Capacity & Aggregate Planning

Capacity Planning

• 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:
  • Long-range planning
  • Intermediate-range planning (aggregate planning)
  • Short-range planning (scheduling)

Time Horizon

• Long-range:
  • Add facilities.
  • Add long lead time equipment.
  • Difficult to adjust capacity as limited options exist.
• Intermediate-range:
  • Subcontract
  • Add personnel
  • Add equipment
  • Build or use inventory
  • Add shifts
• Short-range:
  • Schedule jobs
  • Schedule personnel
  • Allocate machinery

Design and Effective Capacity

• Design capacity: The maximum theoretical output of a system, normally expressed as a rate.
• Effective capacity: The capacity a firm expects to achieve given current operating constraints. Often lower than design capacity.

Utilization and Efficiency

• Utilization: The percent of design capacity actually achieved. Utilization = \frac{Actual \ output}{Design \ capacity}
• Efficiency: The percent of effective capacity actually achieved. Efficiency = \frac{Actual \ output}{Effective \ capacity}

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%

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 Considerations

• 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.
• Forecast demand accurately.
• Match technology increments and sales volume.
• Find the optimum operating size (volume).
• 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. 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

Service-Sector Demand and Capacity Management

• Demand management:
  • Appointment, reservations, FCFS rule
• Capacity management:
  • Full time, temporary, part-time staff

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.
• 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.

Bottleneck Management

• Release work orders to the system at the pace of set by the bottleneck
  • Drum, Buffer, Rope
• Lost time at the bottleneck represents lost time for the whole system
• Increasing the capacity of a non-bottleneck station is a mirage
• Increasing the capacity of a bottleneck increases the capacity of the whole system

The Planning Process

• Long-range plans (over one year)
  • Capacity decisions critical to long range plans
  • Issues:
    • Research and Development
    • New product plans
    • Capital investments
    • Facility location/expansion
• Intermediate-range plans (3 to 18 months)
  • Issues:
    • Sales and operations planning
    • Production planning and budgeting
    • Setting employment, inventory, subcontracting levels
    • Analyzing operating plans
• Short-range plans (up to 3 months)
  • Scheduling techniques
  • Issues:
    • Job assignments
    • Ordering
    • Job scheduling
    • Dispatching
    • Overtime
    • Part-time help

Aggregate Planning

• The objective of aggregate planning is usually to meet forecast demand while minimizing cost over the planning period.
• 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.

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
• 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
• 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
• 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
• 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
• 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
• 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

Aggregate Planning Options

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
• 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

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

Aggregate Planning in Services

• Most services use combination strategies and mixed plans
• Controlling the cost of labor is critical
  • Accurate scheduling of labor-hours to assure quick response to customer demand
  • An on-call labor resource to cover unexpected demand
  • Flexibility of individual worker skills
  • Flexibility in rate of output or hours of work

Five Service Scenarios

• 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

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

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

• 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

Dependent Inventory Model Requirements

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

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
• 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

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

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

BOM Example

• 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
• For an order of 50 Awesome speaker kits

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
• 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

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

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

Enterprise Resource Planning (ERP)

• An extension of the MRP system to tie in customers and suppliers
• Allows automation and integration of many business processes
• Shares common data bases and business practices
• Produces information in real time
• Coordinates business from supplier evaluation to customer invoicing

ERP modules include

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

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
• 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