Capacity

Aggregate planning
Strategic decisions:
• Selection and design of the
product or service
• Selection and design of the
production process and the
technology to be used
• Job design
• Long-term capability
• The location or emplacement
• The layout of the plant
• Human Resources
Tactical decisions:
• Medium-term planning
and production
scheduling
• Planning control (detection
of deviations). Standard
procedures and timing
• Material flow
• Purchase of materials
• Inventory or stock of raw
materials
• Manufacturing
• Component Inventory
• Mounting
• Inventory of finished
products
• Decisions that guarantee
the quality level of the
products
• Preventive maintenance of
machinery
Capacity Planning
• HOW much long range
capacity will be needed?
• WHEN will the
additional capacity be
required?
• WHERE should the facility
be located?
• WHAT should the layout and
characteristics of the facility be?
Capacity in short

RAW
MATERIAL
INPUTS

FACTORY
CAPACITY CAPACITY =
(= MACHINE FOR 200 grains of sand/minute
PROCESSING)

FACTORY
OUTPUT
 For any fixed system, what happens as we increase the number
of jobs in the system?

Speed of
Sand through
Funnel

Response Time

Time in System

Amount of Sand
Jobs In Poured Into
Funnel
System
Basic funnel capacity management
questions?
• How much sand should we allow into
the system of funnels?
• How many funnels should we have?
• How big should our funnels be?
• What kind of funnels should they be?
• When should we add funnels?
 What are the problems with these two systems?

DEMAND = 200 grains/minute DEMAND = 100 grains/minute

200 grains/minute
100 grains/minute

100 grains/minute
200 grains/minute
 There are several ways to increase
capacity …

100 grains/minute
“scale up”
modify your funnel or
get a bigger funnel

400 grains/minute

“scale out”

get more funnels

change technology
to big-mouth funnel
400 grains/minute 4 funnels X 100 grains/minute = 400 grains/minute
 Creating a balanced production system can be fairly easy
in simple systems

200 grains/minute
each
100 grains/minute

200 grains/minute
200 grains/minute
Easy to identify the bottleneck stage(s) by observing
where inventory builds up …

200 400
100

200

100

200

400 400

100
 In complex real-world systems …

Here, you don’t know individual

capacities … which processing stage
doesn’t have sufficient capacity?
 Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity
Capacity strategies:
•Accommodate changes by
varying workforce size
•Use part-timers,
overtime, or idle time to
absorb changes
•Use subcontractors and
maintain a stable
workforce
•Use inventories to absorb
changes in demand
Demand strategies:
• Change prices or other factors to influence
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
• 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
• Counter seasonal product and service mixing
• Develop a product mix of counter seasonal
items
• May lead to products or services outside the
company’s areas of expertise
Chase demand variing task force

PC WC HC FC

D(t) P(t) = D(t)

W(t)

• D(t): Aggregate demand series

• P(t): Aggregate production levels  PRODUCTION
EQUALS DEMAND
• W(t): Required Workforce levels
• Costs Involved:
• PC: Production Costs
• fixed (setup, overhead)
• variable (materials, consumables, etc.)
• WC: Regular labor costs
• HC: Hiring costs: e.g., advertising, interviewing, training
• FC: Firing costs: e.g., compensation, social cost
• Production rate is synchronized with demand by
varying machine capacity or hiring and laying off
workers as the demand rate varies
• However, in practice, it is often difficult to vary
capacity and workforce on short notice
• Expensive if cost of varying capacity is high
• Negative effect on workforce morale
• Results in low levels of inventory
• Should be used when inventory holding costs are
high and costs of changing capacity are low
Ajust production with constant workforce

PC SC WC OC UC

D(t) P(t)
S(t)
O(t)
U(t)
W = constant
• S(t): Subcontracted quantities
• O(t): Overtime levels
• U(t): Undertime levels  TIME FLEXIBILITY & SUBCONTRACT
• Costs involved:
• PC, WC: as before
•SC: subcontracting costs: e.g., purchasing, transport, quality,
etc.
•OC: overtime costs: incremental cost of producing one unit in
overtime
• (UC: undertime costs: this is hidden in WC)
• Time flexibility can be used if there is
excess machine capacity
• Workforce is kept stable, but the number
of hours worked is varied over time to
synchronize production and demand
• Can use overtime or a flexible work
schedule
• Requires flexible workforce, but avoids
morale problems of the chase strategy
• Low levels of inventory, lower utilization
• Should be used when inventory holding
costs are high and capacity is relatively
inexpensive
Constant production with inventory adjustment

PC WC IC

D(t) P(t)

I(t)

W(t), O(t), U(t), S(t) = constant

•I(t): Accumulated Inventory levels

•Costs involved:
•PC, WC: as before
•IC: inventory holding costs: e.g., interest lost, storage
space, pilferage, obsolescence, etc.
• Maintain stable machine capacity and
workforce levels with a constant output
rate
• Shortages and surpluses result in
fluctuations in inventory levels over time
• Inventories that are built up in anticipation
of future demand or backlogs are carried
over from high to low demand periods
• Better for worker morale
• Large inventories and backlogs may
accumulate
• Should be used when inventory holding
and backlog costs are relatively low
Constant production with under level
inventary

PC WC BC

D(t) P(t)

B(t)

W(t), O(t), U(t), S(t) = constant

•B(t): Accumulated Backlog levels

•Costs involved:
•PC, WC: as before
•BC: backlog (handling) costs: e.g., expediting costs,
penalties, lost sales (eventually), customer
dissatisfaction
•Demand control
Mixed solutions

PC WC HC FC OC UC SC IC BC

P
D W
H
F
Io O
U
S
I
Wo
B

Additional constraints arising from the company strategy; e.g.,

• maximal allowed subcontracting
• maximal allowed workforce variation in two consecutive periods
• maximal allowed overtime
• safety stocks
• etc.
Aggregate Planning (S&OP)-System Design Matrix:
Framework Aggregate Planning Options

High High
Chase

Mixed – Hire/Fire,
Overtime,
Workforce Subcontract, etc. Level –
Excess
change Inventory &
plant
flexibility Backorders
capacity
Level –
Overtime, Subcontract
& Undertime

Low Low
Low Inventory High
Level
Developing the Aggregate Plan

• Step 1- Choose strategy

• Step 2- Determine the aggregate production
rate
• Step 3- Calculate the size of the workforce
• Step 4- Test the plan as follows:
» Calculate Inventory, expected hiring/firing, overtime
needs
» Calculate total cost of plan

• Step 5- Evaluate performance: cost,

service, human resources, and operations
Simulation

Chase
Demand

Level
Output
Caveats

• The Aggregate plan must balance

several perspectives
• Costs are important but so are:
–Customer service
–Operational effectiveness
–Workforce morale
• A successful AP considers each of
these factors
Services aggregate planning

Controlling the cost of labor is critical

1. Accurate scheduling of labor-hours

to assure quick response to
customer demand
2. An on-call labor resource to cover
unexpected demand
3. Flexibility of individual worker skills
4. Flexibility in rate of output or hours
of work
Scenario
• Restaurants
• Smoothing the production process
• Determining the optimal workforce size
• Hospitals
• Responding to patient demand.
• National Chains of Small Service Firms
• Planning done at national level and at local level
• Miscellaneous Services
• Plan human resource requirements
• Manage demand
• Airline industry
• Extremely complex planning problem
• Involves number of flights, number of passengers,
air and ground personnel, allocation of seats to fare
classes
• Resources spread through the entire system
 Level Production Chase Demand

Demand Demand

Production Production
Units

Units
Time Time