October 25, 2007

Ops Mngt Lesson 6 Exercise

This blog entry will discuss some examples for different strategies of medium term capacity planning, yield management and queue design.

Level CapacityManagement:

This strategy, keeps the production level (capacity) stable on the medium term. During the periods where production is below demand it builds inventory and where demand exceeds production, the inventory is consumed as shown in the picture below. The goal is to adjust capacity in order to balance the areas below and above the capacity, otherwise either we will have increasing inventory over the time or it won't be possible to satisfy demand.


An extreme example of a company that uses this strategy could be a quality wine producer. This kind of business cannot adjust demand on the medium term as the amount of grapes produced by a vineyard plantation is quite fixed and growing more grapes in order to increase demand it takes years. Buying grapes to a third party is difficult as each quality wine producer uses a particular kind of grape. Of course they can harvest less grapes if the demand falls below expectations adjusting capacity in this way, but their strategy if this is the case, usually will be to lower the price, not reducing the quantity of wine produced.

Chase Capacity Management:

This strategy pursuits to match the capacity with the demand leadint to a resource optimization and inventory reduction compared with the Level strategy. 

As an example, I will use a real example from my own experience that it's the way a Help Desk adjust their capacity (number of persons answering calls) according with the demand (number of incoming calls) in one particular day.

In the picture below can be seen (in blue) the number of incoming calls and the number of people attending those calls at every time frame (in yellow).  


It can be noticed how the curves are very similar and it's clear that chase demand has been used. It can also be seen that there is a shift between the demand curve and the capacity curve. This was a defect of the timetable containing the starting working hours of every Help Desk agent and had the effect of increasing the number of abandoned calls (red curve) that was just what the study tried to improve (reduce). Once the scheduling was corrected, a better matching between demand and capacity lead to a reduction of the number of abandoned calls.

This strategy is used because it optimises the number of resources employed, in this case, mainly the number of Help Desk agents.

Yield Management:

This strategy tries to maximise the revenue from perishable fixed resources. I'll try to explain in this section how an utility company (Electricity Producer) it makes use of Yield Management.

First of all, we have to clarify two aspects of electricty production:

1. Electricity is a perishable resource. it has to be used or "destroyed", but you cannot store electricity.

2. Usually an electricity producer uses a "chase demand" strategy that has some limitations. Commonly, they have a number of Nuclear Power generators that cannot be stopped to adjust for demand variations and that account for a big part of the production. They have also a number of Hydro plants, Fuel Plants...etc that they can switch on and off depending on the demand.

Now that this is clear, the problem is that during night there's more electricity produced from Nuclear Power plants than the demand for it. So what the electricity producers can do about it? They use Yield Management lowering the price of the electricity during night, in order to increase the demand covering the capacity (very similar to the strategy followed by the airlines when they change the seat price when there is low demand)

They use this strategy to obtain some revenue from a resource that won't produce any revenue at all if it is not consumed in the precise moment it's produced.

Queue Design:

Single Queue/Multi Server:

This is a very common approach to queue design. An example could be a computer Operating System distributing jobs among different microprocessors. The supervisor of the operating system, waits for a microprocessor to be available and then sends the next job in the queue to this processor (this is the way computers used to work some time ago although now they use more sophisticated approaches).

What is interesting from this example is that the supervisor can implement several strategies for managing the queue. The simplest of all is the FIFO (First In First Out) meaning that the first job that entered in the queue will be the first to go out.

But the supervisor can also use a strategy call SJF (Shortest Job First) in which it will prioritise those jobs whose execution time is expected to be shorter.


This strategy is sub-optimum and is rarely used when all the servers serve the same resource (the example of the Business check-in resource at an airport, compared with the economy class desks is not valid as they are not serving the same resource). On the other hand, the queues formed at the different cashes of a supermarket are not a valid example either, as one person waiting at one queue will normally move to another when there is availability of a new cashier.

A valid example for this queue design, could be the tolls of some highways when a separation exists among the lanes, so when you're in a

particular lane you cannot change to another as you will normally have one or more cars behind you.

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