms:

 Producing standard and non perishable products

 in capital intensive industries

c) Demand management plan: attempt to change demand to reduce fluctuations.

Methods to adjust demand

5) HOW CAN OPERATIONS UNDERSTAND THE CONSEQUENCES OF THEIR CAPACITY MANAGEMENT

DECISIONS?

Before an operation adopts one or more of the three ‘pure’ capacity management plans (demand management,

level capacity or chase capacity), it should examine the likely consequences of its decisions .

Four methods are particularly useful in this assessment:

 Factoring in predictable versus unpredictable demand variation;

 Using cumulative representations of demand and capacity;

 Using queuing principles to make capacity management decisions;

 Taking a longitudinal perspective that considers short- and long-term outlooks. 27

Cumulative representations assess whether a particular level of capacity can satisfy demand using a diagram

which shows the cumulative levels of capacity and demand over time

• If the total over-capacity area is larger that total under - capacity area, than that capacity is adequate.

• However, this is conditioned by the possibility to stock inventories

• When calculating over - and under-capacity. Note that not all months have the same number working days

 It is necessary that over-capacity occurs before under-capacity

1. A level capacity plan that produces shortages in spite of meeting demand at the end of the year.

2. A level capacity plan that meets demand at all times during the year

For capacity planning purposes demand is best considered on a cumulative basis. This allows alternative capacity

and output plans to be evaluated for feasibility.

For any capacity plan to meet demand as it occurs, its cumulative production line must always lie above the

cumulative demand line.

If a pure demand chase plan were adopted, the cumulative production line would match the cumulative demand

line. The gap between the two lines would be zero and hence inventory (or the queue, if we were taking a service

example) would be zero. Although this would eliminate inventory-carrying costs, as we discussed earlier, there

would be costs associated with changing capacity levels. 28

Taking a longitudinal perspective that considers short- and long-term outlooks

The learning from managing capacity in practice should be captured and used to refine both demand forecasting

and capacity planning.

Capacity management strategies are partly dependent on the long- and short-term outlook for volumes.

Ex. pag 420 CHAPTER 13

INVENTORY MANAGEMENT

Inventories are accumulations of transformed resources; either physical items (called ‘stock’), people (called

queues) or information (called databases).

Managing these accumulations is what we call ‘inventory management’.

If there is a difference between the timing or the rate of supply and demand at any point in a process or network

then accumulations will occur. When the rate of supply exceeds the rate of demand, inventory increases; when the

rate of demand exceeds the rate of supply, inventory decreases. So, if an operation or process can match supply

and demand rates, it will also succeed in reducing its inventory levels. But most organisations must cope with

unequal supply and demand, at least at some points in their supply chain.

Types of inventory

 Cycle : inventory that occurs when one stage in a process cannot supply all the items it produces simultaneously

and so has to build up inventory of one item while it processes the others.



Cycle inventory in a bakery Three types of bread: arepa (A), baguette (B), ciabatta (C).

Because of the nature of the mixing and baking process, only one type of bread can be produced at any time.

 Buffer : an inventory that compensates for unexpected fluctuations in supply and demand; can also be called a

safety inventory.

 De-coupling inventory : the inventory that is used to allow work centres or processes to operate relatively

independently. Useful in process layout

 Anticipation inventory : inventory that is accumulated to cope with expected future demand (ex. Seasonal) or

interruptions in supply.

 Pipeline inventory : the inventory that exists because material cannot be transported instantaneously. 29

Some reasons to avoid inventories

Inventory should only accumulate when the advantages of having it outweigh its disadvantages.

Why keep physical inventory and how to reduce it

 Physical inventory is an insurance against uncertainty – Inventory can act as a buffer against unexpected



fluctuations in supply and demand. Safety stocks for when demand or supply is not perfectly predictable.

How to reduce: Improve demand forecasting, tighten supply, e.g. through service-level penalties

 Physical inventory can counteract a lack of flexibility – Where a wide range of customer options is offered,

unless the operation is perfectly flexible, stock will be needed to ensure supply when it is engaged in other



activities. Cycle stock to maintain supply when other products are being made.

How to reduce: Increase flexibility of processes, e.g. by reducing changeover times or using parallel processes

producing output simultaneously

 Physical inventory allows operations to take advantage of short-term opportunities – Sometimes opportunities

arise that necessitate accumulating inventory, even when there is no immediate demand for it. For example, a

supplier may be offering a particularly good deal on selected items for a limited time period.

 Suppliers offer ‘time-limited’ special low-cost offers.

How to reduce: Persuade suppliers to adopt ‘everyday low prices’

 Physical inventory can be used to anticipate future demands –Rather than trying to make a product only when it



is needed, it is produced throughout the year ahead of demand and put into inventory until it is needed

anticipation inventory and is most commonly used when demand fluctuations are large but relatively



predictable. Build up stocks in low-demand periods for use in high-demand periods.

How to reduce: Increase volume flexibility by moving towards a ‘chase demand’ plan.

 Physical inventory can reduce overall costs – Holding relatively large inventories may bring savings that are

greater than the cost of holding the inventory. This may be when bulk-buying gets the lowest possible cost of

inputs, or when large order quantities reduce both the number of orders placed and the associated costs of



administration and material handling. Purchasing a batch of products in order to save delivery and

administration costs.

How to reduce: Reduce administration costs through purchasing process efficiency gains, investigate 30

alternative delivery channels that reduce transport costs

 Physical inventory can increase in value – Sometimes the items held as inventory can increase in value and so

become an investment wine.

 Physical inventory fills th