Fitness Plus is health-services and sports club, based in Greensboro, North Carolina. Fitness Plus started in 1991 which offers a range of facilities and services in three main activities such as fitness, recreation and relaxation. The Club has become very popular and well known by 1995. By May 2000, memberships have grown up to an enormous level due to growth in population and geography of the area. This Growth resulted into customer's complaints about over crowdedness and unavailability of equipment. Management has decided to sort out these problems by measuring either the club has reached to its capacity or re-designing of processes/facilities is required. In light of current situation management can have three options
Major Issues Discussed:
1. Over Crowded:
The Club has become over crowded in peak hours and 8o members per hour are checked in. This problem can be overcome by using off peak rates, these rates should be comparatively low with peak hours. By using this strategy people will prefer to avail off peak hours and then it will be less busy. Most of the complaints are related to fitness area. Member can avail all facilities with out waiting long time and goodwill of the Club will not be impaired and future prospect of business will be bright.
2. Unavailability of Equipment:
Most of the complaints are related to nautilus, cardiovascular and aerobics fitness areas. We have some statistics of recent member survey which clearly shows that there is a problem with Cardiovascular equipment. Average capacity measure for cardiovascular equipment shows that it is short as compare to average usage, other equipment seem to be quite right. Processes re-design is required for this area. Fitness Plus should provide discount on early check out until expansion is made.
3. Competition:
This area is grooming up and once again people are moving in for businesses. This has increased the competition as well. YMCA is providing full services and facilities with almost in every field in very low prices. Fitness Plus is facing difficulties while having cardiovascular equipment shortage but there is another Gold�s Gym which is offering excellent cardiovascular and weights services. Oasis also providing services to the adults. If Fitness Plus is going to invest in Cardiovascular, it will be risky because already the competition Is very high. These two facility providers are is the same area and very near to the Fitness Club.
4. Time Limitation:
The Club has just started solving these problems of congestion and equipment shortage now in May. The peak time of club is January, and it will take six months to complete this project of expansion. Times span seems to be enough but this is estimated time, actual time can be longer then six months. If the expansion work is not completed in time then Fitness Club will loose revenues which are expected in peak time.
5. Finances:
Owner thinks that a new facility would take six months to renovate, and the financial resources were not available to do both expansion or new branch. There must be enough budget available for future because Fitness club is thinking either to expand the existing facilities or open a new club. Finances are not enough to complete any of the project either expansion or new branch. If Fitness Club expand the existing facility it will cost less as compare to set up a new Club. Expansion can be proposed. Fitness club can invest in expansion by debt financing. This debt can be recovered soon, as goodwill of the Club is very high in the area, memberships have grown up already and increasing day by day. Fitness club can finance its expansion project in following sources of finance.
1. Internal Sources
Traditionally, the major sources of finance for a small business are internal sources:
Personal savings (Not available as per information in the Case)
Retained profits (Not available as per limited information in the Case)
Working capital (Not available as per limited information in the Case)
Sale of assets (Option may be available)
2. External Sources
Share Capital (Not applicable as per limited information in the Case)
Debentures (Option available)
Overdraft facilities (Option available)
Hire purchase (Option available)
Grants (Specific requirements for SMEs)
Venture capital (Option available)
Factoring and invoice discounting (Option available)
Factoring (Option available)
Leasing (Option available)
http://www.bized.co.uk/learn/accounting/financial/sources/index.htm Date accessed 18-11-2010
6. Population Growth:
Population of this area where Fitness Plus exists is increasing day by day. Memberships are increasing and reputation is very high amongst the people. Future prospects of new memberships are very bright and expansion is ultimately required either in terms of new branch of expansion of existing facility.
7. Recent Face-lifting of Area:
This area has recently been redeveloped, due to this more and more people are coming in to set up offices, other business and residing in residential flats. This will increase the level of memberships which require more equipment. There is a problem of congestion to install new equipment in existing building. To cope up with this issue again expansion or new branch is severely required.
Questions & Answers
Question 1: What method would you use to measure the capacity of Fitness Plus? Has Fitness Plus reached its capacity?
Answer:
Capacity:
Capacity is the maximum rate of output of a process or a system. managers are responsible for ensuring that the firm has the capacity to meet current and future demand. Otherwise the organization will miss out on opportunities for growth and profit. There are two main method of measuring capacity, output measure of capacity and input measure of capacity. Its hard to apply single method to every situation and find the desired affective results. A retailer measures capacity as annual sales dollars generated per square foot, whereas an airline measure capacity as available seat-miles (ASMs) per month. A theater measure capacity as number of machine hours. In general capacity can be expressed in two ways: in terms of output measures or input measures.
Output Measure of Capacity:
Output measures of capacity are best utilized when applied to individual processes within the firm, or when the firm provides a relatively small numbers of standardized services and products. High-volume processes such as such as Fitness Club. In this case number of members check out per hour. Here is this case there are multiple process that�s why output measure is not that much successful. But if we apply to individual process then it will work very effectively. Following are the processes of Fitness Plus.
Aerobics
Cardiovascular equipment
Nautilus machines
Free weights
Racquetball courts
Tennis courts
Input Measure of Capacity:
Input measures are generally used for low-volume, flexible processes, such as those associated with a custom furniture maker. In this case, furniture maker might measure capacity in terms of inputs, such as number of work stations or number of workers. The problem with input measures is that demand is invariably expressed as an output rate. if the furniture maker wants to keep up with demand, he/she must convert the business's annual demand for furniture into labor hours and number of employees required to fulfill those hours.
We will use output measure of capacity to measure the capacity of fitness plus. Most of the complaints are related to nautilus, cardiovascular and aerobics fitness areas. We have statistics of recent member survey to calculate the capacity of Fitness Plus. There are two major portions of existing case of fitness plus to measure the capacity, one is in terms of equipment availability and other is overcrowded/congestion of available room.
Equipment Unavailability:
There are three main areas where availability of equipment need to be improved. We have data from a member survey to calculate the capacity of these three areas.
S.No.
Area
Avg Member
Checked in/hr
Usage
Survey
Member/
Hour
Machines/Equipment
Available
Surplus/
(Shortage)
Capacity Cushion
Remarks
1
Nautilus
80
25%
20
24
4
17%
4 Machines are extra
2
Cardiovascular
80
40%
32
29
(3)
0
3 machines are short
3
Aerobics fitness
80
30%
24
35
11
31%
11 member space available
Nautilus Utilization: 20/24*100 = 83%
Nautilus Cushion: 100%-83% = 17%
Aerobics fitness Utilization: 24/35*100 = 69%
Aerobics fitness Cushion: 100%-69% = 31%
Cardiovascular equipment Utilization: 32/29*100 = 110% mean 100% utilization
Cardiovascular equipment: 100%-110% = -10% No cushion available
Average Overall Cushions:
Cushion in Nautilus + Cushion in aerobics + cushion in cardiovascular (17%+31%+(-10%))/3= 13%
Cardiovascular equipment is short, It needs main focus to meet the requirement of equipment. It is quiet clear that equipment is short, when it will be installed then there is requirement of more room in existing areas where shortages occurs.
a. Peak capacity:
Peak capacity, when calling for extraordinary efforts under ideal conditions that are not sustainable. Rated capacity, an engineering assessment of maximum annual output
b. Effective capacity:
Economically sustainable under normal conditions.
c. Increasing maximum capacity:
The effective capacities of multiple operations within the same facility are different. Expansion of a facility�s capacity occurs only when bottleneck capacity is increased. Flexible flow processes may have floating bottlenecks due to widely varying workloads on different operations at different times. Fitness plus areas have high equipment utilization rates. Various ways of expanding capacity of bottleneck operations, for example:
New equipment
Expand facilities
Operate bottleneck more hours per week
Redesign the process
d. Theory of Constraints:
�A bottleneck is an operation that has the lowest effective capacity of any operation in the facility and thus limits the system�s output.� Focus is on whatever impedes, (i.e., bottlenecks) progress toward the goal of maximizing flow of total value-added funds. The focus on bottlenecks is the means to increase throughput and, consequently, the flow of value added funds. The performance of the overall system is a function of how bottleneck operations or processes are scheduled.
Application of TOC involves five steps.
Identify system bottleneck(s).
Exploit the bottleneck(s) (i.e., maximize throughput). Any idle time at bottleneck processes is a lost opportunity to generate total value-added funds.
Subordinate all other decisions to step 2.
Elevate the bottleneck(s). Consider increasing capacity at the bottleneck(s).
Do not let inertia set in.
Many large corporations, both service oriented and manufacturing, have applied the principles of TOC. [Mention Delta Airlines and Bethlehem Steel.]
http://itdc.im.cyut.edu.tw/~jerry/opim/ritzman/chap06.htm Access Date: 15-Nov-2010 Time 15:35
Over crowded & Congestion:
It has been complained that club is very congested and it gets overcrowded when there is peak time. Fitness Plus can review the prices for peak time hours and off peak time hours to get rid of this problem of over crowdedness and congestion. We don�t Have enough data and exact picture about this issue that what is exact design of fitness plus and what type of partitions between the rooms. There should be complete review of existing system of designing and placement of equipment inside the club.
The owner's consideration are..
Were the capacities of the existing facilities constrained, and if so, where?
Answer: In light of above scenarios, the existing facility of cardiovascular equipment is constraint and we can decide to expand the existing capacity.
Because of the limited amount of land at the present site, expansion of some services might require reducing the capacity of others. If capacity expansion was necessary, should the existing facility be expanded?
Answer: We have limited information of the Club's other facilities cushions. But according to the customers complaints other areas seems to be all right. It clearly indicates that there are possibly large cushions available in other areas, so we can expand to meet the long term requirement.
Finally, owing to increased competition and growth downtown, was now the time to open a facility to serve that market?
Answer: As for as competition is concerned, Fitness Plus is well renown amongst the people or the area. Fitness Plus has reasonable goodwill. Expansion will be an additional factor for market leading.
2. Which capacity strategy would be appropriate for Fitness Plus? Justify your answer
Answer:
After analyzing whole situation of Fitness Plus the most appropriate strategy is Sizing Capacity Cushions. This capacity strategy concerns when to adjust capacity cushions and by how much. We are dealing with Fitness plus in prospective of Sizing capacity Cushions. Sizing Capacity Cushions strategy is implemented when we are dealing with following factors.
Sizing capacity cushions:
Following business situational factors suggest to implement sizing capacity cushions strategy.
Average utilization rates near 100% indicates to increase capacity.
Poor customer service or declining productivity.
Utilization rates tend to be higher in capital-intensive industries.
Factors Leading to Large Capacity Cushions.
When demand is variable, uncertain, or product mix changes.
When finished goods inventory cannot be stored.
When customer service is important.
When capacity comes in large increments.
When supply of material or human resources is uncertain.
Factors leading to small capacity cushions.
Large cushions hide inefficiencies, absenteeism, unreliable material supply.
When subcontractors are available to handle demand peaks.
http://itdc.im.cyut.edu.tw/~jerry/opim/ritzman/chap06.htm
Access Date: 15-Nov-2010 Time 15:35
Here in case of Fitness Plus there are several above indications which prompts us to implement capacity cushions strategy. for example
a. Average utilization rates near 100% indicates to increase capacity.
We have calculated below capacity cushions which clearly show that there is requirement of cushions enhancement.
Nautilus Utilization: 20/24*100 = 83%
Nautilus Cushion: 100%-83% = 17%
Aerobics fitness Utilization: 24/35*100 = 69%
Aerobics fitness Cushion: 100%-69% = 31%
Cardiovascular equipment Utilization: 32/29*100 = 110% mean 100% utilization
Cardiovascular equipment Cushions: 100%-110% = -10% No cushion available
Cushion in Nautilus + Cushion in aerobics + cushion in cardiovascular (17%+31%+(-10%))/3= 13%
There are two major areas which require cushion enhancement, one is Nautilus and other one is Cardiovascular equipment. Customers are complaining about these specific areas as well.
b. Poor customer service or declining productivity.
This indication is already existing in this case of fitness plus. Customers are not satisfied at all. They are complaining about numerous things. Recently it is not showing big difference in productivity because member is increasing but in the long run productivity will fall to very low ratios. Upon this point we are again agree to implement capacity cushions strategy.
c. Utilization rates tend to be higher in capital-intensive industries.
Here in Fitness plus case the over all level of utilization.
Cushion in Nautilus + Cushion in aerobics + cushion in cardiovascular (17%+31%+(-10%))/3= 13%
Memberships are increasing day by day and this cushions is an average cushion which should be more then 25%.
d. Factors Leading to Large Capacity Cushions.
In Fitness Plus demand is uncertain, sometimes there are more members who check in and sometimes less. In the same way sometimes there more member who want to cardiovascular equipment or aerobics then normal or expected. This is the factor which require large capacity cushions. These cushions can accommodate as many member as many they check in.
e. When demand is variable, uncertain, or product mix changes.
capacity cushions strategy is the most appropriate strategy when demand is variable as described in above point c. The demand of fitness plus is variable and uncertain. There is product mix change in fitness plus as well. Members are absolutely uncertain and the numbers can not be forecasted.
f. When finished goods inventory cannot be stored.
This theory is applicable when finished goods can not be stored. In this case, fitness plus is service provider and they can not retain services. Fitness plus just offers its services as soon as members check in. All available services of fitness plus must be readily available.
g. When customer service is important.
Customer satisfaction is very important in all service industries and manufacturing industries. Fitness plus must offer best services to satisfy customers in order to maintain/enhance profitability of business. Growth of business in by dent of customer satisfaction. Fitness plus is very keen in customer satisfaction that�s why we can implement capacity cushions strategy confidently.
h. When capacity comes in large increments.
Fitness Plus need large capacity cushions because increase in memberships have increased to the point where expansion is desperate. Members are complaining about over crowdedness and unavailability of equipment. It is required to enhance the capacity to meet these large increments of memberships.
i. When supply of material or human resources is uncertain.
Capacity cushions strategy is implemented when supply of material or human resource is uncertain. In this case of Fitness plus supply is uncertain. Here in fitness plus supply of material can be supposed as machines supply to member for their usage. Fitness plus does not know when and how many machines are required of each areas for members.
j. Factors leading to small capacity cushions.
When demand is high and availability is less of the service it leads to small capacity cushions. Small capacity cushions is bottleneck of fitness plus in current circumstances. We have to implement capacity cushions strategy to eliminate these bottleneck.
k. Large cushions hide inefficiencies, absenteeism, unreliable material supply:
There is great advantage when any organization have large cushions, it hides inefficiencies, absenteeism and unreliable material. If fitness plus have large cushions then the issues of over crowdedness. These cushions can help various stages of business. When fitness plus will have large cushions it can over come all the problems which customers are complaining about. It can be a future and long term planning for incoming demand and increase in memberships for next decade.
l. When subcontractors are available to handle demand peaks:
Capacity cushions strategy is implemented when subcontractor are available to handle demand peaks. In Fitness Plus we can think about outsourcing of any area which is most complaining and hard to control. Outsourcing is best tool to cut the cost and when investor is reluctant to invest more. We can bid for machines from outer contractors, they can install their machines and can get a certain percentage of revenues.
3. How would you link the capacity decision being made by Fitness Plus to other types of operating decisions?
Linking capacity and other decisions
''Capacity decisions should be closely linked to processes and supply chains throughout the organization''. (Book pp245) When fitness plus managers make decisions, they need to keep following point in mind.
Capacity cushions, resource flexibility, and longer lead times all serve as buffers against uncertainty.
Competitive Priorities
Drop in yield losses (quality)
Increase in capital intensive equipment (managing technology
Process management
1. Capacity cushions, resource flexibility, and longer lead times all serve as buffers against uncertainty:
All decisions must have buffers against the uncertainty of capacity cushions, resource flexibility and longer lead times. When we make capacity expansion decision of cardiovascular equipment area we must not forget the cushions for Aerobics, Nautilus and other areas of facilities. We have to design a system which does not effect other facilities areas of the Club.
2. Competitive Priorities
A change in one area may affect decisions in the other areas. Cushions can be lowered, for example less competitive priorities. Here we have to compensate by prioritizing the areas of fitness plus which needs desperate expansion. If cardiovascular area is congested then we have to minimize other areas. We have limited data in this case and it is hard to quantify and calculate the designated measured areas of each field.
3. Drop in yield losses (quality):
When we decide on competitive priorities there is a chance to limit yield losses due to the quality. Suppose we are expanding cardiovascular area which is our top requirement for the time being. Customers complaints will be minimized and quality will be improved and yield will be improved as well. These all factors will improve the profitability of the Fitness Plus.
4. Increase in capital intensive equipment (managing technology)
Fitness plus needs to increase capital intensive equipment (managing technology) in order to Linking capacity and other operational decisions. Because room is not enough in the existing premises of Fitness Plus. Fitness Plus can use the advanced technology machines which helps organization to use least possible room. Always old designs machine's structure is not easily portable and new technology comes with highly portability and small in size.
5. Process Management:
The Club has become over crowded in peak hours and 8o members per hour are checked in. This problem can be overcome by using off peak hours rates, these rates should be comparatively low with peak hours. By using this strategy people will prefer off peak hours and then it will be less crowded. Member can avail all facilities with out long waiting time and goodwill of the Club will be high and future prospect of business will be bright.
Conclusion:
Fitness Plus is market leader in its area where it exists. Fitness Plus has some issues with fitness areas. There are problems of equipment shortages and over crowdedness. To tackle with these issues expansion is imminent. Fitness Plus is well renown health service provider and its membership are growing day by day. Future forecasts for its memberships are rated in good position. Fitness plus existing fitness area will be re-engineered and process will be redesigned to resolve the issues. It will take six months to complete this project and we have six months time to do this, Now its May and peak time will start in January. This project will be done in parts so that existing customer will not suffer. Most of the expansion work should be done after Fitness Plus service hours.
Additional investment is not risky in Fitness Plus because its name is very high amongst the people. Return on capital employed is expected to be in good response. Finance Manager of Fitness Plus will have to play vital role in generating finances for the project. The best source is leasing. There should be financial lease for the machines. Finances problem will be solved and finally machines will be owned by Fitness Club. Construction work of expansion should be done by other sources of finance. Loan from bank is easy and readily available solution. Due to limited data we can not exactly suggest which sources of finance is best choice.
