Capacity & Aggregate

Planning 4
SOURCE:
Heizer and Render, Operations Management, 11thEdition,
Principles of Operations Management, Ninth Edition
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 CAPACITY PLANNING

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 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
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 Planning Over a Time Horizon
Figure S7.1
Time Horizon
Options for Adjusting Capacity

Long-range Add facilities

planning
Intermediate-
Add long lead time equipment *
range Subcontract Add personnel
planning Add equipment Build or use inventory
(aggregate Add shifts
planning)
Schedule jobs
Short-range Schedule personnel
planning
(scheduling)
* Allocate machinery

Modify capacity Use capacity

* Difficult to adjust capacity as limited options exist
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 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

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

Efficiency is the percent of effective

capacity actually achieved
Efficiency = Actual output/Effective capacity

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 Utilization and Efficiency

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%

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 Utilization and Efficiency

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

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 Utilization and Efficiency

► 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 organization’s mission and
strategy
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 Capacity Considerations

1. Forecast demand accurately

2. Match technology increments and sales
volume
3. Find the optimum operating size
(volume)
4. Build for change

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 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
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 Tactics for Matching Capacity to
Demand
1. Making staffing changes
2. Adjusting equipment
► Purchasing additional machinery
► Selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to meet changing product
preferences
6. Closing facilities

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 Service-Sector Demand and
Capacity Management

► Demand management
► Appointment, reservations, FCFS rule

► Capacity management
► Full time, temporary, part-time staff

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 Bottleneck Analysis and the
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

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 Bottleneck Analysis and the
Theory of Constraints
► The bottleneck time is the time of the
slowest workstation (the one that takes
the longest) in a production system
► The throughput time is the time it takes a

unit to go through production from start to

end Figure S7.4

A B C

2 min/unit 4 min/unit 3 min/unit

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 Bottleneck Management

1. Release work orders to the system at the

pace of set by the bottleneck
► Drum, Buffer, Rope
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
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 The Planning Process
Long-range plans (over one year)
Figure 13.1 Capacity decisions critical to long range plans
Issues:
Research and Development
New product plans
Capital investments
Facility location/expansion
Top
executives Intermediate-range plans (3 to 18 months)
Issues:
Sales and operations planning
Production planning and budgeting
Operations Setting employment, inventory,
managers with subcontracting levels
sales and Analyzing operating plans
operations Short-range plans (up to 3 months)
planning team Scheduling techniques
Issues:
Job assignments
Operations Ordering
managers, Job scheduling
supervisors, Dispatching
foremen Overtime
Part-time help
Responsibility Planning tasks and time horizons
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 AGGREGATE
PLANNING

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 Aggregate Planning

The objective of aggregate planning

is usually to meet forecast demand
while minimizing cost over the
planning period

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 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

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 Capacity Options

1. 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
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 Capacity Options

2. 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

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 Capacity Options

3. Varying production rates 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
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 Capacity Options

4. 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
5. Using part-time workers
▶ Useful for filling unskilled or low skilled positions,
especially in services

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 Demand Options

1. 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

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 Demand Options
2. 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

3. Counterseasonal product and service mixing

▶ Develop a product mix of counterseasonal items
▶ May lead to products or services outside the
company’s areas of expertise
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 Aggregate Planning Options
TABLE 13.1 Aggregate Planning Options
OPTION ADVANTAGES DISADVANTAGES COMMENTS
Changing Changes in human Inventory holding Applies mainly to
inventory resources are cost may increase. production, not
levels gradual or none; Shortages may result service,
no abrupt in lost sales. operations.
production
changes.

Varying Avoids the costs of Hiring, layoff, and Used where size
workforce other alternatives. training costs may be of labor pool is
size by significant. large.
hiring or
layoffs

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 Aggregate Planning Options
TABLE 13.1 Aggregate Planning Options
OPTION ADVANTAGES DISADVANTAGES COMMENTS
Varying Matches seasonal Overtime premiums; Allows flexibility
production fluctuations tired workers; may within the
rates without hiring/ not meet demand. aggregate plan.
through training costs.
overtime or
idle time

Sub- Permits flexibility Loss of quality Applies mainly in

contracting and smoothing of control; reduced production
the firm’s output. profits; loss of future settings.
business.

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 Aggregate Planning Options
TABLE 13.1 Aggregate Planning Options
OPTION ADVANTAGES DISADVANTAGES COMMENTS
Using part- Is less costly and High turnover/ Good for
time more flexible than training costs; unskilled jobs in
workers full-time workers. quality suffers; areas with large
scheduling difficult. temporary labor
pools.

Influencing Tries to use Uncertainty in Creates

demand excess capacity. demand. Hard to marketing ideas.
Discounts draw match demand to Overbooking
new customers. supply exactly. used in some
businesses.

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 Aggregate Planning Options
TABLE 13.1 Aggregate Planning Options
OPTION ADVANTAGES DISADVANTAGES COMMENTS
Back May avoid Customer must be Many companies
ordering overtime. Keeps willing to wait, but back order.
during high- capacity constant. goodwill is lost.
demand
periods

Counter- Fully utilizes May require skills or Risky finding

seasonal resources; allows equipment outside products or
product and stable workforce. the firm’s areas of services with
service expertise. opposite demand
mixing patterns.

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 Mixing Options to Develop a Plan

▶ 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

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

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Methods for Aggregate Planning

▶ Graphical Methods
▶ Popular techniques
▶ Easy to understand and use
▶ Trial-and-error approaches that do not
guarantee an optimal solution
▶ Require only limited computations

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 Graphical Methods

1. Determine the demand for each period

2. Determine the capacity for regular time,
overtime, and subcontracting each period
3. Find labor costs, hiring and layoff costs, and
inventory holding costs
4. Consider company policy on workers and
stock levels
5. Develop alternative plans and examine their
total cost

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 Mathematical Approaches

▶ Useful for generating strategies

▶ Transportation Method of Linear Programming
▶ Produces an optimal plan
▶ Works well for inventories, overtime, subcontracting
▶ Does not work when nonlinear or negative factors are
introduced
▶ Other Models
▶ General form of linear programming
▶ Simulation

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 Aggregate Planning in Services

▶ Most services use combination strategies and mixed

plans
▶ 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

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 Five Service Scenarios
 Restaurants
1. Smoothing the production process
2. 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
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 Dependent Demand

For any product for which a schedule can be

established, dependent demand techniques
should be used

Material Requirements Planning (MRP):

A dependent demand techniques that uses a
bill-of-material, inventory, expected receipts
and a MPS to determine material requirement

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 Dependent Demand

Benefits of MRP
1. Better response to customer orders
2. Faster response to market changes
3. Improved utilization of facilities and
labor
4. Reduced inventory levels

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 Dependent Demand

▶ The demand for one item is related to the

demand for another item
▶ Given a quantity for the end item, the
demand for all parts and components can
be calculated
▶ In general, used whenever a schedule can
be established for an item
▶ MRP is the common technique

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 Dependent Inventory Model
Requirements
Effective use of dependent demand inventory models
requires the following

1. Master production schedule

2. Specifications or bill of material
3. Inventory availability
4. Purchase orders outstanding
5. Lead times

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Master Production Schedule (MPS)

▶ Specifies what is to be made and when

▶ Must be in accordance with the aggregate
production plan
▶ Inputs from financial plans, customer demand,
engineering, supplier performance
▶ As the process moves from planning to
execution, each step must be tested for
feasibility
▶ The MPS is the result of the production
planning process

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Master Production Schedule (MPS)

▶ MPS is established in terms of specific products

▶ Schedule must be followed for a reasonable
length of time
▶ The MPS is quite often fixed or frozen in the near
term part of the plan
▶ The MPS is a rolling schedule
▶ The MPS is a statement of what is to be
produced, not a forecast of demand

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 The Planning Process
Production Marketing
Capacity Customer Finance
demand Cash flow
Inventory

Supply Chain
Procurement Sales & Operations Human Resources
Supplier Planning Staff planning
performance Generates an aggregate
plan

Master production
schedule

Change master
production
schedule?

Material
requirements plan

Schedule and
execute plan Figure 14.1
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Master Production Schedule (MPS)

Can be expressed in any of the following terms:

1. A customer order in a job shop (make-to-

order) company
2. Modules in a repetitive (assemble-to-
order or forecast) company
3. An end item in a continuous (stock-to-
forecast) company

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 MPS Example

Master Production Schedule for Chef John’s Buffalo Chicken

TABLE 14.1
Mac & Cheese
GROSS REQUIREMENTS FOR CHEF JOHN’S BUFFALO MAC & CHEESE
Day 6 7 8 9 10 11 12 13 14 And so on
Quantity 450 200 350 525 235 375

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 Bills of Material

▶ List of components, ingredients, and materials

needed to make product
▶ Provides product structure
▶ Items above given level are called parents
▶ Items below given level are called components or
children

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 BOM Example

Level Product structure for “Awesome” (A)

0 A

1 B(2) C(3)

2 E(2) E(2) F(2)

3 D(2) G(1) D(2)

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 BOM Example
For an order of 50 Awesome speaker kits

Part B: 2 x number of As = (2)(50) = 100

Part C: 3 x number of As = (3)(50) = 150
Part D: 2 x number of Bs
+ 2 x number of Fs = (2)(100) + (2)(300) = 800
Part E: 2 x number of Bs
+ 2 x number of Cs = (2)(100) + (2)(150) = 500
Part F: 2 x number of Cs = (2)(150) = 300
Part G: 1 x number of Fs = (1)(300) = 300

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 Bills of Material

▶ Modular Bills
▶ Modules are not final products but components that can be
assembled into multiple end items
▶ Can significantly simplify planning and scheduling
▶ Planning Bills
▶ Also called “pseudo” or super bills
▶ Created to assign an artificial parent to the BOM
▶ Used to group subassemblies to reduce the number of
items planned and scheduled
▶ Used to create standard “kits” for production

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 Bills of Material

 Phantom Bills
 Describe subassemblies that exist only
temporarily
 Are part of another assembly and never go into
inventory
 Low-Level Coding
 Item is coded at the lowest level at which it
occurs
 BOMs are processed one level at a time

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 Accurate Inventory Records

▶ Accurate inventory records are absolutely required

for MRP (or any dependent demand system) to
operate correctly
▶ Generally MRP systems require more than 99%
accuracy

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 MRP Structure
Figure 14.4

Data Files Output Reports

MRP by
BOM Master period report
production schedule
MRP by
date report

Lead times
(Item master file) Planned order
report

Inventory data
Purchase advice
Material
requirement
planning
programs
(computer and Exception reports
Purchasing data software)
Order early or late
or not needed

Order quantity too

small or too large

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 Safety Stock

▶ BOMs, inventory records, purchase and

production quantities may not be perfect
▶ Consideration of safety stock may be prudent
▶ Should be minimized and ultimately
eliminated
▶ Typically built into projected on-hand inventory

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 Enterprise Resource Planning
(ERP)

▶ An extension of the MRP system to tie in

customers and suppliers
1. Allows automation and integration of many
business processes
2. Shares common data bases and business
practices
3. Produces information in real time
▶ Coordinates business from supplier evaluation to
customer invoicing

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 Enterprise Resource Planning
(ERP)

▶ ERP modules include

▶ Basic MRP
▶ Finance
▶ Human resources
▶ Supply chain management (SCM)
▶ Customer relationship management (CRM)
▶ Sustainability

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Figure 14.10 ERP and MRP

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 Enterprise Resource Planning
(ERP)

▶ ERP systems have the potential to

▶ Reduce transaction costs
▶ Increase the speed and accuracy of information
▶ Facilitates a strategic emphasis on JIT systems and
supply chain integration
▶ Can be expensive and time-consuming to install

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 ERP in the Service Sector

▶ ERP systems have been developed for health care,

government, retail stores, hotels, and financial
services
▶ Also called efficient consumer response (ECR)
systems
▶ Objective is to tie sales to buying, inventory,
logistics, and production

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 THANK YOU

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