Strategic Capacity Planning & Aggregate Planning MBA 8452 Systems and Operations Management Strategic Capacity Planning & Aggregate Planning

Introduction to Operations Management/ Operations Strategy Process Analysis and Design Project Management Planning for Production Process Control and Improvement Process Analysis Capacity Management Quality Management Aggregate Planning Job Design Statistical Process Control Just in Time Scheduling Manufacturing Layout/ Assembly Line Balancing Inventory Control Supply Chain Management Services Waiting Line Analysis

Objective: Capacity Management Overview of Capacity Management Be able to explain why capacity management is important Best Operating Level Be able to describe the best operating level Capacity Focus What does capacity focus mean Capacity Requirements Calculate capacity requirements and compare to available capacity Strategies for Meeting Demand Be able to explain the concept of Chase and Level Strategies

Major Operations Planning Activities Overview Process Planning Strategic Capacity Planning Aggregate Planning Master Production Scheduling Material Requirements Planning Order Scheduling Weekly Workforce & Customer Scheduling Daily Workforce & Long Range Medium Short Manufacturing Services

“You can’t build it if you don’t have the capacity” Strategic Capacity Planning Planning of the overall capacity level of capital-intensive resources—facilities, equipment, and overall labor force size —that supports the company’s long-range competitive strategy.

Capacity Planning Basic Questions What kind of capacity is needed? How much is needed? When is needed?

What Is Capacity? The amount of output that a system is capable of achieving over a specific period of time has a time frame can be also measured in terms of resource inputs cannot be stored for later use

Capacity Planning Concept Best Operating Level Design capacity for which average unit cost is at the minimum Average unit cost of output Underutilization Best Operating Level Overutilization Volume

Capacity Planning Concept Capacity Utilization Capacity used rate of output actually achieved Best operating level design capacity

Capacity Planning Concept Example - Capacity Utilization Design capacity = 50 trucks/day Actual output = 36 trucks/day Utilization = ? Solution:

Economies & Diseconomies of Scale Economies of Scale and the Experience Curve working Volume Average unit cost of output 100-unit plant 200-unit plant 400-unit plant 300-unit plant Diseconomies of Scale start working

Capacity Planning Concept The Experience Curve Cost or price per unit Total accumulated production of units

Capacity Expansion Issues Maintaining system balance External sources of capacity Timing and frequency of capacity expansions Stage 1 Stage 2 Stage 3 Inputs Outputs 200/hr 50/hr (bottleneck) Volume Time Capacity leads demand Volume Time Capacity lags demand Timing Strategy

Capacity Expansion Issues Frequency of Capacity Expansion

Determining Capacity Requirements Forecast sales within each individual product line Calculate equipment and labor requirements to meet the forecasts Project equipment and labor availability over the planning horizon

Determining Capacity Requirements Example A manufacturer produces two lines of ketchup, FancyFine and a Generic line. Each is sold in small and family-size plastic bottles. Are we really producing two different types of ketchup from the standpoint of capacity requirements? No! The following table shows forecast demand for the next four years.

Determining Capacity Requirements Example (cont.) Currently, three 100,000-units-per-year machines are available for small-bottle production. Two operators required per machine. Two 120,000-units-per-year machines are available for family-sized-bottle production. Three operators required per machine. Total combined demand forecasts

Capacity Requirements Example--Calculation

Capacity Requirements Example--Projection

Planning Service Capacity Time – service is perishable and must be consumed when it is produced Location – people are not willing to travel long distances to obtain a service so they must be located near the customer Volatility of Demand – demand for services is subject to change

Capacity Utilization & Service Quality Best operating point is near 70% of capacity From 70% to 100% of service capacity, what might happen to service quality? Why? Context specific tradeoff

Aggregate Planning (Chap. 12) Matches market demand to company resources Medium-range: 6-18 months Goal: Specify the optimal combination of production rate workforce level inventory on hand

Inputs and Outputs to Aggregate Production Planning Capacity Constraints Strategic Objectives Company Policies Demand Forecasts Financial Constraints Aggregate Production Planning Size of Workforce Units or dollars subcontracted, backordered, or lost Production per month (in units or $) Inventory Levels

Strategies for Meeting Demand Level production - produce at constant rate & use inventory as needed to meet demand Chase demand - change workforce levels so that production matches demand Subcontracting - useful if supplier meets quality & time requirements

Level Production Time Production Demand Units

Chase Demand Time Units Production Demand