1. BA 320 Operations Management Chapter 9 Capacity and Aggregate Planning

2. BA 320 Operations Management Capacity Planning Establishes overall level of productive resources Establishes overall level of productive resources Affects lead time responsiveness, cost & competitiveness Affects lead time responsiveness, cost & competitiveness Determines when and how much to increase capacity Determines when and how much to increase capacity

3. BA 320 Operations Management Capacity Expansion Volume & certainty of anticipated demand Volume & certainty of anticipated demand Strategic objectives for growth Strategic objectives for growth Costs of expansion & operation Costs of expansion & operation Incremental or one-step expansion Incremental or one-step expansion

4. BA 320 Operations Management Capacity Expansion Strategies

5. BA 320 Operations Management Capacity Expansion Strategies (a) Capacity lead strategy (b) Capacity lag strategy (c) Average capacity strategy (d) Incremental vs. one-step expansion Units Capacity Time Demand Units Capacity Time Demand Units Capacity Time Demand Units Incrementalexpansion Time Demand One-step expansion Figure 9.1

6. BA 320 Operations Management Best Operating Levels Average cost per room # Rooms Figure 9.2

7. BA 320 Operations Management Best Operating Levels Average cost per room Best operating level Economies of scale Diseconomies of scale 2505001000 # Rooms Figure 9.2

8. BA 320 Operations Management Aggregate Production Planning (APP) Matches market demand to company resources Matches market demand to company resources Plans production 6 months to 12 months in advance Plans production 6 months to 12 months in advance Expresses demand, resources, and capacity in general terms Expresses demand, resources, and capacity in general terms Develops a strategy for economically meeting demand Develops a strategy for economically meeting demand Establishes a company-wide game plan for allocating resources Establishes a company-wide game plan for allocating resources

9. BA 320 Operations Management Inputs and Outputs to APP

10. BA 320 Operations Management Inputs and Outputs to APP Company Policies Company Policies Strategic Objectives Strategic Objectives Capacity Constraints Capacity Constraints Units or dollars subcontracted, backordered, or lost Units or dollars subcontracted, backordered, or lost Size of Workforce Size of Workforce Production per month (in units or $) Production per month (in units or $) Inventory Levels Inventory Levels Financial Constraints Financial Constraints Demand Forecasts Demand Forecasts Aggregate Production Planning Aggregate Production Planning Figure 9.3

11. BA 320 Operations Management Adjusting Capacity to Meet Demand 1.Producing at a constant rate and using inventory to absorb fluctuations in demand (level production) 2.Hiring and firing workers to match demand (chase demand) 3.Maintaining resources for high demand levels 4.Increase or decrease working hours (overtime and undertime) 5.Subcontracting work to other firms 6.Using part-time workers 7.Providing the service or product at a later time period (backordering)

12. BA 320 Operations Management Strategy Details Level production - produce at constant rate & use inventory as needed to meet demand Level production - produce at constant rate & use inventory as needed to meet demand Chase demand - change workforce levels so that production matches demand Chase demand - change workforce levels so that production matches demand Maintaining resources for high demand levels - ensures high levels of customer service Maintaining resources for high demand levels - ensures high levels of customer service

13. BA 320 Operations Management Strategy Details Overtime & undertime - common when demand fluctuations are not extreme Overtime & undertime - common when demand fluctuations are not extreme Subcontracting - useful if supplier meets quality & time requirements Subcontracting - useful if supplier meets quality & time requirements Part-time workers - feasible for unskilled jobs or if labor pool exists Part-time workers - feasible for unskilled jobs or if labor pool exists Backordering - only works if customer is willing to wait for product/services Backordering - only works if customer is willing to wait for product/services

14. BA 320 Operations Management Level Production

15. BA 320 Operations Management Level Production Production Demand Units Time Figure 9.4 (a)

16. BA 320 Operations Management Chase Demand Figure 9.4 (b) ProductionDemandUnits Time

17. BA 320 Operations Management APP Using Pure Strategies Hiring cost= $100 per worker Firing cost= $500 per worker Inventory carrying cost= $0.50 pound per quarter Production per employee= 1,000 pounds per quarter Beginning work force= 100 workers QUARTERSALES FORECAST (LB) Spring80,000 Summer50,000 Fall120,000 Winter150,000 Example 9.1

18. BA 320 Operations Management APP Using Pure Strategies Hiring cost= $100 per worker Firing cost= $500 per worker Inventory carrying cost= $0.50 pound per quarter Production per employee= 1,000 pounds per quarter Beginning work force= 100 workers QUARTERSALES FORECAST (LB) Spring80,000 Summer50,000 Fall120,000 Winter150,000 Level production = 100,000 pounds (50,000 + 120,000 + 150,000 + 80,000) 4 Example 9.1

19. BA 320 Operations Management Level Production Strategy Example 9.1 Spring80,000100,00020,000 Summer50,000100,00070,000 Fall120,000100,00050,000 Winter150,000100,0000 400,000140,000 Cost = 140,000 pounds x 0.50 per pound = $70,000 SALESPRODUCTION QUARTERFORECASTPLANINVENTORY

20. BA 320 Operations Management Spring80,00080,00080020 Summer50,00050,00050030 Fall120,000120,000120700 Winter150,000150,000150300 10050 SALESPRODUCTIONWORKERSWORKERSWORKERS SALESPRODUCTIONWORKERSWORKERSWORKERS QUARTERFORECASTPLANNEEDEDHIREDFIRED Cost= (100 workers hired x $100) + (50 workers fired x $500) = $10,000 + 25,000 = $35,000 Example 9.1 Chase Demand Strategy

21. BA 320 Operations Management APP Using Mixed Strategies Production per employee= 100 cases per month Wage rate= $10 per case for regular production = $15 per case for overtime = $25 for subcontracting Hiring cost= $1000 per worker Firing cost= $500 per worker Inventory carrying cost= $1.00 case per month Beginning work force= 10 workers Example 9.2 January1000July500 February400August500 March400September1000 April400October1500 May400November2500 June400December3000 MONTHDEMAND (CASES)MONTHDEMAND (CASES)

22. BA 320 Operations Management APP by Linear Programming where H t =# hired for period t F t =# fired for period t I t =inventory at end of period t P t =units produced in period t W t =workforce size for period t Minimize Z =$100 (H 1 + H 2 + H 3 + H 4 ) + $500 (F 1 + F 2 + F 3 + F 4 ) + $0.50 (I 1 + I 2 + I 3 + I 4 ) Subject to P 1 - I 1 = 80,000(1) DemandI 1 + P 2 - I 2 = 50,000(2) constraintsI 2 + P 3 - I 3 = 120,000(3) I 3 + P 4 - I 4 = 150,000(4) Production1000 W 1 = P 1 (5) constraints1000 W 2 = P 2 (6) 1000 W 3 = P 3 (7) 1000 W 4 = P 4 (8) 100 + H 1 - F 1 = W 1 (9) Work forceW 1 + H 2 - F 2 = W 2 (10) Work forceW 1 + H 2 - F 2 = W 2 (10) constraintsW 2 + H 3 - F 3 = W 3 (11) constraintsW 2 + H 3 - F 3 = W 3 (11) W 3 + H 4 - F 4 = W 4 (12) Example 9.3

23. BA 320 Operations Management APP by the Transportation Method 19001000100500 215001200150500 316001300200500 430001300200500 Regular production cost per unit$20 Overtime production cost per unit$25 Subcontracting cost per unit$28 Inventory holding cost per unit per period$3 Beginning inventory300 units EXPECTEDREGULAROVERTIMESUBCONTRACT QUARTERDEMANDCAPACITYCAPACITYCAPACITY Example 9.4

24. BA 320 Operations Management The Transportation Tableau Unused PERIOD OF PRODUCTION1234CapacityCapacity Beginning0369 Inventory300———300 Regular600300100—1000 Overtime100100 Subcontract500 Regular1200——1200 Overtime150150 Subcontract250250500 Regular1300—1300 Overtime200—200 Subcontract500500 Regular13001300 Overtime200200 Subcontract500500 Demand900150016003000250 12341234 PERIOD OF USE 20232629 25283134 28313437 202326 252831 283134 2023 2528 2831 20 25 28 Table 9.2

25. BA 320 Operations Management Burruss’ Production Plan 190010001000500 215001200150250600 3160013002005001000 4300013002005000 Total7000480065012502100 REGULARSUB-ENDING PERIODDEMANDPRODUCTIONOVERTIMECONTRACTINVENTORY Table 9.3

26. BA 320 Operations Management Other Quantitative Techniques Linear decision rule (LDR) Linear decision rule (LDR) Search decision rule (SDR) Search decision rule (SDR) Management coefficients model Management coefficients model

27. BA 320 Operations Management Demand Management Shift demand into other periods Shift demand into other periods Incentives, sales promotions, advertising campaigns Incentives, sales promotions, advertising campaigns Offer product or services with countercyclical demand patterns Offer product or services with countercyclical demand patterns Partnering with suppliers to reduce information distortion along the supply chain Partnering with suppliers to reduce information distortion along the supply chain

28. BA 320 Operations Management Demand Distortion along the Supply Chain

29. BA 320 Operations Management Hierarchical Planning Process

30. BA 320 Operations Management Hierarchical Planning Process Items Product lines or families Individual products Components Manufacturing operations Resource Level Plants Individual machines Critical work centers Production Planning Capacity Planning Resource requirements plan Rough-cut capacity plan Capacity requirements plan Input/ output control Aggregate production plan Master production schedule Material requirements plan Shop floor schedule All work centers Figure 9.5

31. BA 320 Operations Management Available-to-PromisePERIOD ON-HAND = 50123456 Forecast100100100100100100 Customer orders Master production schedule200200200 Available to promise PERIOD ON-HAND = 50123456 Forecast100100100100100100 Customer orders90120130702010 Master production schedule200200200 Available to promise400170 ATP in period 1 = (50 + 200) - (90 + 120) = 40 ATP in period 3 = 200 - (130 + 70) = 0 ATP in period 5 = 200 - (20 + 10) = 170 Example 9.5

32. BA 320 Operations Management Available-to-Promise

33. Available-to-Promise Product Request Is the product available at this location? Is an alternative product available at an alternate location? Is an alternative product available at this location? Is this product available at a different location? Available- to-promise Allocate inventory Capable-to- promise date Is the customer willing to wait for the product? Available- to-promise Allocate inventory Revise master schedule Trigger production Lose sale Yes No Yes No Yes No Yes No Yes No Figure 9.6

34. BA 320 Operations Management Aggregate Planning for Services 1.Most services can’t be inventoried 2.Demand for services is difficult to predict 3.Capacity is also difficult to predict 4.Service capacity must be provided at the appropriate place and time 5.Labor is usually the most constraining resource for services

35. BA 320 Operations Management Yield Management P( n < x )  C u C u + C o where n = number of no-shows x = number of rooms or seats overbooked C u = cost of underbooking; i.e., lost sale C o = cost of overbooking; i.e., replacement cost P= probability

36. BA 320 Operations Management Yield Management NO-SHOWSPROBABILITY 0.15 1.25 2.30 3.30 Example 9.4

37. BA 320 Operations Management Yield Management NO-SHOWSPROBABILITYP(N < X) 0.15.00 1.25.15 2.30.40 3.30.70 Expected number of no shows 0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75 Optimal probability of no-shows P(n < x)  = =.517 C u C u + C o 75 75 + 70 Example 9.4.517

38. BA 320 Operations Management Yield Management Example 9.4 NO-SHOWSPROBABILITYP(N < X) 0.15.00 1.25.15 2.30.40 3.30.70 Expected number of no shows 0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75 Optimal probability of no-shows P(n < x)  = =.517 C u C u + C o 75 75 + 70.517 Cost of overbooking [2(.15) + 1(.25)]$70=$38.50Cost of bumping customers (.30)$75=$22.50Lost revenue from no-shows $61.00Total cost of overbooking by 2 rooms Expected savings = ($131.225 - $61) = $70.25 a night