Capacity & Aggregate Planning (T7)

Arliza AbdullahOPM530/533

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Capacity & Aggregate Planning

UNIVERSITI TEKNOLOGI MARAFACULTY OF BUSINESS MANAGEMENT


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Outline

The planning process The nature of aggregate planning Aggregate planning strategies Methods for aggregate planning Aggregate planning in services


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Outline

CAPACITY Defining Capacity Capacity and Strategy Capacity Considerations Managing Demand

CAPACITY PLANNING BREAKEVEN ANALYSIS

Single-Product Case Multi-product Case


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How much long-range capacity is needed When more capacity is needed Where facilities should be located (location) How facilities should be arranged (layout)

Facility planning answers:

Facility Planning


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Forecast

Demand

Compute

Needed

Capacity

Compute

Rated

Capacity

Evaluate

Capacity

Plans

Implement

Best Plan

Qualitative

Factors

(e.g., Skills)

Select Best

Capacity

Plan

Develop

Alternative

Plans

Quantitative

Factors

(e.g., Cost)

Capacity Planning Process


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Types of Planning Over a Time Horizon

Add FacilitiesAdd long lead time equipment

Schedule Jobs Schedule Personnel Allocate Machinery

Sub-ContractAdd EquipmentAdd Shifts

Add PersonnelBuild or Use Inventory

Long Range Planning

Intermediate Range Planning

Short Range Planning

Modify Capacity Use Capacity

*

*

*Limited options exist


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Definition and Measures of Capacity

Capacity:

The “throughput,” or number of units a facility can hold, receive, store, or produce in a period of time.

Utilization: Actual output as a percent of design capacity.

Effective capacity:

Capacity a firm can expect to receive given its product mix, methods of scheduling, maintenance, and standards of quality.

Efficiency: Actual output as a percent of effective capacity.


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Actual or Expected Output

Actual (or Expected) Output =

(Effective Capacity)(Efficiency)


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Measure of planned or actual capacity usage of a facility, work center, or machine

UtilizationActual Output

Design CapacityPlanned hours to be used

Total hours available

=

=

Utilization


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Measure of how well a facility or machine is performing when used

EfficiencyActual output

Effective CapacityActual output in units

Standard output in unitsAverage actual time

Standard time

=

=

=

Efficiency


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Implications of Capacity Changes

Changes in:― Sales― Cash flow― Quality― Supply chain― Human resources― Maintenance


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Special Requirements for Making Good Capacity Decisions

Forecast demand accurately Understanding the technology and capacity increments Finding the optimal operating level (volume) Build for change


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Strategies for Matching Capacity to Demand

1. Making staffing changes (increasing or decreasing the number of employees)

2. Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment

3. Improving methods to increase throughput; and/or4. Redesigning the product to facilitate more throughput


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Approaches to Capacity Expansion 1

Expected Demand

Time in Years

Dem

and

New Capacity

Capacity leads demand with an incremental expansion


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Expected Demand

Time in Years

Dem

and

New Capacity

Capacity leads demand with a one-step expansion


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Expected Demand

Time in Years

Dem

and

New Capacity

Capacity lags demand with an incremental expansion


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Expected Demand

Time in Years

Dem

and

New Capacity

Attempts to have an average capacity, with an incremental expansion


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Breakeven Analysis

Technique for evaluating process & equipment alternatives Objective: Find the point ($ or units) at which total cost equals total

revenue Assumptions

― Revenue & costs are related linearly to volume― All information is known with certainty― No time value of money

Fixed costs: costs that continue even if no units are produced: depreciation, taxes, debt, mortgage payments

Variable costs: costs that vary with the volume of units produced: labor, materials, portion of utilities


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Cost Fixed costs

constant regardless of the number of units produced Variable costs

vary with the volume of units produced

Revenue price at which an item is sold

Total revenue is price times volume sold

Profit difference between total revenue and total cost

Process Selection with Break-Even Analysis


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Breakeven Chart

Fixed cost

Variable cost

Total cost line

Total revenue line

ProfitBreakeven pointTotal cost = Total revenue

Volume (units/period)

Cost

in D

olla

rs

Loss


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Process Selection with Break-Even Analysis (cont.)

Total cost Total cost = fixed cost + total variable cost= fixed cost + total variable costTC = TC = ccff + + vcvcvv

Total revenue =Total revenue = volume x price volume x priceTR = TR = vpvp

Profit Profit = total revenue - total cost= total revenue - total costZ = TR – TC = Z = TR – TC = vpvp - ( - (ccff + + vcvcvv))


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Process Selection with Break-Even Analysis (cont.)

Solving for Break-Even Volume

TRTR = TC= TCvpvp = = ccff + + vcvcvv

vpvp - - vcvcvv = = ccff

vv((p - cp - cvv)) = = ccff

vv ==

ccff

p p -- c cvv


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Break-Even Analysis: Example

Fixed costFixed cost = = ccff = $2,000 = $2,000

Variable costVariable cost = = ccvv = $5 per raft = $5 per raft

PricePrice = = pp = $10 per raft = $10 per raft

Break-even point isBreak-even point is

v v = = = 400 rafts= = = 400 raftsccff

p p - - ccvv

20002000

10 - 510 - 5


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Break-Even Analysis: Graph

Total cost line

Total revenue

line

Break-even point400 Units

$3,000 —

$2,000 —

$1,000 —


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Process Selection

Below 2,667, choose ABelow 2,667, choose AAbove 2,667, choose BAbove 2,667, choose B

$2,000 + $5$2,000 + $5vv = $10,000 + $2= $10,000 + $2vv$3$3vv = $8,000= $8,000

vv = 2,667 rafts= 2,667 rafts

Process AProcess A Process BProcess B


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Process Selection:

Graph

Example 4.2Example 4.2

| | | |1000 2000 3000 4000 Units

$20,000 —

$15,000 —

$10,000 —

$5,000 —

Total cost of process A

Total cost of process B

Choose process A

Choose process B

Point of indifference = 2,667 Units


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Vary staffing Change equipment

& processes Change methods Redesign the product for faster

processing

Capacity Management

(service)(service)

Vary prices Vary promotion Change lead times

(e.g., backorders) Offer complementary products

Demand Management

(manufacturing)

Managing Existing Capacity


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Aggregate Planning Requires

Logical overall unit for measuring sales and outputs Forecast of demand for intermediate planning period

in these aggregate units Method for determining costs Model that combines forecasts and costs so that

planning decisions can be made


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Setting goals & objectives Example: Meet demand within the limits

of available resources at the least cost

Determining steps to achieve goals Example: Hire more workers

Setting start & completion dates Example: Begin hiring in Jan.; finish, Mar.

Assigning responsibility

Planning


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Planning Tasks and Responsibilities


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Planning Horizons

Today 3 Months 1 year 5 years

Planning Horizon

Short-range plansJob assignmentsOrderingJob schedulingDispatching

Intermediate-range plansSales planningProduction planning and budgetingSetting employment, inventory, subcontracting levelsAnalyzing operating plans

Long-range plansR&DNew product plansCapital expensesFacility location, expansion

Responsible: Operations managers, supervisors, foremen

Responsible: Operations managers

Responsible: Top executives


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Relationships of the Aggregate Plan

AggregatePlan for

Production

DemandForecasts,

orders

MasterProduction

Schedule, and MRP systems

Detailed WorkSchedules

ExternalCapacity

Subcontractors

Inventory OnHand

Raw MaterialsAvailable

Work Force

Marketplaceand Demand

Research andTechnology

ProductDecisions

ProcessPlanning & Capacity

Decisions


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Provides the quantity and timing of production for intermediate future Usually 3 to 18 months into future

Combines (‘aggregates’) production Often expressed in common units

Example: Hours, dollars, equivalents (e.g., FTE students)

Involves capacity and demand variables

Aggregate Planning


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Meet demand Use capacity efficiently Meet inventory policy Minimize cost

Labor Inventory Plant & equipment Subcontract

Aggregate Planning Goals


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Aggregate Planning StrategiesPure Strategies

Capacity Options — change capacity: changing inventory levels varying work force size by hiring or layoffs varying production capacity through overtime or idle time subcontracting using part-time workers

Demand Options — change demand: influencing demand backordering during high demand periods Counter seasonal product mixing


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Aggregate Scheduling Options - Advantages and Disadvantages

Option Advantage Disadvantage SomeComments

Changinginventory levels

Changes inhuman resourcesare gradual, notabruptproductionchanges

Inventoryholding costs;Shortages mayresult in lostsales

Applies mainlyto production,not service,operations

Varyingworkforce sizeby hiring orlayoffs

Avoids use ofother alternatives

Hiring, layoff,and trainingcosts

Used where sizeof labor pool islarge


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Option Advantage Disadvantage Some

Comments

Varying

production rates

through overtime

or idle time

Matches seasonal

fluctuations

without

hiring/training

costs

Overtime

premiums, tired

workers, may not

meet demand

Allows

flexibility within

the aggregate

plan

Subcontracting Permits

flexibility and

smoothing of the

firm's output

Loss of quality

control; reduced

profits; loss of

future business

Applies mainly

in production

settings

Advantages/Disadvantages - Continued


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Advantages/Disadvantages - Continued

Option Advantage Disadvantage SomeComments

Using part-timeworkers

Less costly andmore flexiblethan full-timeworkers

Highturnover/trainingcosts; qualitysuffers;schedulingdifficult

Good forunskilled jobs inareas with largetemporary laborpools

Influencingdemand

Tries to useexcess capacity.Discounts drawnew customers.

Uncertainty indemand. Hard tomatch demand tosupply exactly.

Createsmarketing ideas.Overbookingused in somebusinesses.


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Advantage/Disadvantage - Continued

Option Advantage Disadvantage Some

Comments

Back ordering

during high-

demand periods

May avoid

overtime. Keeps

capacity constant

Customer must

be willing to

wait, but

goodwill is lost.

Many companies

backorder.

Counterseasonal

products and

service mixing

Fully utilizes

resources; allows

stable workforce.

May require

skills or

equipment

outside a firm's

areas of

expertise.

Risky finding

products or

services with

opposite demand

patterns.


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The Extremes

Level Strategy

Chase Strategy

Production equals

demand

Production rate is constant


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Mixed strategy Combines 2 or more aggregate scheduling options

Level scheduling strategy Produce same amount every day Keep work force level constant Vary non-work force capacity or demand options Often results in lowest production costs

Aggregate Planning Strategies


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Controlling the Cost of Labor in Service Firms

Seek: Close control of labor hours to ensure quick response to

customer demand On-call labor resource that can be added or deleted to meet

unexpected demand Flexibility of individual worker skills to permit reallocation of

available labor Flexibility of individual worker in rate of output or hours of

work to meet demand

Capacity & Aggregate Planning (T7)

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