BA 320 Operations Management Chapter 9 Capacity and Aggregate Planning

BA 320 Operations Management

Chapter 9Chapter 9

Capacity and Capacity and Aggregate Aggregate Planning Planning


Capacity PlanningCapacity Planning

Establishes overall level of Establishes overall level of productive resourcesproductive resources

Affects lead time Affects lead time responsiveness, cost & responsiveness, cost & competitivenesscompetitiveness

Determines when and how Determines when and how much to increase capacitymuch to increase capacity


Capacity ExpansionCapacity Expansion

Volume & certainty of anticipated Volume & certainty of anticipated demanddemand

Strategic objectives for growthStrategic objectives for growthCosts of expansion & operationCosts of expansion & operation Incremental or one-step Incremental or one-step

expansionexpansion


Capacity Expansion StrategiesCapacity Expansion Strategies


Capacity Expansion StrategiesCapacity Expansion Strategies(a) Capacity lead strategy(a) Capacity lead strategy (b) Capacity lag strategy(b) Capacity lag strategy

(c) Average capacity strategy(c) Average capacity strategy (d) Incremental vs. one-step expansion(d) Incremental vs. one-step expansion

UnitsUnits

CapacityCapacity

TimeTime

DemandDemand

UnitsUnits

CapacityCapacity

TimeTime

DemandDemand

UnitsUnits

CapacityCapacity

TimeTime

DemandDemand

UnitsUnitsIncrementalIncrementalexpansionexpansion

TimeTime

DemandDemand

One-step expansionOne-step expansion

Figure 9.1Figure 9.1


Best Operating LevelsBest Operating LevelsA

vera

ge

cost

per

ro

om

Ave

rag

e co

st p

er r

oo

m

# Rooms# RoomsFigure 9.2Figure 9.2


Best Operating LevelsBest Operating LevelsA

vera

ge

cost

per

ro

om

Ave

rag

e co

st p

er r

oo

m

Best operating Best operating levellevel

Economies Economies of scaleof scale

Diseconomies Diseconomies of scaleof scale

250250 500500 10001000

# Rooms# RoomsFigure 9.2Figure 9.2


Aggregate Production Aggregate Production Planning (APP)Planning (APP)

Matches market demand to company Matches market demand to company resourcesresources

Plans production 6 months to 12 months Plans production 6 months to 12 months in advancein advance

Expresses demand, resources, and Expresses demand, resources, and capacity in general termscapacity in general terms

Develops a strategy for economically Develops a strategy for economically meeting demandmeeting demand

Establishes a company-wide game plan Establishes a company-wide game plan for allocating resourcesfor allocating resources


Inputs and Outputs to APPInputs and Outputs to APP


Inputs and Outputs to APPInputs and Outputs to APP

CompanyPolicies

CompanyPolicies

StrategicObjectivesStrategic

ObjectivesCapacity

ConstraintsCapacity

Constraints

Units or dollarssubcontracted,

backordered, or lost

Units or dollarssubcontracted,

backordered, or lost

Size ofWorkforce

Size ofWorkforce

Productionper month

(in units or $)

Productionper month

(in units or $)

InventoryLevels

InventoryLevels

FinancialConstraintsFinancial

ConstraintsDemand

ForecastsDemand

Forecasts

AggregateProductionPlanning

AggregateProductionPlanning



Adjusting Capacity to Adjusting Capacity to Meet DemandMeet Demand

1.1. Producing at a constant rate and using inventory Producing at a constant rate and using inventory to absorb fluctuations in demand (level to absorb fluctuations in demand (level production)production)

2.2. Hiring and firing workers to match demand (chase Hiring and firing workers to match demand (chase demand)demand)

3.3. Maintaining resources for high demand levelsMaintaining resources for high demand levels4.4. Increase or decrease working hours (overtime Increase or decrease working hours (overtime

and undertime)and undertime)5.5. Subcontracting work to other firmsSubcontracting work to other firms6.6. Using part-time workersUsing part-time workers7.7. Providing the service or product at a later time Providing the service or product at a later time

period (backordering)period (backordering)


Strategy DetailsStrategy Details Level production - produce at constant rate Level production - produce at constant rate

& use inventory as needed to meet demand& use inventory as needed to meet demand Chase demand - change workforce levels Chase demand - change workforce levels

so that production matches demandso that production matches demand Maintaining resources for high demand Maintaining resources for high demand

levels - ensures high levels of customer levels - ensures high levels of customer serviceservice


Strategy DetailsStrategy Details Overtime & undertime - common when Overtime & undertime - common when

demand fluctuations are not extremedemand fluctuations are not extreme Subcontracting - useful if supplier meets Subcontracting - useful if supplier meets

quality & time requirementsquality & time requirements Part-time workers - feasible for unskilled Part-time workers - feasible for unskilled

jobs or if labor pool existsjobs or if labor pool exists Backordering - only works if customer is Backordering - only works if customer is

willing to wait for product/serviceswilling to wait for product/services


Level ProductionLevel Production


Level ProductionLevel Production

ProductionProduction

DemandDemand

Un

its

Un

its

TimeTime

Figure 9.4 (a)Figure 9.4 (a)


Chase DemandChase Demand

Figure 9.4 (b)Figure 9.4 (b)

ProductionProduction

DemandDemand

Un

its

Un

its

TimeTime


APP Using Pure StrategiesAPP Using Pure Strategies

Hiring costHiring cost = $100 per worker= $100 per worker

Firing costFiring cost = $500 per worker= $500 per worker

Inventory carrying costInventory carrying cost = $0.50 pound per quarter= $0.50 pound per quarter

Production per employeeProduction per employee = 1,000 pounds per quarter= 1,000 pounds per quarter

Beginning work forceBeginning work force = 100 workers= 100 workers

QUARTERQUARTER SALES FORECAST (LB)SALES FORECAST (LB)

SpringSpring 80,00080,000SummerSummer 50,00050,000FallFall 120,000120,000WinterWinter 150,000150,000

Example 9.1Example 9.1


APP Using Pure StrategiesAPP Using Pure Strategies

Hiring costHiring cost = $100 per worker= $100 per worker

Firing costFiring cost = $500 per worker= $500 per worker

Inventory carrying costInventory carrying cost = $0.50 pound per quarter= $0.50 pound per quarter

Production per employeeProduction per employee = 1,000 pounds per quarter= 1,000 pounds per quarter

Beginning work forceBeginning work force = 100 workers= 100 workers

QUARTERQUARTER SALES FORECAST (LB)SALES FORECAST (LB)

SpringSpring 80,00080,000SummerSummer 50,00050,000FallFall 120,000120,000WinterWinter 150,000150,000

Level production

= 100,000 pounds

(50,000 + 120,000 + 150,000 + 80,000)4



Level Production StrategyLevel Production Strategy


SpringSpring 80,00080,000 100,000100,000 20,00020,000SummerSummer 50,00050,000 100,000100,000 70,00070,000FallFall 120,000120,000 100,000100,000 50,00050,000WinterWinter 150,000150,000 100,000100,000 00

400,000400,000 140,000140,000

Cost = 140,000 pounds x 0.50 per pound = $70,000Cost = 140,000 pounds x 0.50 per pound = $70,000

SALESSALES PRODUCTIONPRODUCTIONQUARTERQUARTER FORECASTFORECAST PLANPLAN INVENTORYINVENTORY


SpringSpring 80,00080,000 80,00080,000 8080 00 2020SummerSummer 50,00050,000 50,00050,000 5050 00 3030FallFall 120,000120,000 120,000120,000 120120 7070 00WinterWinter 150,000150,000 150,000150,000 150150 3030 00

100100 5050

SALESSALES PRODUCTIONPRODUCTION WORKERSWORKERS WORKERSWORKERS WORKERSWORKERSQUARTERQUARTER FORECASTFORECAST PLANPLAN NEEDEDNEEDED HIREDHIRED FIREDFIRED

CostCost = (100 workers hired x $100) + (50 workers fired x $500)= (100 workers hired x $100) + (50 workers fired x $500)

= $10,000 + 25,000 = $35,000 = $10,000 + 25,000 = $35,000


Chase Demand StrategyChase Demand Strategy


APP Using Mixed StrategiesAPP Using Mixed Strategies

Production per employeeProduction per employee = 100 cases per month= 100 cases per monthWage rateWage rate = $10 per case for regular production= $10 per case for regular production

= $15 per case for overtime= $15 per case for overtime= $25 for subcontracting= $25 for subcontracting

Hiring costHiring cost = $1000 per worker= $1000 per workerFiring costFiring cost = $500 per worker= $500 per worker

Inventory carrying costInventory carrying cost = $1.00 case per month= $1.00 case per monthBeginning work forceBeginning work force = 10 workers= 10 workers


JanuaryJanuary 10001000 JulyJuly 500500FebruaryFebruary 400400 AugustAugust 500500MarchMarch 400400 SeptemberSeptember 10001000AprilApril 400400 OctoberOctober 15001500MayMay 400400 NovemberNovember 25002500JuneJune 400400 DecemberDecember 30003000

MONTHMONTH DEMAND (CASES)DEMAND (CASES) MONTHMONTH DEMAND (CASES)DEMAND (CASES)


APP by Linear ProgrammingAPP by Linear Programming

wherewhereHHtt == # hired for period # hired for period tt

FFtt == # fired for period # fired for period tt

IItt == inventory at endinventory at end

of period of period ttPPtt == units producedunits produced

in periodin period ttWWtt == workforce sizeworkforce size

for periodfor period tt

Minimize Z =Minimize Z = $100 ($100 (HH11 + + HH22 + + HH33 + + HH44))

+ $500 (+ $500 (FF11 + + FF22 + + FF33 + + FF44))

+ $0.50 (+ $0.50 (II11 + + II22 + + I I33 + + II44))

Subject toSubject to

PP11 - - II11 = 80,000= 80,000 (1)(1)

DemandDemand II11 + + PP22 - - II22 = 50,000= 50,000 (2)(2)

constraintsconstraints II22 + + PP33 - - II33 = 120,000= 120,000 (3)(3)

II33 + + PP44 - - II44 = 150,000= 150,000 (4)(4)

ProductionProduction 1000 1000 WW11 = = PP11 (5)(5)

constraintsconstraints 1000 1000 WW22 = = PP22 (6)(6)

1000 1000 WW33 = = PP33 (7)(7)

1000 1000 WW44 = = PP44 (8)(8)

100 + 100 + HH11 - - FF11 = = WW11 (9)(9)

Work forceWork force WW11 + + HH22 - - FF22 = = WW22 (10)(10)

constraintsconstraints WW22 + + HH33 - - FF33 = = WW33 (11)(11)

WW33 + + HH44 - - FF44 = = WW44 (12)(12)



APP by the Transportation APP by the Transportation MethodMethod

11 900900 10001000 100100 50050022 15001500 12001200 150150 50050033 16001600 13001300 200200 50050044 30003000 13001300 200200 500500

Regular production cost per unitRegular production cost per unit $20$20Overtime production cost per unitOvertime production cost per unit $25$25Subcontracting cost per unitSubcontracting cost per unit $28$28Inventory holding cost per unit per periodInventory holding cost per unit per period $3$3Beginning inventoryBeginning inventory 300 units300 units

EXPECTEDEXPECTED REGULARREGULAR OVERTIMEOVERTIME SUBCONTRACTSUBCONTRACTQUARTERQUARTER DEMANDDEMAND CAPACITYCAPACITY CAPACITYCAPACITY CAPACITYCAPACITY



The Transportation TableauThe Transportation TableauUnused

PERIOD OF PRODUCTION 1 2 3 4 Capacity Capacity

Beginning 0 3 6 9

Inventory 300 — — — 300

Regular 600 300 100 — 1000

Overtime 100 100

Subcontract 500

Regular 1200 — — 1200

Overtime 150 150

Subcontract 250 250 500

Regular 1300 — 1300

Overtime 200 — 200

Subcontract 500 500

Regular 1300 1300

Overtime 200 200

Subcontract 500 500

Demand 900 1500 1600 3000 250

1

2

3

4

PERIOD OF USE

20 23 26 29

25 28 31 34

28 31 34 37

20 23 26

25 28 31

28 31 34

20 23

25 28

28 31

20

25

28

Table 9.2Table 9.2


Burruss’ Burruss’ Production PlanProduction Plan

11 900900 10001000 100100 00 50050022 15001500 12001200 150150 250250 60060033 16001600 13001300 200200 500500 1000100044 30003000 13001300 200200 500500 00

TotalTotal 70007000 48004800 650650 12501250 21002100

REGULARREGULAR SUB-SUB- ENDINGENDINGPERIODPERIOD DEMANDDEMAND PRODUCTIONPRODUCTION OVERTIMEOVERTIME CONTRACTCONTRACT INVENTORYINVENTORY

Table 9.3Table 9.3


Other Quantitative Other Quantitative TechniquesTechniques

Linear decision rule (LDR)Linear decision rule (LDR)

Search decision rule (SDR)Search decision rule (SDR)

Management coefficients modelManagement coefficients model


Demand ManagementDemand ManagementShift demand into other periodsShift demand into other periods

Incentives, sales promotions, Incentives, sales promotions, advertising campaignsadvertising campaigns

Offer product or services with Offer product or services with countercyclical demand patternscountercyclical demand patterns

Partnering with suppliers to reduce Partnering with suppliers to reduce information distortion along the information distortion along the supply chainsupply chain


Demand Distortion along Demand Distortion along the Supply Chainthe Supply Chain


Hierarchical Planning ProcessHierarchical Planning Process


Hierarchical Planning ProcessHierarchical Planning ProcessItemsItems

Product lines Product lines or familiesor families

Individual Individual productsproducts

ComponentsComponents

Manufacturing Manufacturing operationsoperations

Resource Resource LevelLevel

PlantsPlants

Individual Individual machinesmachines

Critical Critical work work

centerscenters

Production Production PlanningPlanning

Capacity Capacity PlanningPlanning

Resource requirements

plan

Rough-cut capacity

plan

Capacity requirements

plan

Input/ output control

Aggregate production

plan

Master production schedule

Material requirements

plan

Shop floor

schedule

All All work work

centerscenters



Available-to-PromiseAvailable-to-PromisePERIODPERIOD

ON-HAND = 50ON-HAND = 50 11 22 33 44 55 66

ForecastForecast 100100 100100 100100 100100 100100 100100Customer ordersCustomer ordersMaster production scheduleMaster production schedule 200200 200200 200200Available to promiseAvailable to promise

PERIODPERIOD

ON-HAND = 50ON-HAND = 50 11 22 33 44 55 66

ForecastForecast 100100 100100 100100 100100 100100 100100Customer ordersCustomer orders 9090 120120 130130 7070 2020 1010Master production scheduleMaster production schedule 200200 200200 200200Available to promiseAvailable to promise 4040 00 170170

ATP in period 1 = (50 + 200) - (90 + 120) = 40ATP in period 1 = (50 + 200) - (90 + 120) = 40ATP in period 3 = 200 - (130 + 70) = 0ATP in period 3 = 200 - (130 + 70) = 0ATP in period 5 = 200 - (20 + 10) = 170ATP in period 5 = 200 - (20 + 10) = 170



Available-to-PromiseAvailable-to-Promise


Available-to-PromiseAvailable-to-PromiseProduct Request

Is the product available at

this location?

Is an alternative product available

at an alternate location?

Is an alternative product available at this location?

Is this product available at a

different location?

Available-to-promise

Allocate inventory

Capable-to-promise date

Is the customer willing to wait for

the product?

Available-to-promise

Allocate inventory

Revise master schedule

Trigger production

Lose sale

YesYes

NoNo

YesYes

NoNo

YesYes

NoNo

YesYes

NoNo

YesYes

NoNo



Aggregate Planning Aggregate Planning for Servicesfor Services

1.1. Most services can’t be inventoriedMost services can’t be inventoried

2.2. Demand for services is difficult to predictDemand for services is difficult to predict

3.3. Capacity is also difficult to predictCapacity is also difficult to predict

4.4. Service capacity must be provided at the Service capacity must be provided at the appropriate place and timeappropriate place and time

5.5. Labor is usually the most constraining Labor is usually the most constraining resource for servicesresource for services


Yield ManagementYield Management

PP((nn < < xx) ) CCuu

CCuu + + CCoo

where

n = number of no-showsx = number of rooms or seats overbooked

Cu = cost of underbooking; i.e., lost saleCo = cost of overbooking; i.e., replacement costP = probability



NO-SHOWSNO-SHOWS PROBABILITYPROBABILITY

00 .15.1511 .25.25

22 .30.3033 .30.30




NO-SHOWSNO-SHOWS PROBABILITYPROBABILITY PP((NN < < XX))

00 .15.15 .00.0011 .25.25 .15.1522 .30.30 .40.4033 .30.30 .70.70

Expected number of no showsExpected number of no shows

0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.750(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75

Optimal probability of no-showsOptimal probability of no-shows

P(P(nn < < xx) ) = = .517 = = .517CCuu

CCuu + + CCoo

757575 + 7075 + 70


.517.517




NO-SHOWSNO-SHOWS PROBABILITYPROBABILITY PP((NN < < XX))

00 .15.15 .00.0011 .25.25 .15.1522 .30.30 .40.4033 .30.30 .70.70

Expected number of no showsExpected number of no shows

0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.750(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75

Optimal probability of no-showsOptimal probability of no-shows

P(P(nn < < xx) ) = = .517 = = .517CCuu

CCuu + + CCoo

757575 + 7075 + 70

.517.517

Cost of overbooking

[2(.15) + 1(.25)]$70 = $38.50 Cost of bumping customers(.30)$75 = $22.50 Lost revenue from no-shows

$61.00 Total cost of overbooking by2 rooms

Expected savings = ($131.225 - $61) = $70.25 a night

Documents

BA 320 Operations Management Chapter 9 Capacity and Aggregate Planning