How it works
Every business has to consider how much capacity
it needs for its operation, and how to manage
this capacity both day-to-day and in the future.
Management has to choose a priority: whether to
deliver excellent customer service by having extra
capacity, and thus price its products or services high;
or to manage its resources efficiently for a better return
on investment, at the risk of disappointing customers
Managing capacity
if and when demand goes beyond capacity.
Businesses may offer consumers incentives to help
manage capacity—for instance, cheaper late-morning
train fares encourage passengers to travel after rush
hour, easing overcrowding on trains that are full to
capacity in the early morning. Likewise, many hotel
chains do not charge a fixed price for rooms, pricing
them according to demand to maintain capacity.
In terms of production, capacity means how much work can be
achieved in a given time. Ideally, a business matches its capacity to
customer demand, using its resources with maximum efficiency.
Capacity decisions
The fundamental decision is whether to compromise
on demand or capacity—whether to put customers or
the streamlining of operational costs first.
Customer focus
The company, in this case a car dealer, keeps
more cars in stock than required so it can
always satisfy customer demand.
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Sale
Increase demand
To use up stock, pricing
policies increase demand
by encouraging customers
to buy fast—for example,
offering on-site deals
for older car models.
Manage capacity—
raise prices
Customers are happy to have a
product immediately but must
pay a higher price to cover the
cost of holding excess stock.
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HOW OPERATIONS AND PRODUCTION WORK
Control
HOW CAPACITY AFFECTS A COMPANY
Capacity management is critical
to ensure, for example, that a
manufacturing operation has
the right level of resources to
work to a production schedule.
It affects many areas of the
business, as all are interlinked
and cost the company money:
Factory or office size
What and how much
equipment is needed
Staffing levels
Use of labor—for example,
shift work
Which materials to use, how
much/how often to order
Inventory (stock) levels
Production scheduling
Speed and ease of processes
Type of information
technology used
Potential capacity The capacity that
can be made available long-term, a factor
that affects investment decisions and
business growth
Immediate capacity The maximum
potential capacity available in the
short term
Effective capacity The total capacity
that is realistically achievable when all
resources are being used optimally
NEED TO KNOW
Resource focus
The company uses resources as efficiently as
possible. Wastage is kept to a minimum, but
satisfying demand is hard because work is at
full capacity and output cannot rise.
Demand not satisfied
Company is unable to meet surges in
demand; customers may have to wait
while production catches up, and
business may be lost to competitors.
Manage capacity—keep stock low
It produces stock according to demand and holds low
inventory to minimize unnecessary spending and storage costs.
90 million
the number of iPhone 6 units
made by one manufacturer
to meet demand in 2014
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