Chapter 9

Capacity and Aggregate Planning

To Accompany Russell and Taylor, Operations Management, 4th Edition, 2003 Prentice-Hall, Inc. All rights reserved.

Defining Capacity

Now:
the rate of output from an OM system per unit of time OR the rate at which the firm withdraws work from the system

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Supply Chain Capacity

Tactical perspective

output driven units of output, hours worked capability

strategic perspective

what you can and cannot do match capabilities with marketing needs

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Types of Capacity:

Maximum Capacity

(aka Design)

Defined: The highest rate of output that a process can achieve Calculation involves the following assumptions: equally skilled workers no time loss due to changeovers or product differences no loss of capacity due to PM or planned downtime no OT work or heroic employee efforts Are these assumptions realistic?
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Types of Capacity:

Effective Capacity

Defined: the output rate that managers expect for a given process

Why would you operate below maximum?

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Types of Capacity:

Demonstrated Capacity

Defined: the actual level of output for a process over a period of time, i.e., the average of output over time Why might this number be different than maximum or effective capacity?

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Types of Capacity:

Demonstrated Capacity

Demonstrated capacity

what we actually observe can be affected by numerous factors

problems with input problems internally nature of the product

new vs standard

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Capacity within the Supply Chain

Must deal with the issue of bottlenecks and system constraints. Capacity defined by:

information systems infrastructure physical capacity logistics capacity supplier capacity relationship management
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Bottlenecks

Must look for bottleneck constraining resource how identified too much or too little inventory overtime why important limits output determines lead time determines ability of system to make money Keys to success keep the bottlenecks busy inventories/signals invest in bottlenecks

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Capacity - calculating

Level of output of a plant or system is dependent on how it is organized

capacity in sequence

linear operations multiple alternative operations any machine can be used

capacity in parallel

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Capacity - Sequential

Capacity of a system or process is based on the operation with the lowest amount of capacity

Keys

convert into the same units of measurement ensure that we are talking about the same dimensions

effective vs design vs demonstrated

capacity taken over the same time

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Capacity - Sequential

We have a process that makes cans

Operation 1 - punches out tops and bottoms

2 lids for every can produces 250 lids per minute 1 body for every can produces 175 bodies per minute

Operation 2 - body

Operation 3 - mating

makes the can produces 7500 cans per hour

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Capacity - Parallel

Capacity of the system or operation is based on the sum of the capacities of the various machines that make up the operation.

Operation 3 has 4 machines

machine 1 - 90 pieces per minute machine 2 - 110 pieces per minute machine 3 -120 pieces per minute machine 4 - 80 pieces per minute Total capacity for operation 3 = 400 pieces/min

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Capacity Management Tools:

Calculating Capacity

1. Describe the general flow of activities within the process 2. Establish the time period 3. Establish a common unit 4. Identify the Maximum capacity for the overall process 5. Identify the Effective capacity for the overall process 6. Determine the Demonstrated capacity 7. Compare the Demonstrated, Effective and Maximum Capacities and take appropriate actions
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Capacity Planning
Establishes overall level of productive resources Affects lead time responsiveness, cost & competitiveness Determines when and how much to increase capacity
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Capacity Expansion
Volume & certainty of anticipated demand Strategic objectives for growth Costs of expansion & operation Incremental or one-step expansion

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Capacity Expansion Strategies

(a) Capacity lead strategy (b) Capacity lag strategy Capacity Demand Units Demand Units Capacity

Time (c) Average capacity strategy

Time (d) Incremental vs. one-step expansion One-step expansion

Capacity

Units

Units

Demand

Incremental expansion Demand

Figure 9.1

Time

Time

Aggregate Production Planning (APP)

Matches market demand to company resources Plans production 6 months to 12 months in advance Expresses demand, resources, and capacity in general terms Develops a strategy for economically meeting demand Establishes a company-wide game plan for allocating resources
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Inputs and Outputs to APP

Capacity Constraints Strategic Objectives Company Policies

Demand Forecasts

Aggregate Production Planning

Financial Constraints

Size of Workforce
Figure 9.3

Production per month (in units or $)

Inventory Levels

Units or dollars subcontracted, backordered, or lost

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Adjusting Capacity to Meet Demand

1. Producing at a constant rate and using inventory to absorb fluctuations in demand (level production) 2. Hiring and firing workers to match demand (chase demand) 3. Maintaining resources for high demand levels 4. Increase or decrease working hours (overtime and undertime) 5. Subcontracting work to other firms 6. Using part-time workers 7. Providing the service or product at a later time period (backordering)

Strategy Details
Level production - produce at constant rate & use inventory as needed to meet demand Chase demand - change workforce levels so that production matches demand Maintaining resources for high demand levels - ensures high levels of customer service

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Strategy Details
Overtime & undertime - common when demand fluctuations are not extreme Subcontracting - useful if supplier meets quality & time requirements Part-time workers - feasible for unskilled jobs or if labor pool exists Backordering - only works if customer is willing to wait for product/services

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Level Production
Demand Production Units

Time
Figure 9.4 (a)
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Chase Demand
Demand Production Units

Time
Figure 9.4 (b)
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APP Using Pure Strategies

QUARTER Spring Summer Fall Winter Hiring cost Firing cost Inventory carrying cost Production per employee Beginning work force SALES FORECAST (LB) 80,000 50,000 120,000 150,000 = $100 per worker = $500 per worker = $0.50 pound per quarter = 1,000 pounds per quarter = 100 workers

Example 9.1

APP Using Pure Strategies

QUARTER Spring Summer Fall Winter
Hiring cost Firing cost Inventory carrying cost Production per employee Beginning work force

SALES FORECAST (LB) 80,000 50,000 120,000 150,000

= $100 per worker = $500 per worker = $0.50 pound per quarter = 1,000 pounds per quarter = 100 workers

Level production (50,000 + 120,000 + 150,000 + 80,000) 4 = 100,000 pounds

Example 9.1

Level Production Strategy

QUARTER Spring Summer Fall Winter SALES FORECAST 80,000 50,000 120,000 150,000 PRODUCTION PLAN INVENTORY 100,000 100,000 100,000 100,000 400,000 20,000 70,000 50,000 0 140,000

Cost = 140,000 pounds x 0.50 per pound = $70,000

Example 9.1

Chase Demand Strategy

QUARTER SALES PRODUCTION FORECAST PLAN WORKERS NEEDED WORKERS WORKERS HIRED FIRED

Spring Summer Fall Winter

80,000 50,000 120,000 150,000

80,000 50,000 120,000 150,000

80 50 120 150

0 0 70 30 100

20 30 0 0 50

Cost = (100 workers hired x $100) + (50 workers fired x $500) = $10,000 + 25,000 = $35,000

Example 9.1
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APP Using Mixed Strategies

MONTH January February March April May June DEMAND (CASES) 1000 400 400 400 400 400 MONTH July August September October November December DEMAND (CASES) 500 500 1000 1500 2500 3000

Production per employee = 100 cases per month Wage rate = $10 per case for regular production = $15 per case for overtime = $25 for subcontracting Hiring cost = $1000 per worker Firing cost = $500 per worker Inventory carrying cost = $1.00 case per month Beginning work force = 10 workers Example 9.2

Demand Management
Shift demand into other periods
Incentives, sales promotions, advertising campaigns

Offer product or services with countercyclical demand patterns Partnering with suppliers to reduce information distortion along the supply chain
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Demand Distortion along the Supply Chain

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Hierarchical Planning Process

Items
Product lines or families

Production Planning
Aggregate production plan

Capacity Planning
Resource requirements plan

Resource Level
Plants

Individual products

Master production schedule

Rough-cut capacity plan

Critical work centers

Components

Material requirements plan

Capacity requirements plan

All work centers

Manufacturing operations

Shop floor schedule

Input/ output control

Individual machines

Figure 9.5
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Aggregate Planning for Services

Most services cant be inventoried Demand for services is difficult to predict Capacity is also difficult to predict Service capacity must be provided at the appropriate place and time 5. Labor is usually the most constraining resource for services 1. 2. 3. 4.
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Best Operating Levels

Average cost per room

Figure 9.2

# Rooms
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Inputs and Outputs to APP

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Level Production

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APP by Linear Programming

Minimize Z = $100 (H1 + H2 + H3 + H4) + $500 (F1 + F2 + F3 + F4) + $0.50 (I1 + I2 + I3 + I4)
Subject to

Demand constraints
where Ht = # hired for period t Ft = # fired for period t It = inventory at end of period t Pt = units produced in period t Wt = workforce size for period t Example 9.3

Production constraints

Work force constraints

P1 - I1 I1 + P2 - I2 I2 + P3 - I3 I3 + P4 - I4 1000 W1 1000 W2 1000 W3 1000 W4 100 + H1 - F1 W1 + H2 - F2 W2 + H3 - F3 W3 + H4 - F4

= 80,000 = 50,000 = 120,000 = 150,000 = P1 = P2 = P3 = P4 = W1 = W2 = W3 = W4

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
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APP by the Transportation Method

QUARTER EXPECTED DEMAND REGULAR CAPACITY OVERTIME CAPACITY SUBCONTRACT CAPACITY

1 2 3 4

900 1500 1600 3000

1000 1200 1300 1300

100 150 200 200

$20 $25 $28 $3 300 units

500 500 500 500

Regular production cost per unit Overtime production cost per unit Subcontracting cost per unit Inventory holding cost per unit per period Beginning inventory
Example 9.4
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The Transportation Tableau

Table 9.2
PERIOD OF USE Unused Capacity 9 300 PERIOD OF PRODUCTION Beginning Inventory 1 Regular Overtime Subcontract 2 Regular Overtime Subcontract 3 Regular Overtime Subcontract 4 Regular Overtime Subcontract Demand 900 1500 1600 300 600 1 0 2 3 3 6 4 Capacity

20
25 28

300

23
28 31

100

26
31 34

100

29
34 37

1000 100 500 1200 150 250 500 1300 200 500 1300 200 500 250

1200

20 25 28

23 28 31

150 250 500 1300 200 500 3000

26 31 34 23 28 31 20 25 28

1300 200

20 25 28

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Burruss Production Plan

REGULAR SUBENDING PERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY

1 2 3 4 Total

900 1500 1600 3000 7000

1000 1200 1300 1300 4800

100 150 200 200 650

0 250 500 500 1250

500 600 1000 0 2100

Table 9.3
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Other Quantitative Techniques

Linear decision rule (LDR) Search decision rule (SDR) Management coefficients model

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Hierarchical Planning Process

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Available-to-Promise
ON-HAND = 50
Forecast Customer orders Master production schedule Available to promise

1
100 200

2
100

PERIOD 3 4
100 200 100

5
100 200

6
100

ON-HAND = 50
Forecast Customer orders Master production schedule Available to promise

1
100 90 200 40

2
100 120

PERIOD 3 4
100 130 200 0 100 70

5
100 20 200 170

6
100 10

ATP in period 1 = (50 + 200) - (90 + 120) = 40 ATP in period 3 = 200 - (130 + 70) = 0 ATP in period 5 = 200 - (20 + 10) = 170 Example 9.5
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Available-to-Promise

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Available-to-Promise
Product Request

Yes

Is the product available at this location?

Is an alternative product available at an alternate location? No Capable-topromise date

Yes

Availableto-promise

No

Allocate inventory

Availableto-promise

Yes

Is an alternative product available at this location?

Allocate inventory Yes

No

Is the customer willing to wait for the product?

Yes

Revise master schedule

Is this product available at a different location? No

No

Trigger production

Figure 9.6

Lose sale

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Yield Management
Cu P(n < x) Cu + Co
where n = number of no-shows x = number of rooms or seats overbooked Cu = cost of underbooking; i.e., lost sale Co = cost of overbooking; i.e., replacement cost P = probability
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Yield Management
NO-SHOWS 0 1 2 3 PROBABILITY .15 .25 .30 .30

Example 9.4
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Yield Management
NO-SHOWS 0 1 2 3 PROBABILITY .15 .25 .30 .30 P(N < X) .00 .15 .40 .70

.517

Expected number of no shows 0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75 Optimal probability of no-shows Cu 75 P(n < x) C + C = = .517 75 + 70 u o
Example 9.4
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Yield Management
NO-SHOWS PROBABILITY P(N < X) Cost of overbooking 0 .15 .00 [2(.15) + 1(.25) ]$70 = $38.50 .25 Cost of bumping customers 1 .15 Lost revenue from .40 no-shows.517 2(.30)$75 = $22.50 .30 3 .70 $61.00 .30 Total cost of overbooking by 2 rooms Expected number of no shows Expected savings = ($131.225 - $61) = $70.25 a night 0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75 Optimal probability of no-shows Cu 75 P(n < x) C + C = = .517 75 + 70 u o
Example 9.4
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Best Operating Levels

Average cost per room

Best operating level

Economies of scale 250

Figure 9.2

Diseconomies of scale 500 1000

# Rooms