Capacity Planning

&
Aggregate Planning
 Introduction to Operations Management/
Operations Strategy

Process Analysis Project Planning for Production Process Control

and Design Management and Improvement

Process Capacity Management Quality

Analysis Management
Aggregate Planning
Job Design Statistical
Just in Time Process Control

Manufacturing Scheduling

Layout/ Inventory Control

Assembly Line Balancing

Supply Chain
Services Management

Waiting Line Analysis

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 Capacity planning
 Capacity Requirements
 Calculate capacity requirements and compare to available capacity

 Strategies for meeting demand

 Be able to explain the concept of Chase and Level Strategies
 Capacity planning makes sure there is balance between demand placed
on the operation and its ability to satisfy that demand
 If an operations has too much capacity, it will be underutilized
 If it has too little capacity, it may be having poor customer service as it
may turn away customers or make them wait for too long for services
 Serious consequence result from not getting a good balance between
demand and capacity, in the long run
 It is about coping with changes in demand within the existing operation-
medium term capacity planning or aggregate capacity planning
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 Major Operations Planning Activities
Overview
Long Process Planning
Range
Strategic Capacity
Planning
Aggregate Planning
Manufacturin Services
Medium g Production Scheduling
Range Master

Material Requirements Planning

Order Scheduling Weekly Workforce &

Customer Scheduling
Short
Range Daily Workforce &
Customer Scheduling
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 Strategic capacity planning
 Planning of the overall capacity level of
capital-intensive resources—facilities,
equipment, and overall labor force size
—that supports the company’s long-
range competitive strategy.

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Capacity Planning
Basic Questions

 What kind of capacity is needed?

 How much is needed?

 When is needed?

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 What Is Capacity?
 The amount of output that a system is
capable of achieving over a specific
period of time
 has a time frame
 can be also measured in terms of resource
inputs
 cannot be stored for later use

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 Capacity Planning Concept
Best Operating Level
 Design capacity for which average unit
cost is at the minimum

Average
unit cost
Underutilization Overutilization
of output
Best Operating
Level

Volume
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 Capacity Planning Concept
Capacity Utilization
Capacity used
Utilizati on 
Best operating level
 Capacity used
 rate of output actually achieved
 Best operating level
 design capacity

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 Capacity Planning Concept
Example - Capacity Utilization
 Design capacity = 50 trucks/day
 Actual output = 36 trucks/day

 Utilization = ?
Solution:
Capacity used 36 trucks/da y
Utilizatio n  =  0.72
Best operating level 50 trucks/da y

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 Economies & diseconomies of Scale
Economies of Scale and the Experience Curve working

100-unit
Average plant
unit cost 200-unit
of output plant 400-unit
300-unit
plant
plant

Diseconomies of Scale start working

Volume
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 The Experience Curve

Cost or
price
per unit

Total accumulated production of units

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 Capacity expansion issues
 Maintaining system balance
Inputs Stage 1 Stage 2 Stage 3 Outputs
200/hr 50/hr 200/hr
(bottleneck)
 External sources of capacity
 Timing and frequency of capacity expansions

Volume Volume

Time Time
Timing
Strategy Capacity leads demand Capacity lags demand
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Frequency of capacity expansion

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Determining capacity requirements
 Forecast sales within each individual
product line

 Calculate equipment and labor

requirements to meet the forecasts

 Project equipment and labor availability

over the planning horizon

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Planning Service Capacity
 Time – service is perishable and must be
consumed when it is produced

 Location – people are not willing to travel

long distances to obtain a service so they
must be located near the customer

 Volatility of demand – demand for

services is subject to change
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 Aggregate Planning
 It is a process of matching market demand to company resources
 It contains targeted sales, production levels, inventory levels and customer back
logs
 Goal: Specify the optimal combination of production rate, workforce level, and
inventory on hand
 Aggregate planning should minimize effects of shortsighted, day today scheduling,
whereby laying off of workers is done on one day, and rehiring the next day
 There is need for long term perspective on resource use to minimize short term
requirements changes with cost savings
 Aggregate planning is an attempt to balance capacity and demand so as to minimize
costs
 Aggregate planning is intermediate-term covering say 18 months, it is the base for
future short range planning such as production scheduling, sequencing, and
loading
 If demand and capacity are not balanced , a decision is taken to increase or
decrease capacity to meet demand, or to increase or decrease demand to meet 17
 Inputs and Outputs to
Aggregate Production Planning
Capacity Strategic Company
Constraints Objectives Policies

Demand Financial
Forecasts Aggregate Constraints
Production
Planning

Size of
Workforce Units or dollars
Production Inventory subcontracted,
per month Levels backordered, or
(in units or $) lost
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 Objectives of aggregate planning
 Maximize customer service

 Minimize inventory investment

 Minimizes changes in workforce levels

 Minimizes changes in production rates

 Maximizes utilization of plant and equipment

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 Strategies for Meeting Demand
 Level production - produce at constant rate &
use inventory as needed to meet demand
 Chase demand - change workforce levels so
that production matches demand
 Subcontracting - useful if supplier meets
quality & time requirements

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 Level production

Demand

Production
Units

Time

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 Chase demand

Demand

Units

Production

Time

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Options to increase demand to match capacity

 Pricing (lower price to promote demand)

 Promotions (advertising to shift demand)

 Back ordering (postpone delivery)

 New demand creation (service expansion)

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Options to manage capacity to match demand

 Hire /lay off workers

 Overtime

 Part time or casual labor

 Inventory (built up to cushion demand)

 Subcontracting (toll manufacturing)

 Cross training (multi-skilling) 24

 Level strategy

 The strategy seeks to maintain a steady production rate or employment

rate
 To satisfy changes in demand , inventory level is raised or lowered in
anticipation of demand forecast
 Use of back order or backlog to deliver when product becomes readily
available
 Constant level output is good from employee relations point of view
 Downside are excess inventory, overtime costs, expediting costs, loss of
customer goodwill

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 Chase strategy

 Seeks to match demand and capacity

 Results in considerable amount of hiring, firing, laying off of employees,
insecure and unhappy employees,
 Problems with unions, erratic use of equipment
 Calls for great flexibility for the firm
 Inventory levels are lowest possible to achieve cost savings

 Some find it beneficial to use both chase and level strategies

 Linear decision rule, search decision rule, simulation and functional
objective search are some of the aggregate planning approaches

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End!!

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