4/7/2016

Operations Management

Capacity Planning and Control

Bruno Silvestre
1

Course Schedule Week 1

DATE

Session 1
(Mon. April 4)

Session 2
(Tue. April 5)

Session 3
(Wed. April 6)

Session 4
(Thu. April 7)

IN CLASS

OBS

-Introductions, course overview, and general

administrative issues
-Introduction to Operations Management (Ch. 1)

No assigned readings

-Operations Performance (Ch. 2)

Pre-Work:
-Read Chapters 1, 2 and 4

-Process Design (Ch. 4)

-Operations Improvement (Ch.18)
-Organizing for Improvement (Ch. 20)
-The Nature of Planning & Control (Ch. 10)

Pre-Work:
-Read Chapters 10 and 11

-Capacity Management (Ch.11)

Session 5
-Test 1
(Fri. April 8)

Pre-Work:
-Read Chapter 18
-Read Chapter 20 (pages
645-656)

Test 1 will be based on

cumulative content covered
up to here

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Announcements
Assign Groups Company Visits
Group 1:
April 12th (Tue) - OC-System facility
Departs: 8:15am from schools front door (Joroinen)
Tour 9:30am-11:30am
Lunch will be provided by the company
Arrive: 12:30pm

Group 2:
April 14th (Thu) Alhstrom Glassfiber facility
Departs: 9:40am from schools front door (Mikkeli)
Tour 10:00am-12:00pm
Lunch will NOT be provided by the company
Arrive: 12:15pm

Announcements
Assign Groups Group Project
Part 1 in groups of 2 students

Extended Office Hours for Test 1

Thursday (today) April 7 1:00pm to 5:00pm

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Agenda

Capacity Considerations
Aggregate Planning
Introduction
What is an aggregate production plan
Aggregate planning strategies
Tutorial: multiple-period production
Using tables to make an aggregate planning

Generating basic aggregate plans

Modifying/improving the basic plans
5

What is capacity?

Capacity in the static, physical sense means the scale

of an operation.
However, this may not reflect the operations
processing capability.
Hence, we must incorporate a time dimension
appropriate to the use of assets.

For example, 24,000 litres per day;

10,000 calls per day;
57 patients per session;
Etc.

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The Objectives of capacity planning and control

Measure aggregate
capacity and demand.

Aggregated output

Identify the alternative

capacity plans.
Choose the most
appropriate capacity plan.

Forecast demand

Estimate of current capacity

Time

How capacity and demand are measured

Efficiency =

Design
capacity

Planned loss
of 59 hours

Effective
capacity
168 hours
per week

Actual output
Effective capacity

109 hours
per week

Utilization=

Avoidable loss
58 hours per
week
Actual output
51 hours per
week

Actual output
Design capacity

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The nature of aggregate capacity

Aggregate capacity of a hotel:

rooms per night;
ignores the numbers of guests in each room.

Aggregate capacity of an aluminium producer:

tonnes per month;
ignores types of alloy, gauge and batch variations.

The operations system: we are headed to

Marketplace
and Demand

Demand Forecasts,
Make Orders

Product
Decisions

Process Planning &

Capacity Decisions

Inventory Management
Aggregate Planning
for Production

Master Production Schedule,

and MRP systems

Research and
Technology

Work Force

Raw Materials
Available

Inventory On
Hand

External
Capacity
Subcontractors

Detailed Work
Schedules

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Sales and Operations Planning Process

Establishes production
and capacity strategies
(plant size, major machines)

Forecasting and demand management

Strategic Planning

Sales and Operations

Planning
Operations Plan

Master Production
Scheduling (MPS)
Material Requirement
Planning (MRP)
Detailed planning and
execution systems

Establishes schedules
for individual products

Capacity planning

Sales Plan

Establishes Planning for

Production capacity to
meet aggregate demand

Establishes schedules for

material and components
Establishes detailed
planning: e.g. job/machine
assignment

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Planning Horizon
Long term
Intermediate term
Short term

Now

2 months

1 Year
Long-term plans

Short-term plans
(Detailed plans)

Machine loading
Job assignments

Intermediate-term plans
(General levels)

Aggregate planning
Usually 12 months

Long term capacity

Plant size and major
machines
Usually 2-5 years

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Aggregate Planning
Aggregate demand: Demand for product lines or
product families, not individual products/services
Aggregate planning: Intermediate-term capacity and
production planning, usually covering the next 12
months (or 6-18 months).
Begins with a forecast of aggregate demand for the
intermediate term
Be updated periodically to take into account updated
forecasts and other changes

Main concern: Do we have enough capacity?

Capacity shortage need to get more capacity?
Excess capacity efficiently use of the existing capacity and
resources
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Some concepts
Inventory: An idle material or product
Functions of Inventory
To meet anticipated demand
To protect against stock-outs
To take advantage of economic lot size and
quantity discount
To smooth seasonal production requirements
To hedge against price increases

Backorders: an order (or part of it) waiting to be filled

Can shift demand to future
Costs

Subcontract: a type of contract for outsourcing

certain types of work
Costs
pros vs. cons

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Demand and capacity options

Can we manage demand?

Pricing: shifting demand from peak periods to off-peak periods.

Promotion: Incentives, sales promotions, advertising campaigns
Backorders: shifting demand to future periods
New/complementary products: when demand is very uneven

Can we manage supply (capacity)?

Hiring and layoff/firing

Overtime/slack time
Part-time/temporary workers
Accumulation of Inventories
Subcontracting
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Capacity and Demand

If capacity and demand are nearly equal,
emphasis should be placed on meeting
demand as efficiently as possible (reduce
costs).
If capacity is greater than demand, the firm
might choose promotion and advertising in
order to increase demand (incentives).
If capacity is less than demand, the firm might
consider subcontracting a portion of the work
load (or increase profit margin).
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Aggregate Planning Goals

Meet demand
Use capacity efficiently
Meet policies: such as inventory, union,
and company policies
Minimize total costs

Labor
Production: regular, overtime and subcontracting
Inventory
Backorder
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The cost consideration in AP

Regular-time cost

Regular-time production costs

Overtime cost

Typically 150% of regular-time production costs

Subcontracting cost

Cost of paying for subcontractors

Hiring &Layoff cost

Cost of advertising vacancies, interviews, training

Cost of compensation pay, retaining remaining workers

Inventory holing cost

Cost of capital and storage costs, risk cost

Backorder &
stockout cost

Cost of expediting past-due orders, costs of

loss sales and loss of goodwill
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Basic Strategies for Meeting

Uneven Demand

Level output strategy/Level approach: Maintaining a

steady rate of output while meeting variations in demand
by a combination of inventory, subcontracting, overtime,
and backorders
Chase demand strategy/Chase approach: Matching
capacity to demand; the planned output for a period is set
at the forecast of demand for that period, usually by
hiring/firing workers.
Hybrid Aggregate Plan approaches, can use Linear
Programming to get an optimal planning

Level: Maintain a steady output rate

Chase: Match demand period by period
Hybrid : Use a combination of decision variables

Level Approach

Chase Approach

Keeps production rate constant

Demand variability dealt by
inventory, backorders, overtime,
slack time, subcontracting
Good for make-to-stock
Good for workforce stability
Bad for inventory build-up or
stockouts

n
n
n

Production matches demand

Demand variability dealt by
changing capacities, mostly by
hiring/firing of workers
Good for make-to-order
Bad for employee morale
Good for minimizing inventory
Demand

Production

Units

Units

Demand

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Production
Time

Time

20

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How to prepare an AP?

Target: total cost should be as low as possible
Depends on an organizations objectives, resource
availability, cost structure, for example
High customer serviceno backorders
Cannot find enough labor resourcelimited # of firing or
hiring
The technology of the product is organizations core
competencyno subcontract
Holding cost is expensiveChase approach
Demand fluctuates and holding cost is cheapLevel
approach
Morale is the most importantlimits the use of firing and
hiring frequently, keep stable workforce

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Tutorial: multiple period

production
Coming up
Examples of AP in class

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