Capacity Planning

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Capacity Planning Management

• The Capacity Planning Process
• Strategic Capacity Panning
• Aggregate Capacity Planning
• Reading Materials Ch. 11, 14, TN4

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What is Capacity?

• Capacity can be defined as the ability to hold,
  receive, store, or accommodate
• Manufacturing number of units that can be
  produced in a unit time
• Service number of customers that can be served
  in a unit time

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How to Determine/Measure Capacity?

• What is the capacity of CUHK?
• What is the capacity of HSBC?
• Capacity for different products
• Capacity in terms of resources
• Capacity at different levels (i.e., company,
  department, shop-floor, etc.)

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Types of Capacity Planning

• Strategic Planning (long-range)
• Greater than one year planning horizon
• Usually performed in annual increment
• Aggregate Planning (medium-range)
• Six to eighteen months
• Weekly, monthly, quarterly increment
• Shop-floor planning (short-range)
• Schedule operations to fulfill orders
• Weekly or daily increments

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Planning Horizon
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Objectives of Capacity Planning

• Customer satisfaction
• Utilization of space, equipment, people
• Efficient flow of information, material, people
• Employee morale safety

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Three Basic Questions

• What is to be accomplished at the facility?
• How much capacity is needed?
• When should capacity changes take place?

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1. Strategic Planning (Usually More Than One Year)

• Basic concepts
• Capacity planning

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Strategic Capacity Planning

• Is an approach for determining the overall
  capacity level of capital intensive resources,
  including facilities, equipment, and overall
  labor force size
• Has to consider
• Corporate strategy (product, process, location,
  etc.)
• Future market condition and demand forecast
• Other factors (learning curve, economies of
  scale, flexibility, etc.)

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Capacity Utilization

• Where
• Capacity used rate of output actually achieved
• Best operating level capacity for which the
  process was designed

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Best Operating Level
Example Engineers design engines and assembly
lines to operate at an ideal or best operating
level to maximize output and minimize ware
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Example of Capacity Utilization

• During one week of production, a plant produced
  83 units of a product. Its historic highest or
  best utilization recorded was 120 units per week.
  What is this plants capacity utilization rate?

• Answer
• Capacity utilization rate Capacity used
  . Best operating level
• 83/120
• 0.69 or 69

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Economies Diseconomies of Scale
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The Experience Curve
As plants produce more products, they gain
experience in the best production methods and
reduce their costs per unit
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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)
• Extend focus concept to operating level

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Capacity Flexibility

• Flexible plants
• Flexible processes
• Flexible workers

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Capacity Planning Balance
Unbalanced stages of production
Units per month
6,000
7,000
5,000

• Maintaining System Balance Output of one stage
  is the exact input requirements for the next
  stage

Balanced stages of production
Units per month
6,000
6,000
6,000
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Capacity Planning

• Frequency of Capacity Additions
• External Sources of Capacity

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Determining Capacity Requirements

• 1. Forecast sales within each individual product
  line
• 2. Calculate equipment and labor requirements to
  meet the forecasts
• 3. Project equipment and labor availability over
  the planning horizon

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Example of Capacity Requirements
A manufacturer produces two lines of mustard,
FancyFine and Generic line. Each is sold in
small and family-size plastic bottles. The
following table shows forecast demand for the
next four years.
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Example (Contd) Product from a Capacity
Viewpoint

• Question Are we really producing two different
  types of mustards from the standpoint of capacity
  requirements?
• Answer No, its the same product just packaged
  differently.

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Example (Continued) Equipment and Labor
Requirements

• Three 100,000 units-per-year machines are
  available for small-bottle production. Two
  operators required per machine.
• Two 120,000 units-per-year machines are available
  for family-sized-bottle production. Three
  operators required per machine.

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Question What are the Year 1 values for
capacity, machine, and labor?

• The McGraw-Hill Companies, Inc., 2004

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24
Question What are the values for columns 2, 3
and 4 in the table below?
56.67 1.70 3.40
66.67 2.00 4.00
80.00 2.40 4.80
58.33 1.17 3.50
70.83 1.42 4.25
83.33 1.67 5.00

• The McGraw-Hill Companies, Inc., 2004

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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 0.1, 0.5, and 0.4.
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Example (Contd) 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 profits, in thousands of dollars are
presented in the table below
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Step 1 Draw the three decisions
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Step 2. Add the possible states of nature,
probabilities, and payoffs
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Step 3. Determine the expected value of each
decision
90k
50k
62k
10k
A
EVA0.4(90)0.5(50)0.1(10)62k
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Step 4. Make decision
62k
80.5k
46k
Alternative B generates the greatest expected
profit, so our choice is B or to construct a new
facility
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Planning Service Capacity vs. Manufacturing
Capacity

• Time Service cannot be stored for later use and
  capacity must be available to provide a service
  when it is needed
• Location Service goods must be at the customer
  demand point and capacity must be located near
  the customer
• Volatility of Demand Much greater than in
  manufacturing

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Capacity Utilization Service Quality

• Best operating point is near 70 of capacity
• From 70 to 100 of service capacity, what do you
  think happens to service quality?

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2. Aggregate Planning(Usually More Than One Year)

• Aggregate Operations Planning
• Strategies

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The Aggregate Operations Plan

• Main purpose 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 (Aggregation)
• This planning is done over an intermediate-range
  planning period of 3 to18 months

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Balancing Aggregate Demandand Aggregate
Production Capacity
10000
Suppose the figure to the right represents
forecast demand in units
10000
8000
8000
7000
6000
5500
6000
4500
4000
Now suppose this lower figure represents the
aggregate capacity of the company to meet demand
2000
0
Jan
Feb
Mar
Apr
May
Jun
9000
10000
8000
8000
What we want to do is to balance out the
production rate, workforce levels, and inventory
to make these figures match up
6000
6000
4500
4000
4000
4000
2000
0
Jan
Feb
Mar
Apr
May
Jun
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Required Inputs to the Production Planning System
External to firm
Planning for production
Internal to firm
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Key Strategies for Meeting Demand

• Chase strategy
• Match the production rate to the order rate
• Level strategy
• Keep workforce level constant
• Keep (daily) production level constant
• Some combination of the two

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Aggregate Planning Methods

• Graphical charting techniques
• Popular easy-to-understand
• Trial error approach
• Mathematical approaches
• Transportation method
• Linear decision rule
• Management coefficients model
• Simulation

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Examples Unit Demand and Cost Data
Suppose we have the following unit demand and
cost information
Demand/mo Jan Feb Mar Apr May Jun 4500 5500 7000
10000 8000 6000
Materials 5/unit Holding costs 1/unit per
mo. Marginal cost of stockout 1.25/unit per
mo. Hiring and training cost 200/worker Layoff
costs 250/worker Labor hours required .15
hrs/unit Straight time labor cost 8/hour Beginni
ng inventory 250 units Productive
hours/worker/day 7.25 Paid straight hrs/day 8
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Straight Labor Costs and Output
Given the demand and cost information below,
what are the aggregate hours/worker/month,
units/worker, and dollars/worker?
Demand/mo Jan Feb Mar Apr May Jun
7.25x22
4500 5500 7000 10000 8000 6000
Productive hours/worker/day 7.25 Paid straight
hrs/day 8
7.25/0.1548.33 48.33x221063.33
22x8hrsx81408
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Chase StrategyHiring Firing to meet demand
Lets assume our current workforce is 7 workers.
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Below are the complete calculations for the
remaining months in the six month planning horizon
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Below are the complete calculations for the
remaining months in the six month planning
horizon with the other costs included
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Level Workforce StrategySurplus and Shortage
Allowed
Lets take the same problem as before but this
time use the Level Workforce strategy
This time we will seek to use a workforce level
of 6 workers
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Below are the complete calculations for the
remaining months in the six month planning horizon
Note, if we recalculate this sheet with 7 workers
we would have a surplus
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Below are the complete calculations for the
remaining months in the six month planning
horizon with the other costs included
Note, total costs under this strategy are less
than Chase at 260.408.62
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Discussion Questions

• Are the level strategy and chase strategy
  reasonable?
• Which one is better?
• Are there other alternative strategies? If yes,
  how to develop such strategies?

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End Q A