Capacity Planning and Control: Nestle

Topics: Chocolate, Supply and demand, Nestlé Pages: 7 (2266 words) Published: December 4, 2008
Capacity Planning and Control: Nestle

Course Work in Operations Management

May, 2005

A business organization is an entity that inputs capital and resources, processes them and gets an output – products and services. Any business invests much capital into R’n’D and marketing for studying the customers’ opinion because it is a priority for any business to satisfy its customers. The more satisfied the customers are the better off the business is. Thus both parties are well off – customers get what they pay for – quality, brand etc, company generates brand identity, high revenues and profit. The bad story in the case is that any business experiences difficulties on the way, no matter how popular the product is or how well it sells.

One major concern for many businesses is seasonality. Organizations involved in bathing suit industry, ice-cream, medicine, tea and others face this problem very often. There are periods of time when the demand for a particular product is extremely high. Ice cream for example is a seasonal product that sells mainly during the summer. Ski equipment is gear that sells only during the winter season. There are exceptions of course as medicines and tea. Both can be bought and consumed at any time where as, medicines peak sales in winter and tea also. This does not mean though that the products die during the other seasons. However, it is evident that demand drops. In such cases sales drop too, so does revenue and profits, labor force becomes too much in the organization, costs for supporting depreciating machineries increase especially for the production of limited number of goods, expenses for salaries increase and as a whole the business starts going down. Many businesses face this situation nowadays. The question is how to deal with it. One main way of coping with this problem is cutting expenses.

According to Slack et. al. (2001) the best mechanism for running a business is to match level of demand (goods, services that customers need) with supply of capacity (recourses, labor force that the business inputs in the production process). They also define capacity as “the maximum level of value –added activity over a period of time”. Thus three main factors come into force here – the capacity of resources and labor force, the process operation which itself leads to satisfying customers through matching demand. It is very important to plan and coordinate all 3 factors very effectively because a difference in capacity and performance easily affects: costs, revenues, working capital, flexibility, quality of goods, speed of response and others. (Slack et. al. (2001))

Seasonality – or the wide gap between demand and capacity at a given period of time leads to imbalance in the business. In the ice-cream industry during the winter season capacity (resources and labor force) exceeds the demand (due to the cold weather). This situation evokes high costs and inefficiency of the business process. In solving the problem with seasonality[1] a business first needs to measure aggregate demand and capacity through predicting possible fluctuations in demand over time so that it can plan its capacity accordingly. Second step is to, identify the alternative capacity plans and finally chose the best capacity plan. (Slack et. al. (2001))

Aggregate demand (Slack et. al. (2001)) is best measured through possible predictions of fluctuations, past data or output. The alternative capacity plans include:

• level capacity plan
This mechanism involves same level of capacity all period through regardless of the demand. It leads to stable employment, low unit cost and high process utilization, but however it evokes production for storage and inventory rather than for immediate sale. Therefore, the “shelf-life” factor has to be considered very carefully (as production exceeds demand) especially when dealing with non-durable goods – food products.

• chase demand plan
This mechanism is exactly...

References: 1. Nestle; Good Food, Good Life [Online], Available: [Accessed: 2005, May 6].
2. Slack, N., Chambers, S., Harland C., Harrison A. and Johnson R. (2001) Operations Managemnt (3rd edition) Pitman Publishing
[1] Slack et. al. (2001) also state that fluctuations in demand may not only be seasonal, but also weekly and daily as in the case of a supermarket when there are national holidays for example.
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