1. Facilities and Aggregate Planning
INTRODUCTION to Operation Management
4e, Schroeder
Facilities and Aggregate Planning
Chapter 12
Due Date!
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc., All Rights Reserved.

2. Chapter 12 Outline Facilities Decisions Facilities Strategy
Aggregate Planning Definition
Planning Options
Basic Strategies
Aggregate Planning Costs
Example of Costing
Sales and Operations Planning
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3. Hierarchy of Capacity Decisions
Facilities
decisions
Facilities
decisions
Aggregate
planning
Aggregate
Planning
Scheduling
Scheduling 6 12 18 24
Months
Planning Horizon
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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
Nominal capacity
Subtracts downtime, shift breaks, etc.
Is the actual capacity that should be used in planning
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5. Utilization = output/nominal capacity
Capacity Utilization
Capacity utilization is defined relative to output and nominal capacity:
Utilization = output/nominal capacity
Capacity is seldom at 100 percent utilization.
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6. Facilities Decisions How much total capacity is needed?
How large should each unit of capacity be?
When is the capacity needed?
What type of facilities/capacity are needed?
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7. Facilities Strategy Facilities strategy typically considers:
Amount of capacity
Size of the units
Timing of capacity changes
Types of facilities needed for the long run
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8. Factors Affecting Facilities Strategy
Predicted demand
Cost of facilities
Likely behavior of competitors
Business strategy
International considerations
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9. How Much?: Strategies for “Capacity Cushion”
Capacity cushion = capacity – average demand
Try not to run out (e.g. utilities)
Build to average forecast
Maximize utilization at bottlenecks
Reduce rejects and rework
Reduce throughput time
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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
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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
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12. 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%) – several products and processes.
Whirlpool factory in Findlay, Ohio, is example of product focus. They make all Whirlpool’s dishwashers for the U.S. market.
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13. Aggregate Planning Characteristics
A time horizon of about 12 months
An aggregated level of demand for one or few categories of product
The possibility of changing both supply and demand
A variety of management objectives
Facilities that are considered fixed (cannot be expanded or reduced)
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14. 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
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15. Options for Influencing (Managing) Demand
Pricing
Advertising and promotion
Backlog or reservations (shifting demand)
Development of complementary products
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16. 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
Making cooperative arrangements
Cooperative arrangement: Nissan assembles its Quest minivan in Ford’s plant in Avon Lake, Ohio.
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17. Basic Production Strategies
“Level” strategy (constant work force, use inventory as buffer)
“Chase” strategy (produce to demand, vary workforce)
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18. Level Load Strategy Deliver products and services at a constant rate
Avoid making changes to operations
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19. 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
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20. Table 12.1: Comparison of Chase versus Level Strategy
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21. 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)
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22. Sales & Operations Planning
The underlying purpose of Sales and Operations Planning (S&OP) is to balance demand and supply.
Uses cross-functional teams
Monthly ‘time buckets’ over a rolling 12 month horizon.
Based on families of products
Input into detailed planning and scheduling and ERP
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23. Inputs to S&OP Input Responsibility Demand Forecast Marketing
Market intelligence Marketing
Actual sales Sales
Capacity information Manufacturing
Management targets Management
Financial requirements Finance
New product information R&D
New process information Process engineering
Workforce availability Human resources
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24. S&OP Outputs Output Responsibility Sales plan Marketing and sales
Production plan Manufacturing
Inventory plan (MTS) Management
Backlog plan (MTO) Management
Purchasing plan Purchasing
Financial plan Finance
Engineering plan Engineering
Workforce plan Human resources
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25. Iterative Nature of S&OP (made possible by concurrent planning)
Develop production plan.
Check implications for inventory/backlog plan.
If necessary, adjust production plan.
Check against resource plan and availability.
Recheck against inventory/backlog and resources.
Continue (go to 5) until you meet all constraints.
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26. Summary Facilities Decisions Facilities Strategy
Aggregate Planning Definition
Planning Options
Basic Strategies
Aggregate Planning Costs
Example of Costing
Sales and Operations Planning
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27. End of Chapter Twelve
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