Operations Management Contemporary Concepts and Cases Chapter Twelve Capacity Planning Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

12-2 Chapter 12 Outline Facilities Decisions Facilities Strategy Sales & Operations Planning Definition Cross-Functional Nature of S&OP Planning Options Basic Aggregate Planning Strategies Aggregate Planning Costs Aggregate Planning Example

12-3 Hierarchy of Capacity Decisions (Fig. 12.1) Facilities decisions Aggregate planning Scheduling Months Planning Horizon Scheduling Facilities decisions Aggregate Planning

12-4 Definition of “Capacity” Capacity is defined as the maximum output that can be 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

12-5 Capacity Utilization Capacity utilization is defined relative to actual output and capacity: Utilization = actual output/capacity X 100% Capacity is seldom at 100% utilization.

12-6 Facilities Decisions How much total capacity is needed? How large should each facility be? When is the capacity needed? Where should the facilities be located? What type of facilities/capacity are needed?

12-7 Facilities Strategy Facilities strategy typically considers: Amount of capacity Size of the facilities Timing of capacity changes Facility locations Types of facilities needed for the long run

12-8 Factors Affecting Facilities Strategy Predicted demand Cost of facilities Likely behavior of competitors Business strategy International considerations

12-9 How Much?: Strategies for “Capacity Cushion” Capacity cushion = 100% – Utilization Three strategies –Large cushion (e.g., make-to-order) –Moderate cushion (cost of running out balanced with cost of excess capacity) –Small cushion (e.g., make-to-stock)

12-10 How Large? What is “Optimum” Unit Size? Economies of scale –Production costs are not linear –Overhead spread over more units Diseconomies of scale –Increased transportation costs –Cost of more bureaucracy –Increased organizational complexity

12-11 When? Timing of Facility Additions Preempt the competition –Build capacity ahead of need –Positive capacity cushion Wait-and-see strategy –Small or negative capacity cushion –Lower risk strategy

12-12 Where? Location of Facilities Quantitative Factors –ROI –NPV –Transportation –Taxes –Lead times Qualitative Factors –Language and norms –Attitudes among workers & customers –Proximity to customers, suppliers & competitors

12-13 What Type? Types of Facilities Product-focused (55%) - computers, chain saws, dishwashers Market-focused (30%) - electricity, bakeries Process-focused (10%) - computer chips General purpose (5%) – furniture, banking

12-14 Sales & Operations Planning Definition Matching supply & demand over a medium time frame Time horizon of about 12 months An aggregated level of demand for one or a few categories of product. Demand fluctuates or is uncertain. Possibility of changing both supply and demand Variety of management objectives Facilities that are considered fixed (cannot be expanded or reduced)

12-15 Cross-Functional Nature of S&OP Engineering: product definition HR: workforce availability Operations: capacity, inventory, forecast Management: business plan Finance: capital Marketing: product demand Sales: forecast

12-16 Iterative Nature of S & OP (made possible by concurrent planning) 1. Develop production plan. 2. Check implications for inventory/backlog plan. 3. If necessary, adjust production plan. 4. Check against resource plan and availability. 5. If necessary, adjust production plan. 6. Recheck against inventory/backlog and resources. 7. Continue (go to 5) until you meet all constraints.

12-17 Planning Options Options for managing demand –influencing demand from customers –delivering orders as promised Options for managing supply –delivering what is promised –managing capacity & other resources

12-18 Options for Influencing (Managing) Demand Pricing Advertising and promotion Backlog or reservations (shifting demand) Development of complementary offerings

12-19 Options for Influencing (managing) Supply Hiring and layoff of employees Using overtime and undertime Using part-time or temporary labor Carrying inventory Outsourcing or subcontracting Cooperative arrangements

12-20 Basic Production Strategies “Level” strategy (constant work force, use inventory as buffer) “Chase” strategy (produce to demand, vary workforce)

12-21 Level Load Strategy Produce products and services at a constant rate Avoid making changes to operations

12-22 Chase Strategy Produce only what you sell Produce products or services just-in-time If there are no sales—do not produce Typical for services

12-23 Table 12.1: Comparison of Chase versus Level Strategy

12-24 Aggregate Planning Costs Hiring and firing costs (Chase) Overtime and undertime costs (Chase) Subcontracting costs (Chase) Part-time labor costs (Chase) Inventory-carrying costs (Level) Cost of stockout or back order (Level)

12-25 Summary Facilities Decisions Facilities Strategy Sales & Operations Planning Definition Cross-Functional Nature of S&OP Planning Options Basic Aggregate Planning Strategies Aggregate Planning Costs Aggregate Planning Example

12-26 End of Chapter Twelve