Operations ManagementOperations ManagementContemporary Concepts and CasesContemporary Concepts and Cases

Chapter TwelveChapter TwelveCapacity PlanningCapacity Planning

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Chapter 12 OutlineChapter 12 Outline

Facilities DecisionsFacilities DecisionsFacilities StrategyFacilities StrategySales & Operations Planning DefinitionSales & Operations Planning DefinitionCross-Functional Nature of S&OPCross-Functional Nature of S&OPPlanning OptionsPlanning OptionsBasic Aggregate Planning StrategiesBasic Aggregate Planning StrategiesAggregate Planning CostsAggregate Planning CostsAggregate Planning ExampleAggregate Planning Example

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Hierarchy of Capacity DecisionsHierarchy of Capacity Decisions(Fig. 12.1)(Fig. 12.1)

Facilitiesdecisions

Aggregateplanning

Scheduling

0 6 12 18 24Months

Planning Horizon

Scheduling

Facilitiesdecisions

AggregatePlanning

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Definition of “Definition of “CapacityCapacity””

Capacity is defined as the maximum output that can be Capacity is defined as the maximum output that can be produced over a given period of time.produced over a given period of time.

Theoretical capacity primarily determined by– Physical assets– Labor availability

Actual output (effective capacity)– Accounts for downtime, shift breaks, etc.– Is the capacity that should be used in planning

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Capacity UtilizationCapacity Utilization

Capacity utilization is defined relative to actual Capacity utilization is defined relative to actual output and capacity:output and capacity:

Utilization = Utilization = actual output/capacity X 100%actual output/capacity X 100%

Capacity is seldom at 100% utilization.Capacity is seldom at 100% utilization.

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Facilities DecisionsFacilities Decisions

How much total capacity is needed?How much total capacity is needed?

How large should each facility be?How large should each facility be?

When is the capacity needed?When is the capacity needed?

Where should the facilities be located?Where should the facilities be located?

What type of facilities/capacity are needed?What type of facilities/capacity are needed?

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Facilities StrategyFacilities Strategy

Facilities strategy typically considers:Facilities strategy typically considers:

Amount of capacityAmount of capacity

Size of the facilitiesSize of the facilities

Timing of capacity changesTiming of capacity changes

Facility locationsFacility locations

Types of facilities needed for the long runTypes of facilities needed for the long run

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Factors Affecting Facilities StrategyFactors Affecting Facilities Strategy

Predicted demandPredicted demand

Cost of facilitiesCost of facilities

Likely behavior of competitorsLikely behavior of competitors

Business strategyBusiness strategy

International considerationsInternational considerations

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How Much?: Strategies for How Much?: Strategies for “Capacity Cushion”“Capacity Cushion”

Capacity cushion = 100% – UtilizationCapacity cushion = 100% – Utilization

Three strategiesThree strategies– Large cushion (e.g., make-to-order)Large cushion (e.g., make-to-order)

– Moderate cushion (cost of running out balanced Moderate cushion (cost of running out balanced with cost of excess capacity)with cost of excess capacity)

– Small cushion (e.g., make-to-stock)Small cushion (e.g., make-to-stock)

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How Large?How Large?What is “Optimum” Unit Size?What is “Optimum” Unit Size?

Economies of scaleEconomies of scale– Production costs are not linearProduction costs are not linear– Overhead spread over more unitsOverhead spread over more units

Diseconomies of scaleDiseconomies of scale– Increased transportation costsIncreased transportation costs

– Cost of more bureaucracyCost of more bureaucracy

– Increased organizational complexityIncreased organizational complexity

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When?When?Timing of Facility AdditionsTiming of Facility Additions

Preempt the competitionPreempt the competition– Build capacity ahead of needBuild capacity ahead of need– Positive capacity cushionPositive capacity cushion

Wait-and-see strategyWait-and-see strategy– Small or negative capacity cushionSmall or negative capacity cushion– Lower risk strategyLower risk strategy

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Where?Where?Location of FacilitiesLocation of Facilities

Quantitative FactorsQuantitative Factors– ROIROI– NPVNPV– TransportationTransportation– TaxesTaxes– Lead timesLead times

Qualitative Factors Qualitative Factors – Language and normsLanguage and norms– Attitudes among workers & customersAttitudes among workers & customers– Proximity to customers, suppliers & competitorsProximity to customers, suppliers & competitors

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What Type?What Type?Types of FacilitiesTypes of Facilities

Product-focused (55%) - computers, chain Product-focused (55%) - computers, chain saws, dishwasherssaws, dishwashers

Market-focused (30%) - electricity, bakeriesMarket-focused (30%) - electricity, bakeries

Process-focused (10%) - computer chipsProcess-focused (10%) - computer chips

General purpose (5%) – furniture, bankingGeneral purpose (5%) – furniture, banking

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Sales & Operations Planning DefinitionSales & Operations Planning Definition

Matching supply & demand over a medium time frameMatching supply & demand over a medium time frame

Time horizon of about 12 monthsTime horizon of about 12 months

An An aggregatedaggregated level of demand for one or a few level of demand for one or a few categories of product. Demand fluctuates or is uncertain.categories of product. Demand fluctuates or is uncertain.

Possibility of changing both supply and demandPossibility of changing both supply and demand

Variety of management objectivesVariety of management objectives

Facilities that are considered fixed (cannot be expanded Facilities that are considered fixed (cannot be expanded or reduced)or reduced)

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Cross-Functional Nature of S&OPCross-Functional Nature of S&OP

Engineering: product definitionEngineering: product definition

HR: workforce availabilityHR: workforce availability

Operations: capacity, inventory, forecastOperations: capacity, inventory, forecast

Management: business planManagement: business plan

Finance: capitalFinance: capital

Marketing: product demandMarketing: product demand

Sales: forecastSales: forecast

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Iterative Nature of SIterative Nature of S&&OPOP(made possible by concurrent planning)(made possible by concurrent planning)

1.1. Develop Develop productionproduction plan. plan.

2.2. Check implications for Check implications for inventory/backloginventory/backlog plan. plan.

3.3. If necessary, adjust If necessary, adjust productionproduction plan. plan.

4.4. Check against Check against resourceresource plan and availability. plan and availability.

5.5. If necessary, adjust If necessary, adjust productionproduction plan. plan.

6.6. Recheck against Recheck against inventory/backloginventory/backlog and and

resourcesresources..

7.7. ContinueContinue (go to 5) until you meet all constraints.(go to 5) until you meet all constraints.

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Planning OptionsPlanning Options

Options for managing demandOptions for managing demand– influencing demand from customersinfluencing demand from customers

– delivering orders as promiseddelivering orders as promised

Options for managing supplyOptions for managing supply– delivering what is promiseddelivering what is promised

– managing capacity & other resourcesmanaging capacity & other resources

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Options for Influencing Options for Influencing (Managing) Demand(Managing) Demand

PricingPricing

Advertising and promotionAdvertising and promotion

Backlog or reservations (shifting demand)Backlog or reservations (shifting demand)

Development of complementary offeringsDevelopment of complementary offerings

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Options for Influencing Options for Influencing (managing) Supply(managing) Supply

Hiring and layoff of employeesHiring and layoff of employees

Using overtime and undertimeUsing overtime and undertime

Using part-time or temporary laborUsing part-time or temporary labor

Carrying inventoryCarrying inventory

Outsourcing or subcontractingOutsourcing or subcontracting

Cooperative arrangementsCooperative arrangements

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Basic Production StrategiesBasic Production Strategies

““Level” strategy (constant work Level” strategy (constant work

force, use inventory as buffer)force, use inventory as buffer)

““Chase” strategy (produce to Chase” strategy (produce to

demand, vary workforce)demand, vary workforce)

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Level Load StrategyLevel Load Strategy

Produce products and services at a Produce products and services at a constant rateconstant rate

Avoid making changes to Avoid making changes to operationsoperations

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Chase StrategyChase Strategy

Produce only what you sellProduce only what you sell

Produce products or services just-in-timeProduce products or services just-in-time

If there are no sales—do not produceIf there are no sales—do not produce

Typical for servicesTypical for services

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Table 12.1: Comparison of Chase Table 12.1: Comparison of Chase versus Level Strategyversus Level Strategy

Chase Strategy

Level Strategy

Level of labor skill required Low HighJ ob discretion Low HighCompensation rate Low HighTraining required per employee Low HighLabor turnover High LowHire-layoff cost per employee Low HighAmount of supervision required High LowType of budgeting and forecasting required Short-run Long-run

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Aggregate Planning CostsAggregate Planning Costs

Hiring and firing costs (Chase)Hiring and firing costs (Chase)

Overtime and undertime costs (Chase)Overtime and undertime costs (Chase)

Subcontracting costs (Chase)Subcontracting costs (Chase)

Part-time labor costs (Chase)Part-time labor costs (Chase)

Inventory-carrying costs (Level) Inventory-carrying costs (Level)

Cost of stockout or back order (Level)Cost of stockout or back order (Level)

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SummarySummary

Facilities DecisionsFacilities DecisionsFacilities StrategyFacilities StrategySales & Operations Planning DefinitionSales & Operations Planning DefinitionCross-Functional Nature of S&OPCross-Functional Nature of S&OPPlanning OptionsPlanning OptionsBasic Aggregate Planning StrategiesBasic Aggregate Planning StrategiesAggregate Planning CostsAggregate Planning CostsAggregate Planning ExampleAggregate Planning Example

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End of Chapter Twelve