1. Fundamentals of Operations Management BUS 3 – 140 Capacity & Operations Planning Week of Feb 25, 2008

2. Definitions Design capacity
Maximum output rate or service capacity for which an operation, process, or facility is designed
Effective capacity
Design capacity minus allowances such as personal time, maintenance, and scrap
Actual output
Rate of output actually achieved--cannot exceed effective capacity.
* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

3. Measures of Capacity (Table 5.1)
* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

4. Factors that Influence Effective Capacity (Table 5.2)
FACILITIES
POLICY
Design
Location
OPERATIONAL
Layout
Scheduling
Environment
Materials Management
Quality assurance
PRODUCT / SERVICES
Maintenance policies
Design
Equipment breakdowns
Product or service MIX
SUPPLY CHAINS
PROCESS
Quantity capabilities
EXTERNAL FACTORS
Quality capabilities
Product standards
Safety regulations
HUMAN FACTORS
Unions
Job Content
Pollution control standards
Job Design
Training and Experience
Motivation
Compensation
Learning Curve
Absenteeism & labor turnover

5. Strategic Considerations in Capacity Planning
Revenue
Cost
Technologies
Volumes
Markets
Acquisitions
Sourcing decisions
Expansion decisions
Capital equipment
Long time to Implement and then in place for a Long time

6. Tactical Considerations in Capacity Planning

7. Anything that LIMITS a system in reaching its Goal
Constraints
Anything that LIMITS a system in reaching its Goal
Types of Constraints:
Resource
Material
Supplier/Vendor
Financial
Knowledge/Competence
Policy

8. Potential Bottleneck Operations (2 Examples)
Operation 1 20/hr.
Operation 2 10/hr.
Operation 3 15/hr.
10/hr.
Maximum output rate limited by bottleneck
40 Units coming in every hour, but only 30 going out
Machine #1
10/hr
Machine #2
10/hr
Bottleneck
Operation
30/hr
Machine #3
10/hr
Machine #4
10/hr

9. Constraint True Definition IMBALANCE IMBALANCE IMBALANCE
A Constraint that causes REVENUE to be Lost
IMBALANCE
IMBALANCE
IMBALANCE
Operation 1 20/hr.
Operation 2 10/hr.
Operation 3 15/hr.
10/hr.
Unless more than 10 units per hour can be SOLD,
the Operations are IMBALANCED but not a true Constraint

10. Unique Elements of Service Capacity
The need to be near Customers
Cannot store “inventory” of services in advance of the requirement
Variability of Inputs and Outputs

11. Developing Capacity Alternatives
Design flexibility into systems
Add power and water lines for easier expansion
Simplify facilities
Three bedroom house when you have no kids
Take stage of life cycle into account
Take a “big picture” approach to capacity changes
Correlation of different events (e.g. Increasing number of Hotel Rooms offered will increase need for Parking, Food, Housekeeping, etc..)
Attempt to smooth out capacity requirements
Influence demand so that load during peak times may be transferred of too-peak times
Use same equipment for complementary products (e.g. Bicycles and “Body by Jake”)

12. Capacity Planning & Cost

13. Fixed and variable Costs
Fixed Costs
Remain CONSTANT regards of level of Volume
Rent
Manager salaries
Insurance
Overhead
Variable Costs
Vary directly with Volume of Output
Total Material Cost
Total
Beware of ABSORBING OVERHEAD (amortizing Fixed Costs)
as a justification for producing more than can be Sold

14. Total variable cost (VC)
Breakeven Point
The volume of output at which total cost and total revenue are equal
Fixed Cost divided by Contribution Margin per unit
Amount ($)
Q (volume in units)
Total cost = VC + FC
Total variable cost (VC)
Fixed cost (FC)
Profit
Profit
Total revenue
Total revenue
Total cost
Total cost
Break Even Point units
Q (volume in units)
Q (volume in units)
Once the Breakeven Point is passed,
Economies Of Scale result in accelerated Profits

15. Breakeven Exercise
Page 194 of Book

16. Aggregate Planning

17. Intermediate Planning (Table 13.1)
Intermediate Plans
Long-Range Plans
General levels of:
Employment
Output
Finished Goods Inventory
Subcontracting
Backorders
Short-Range Plans
Long-term capacity
Location
Layout
Product Design
Work System design
Detailed Plans:
Machine loading
Job assignments
Job sequencing
Production Orders
Work schedules
* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

18. Intermediate Planning (Figure 13.1)
Business Plan
Establishes operations
and capacity strategies
Aggregate plan
Establishes
operations capacity
Master schedule
Establishes schedules
for specific products
Corporate
strategies
and policies
Economic,
competitive,
and political
conditions
Aggregate
demand
forecasts
* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

19. Aggregate Planning
Focus on Quantity and Timing of expected Demand (forecast)
Start with Multiple plans and choose the most appropriate one
Factor in Revenue, Market Share, and Inventory targets
Estimate the impact of Product Transitions

20. Aggregate Planning Inputs and Outputs (Table 13.2)
* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

21. Demand Options
When Demand does not match Capacity then alter (i.e. Influence) demand
Pricing
Promotion
New demand to smooth peaks and valleys (e.g. Bus taking kids on field trips during the school day)
Points out a useful application of the economic concept of Elasticity of Demand

22. Capacity Options Hire workers and / or layoff workers
Attraction and Retention risk
Skill set replacement
Union issues
Hiring and layoff costs
Part time workers and contractors
Work schedule adjustments
Overtime
Second (and third) shifts
Sending workers home
Four day weeks
Inventories
Subcontracting, offloading, outsourcing

23. Managing Uneven Load Level Load Chase Develop Business Rules
No more than x% of forecasted demand
Never short an order
No more than 110% of capacity
No more than 50% in last month of Quarter
Other

24. Managing Uneven Load (Table 13.3)
CHASE Approach
Capacities are adjusted to match demand requirements over the planning horizon
LEVEL Approach
Capacities are kept constant over the planning horizon
* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

25. Techniques for Aggregate Planning
Know your Demand
Know your CAPACITIES (including Flex up or down)
Account for company policies on Layoffs, costs, overtime, etc..
Agree on The Plan
Draw the Capacity Line and the Load bars against it

26. Summary of Techniques for Aggregate Planning (Table 13.7)
True Optimization is rare, but the analysis is useful to
drive Business Rules and formal decision criteria
* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

27. Aggregate Planning in Services
Cannot stock Finished Goods Inventory
Demand is Perishable
Input is highly variable
Cross train people to increase effective capacity
Yield Management (Airlines)

28. Master Scheduling

29. The Master Schedule “disaggregates ” the Aggregate Plan
Figure 13.4
Figure 13.5
Aggregate
Planning
Aggregate Plan
Jan
Feb
Mar
Lawn Mowers
200
300
400
Disaggregation
Master Schedule
Jan
Feb
Mar
Push Mowers
100
100
100
Power Mowers 75
150
200
Riding Mowers 25 50
100
Total
200
300
400
Master
Schedule
* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

30. The Master Scheduling Process (Figure 13.6)
Inputs
Outputs
Beginning Inventory
Forecast
Orders
Projected Inventory
Master Production Schedule
Uncommitted Inventory
PROCESS
* From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

31. Additional Key Points in Master Scheduling
Rough Cut Capacity Planning
Time Horizons
Time Fences
“Available to Promise”
The most valuable part of the job is knowing when
to say, “Yes” and when to say, “No”

32. Time Fences “frozen” (firm or fixed) “liquid” (open)
“slushy” somewhat firm
“liquid” (open)
Only Executive Exception would authorize a Change
Only Executive Exception would NOT authorize a Change
Changes are likely to be accepted, but require Research and / or Business Case

33. Time Fences can be Dynamic
Typical Technology Manufacturer
Dell Computer
Cargo Airplanes for the US Dept. of Defense
Restaurant
Burger King
Generally varies by Lead Time to obtain Materials and Capital equipment
Goal is to minimize the Red and Yellow and keep FLEXIBILITY and RESPONSIVENESS to a maximum

34. Sales & Operations Planning A bridge between Aggregate Planning & Master Scheduling

35. Sales & Operations Planning (S&OP)
Purpose
Senior Management Alignment on Revenue and Supply plans
Greater accountability of individual plans
Consensus on managing gaps
Output
Judged Revenue Plan
Master Build Schedule
Contingency plans
Documented agreements and planned outcomes

36. Key S&OP Inputs, by Function
Unconstrained Forecast
Execution to Plan
Capacity
Materials Plan
Time to Volume
Buffer Targets
Sales
Operations
BU’s
Finance
Prelim. Revenue Plan
GM Revenue objectives
Profitability scenarios
Prelim. Budgets
Prelim. FGI Targets
Return on Invested Capital
Market Trends & TAM
Share expectations
Customer TAM expectations
Roadmaps and Transitions

37. S&OP Output is a Consensus Plan
Constrained Revenue plan
Accountability for Forecast Accuracy
Standard, system-generated, accuracy metrics
Defined ownership by Sales and Marketing
Joint ownership of FGI between Sales and Operations
MPS tied to single plan of record and business rules
Published Lead Times
Integrated Revenue plan
Credible EPS guidance
Exception Loops between meetings

38. Introduction to Inventory Management

39. Reasons for Carrying Inventory
Revenue
Have what Customers want, when they want it
Compensate for non-linear demand that doesn’t match your capacity
Buffer for upside demand
Buffer for when competitors cannot deliver
Buffer against unexpected internal supply problems
Carrying Buffer inventory is necessary, but continuous, relentless
efforts to minimize variability, and thus eliminate the need for
the Buffers is greatly preferred

40. Reasons for Carrying Inventory
Cost
Minimize shortages, to avoid delays and idle time
Optimize plant, people, and equipment utilization
Obtain volume discounts for favorable unit pricing
Hedge against future price increases
Optimizing utilization and unit pricing are valuable only when
the goods made or purchased will SOLD to a paying Customer
in a reasonable time
The cost of a STOCKOUT is hard to quantify,
but is to be AVOIDED at all times

41. Types of Inventory Manufacturing All Finished Goods Subassembly (WIP)
Raw
Materials
Work
In Process
(WIP)
Finished
Goods
(FGI)
Maintenance,
Repair, &
Operating
Supplies (MRO)
Resale
Items
Manufacturing
All
Chocolate
Cake
Finished Goods
Cake
Icing
Subassembly (WIP)
Raw Material
Egg
Mix
Water
MRO
Raw