Putting theory into practice: Capacity management

10 January 2021

The theory

Capacity management is a concept which translates as the act of ensuring maximum optimisation of organisational activities and production output at any given time.

The concept entails several frameworks and models that assist organisations in identifying the current capacity at which they operate and how they can recognise and implement optimal capacity structures.

The majority of the literature on capacity management says that the most common cause of inefficient use of capacity is a mismatch between the supply and demand of products. Additionally, emerging research argues that organisations failing to adhere to effective capacity management will likely experience diminished revenues.

Capacity management models, which involve myriad concepts and frameworks, are thus vital instruments for organisations to realise and improve their capacity structure. For instance, ‘capacity plans’ equip organisations with the tools needed to match their demand with an appropriate usage of capacity.

Additionally, an organisation can choose a capacity plan depending on the characteristics of its operation. For example, organisations operating in markets with high volatility can benefit from the ‘chase demand plan’, which basically entails an operation aspiring to stay on top of demand at all times. This can be achieved by holding capacity above the demand base line (also called the ‘lead approach’) or holding capacity just below the base line (the ‘lag approach’).

Capacity management has become ubiquitous in operations management over the last few decades. Nowadays, the concept can also be seen as a strategic tool in organisations to gain advantage and increase market share through increased efficiency of operations.

Raising capacity: Ronja Lodmark works for shipping firm TG

The practice

Ronja Lodmark, 28, from Sweden, was introduced to capacity management through the Operations Management module delivered as part of the MBA programme.

Ronja, who works for multinational shipping company TG, presented the concept to her senior management with the goal of optimising its lengthy and costly deployment procedures by adapting capacity management plans.

A two-fold strategy was proposed: firstly, to identify the bottlenecks in the operation and, secondly, to apply the frameworks of the ‘chase demand plan’.

“At TG, we have more than 3,000 seafarers who need to be ready for deployment within a very short notice period,” she says. “On top of this, we are in the shipping industry, which is incredibly volatile but when demand arises it does in great volumes.

“We have always tried to identify ways in which we can optimise our operations, but, looking back at our efforts, it is apparent that we were more concerned with a ‘top-down’ approach where additional human capital and resources were allocated to match the surges in demand.

“We were able to identify ‘document handling’ as the bottleneck in the deployment procedure. The department of documentation has more than 40 employees who are assigned to particular areas of the operation. By using a capacity measurement considering the input and output of the operation, I was able to calculate the effective capacity of the department – which, unsurprisingly, was operating well below average.

“Delivering a fast-paced service is integral to our success at TG. Our clients expect us to be able to meet their demands within a very short timeframe as waiting times are incredibly costly for our clients due to the high opex (operating expenses divided by the number of ownership days of consolidated vessels) of commodity ships. As such, we need to make sure that we can cater for sudden surges in demand without being extremely overstaffed when demand is low.

“After finding the department of documentation is operating below its effective capacity, we had to start figuring out how we could go about increasing its efficiency. I decided to do a deep dive into the department’s many sub-sections to assess the capacity against low and high demand.

“I found the sub-sections held a very uneven distribution of manpower. In other words, some sections were overstaffed while others were understaffed and unable to operate effectively during times of high demand.

“So, with the problem identified, we had to start looking at solutions. An attractive solution for any organisation concerned with budgeting would be to cut costs by letting go of employees in the overstaffed sections. However, the ‘chase demand plan’ argues it’s most effective for operations in volatile markets to plan their capacity ahead of demand (the ‘lead approach’). So we decided to not let go of any employees and looked at how to optimise the operation with the existing number of employees.

“The breakthrough for the department came with the introduction of a new training policy. As proposed in the capacity plan, the operation should aim to stay ahead of the demand, which made us look closer into the structure of the department. It became clear that the entire operation needed a restructuring to increase the efficiency of the current capacity.

“As the capacity plan says, making the best possible use out of an organisation’s capacity will be the winning strategy. And, with this in mind, we decided to invest in our employees by training them in all areas of the department so they could be allocated to any section, depending on the demand.

“We conducted the training programme over two weeks and it had a drastic impact on the efficiency of the department. We are yet to experience the changes in a period of high demand as the market has remained medium-low since. But, by utilising the same capacity measurement as we did prior to the changes, we could see a 60 per cent increase in overall efficiency.

“Understanding and addressing the capacity management issues in the department has been a great development for the entire organisation. Client satisfaction is expected to rise, as the increased efficiency will ensure a quicker deployment time. There has also been an increase in employee satisfaction within the department. The capacity plans allowed us to invest in our human capital, which in turn generated feelings of importance and value among employees.”

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