7

Capacity and Aggregate Planning

Process Strategies
The objective of a process strategy is to build a production process that meets customer requirements and product specifications within cost and other managerial constraints

Capacity
The throughput, or the number of units a facility can hold, receive, store, or produce in a period of time Determines fixed costs Determines if demand will be satisfied Three time horizons

Planning Over a Time Horizon

Options for Adjusting Capacity Long-range planning Intermediaterange planning Add facilities Add long lead time equipment Subcontract Add equipment Add shifts

*
Add personnel Build or use inventory Schedule jobs Schedule personnel Allocate machinery Use capacity
Figure S7.1

Short-range planning Modify capacity

* Difficult to adjust capacity as limited options exist

Design and Effective Capacity

Design capacity is the maximum theoretical output of a system
Normally expressed as a rate

Effective capacity is the capacity a firm expects to achieve given current operating constraints
Often lower than design capacity

Utilization and Efficiency

Utilization is the percent of design capacity achieved
Utilization = Actual output/Design capacity

Efficiency is the percent of effective capacity achieved

Efficiency = Actual output/Effective capacity

Bakery Example
Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Bakery Example
Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Bakery Example
Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4%

Bakery Example
Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4%

Bakery Example
Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4% Efficiency = 148,000/175,000 = 84.6%

Bakery Example
Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4% Efficiency = 148,000/175,000 = 84.6%

Bakery Example
Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Efficiency = 84.6% Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

Bakery Example
Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Efficiency = 84.6% Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

Capacity and Strategy

Capacity decisions impact all 10 decisions of operations management as well as other functional areas of the organization
Capacity decisions must be integrated into the organizations mission and strategy

Capacity Considerations
1. Forecast demand accurately 2. Understand the technology and capacity increments 3. Find the optimum operating level (volume) 4. Build for change

Managing Demand
Demand exceeds capacity
Curtail demand by raising prices, scheduling longer lead time Long term solution is to increase capacity

Capacity exceeds demand

Stimulate market

Product changes

Adjusting to seasonal demands

Produce products with complementary demand patterns

Tactics for Matching Capacity to Demand

1. 2. Making staffing changes Adjusting equipment

Purchasing additional machinery

Selling or leasing out existing equipment

3. 4. 5. Improving processes to increase throughput Redesigning products to facilitate more throughput Adding process flexibility to meet changing product preferences

6.

Closing facilities

Demand and Capacity Management in the Service Sector

Demand management
Appointment, reservations, FCFS rule

Capacity management
Full time, temporary, part-time staff

Bottleneck Analysis and Theory of Constraints

Each work area can have its own unique capacity Capacity analysis determines the throughput capacity of workstations in a system A bottleneck is a limiting factor or constraint A bottleneck has the lowest effective capacity in a system

Bottleneck Management
1. Release work orders to the system at the pace of set by the bottleneck 2. Lost time at the bottleneck represents lost time for the whole system 3. Increasing the capacity of a non-bottleneck station is a mirage 4. Increasing the capacity of a bottleneck increases the capacity of the whole system

Aggregate Planning
The objective of aggregate planning is to meet forecasted demand while minimizing cost over the planning period

The Planning Process

Determine the quantity and timing of production for the intermediate future
Objective is to minimize cost over the planning period by adjusting
Production rates Labor levels Inventory levels Overtime work Subcontracting rates Other controllable variables

Aggregate Planning
Required for aggregate planning
A logical overall unit for measuring sales and output A forecast of demand for an intermediate planning period in these aggregate terms A method for determining costs A model that combines forecasts and costs so that scheduling decisions can be made for the planning period

Planning Horizons
Long-range plans (over one year)
Research and Development New product plans Capital investments Facility location/expansion Top executives

Intermediate-range plans (3 to 18 months)

Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans

Operations managers

Short-range plans (up to 3 months)

Operations managers, supervisors, foremen Responsibility Job assignments Ordering Job scheduling Dispatching Overtime Part-time help Planning tasks and horizon

Figure 13.1

Aggregate Planning
Jan 150,000

Quarter 1 Feb 120,000

Quarter 2 May 130,000 Quarter 3 Aug 150,000

Mar 110,000

Apr 100,000

Jun 150,000

Jul 180,000

Sep 140,000

Aggregate Planning

Figure 13.2

Aggregate Planning
Combines appropriate resources into general terms Part of a larger production planning system

Disaggregation breaks the plan down into greater detail

Disaggregation results in a master production schedule

Aggregate Planning Strategies

1. Use inventories to absorb changes in demand 2. Accommodate changes by varying workforce size 3. Use part-timers, overtime, or idle time to absorb changes 4. Use subcontractors and maintain a stable workforce 5. Change prices or other factors to influence demand

Capacity Options
Changing inventory levels
Increase inventory in low demand periods to meet high demand in the future Increases costs associated with storage, insurance, handling, obsolescence, and capital investment Shortages may mean lost sales due to long lead times and poor customer service

Capacity Options
Varying workforce size by hiring or layoffs
Match production rate to demand Training and separation costs for hiring and laying off workers New workers may have lower productivity Laying off workers may lower morale and productivity

Capacity Options
Varying production rate through overtime or idle time
Allows constant workforce May be difficult to meet large increases in demand Overtime can be costly and may drive down productivity Absorbing idle time may be difficult

Capacity Options
Subcontracting
Temporary measure during periods of peak demand May be costly

Assuring quality and timely delivery may be difficult

Exposes your customers to a possible competitor

Capacity Options
Using part-time workers
Useful for filling unskilled or low skilled positions, especially in services

Demand Options
Influencing demand
Use advertising or promotion to increase demand in low periods Attempt to shift demand to slow periods May not be sufficient to balance demand and capacity

Demand Options
Back ordering during high- demand periods
Requires customers to wait for an order without loss of goodwill or the order Most effective when there are few if any substitutes for the product or service

Often results in lost sales

Demand Options
Counterseasonal product and service mixing
Develop a product mix of counterseasonal items May lead to products or services outside the companys areas of expertise

Aggregate Planning Options

Option Changing inventory levels Advantages Disadvantages Some Comments Applies mainly to production, not service, operations. Changes in Inventory human holding cost resources are may increase. gradual or Shortages may none; no abrupt result in lost production sales. changes. Avoids the costs Hiring, layoff, of other and training alternatives. costs may be significant.

Varying workforce size by hiring or layoffs

Used where size of labor pool is large.

Table 13.1

Aggregate Planning Options

Option Varying production rates through overtime or idle time Subcontracting Advantages Matches seasonal fluctuations without hiring/ training costs. Permits flexibility and smoothing of the firms output. Disadvantages Overtime premiums; tired workers; may not meet demand. Some Comments Allows flexibility within the aggregate plan.

Loss of quality Applies mainly in control; production reduced profits; settings. loss of future business.

Table 13.1

Aggregate Planning Options

Option Using parttime workers Advantages Is less costly and more flexible than full-time workers. Disadvantages High turnover/ training costs; quality suffers; scheduling difficult. Some Comments Good for unskilled jobs in areas with large temporary labor pools. Creates marketing ideas. Overbooking used in some businesses.

Influencing demand

Tries to use Uncertainty in excess demand. Hard capacity. to match Discounts draw demand to new customers. supply exactly.

Table 13.1

Aggregate Planning Options

Option Advantages Disadvantages Some Comments

Back ordering during highdemand periods

Counterseasonal product and service mixing

May avoid overtime. Keeps capacity constant.

Customer must be willing to wait, but goodwill is lost.

Many companies back order.

Fully utilizes resources; allows stable workforce.

May require skills or equipment outside the firms areas of expertise.

Risky finding products or services with opposite demand patterns.

Table 13.1

Methods for Aggregate Planning

A mixed strategy may be the best way to achieve minimum costs

There are many possible mixed strategies

Finding the optimal plan is not always possible

Mixing Options to Develop a Plan

Chase strategy
Match output rates to demand forecast for each period
Vary workforce levels or vary production rate Favored by many service organizations

Mixing Options to Develop a Plan

Level strategy
Daily production is uniform

Use inventory or idle time as buffer

Stable production leads to better quality and productivity

Some combination of capacity options, a mixed strategy, might be the best solution