Journal 9 need help Capacity and Demand Planning So we have figured out a unique place in the circular economy, designed a product/service to deliver val

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Capacity and Demand Planning
So we have figured out a unique place in the
circular economy, designed a product/service to
deliver value to target customers, and selected an
appropriate process to make them, but we still
need to answer the following questions:
§ How much to produce
§ What lot/batch sizes to choose
§ When to produce
Today’s manufacturing or service rendering is a
highly complex process that requires a lot of
resources and a considerable amount of planning.
We need to make sure our products/services meet
customer demand in a timely fashion.

Capacity Planning Terms (I)

§ SKU (Stock keeping unit): A unique identifier assigned
to each product for easier and more efficient record-

§ Production function: It is the functional relationship
between the quantity of a good produced (output) and
factors of production (inputs such as labor, capital,
land, technology).

§ Bill of Materials: BOM specifies the relationship
between the end product (independent demand) and
the components (dependent demand). It is a
comprehensive list of the raw materials, assemblies,
subassemblies, parts and components, as well as the
quantities of each, needed to manufacture a product.

UPC (Universal Product Code)
is used only in the US and
Canada, while the EAN
(European Article Number) is
used everywhere else globally.

Capacity Planning Terms (II)
§ Master production schedule: An MPS is a plan to

produce individual final items. The MPS lays out
the production plan for each stage’s quantity.

§ Materials requirements planning: MRP is a tool
that determines what items are required, how
many, and when.

§ MRP II: Manufacturing Resource Planning
§ Enterprise resources planning: ERP is commonly

used by (especially) large organizations to
coordinate the ever more complex activities that
they perform. Vendors such as SAP, Oracle,
PeopleSoft are dominating this market segment.

MRP Illustrated

Capacity Planning
• Capacity planning is the process of determining

the production capacity needed by an
organization to meet changing demands for its
products or services.

• Capacity has to do with the space available,
amount of equipment/machines used, number of
people and shifts, manufacturing processes
selected, and management efficiency.

• So you see a business opportunity to build a
plant to make N95 masks during the pandemic.
What factors do you take into account when
building this plant?

Your N95
Mask Plant

• Demand
• Physical facilities
• Manufacturing

• Machines
• Staffing
• Storage room
• Production space
• Outbound logistics

Capacity Choices/Decisions
• How much do we need to produce to meet the

anticipated demand?
• Do we buy or make ourselves? How much needs to be

bought or made in the supply chain?
• If we buy, do we source domestically or internationally?

How do we manage the procurement process?
• If we make, how much do we make and how many

parts and subassemblies do we need to buy from
vendors? Do we set up plants or outsource to contract
manufacturers? Domestic or international locations?
Do we use automation or manual labor? Should we
own or lease equipment/factory?

• What’s our contingency plan if demand is higher/lower
than our forecasts?

Hotel ONT
So you bet on increased travel through the Ontario
Airport and would like to build a hotel on a vacant lot
your friend owns. How big of a hotel (how many
rooms) should you build?
Capacity is calculated as number of rooms x 365 x
utilization rate (not 100% rooms are available every
Occupancy rate is the percentage of occupied rooms
in your property at a given time. It is one of the most
important KPIs and is calculated by dividing the total
number of rooms occupied, by the total number of
rooms available, times 100, creating a percentage such
as 75% occupancy.

U.S. Hotel Occupancy Rate

Airlines Load Factor
Load factor for a single flight is calculated by dividing
the number of (fare paying) passengers by the number
of seats (available for sale).
Load factor for an airline represents the proportion of
airline output that is actually consumed. To calculate
this figure, divide Revenue Passenger Miles (RPMs) by
Available Seat Miles (ASMs).
The higher the load factor, the more an airline can
spread its fixed costs amongst passengers.

Passenger Airlines Load Factor

Managing Demand
qDemand forecasting is the process using

historical sales or other data to estimate
customer demand. It’s an estimate of the amount
of goods and services that customers will
purchase in the specific time period.

§ Use historical data (time series)
§ Use external factors (regression)
§ Use expert opinions
§ Use machine learning/AI

qDemand management:
§ Adjust price
§ Adjust arrival (reservation/appointment/queuing)

Managing Demand

§ Customers oftentimes are asked to be in queue, or

waiting line, before they get the service.
§ Too many agents/cashiers at any given time means that

you are wasting money for your employees to do
nothing. Too few, you may agitate customers who
either leave or wait for a long time to get service.

§ Service provider has to determine what level of service
they provide at how much cost (i.e. what is the
expected wait time, how many customers can they
handle in a day/hour, etc.)

§ Many service providers use an appointment system to
help handle customer arrivals so they can schedule
services accordingly. (i.e. doctor’s office, DMV)

Solutions (I)

§ Arrival: customer

arrival rate and

§ Queue: single line or
multiple, single phase
or multiple, first-come
first-serve or
priority/triage, single
or batch

§ Service: service rate
and number of servers

Solutions (II)

§ Keep them occupied
§ Get them started
§ Explain why
§ Give time estimate
§ Be fair
§ Arrange group wait
§ Make the wait more


Optimal Waiting Line Cost
Cashiers are on your payroll; customers are not!

Discussion Questions
Please answer the following questions with
reference to class and provide evidence to
support your answers.
Everyone: What factors do you take into account when
building an N95 plant in mid-2020? Be methodical.
Everyone: In your current or previous position, how is
capacity managed? How can it be improved?
Everyone: Describe a good waiting line management
from your own personal experience. How can it be even
better (definition first)?
Everyone: Which plane boarding method do you think is
the best and why? What can you do to speed it up?

Group Discussion
Be sure your group is ready to lead and/or
discuss the following question in class, with
research or facts-based evidence.
Learn how California DMV manages demand and
queueing. Critique their management, using what
we have discussed so far in class. Propose a better
(define how you would measure “better”) way as
if you were the head of DMV.

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