1. Strategic Capacity Planning Defined
Capacity: the ability to hold, receive, store, or produce.
Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size. 3

2. The Experience Curve Cost or price per unit
As plants produce more products, they gain experience in the best production methods and reduce their costs per unit.
Cost or
price
per unit
Total accumulated production of units 9

3. Capacity Focus
The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives.
Plants Within Plants (PWP) (from Skinner)
Extend focus concept to operating level 10

4. Example of a Decision Tree Problem
A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:
A) Arrange for subcontracting,
B) Construct new facilities.
C) Do nothing (no change)
The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as .10, .50, and .40. 20

5. Example of a Decision Tree Problem: The Payoff Table
The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These costs, in thousands of dollars are presented in the table below:

6. Example of a Decision Tree Problem: Step 1
Example of a Decision Tree Problem: Step 1. We start by drawing the three decisions
Subcontract
Build New
No Change 22

7. Example of Decision Tree Problem: Step 2
Example of Decision Tree Problem: Step 2. Add our possible states of nature, probabilities, and payoffs
Subcontract
Build New
No Change
High demand (.4)
Medium demand (.5)
Low demand (.1)
$90k
$50k
$10k
$200k
$25k
-$120k
$60k
$40k
$20k 23

8. Example of Decision Tree Problem: Step 3
Example of Decision Tree Problem: Step 3. Determine the expected value of each decision
High demand (.4)
Medium demand (.5)
Low demand (.1)
Subcontract
$90k
$50k
$10k
EVA=.4(90)+.5(50)+.1(10)=$62k
$62k 24

9. Example of Decision Tree Problem: Step 4. Make decision
High demand (.4)
Medium demand (.5)
Low demand (.1) A B C
$90k
$50k
$10k
$200k
$25k
-$120k
$60k
$40k
$20k
$62k
$80.5k
$46k
Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility. 25

10. Capacity Utilization & Service Quality
Best operating point is near 70% of capacity - balances efficiency and reserve
From 70% to 100% of service capacity, what do you think happens to service quality? - customers are serviced, but service quality often declines 27

11. Components of Demand Average demand for a period of time Trend
Seasonal element
Cyclical elements
Random variation
Autocorrelation

12. Delphi Method
l. Choose the experts to participate. There should be a variety of knowledgeable people in different areas.
2. Through a questionnaire (or ), obtain forecasts (and any premises or qualifications for the forecasts) from all participants.
3. Summarize the results and redistribute them to the participants along with appropriate new questions.
4. Summarize again, refining forecasts and conditions, and again develop new questions.
5. Repeat Step 4 if necessary. Distribute the final results to all participants.

13. Which Forecast Would You Prefer?

14. Which Forecast Would You Prefer?

15. In Class Example 3 Period Moving Average
July
110
August
115
September
105
October
November
125
December
January
( )/3 = 110
( )/3 =110
( )/3 =
( )/3 = 115

16. In Class Example Exponential Smoothing,  = .4 Ft = At-1 + (1- )Ft-1
July
110
August
115
September
105
October
November
125
December
January
110
.4(110) + (1-.4)110 = 110
.4(115) + (1-.4)110 = 112
.4(105) + (1-.4)112 = 109.2
.4(110) + (1-.4)109.2 =
.4(125) + (1-.4) =
.4(110) + (1-.4) =

17. In Class 2
a = .4 At Ft
Forecast Error
RSFE
Absolute Deviation
MAD TS
July
110
110.0
August
115
September
105
112.0
October
109.2
November
125
109.5
December
115.7
January
113.4

18. a = .4 At Ft
Forecast Error
July
110
110.0
August
115
= 5.0
September
105
112.0
105 – 112 = -7.0
October
109.2
= 0.8
November
125
109.5
125 – = 15.5
December
115.7
= -5.7
January
113.4

19. a = .4 At Ft
Forecast Error
RSFE
July
110
110.0
August
115
5.0
September
105
112.0
-7.0
5 – 7 = -2.0
October
109.2
0.8
-2+.8 = -1.2
November
125
109.5
15.5
= 14.3
December
115.7
-5.7
14.3 – 5.7 = 8.6
January
113.4

20. a = .4 At Ft
Forecast Error
RSFE
Absolute Deviation
July
110
110.0
August
115
5.0
September
105
112.0
-7.0
-2.0
7.0
October
109.2
0.8
-1.2
November
125
109.5
15.5
14.3
December
115.7
-5.7
8.6
5.7
January
113.4

21. a = .4 At Ft
Forecast Error
RSFE
Absolute Deviation
MAD
July
110
110.0
August
115
5.0
5/1 = 5.0
September
105
112.0
-7.0
-2.0
7.0
(5+ 7)/2 = 6.0
October
109.2
0.8
-1.2
(5+7+.8)/3 = 4.3
November
125
109.5
15.5
14.3
( )/4 = 7.1
December
115.7
-5.7
8.6
5.7
( )/5 = 6.8
January
113.4

22. a = .4 At Ft
Forecast Error
RSFE
Absolute Deviation
MAD TS
July
110
110.0
August
115
5.0
5/5 = 1.00
September
105
112.0
-7.0
-2.0
7.0
6.0
-2/6 = -0.33
October
109.2
0.8
-1.2
4.3
-1.2/4.3 = -0.28
November
125
109.5
15.5
14.3
7.1
14.3/7.1 = 2.02
December
115.7
-5.7
8.6
5.7
6.8
8.6/6.8 = 1.26
January
113.4

23. Strategic Capacity Planning
Process Planning
Long-
range
Strategic Capacity Planning
Forecasting and Demand Mgmt.
Sales and Operations (Aggregate) Planning
Intermediate-
range
Sales Plan
Aggregate Operations Plan
Manufacturing
Services
Master Production Scheduling
Material Requirements Planning
Weekly Workforce &
Customer Scheduling
Order Scheduling
Short-
range
Daily Workforce &
Customer Scheduling 4 4

24. Aggregate Planning Goal: Specify the optimal combination of
production rate (units completed per unit of time)
workforce level (number of workers)
inventory on hand (inventory carried from previous period)
Product group or broad category - family (Aggregation)
Intermediate-range planning period: 6-18 months 6 6

25. Key Strategies for Meeting Demand
Chase - Match production to customer order rate by hiring and laying off employees
Level - Stable workforce with constant output, inventory and backlogs absorb fluctuations in demand
Some combination of the two - Stable workforce, variable hours - vary output through overtime or flexible schedules 10 10