Capacity & Aggregate Planning (T7)

UNIVERSITI TEKNOLOGI MARA
FACULTY OF BUSINESS MANAGEMENT
Capacity & Aggregate Planning
Arliza Abdullah OPM530/533
Outline The planning process The nature of aggregate planning Aggregate planning strategies Methods for aggregate planning Aggregate planning in services
Outline
CAPACITY
Defining Capacity Capacity and Strategy Capacity Considerations Managing Demand
CAPACITY PLANNING BREAKEVEN ANALYSIS

Single-Product Case Multi-product Case
Facility Planning
Facility planning answers:

How much long-range capacity is needed When more capacity is needed Where facilities should be located (location) How facilities should be arranged (layout)
Capacity Planning Process

Forecast Demand Compute Rated Develop Alternative Plans Evaluate Capacity Plans Select Best Capacity Plan Quantitative Factors (e.g., Cost) Qualitative Factors (e.g., Skills) Implement Best Plan
Capacity
Compute
Needed
Capacity
Types of Planning Over a Time Horizon
Long Range Planning Intermediate Range Planning Short Range Planning

*Limited options exist
Add Facilities Add long lead time equipment Sub-Contract Add Equipment Add Shifts
Add Personnel Build or Use Inventory
* Modify Capacity
Schedule Jobs Schedule Personnel Allocate Machinery
Use Capacity
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Definition and Measures of Capacity
Capacity:
The throughput, or number of units a facility can hold, receive, store, or produce in a period of time.
Effective capacity:
Capacity a firm can expect to receive given its product mix, methods of scheduling, maintenance, and standards of quality.
Actual output as a percent of design capacity.
Utilization:
Efficiency:
Actual output as a percent of effective capacity.

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Actual or Expected Output

Actual (or Expected) Output = (Effective Capacity)(Efficiency)
Utilization
Measure of planned or actual capacity usage of a facility, work center, or machine
Utilization
Actual Output = Design Capacity Planned hours to be used = Total hours available
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Efficiency
Measure of how well a facility or machine is performing when used
Efficiency
Actual output = Effective Capacity Actual output in units = Standard output in units Average actual time = Standard time
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Implications of Capacity Changes

Changes in: Sales Cash flow Quality Supply chain Human resources Maintenance
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Special Requirements for Making Good Capacity Decisions

Forecast demand accurately Understanding the technology and capacity increments Finding the optimal operating level (volume) Build for change
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Strategies for Matching Capacity to Demand

1. 2. Making staffing changes (increasing or decreasing the number of employees) Adjusting equipment and processes which might include purchasing additional machinery or selling or leasing out existing equipment Improving methods to increase throughput; and/or Redesigning the product to facilitate more throughput
3. 4.
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Approaches to Capacity Expansion 1

Expected Demand New Capacity Demand
Time in Years
Capacity leads demand with an incremental expansion

Arliza Abdullah OPM530/533 14

Time in Years Capacity leads demand with a one-step expansion


Time in Years
Capacity lags demand with an incremental expansion


New Capacity Expected Demand
Demand
Time in Years Attempts to have an average capacity, with an incremental expansion

Breakeven Analysis
Technique for evaluating process & equipment alternatives Objective: Find the point ($ or units) at which total cost equals total revenue Assumptions
Revenue & costs are related linearly to volume All information is known with certainty No time value of money
Fixed costs: costs that continue even if no units are produced: depreciation, taxes, debt, mortgage payments Variable costs: costs that vary with the volume of units produced: labor, materials, portion of utilities
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Process Selection with Break-Even Analysis
Cost

Fixed costs
constant regardless of the number of units produced
Variable costs
Revenue
vary with the volume of units produced
Total revenue
price at which an item is sold
Profit
is price times volume sold

difference between total revenue and total cost
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Breakeven Chart
Total revenue line Breakeven point Total cost = Total revenue Cost in Dollars Profit Total cost line Variable cost Loss
Fixed cost
Volume (units/period)
Process Selection with Break-Even Analysis (cont.)
Total cost = fixed cost + total variable cost TC = cf + vcv Total revenue = volume x price TR = vp Profit = total revenue - total cost Z = TR TC = vp - (cf + vcv)
Process Selection with Break-Even Analysis (cont.)
TR = TC vp = cf + vcv vp - vcv = cf v(p - cv) = cf

cf v= p-c v
Solving for Break-Even Volume
Break-Even Analysis: Example
Fixed cost = cf = $2,000 Variable cost = cv = $5 per raft Price = p = $10 per raft Break-even point is cf 2000 v= p-c = = 400 rafts v 10 - 5
Break-Even Analysis: Graph
$3,000
Total cost line
$2,000
$1,000
Total revenue line

400 Break-even point
Units
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Process Selection
Process A Process B $2,000 + $5v = $10,000 + $2v $3v = $8,000 v = 2,667 rafts
Below 2,667, choose A Above 2,667, choose B

$20,000
Process Selection: $15,000 Graph

$10,000
Total cost of process A Total cost of process B
$5,000
Choose process A | 1000 | 2000
Choose process B | 3000 | 4000 Units

Example 4.2
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Point of indifference = 2,667 Units
Managing Existing Capacity
Demand Management (manufacturing)

Vary prices
Capacity Management (service)

Vary staffing Change equipment & processes Change methods Redesign the product for faster processing
Vary promotion
Change lead times (e.g., backorders) Offer complementary products
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Aggregate Planning Requires

Logical overall unit for measuring sales and outputs Forecast of demand for intermediate planning period in these aggregate units Method for determining costs Model that combines forecasts and costs so that planning decisions can be made
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Planning
Setting goals & objectives
Example: Meet demand within the limits of available resources at the least cost
Example: Hire more workers Example: Begin hiring in Jan.; finish, Mar.
Determining steps to achieve goals
Setting start & completion dates
Assigning responsibility
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Planning Tasks and Responsibilities
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Planning Horizons
Short-range plans Job assignments Ordering Job scheduling Dispatching
Responsible: Operations managers
Responsible: Operations managers, supervisors, foremen
Intermediate-range plans Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans
Responsible: Top executives
Long-range plans R&D New product plans Capital expenses Facility location, expansion
Today
3 Months
1 year
5 years
Planning Horizon
Relationships of the Aggregate Plan

Marketplace and Demand Product Decisions Research and Technology
Demand Forecasts, orders
Process Planning & Capacity Decisions Aggregate Plan for Production
Work Force
Raw Materials Available Inventory On Hand External Capacity Subcontractors
Master Production Schedule, and MRP systems
Detailed Work Schedules

Aggregate Planning
Provides the quantity and timing of production for intermediate future
Usually 3 to 18 months into future Often expressed in common units
Combines (aggregates) production
Example: Hours, dollars, equivalents (e.g., FTE students)
Involves capacity and demand variables
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Aggregate Planning Goals

Meet demand Use capacity efficiently Meet inventory policy Minimize cost
Labor Inventory Plant & equipment Subcontract
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Aggregate Planning Strategies Pure Strategies

Capacity Options change capacity:

changing inventory levels varying work force size by hiring or layoffs varying production capacity through overtime or idle time subcontracting using part-time workers influencing demand backordering during high demand periods Counter seasonal product mixing
Demand Options change demand:

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Aggregate Scheduling Options - Advantages and Disadvantages
Option
Advantage
Disadvantage
Some Comments
Applies mainly to production, not service, operations
Changing inventory levels
Changes in human resources are gradual, not abrupt production changes Avoids use of other alternatives
Inventory holding costs; Shortages may result in lost sales
Varying workforce size by hiring or layoffs

Hiring, layoff, and training costs
Used where size of labor pool is large
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Advantages/Disadvantages - Continued
Option
Varying
Advantage
Matches seasonal
Disadvantage
Overtime
Some Comments
Allows
production rates
through overtime or idle time Subcontracting
fluctuations
without hiring/training costs Permits flexibility and smoothing of the firm's output
premiums, tired
workers, may not meet demand Loss of quality control; reduced profits; loss of future business
flexibility within
the aggregate plan Applies mainly in production settings
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Advantages/Disadvantages - Continued
Option
Using part-time workers
Advantage
Less costly and more flexible than full-time workers
Disadvantage
High turnover/training costs; quality suffers; scheduling difficult Uncertainty in demand. Hard to match demand to supply exactly.
Some Comments
Good for unskilled jobs in areas with large temporary labor pools
Influencing demand
Tries to use excess capacity. Discounts draw new customers.
Creates marketing ideas. Overbooking used in some businesses.
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Advantage/Disadvantage - Continued
Option Advantage Disadvantage Some Comments
Many companies backorder.
Back ordering during highdemand periods
May avoid Customer must overtime. Keeps be willing to capacity constant wait, but goodwill is lost.
Fully utilizes May require resources; allows skills or stable workforce. equipment outside a firm's areas of expertise.
Counterseasonal products and service mixing
Risky finding products or services with opposite demand patterns.
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The Extremes
Level Strategy Production rate is constant
Chase Strategy Production equals demand
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Aggregate Planning Strategies

Mixed strategy
Combines 2 or more aggregate scheduling options
Level scheduling strategy

Produce same amount every day Keep work force level constant Vary non-work force capacity or demand options Often results in lowest production costs
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Controlling the Cost of Labor in Service Firms

Seek:
Close control of labor hours to ensure quick response to customer demand On-call labor resource that can be added or deleted to meet unexpected demand Flexibility of individual worker skills to permit reallocation of available labor Flexibility of individual worker in rate of output or hours of work to meet demand
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Capacity &amp; Aggregate Planning (T7)

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Capacity &amp; Aggregate Planning (T7)

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UNIVERSITI TEKNOLOGI MARA

FACULTY OF BUSINESS MANAGEMENT

Capacity & Aggregate Planning

Arliza Abdullah OPM530/533

Arliza Abdullah OPM530/533

CAPACITY PLANNING BREAKEVEN ANALYSIS

Arliza Abdullah OPM530/533

Facility planning answers:

Arliza Abdullah OPM530/533

Capacity Planning Process

Types of Planning Over a Time Horizon

Long Range Planning Intermediate Range Planning Short Range Planning

Add Personnel Build or Use Inventory

Schedule Jobs Schedule Personnel Allocate Machinery

Definition and Measures of Capacity

Actual output as a percent of effective capacity.

Actual or Expected Output

Arliza Abdullah OPM530/533

Arliza Abdullah OPM530/533

Arliza Abdullah OPM530/533

Implications of Capacity Changes

Arliza Abdullah OPM530/533

Special Requirements for Making Good Capacity Decisions

Arliza Abdullah OPM530/533

Strategies for Matching Capacity to Demand

Arliza Abdullah OPM530/533

Approaches to Capacity Expansion 1

Capacity leads demand with an incremental expansion

Approaches to Capacity Expansion 2

Time in Years Capacity leads demand with a one-step expansion

Approaches to Capacity Expansion 3

Capacity lags demand with an incremental expansion

Approaches to Capacity Expansion 4

Time in Years Attempts to have an average capacity, with an incremental expansion

Arliza Abdullah OPM530/533

Process Selection with Break-Even Analysis

constant regardless of the number of units produced

vary with the volume of units produced

price at which an item is sold

is price times volume sold

Arliza Abdullah OPM530/533

Process Selection with Break-Even Analysis (cont.)

Process Selection with Break-Even Analysis (cont.)

TR = TC vp = cf + vcv vp - vcv = cf v(p - cv) = cf

Break-Even Analysis: Example

Break-Even Analysis: Graph

Total cost line

Total revenue line

Below 2,667, choose A Above 2,667, choose B

Process Selection: $15,000 Graph

Total cost of process A Total cost of process B

Choose process A | 1000 | 2000

Choose process B | 3000 | 4000 Units

Arliza Abdullah OPM530/533

Point of indifference = 2,667 Units

Managing Existing Capacity

Demand Management (manufacturing)

Capacity Management (service)

Arliza Abdullah OPM530/533

Aggregate Planning Requires

Arliza Abdullah OPM530/533

Determining steps to achieve goals

Setting start & completion dates

Capacity & Aggregate Planning (T7)

Capacity & Aggregate Planning (T7)