Capacity Management
“Ascertaining the issues relative to capacity management should be considered as the critical starting point when an organisation is attempting to plan and assess both inventory and supply chain/purchasing issues. The capacity capabilities/requirements are the central issue that will inform the others abovementioned.”
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BSM311 Operations Assignment
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Executive Summary
A successful operations management has achieved both effectiveness and efficiency in the three core areas of capacity, inventory and supply chain. As core areas, these three encompass the general processes and sub-processes of business operations. These three are all important in evaluating the effectiveness and efficiency of operations management. However, capacity is the initial process because it provides a framework for interpreting inventory data and planning the inventory system as well as evaluating supply chain process and managing the supply chain.
Table of Contents
Executive Summary
Table of Contents
Introduction
Linkages between Capacity, Inventory & Supply Chain
Capacity, Inventory & Supply Chain Issues
Capacity, Inventory & Supply Chain Relative to Internal & External Influences
Capacity, Inventory & Supply Chain in Support of Operational Processes
Conclusion
References
Introduction
The contemporary business environment offers more challenges because of the fast pace of changes in the market that creates pressure for business firms to respond effectively and quickly. The basis of reactions or responses to the barrage of dynamic changes in supply and demand is an understanding of the supply chain capacities. This means that focusing on the capacity infrastructure and the manner that this affects business operations supports the adaptability and speed needed by the company to respond to changes in the market and the business environment. Change is a given element in business operations. To be able to adapt to changes, effective capacity management is key. Part of effective capacity management is recognizing and understanding the role played by internal dynamics and external factors in causing and reacting to change. It is only after accomplishing this that the firm can accurately assess and plan its operations. The entire organisation feels the impact of an effective and responsive capacity management encompassing the various supply chain elements. Supplier capacity amidst market and business environment changes could halt production. Production capacity is also important since a capacity not sufficient to match peak demand together with a weak inventory system could adversely affect the fulfilment of customer orders and requests. Distribution capacity that covers the areas of storage and throughput affects the firm’s capability to deliver the correct products within the agree date and time. Transportation is also an equally important aspect to consider since this links the various areas of the supply chain.
Linkages between Capacity, Inventory & Supply Chain
Capacity, inventory and supply chain are three interrelated aspects of operation that comprise different systems combined to ensure efficient and effective operations.
Capacity refers to the limits of the firm in its operations so that operating way below this limit means that the firm may not be optimizing its capabilities but operating above the limit means the over exertion of its resources. Both scenarios have adverse effects on the business firm with the first scenario affecting cost, productivity and profitability and the second scenario affecting the fulfilment of customer demands. The determination of the limits of the firm in the various areas of its operations depends on its inventory. (Mcnair & Vangermeersch 1998; Yu-Lee 2002)
Inventory focuses on the monitoring of resource availability by considering inputs and output of raw materials and finished products. A low inventory given a stable production level could mean shortage of resources so that the firm may not be able to sustain its present level of production. A high inventory could mean that the firm is operating below its optimal production level, made a mistake in expecting changes in demand, or produced excessive products resulting to more finished goods stored in the warehouse. Inventory monitoring and assessment involves the consideration of capacity since the limit of the operations of the firm determines resource availability and utilisation. Inventory also forms the basis of supply chain management. (Muller 2003)
Supply chain refers to the process commencing with the sourcing of raw materials, combining of the raw materials to produce finished products, up to the delivery of finished products to retailers and final consumers. This tie up the linkages and systems involved in the entire sourcing, production and distribution processes. Effective tie-up of the phases of the supply chain process requires the consideration of factors including the capacity of the firm to meet its production level and the volume of inventory. (Hugos 2006)
These three areas are important in ensuring effective and successful operations management, with capacity constituting the bases of the assessment of inventory and supply chain processes.
In the case of inventory, data on available raw materials achieves context only when considered relative to capacity. Volume of raw materials and finished products stored in the warehouse can only be understood accurately by considering the operating capacity firm. (Muller 2003) Inventory data could be considered as low when capacity requires resources greater than what the firm has at the present and high when capacity does not utilise all of available raw materials. Capacity in turn depends on orders from retailers and direct purchases from consumers. As such, capacity shifts downward or upward depending on market trends. This means that the assessment and analysis of inventory also changes depending on shifts in the capacity of business operations.
With regard to supply chain, the effectiveness of process linkages and adjustments also largely depends on capacity (Hugos 2006). This is because capacity determines decisions in areas such as raw material sourcing, production, storage and distribution. The limit of operations and changes in the limit depending on market changes constitute signals to changes in the supply chain process.
Overall, assessing and planning inventory and supply chain depends on shifts in capacity, which in turn adjusts to influencing factors within or outside of the organisation. Internal and external factors determine capacity. As capacity changes so does the assessment of inventory and supply chain.
Capacity, Inventory & Supply Chain Issues
Issues involving these three aspects then revolve around the extent of sensitivity of inventory and supply chain planning to changes in capacity. If the firm is unable to accurately understand and recognise required changes in capacity, then inventory and supply chain assessments, would likely yield to inaccurate results. Effective operations management should commence with an assessment of capacity before moving on to inventory and supply chain evaluations. The same is true for planning. Capacity planning precedes inventory and supply chain planning since the latter processes take cues from capacity. Problems arise when the firm is unable to support inventory and supply chain planning with the capacity as the context. In addition, capacity determines the pace or level of flexibility required in inventory and supply chain management to be able to adjust to present and impending changes in demand. Otherwise, problems in inventory and supply arise. (Chase, Jacobs & Aquilano 2001; Naughton 2002)
To understand the importance of capacity as the initial step in inventory and supply chain planning, a consideration of the core capabilities of capacity is imperative. Apart from the development of an effective and responsive capacity plan, capacity management also involve three core capabilities indicating its value as the bases of inventory and supply chain planning.
First core capability is an understanding of operations requirements. Capacity pertains not only to present limits in operations but also to forward-looking limits to ensure business viability and sustainability. (Mcnair, & Vangermeersch 1998; Yu-Lee 2002) Managers need to consider changes in the needs of the business firm in order to determine present capacity and expected future shifts. Without considering business requirements, managers cannot effectively manage capacity. With poor management of capacity, inventory assessment has an inaccurate context in interpreting the volume of items under inventory while supply chain management has no point of reference in determining the effectiveness of input-output and process relations.
Second core capability is monitoring of capacity relative to obligations. Capacity management has an important role in determining the firm’s income level. It becomes important to monitor the manner that capacity deployment serves operations objectives. (Mcnair, & Vangermeersch 1998; Yu-Lee 2002)
If results show that objectives are not achieved, then there is a need to make corrections in capacity limits and deployment to support the smooth running of the business operations. These corrections constitute signals in the manner of interpreting inventory data and assessing supply chain efficiency.
Third core capability is managing utilisation. Some assets of business firms constitute large values in the balance sheet. (Mcnair, & Vangermeersch 1998; Yu-Lee 2002) This means that these assets are too valuable to be running at very low rate of utilisation. This means that capacity management strategies need to consider actively proper asset utilisation in order to deploy sufficient assets to meet objectives or ensure the optimisation of assets. Asset utilisation or deployment affects inventory and supply chain.
Capacity, Inventory & Supply Chain Relative to Internal & External Influences
Capacity, inventory and supply chain experience influences from internal and external factors. Since capacity constitutes the initial consideration in inventory and supply chain planning, it is imperative to recognise and understand the internal and external factors affecting capacity directly; and inventory and supply chain directly or indirectly. (Chase, Jacobs & Aquilano 2001; Naughton 2002) By doing so, a thorough understanding of these influences supports effective capacity management that in turn influence inventory and supply chain management.
Internal influences include resource availability and allocation, and organisational factors. Resources pertain to the aggregation of the human resources, technology, finances, facilities, time, processes and systems, and other key resources that fuel business operations. (Mcnair, & Vangermeersch 1998; Yu-Lee 2002) Resources directly affect capacity because available resource determines the limit of the company. If the business firm does not have enough resources then its capacity is low. Even of the firm has sufficient resources, resource allocation and deployment may be poor resulting to disparities between actual and planned capacity. When considered in relation to inventory, this could mean low inventory data or sufficient inventory but ineffective deployment. In relation to supply chain management, this could mean weak linkages from one process to another in the supply chain. The result in both instances is adverse to the company.
Organisational factors comprise the other internal influence on capacity. These factors encompass organisational culture reflected in the organisational structure, rituals, beliefs, values, language and history. (Mcnair, & Vangermeersch 1998; Yu-Lee 2002) These in turn determines the various areas of capacity such as adaptive capacity, leadership capacity, management capacity, and technical capacity. Organisational culture also directly influence inventory systems and supply chain processes. Since organisational culture affects capacity and capacity management, this also determines the role of capacity and the extent of importance of capacity as the initial consideration in inventory and supply chain planning.
External influences constitute factors outside of the operations of the business firm but affect capacity, supply chain and inventory whether directly or indirectly. First external influence is political and regulatory forces (Mcnair, & Vangermeersch 1998; Yu-Lee 2002). Capacity refers to the limit of business operations in meeting its objectives. An example of the influence of political factors on capacity is a civil strife in the location of the manufacturing plant resulting to the disruption of operations because of absence of workers and threats of attacks on the plant. A regulatory force could be increased taxes and quality standards that shift the limits of operations.
Second external influence is demographic and social influence (Mcnair, & Vangermeersch 1998; Yu-Lee 2002). A social and demographic factor is the culture of the environment where the business operates. China has a distinct business culture that relies heavily on networks. This affects capacity in terms of the extent of the resource network of the firm, with a lesser network indicating a lower limit while an extended network supporting a higher ceiling.
Third external influence is economic forces (Mcnair & Vangermeersch 1998; Yu-Lee 2002). This affects capacity in terms resource accessibility and availability. Scarcity of oil or the expected scarcity of oil means increases in price. Operations heavily reliant on oil then experience shifts in capacity in terms of the changes in the limit of operations.
Fourth external influence is technological forces referring to the availability and accessibility to technological tools and processes to support operations (Mcnair & Vangermeersch 1998; Yu-Lee 2002). E-business experience changes in capacity by utilising the Internet in business operations, especially in international operations.
By influencing capacity, these external factors impacts inventory and supply chain both directly and indirectly. Changes in capacity provide a change in the context of interpreting inventory data and signal possible adjustments in the supply chain processes. Direct influence includes the decrease and increase in the volume of inventory as well as the extent of efficiency in converting inputs into outputs according to targets and objectives and the appropriateness of the supply chain processes relative to operations goals.
As such, capacity, inventory and supply chain processes constitute important considerations in assessing operations. Again, capacity constitutes the starting point of the assessment process leading to planning and implementation because knowledge of the limits of current operations and possible shifts in these limits provide a framework in evaluating inventory and supply chain processes for purposes of effective planning. Capacity is the initial process in operations management because this indicates the extent of maximisation and optimisation to achieve goals and identify under-deployment or over-deployment of capabilities. Accurate capacity management then contributes to the effectiveness of an effective inventory plan and supply chain plan.
Capacity, Inventory & Supply Chain in Support of Operational Processes
Operations management centres on the careful management of processes in producing and distributing finished products to retailers and end consumers. This encompasses the general processes of creating, developing, producing and distributing products encompassing the specific processes of purchasing, inventory monitoring, quality monitoring, storing, logistics, and evaluating. The core target of operations management is to achieve efficiency and effectiveness in these processes to achieve firm objectives. As such, operations management also includes measurements and analysis of the internal processes of the firm within the context of the external business environment. (Chase, Jacobs & Aquilano 2001; Naughton 2002)
Capacity, inventory and supply chain constitute the backbone of the operational process because these factors cover the general and sub-processes within operations management. Capacity covers the limits of the business firm in the areas of purchasing and inventory monitoring. Inventory covers purchasing, inventory control, and storing. Supply chain covers purchasing, inventory monitoring, quality monitoring, storing, and logistics. These factors also comprise the key considerations in the assessment of business operations because the results would provide an indication of the extent of responsiveness of capacity to internal and external influences, the concurrent shifts in inventory planning, and the improvements and changes in supply chain processes. By considering these factors in the evaluation process, the firm is able to determine problems and areas for improvements in its operations. As such, these factors constitute the foundation of operations processes.
Effectiveness and efficiency of these factors also ensure successful operations processes. Responsive capacity deployment, appropriate inventory management, and efficient supply chain processes ensures that the firm is able to product the products it intended as output matching expected volume and quality and distribute these to consumers to accurately meet demand. In effect, firms that place importance on these three factors are sure to achieve success in its operations processes in terms of profitability through efficient output to input transformation and sustainability by establishing effective systems and process to support the meeting of changing consumer demand in the long-term.
Conclusion
Successful operations management requires the achievement of efficiency and effectiveness in the three areas of capacity, inventory and supply chain because these areas encompass the general processes and sub-processes comprising business operations. Among these three, capacity constitutes the critical starting point for efforts to assess and plan inventory and supply chain. This is because capacity provides a contextual background in interpreting inventory data and justifying inventory management practices. Capacity also determines efficiency in the supply chain process by affecting various stages of the supply chain including purchasing and logistics. As a starting point, this means that all the three areas of operations management are important in evaluating operations success. Capacity holds a significant position by constituting the first consideration. All three are interrelated processes but there needs to be a beginning for a thorough evaluation of operations.
References
CHASE, R. B., Jacobs, R. F., & Aquilano, N. J., 2001. Operations Management for Competitive Advantage. 10th ed. New York: McGraw-Hill.
HUGOS, M., 2006. Essentials of Supply Chain Management. 2nd ed. New York: John Wiley & Sons.
MCNAIR, C. J., & VANGERMEERSCH, R., 1998. Total Capacity Management: Optimizing at the Operational, Tactical, and Strategic Levels. Boca Raton, FL: CRC Press LLC.
MULLER, M., 2003. Essentials of Inventory Management. New York: AMACOM.
NAUGHTON, S., 2002. Operations Management: In a Week. London: Chartered Management Institute.
YU-LEE, T., 2002. Essentials of Capacity Management. New York: John Wiley & Sons.
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