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Capacity and Demand Planning So we have figured out a unique place in the circular economy, designed a product/service to deliver value to target customers, and selected an appropriate process to make them, but we still need to answer the following questions:  How much to produce  What lot/batch sizes to choose  When to produce Today’s manufacturing or service rendering is a highly complex process that requires a lot of resources and a considerable amount of planning. We need to make sure our products/services meet customer demand in a timely fashion.

Capacity Planning Terms (I)

 SKU (Stock keeping unit): A unique identifier assigned to each product for easier and more efficient record- keeping.

 Production function: It is the functional relationship between the quantity of a good produced (output) and factors of production (inputs such as labor, capital, land, technology).

 Bill of Materials: BOM specifies the relationship between the end product (independent demand) and the components (dependent demand). It is a comprehensive list of the raw materials, assemblies, subassemblies, parts and components, as well as the quantities of each, needed to manufacture a product.

SKU vs. UPC UPC (Universal Product Code) is used only in the US and Canada, while the EAN (European Article Number) is used everywhere else globally.

Capacity Planning Terms (II)  Master production schedule: An MPS is a plan to

produce individual final items. The MPS lays out the production plan for each stage's quantity.

 Materials requirements planning: MRP is a tool that determines what items are required, how many, and when.

 MRP II: Manufacturing Resource Planning  Enterprise resources planning: ERP is commonly

used by (especially) large organizations to coordinate the ever more complex activities that they perform. Vendors such as SAP, Oracle, PeopleSoft are dominating this market segment.

MRP Illustrated

Capacity Planning • Capacity planning is the process of determining

the production capacity needed by an organization to meet changing demands for its products or services.

• Capacity has to do with the space available, amount of equipment/machines used, number of people and shifts, manufacturing processes selected, and management efficiency.

• So you see a business opportunity to build a plant to make N95 masks during the pandemic. What factors do you take into account when building this plant?

Your N95 Mask Plant

• Demand • Physical facilities • Manufacturing

process • Machines • Staffing • Storage room • Production space • Outbound logistics

Capacity Choices/Decisions • How much do we need to produce to meet the

anticipated demand? • Do we buy or make ourselves? How much needs to be

bought or made in the supply chain? • If we buy, do we source domestically or internationally?

How do we manage the procurement process? • If we make, how much do we make and how many

parts and subassemblies do we need to buy from vendors? Do we set up plants or outsource to contract manufacturers? Domestic or international locations? Do we use automation or manual labor? Should we own or lease equipment/factory?

• What’s our contingency plan if demand is higher/lower than our forecasts?

Hotel ONT So you bet on increased travel through the Ontario Airport and would like to build a hotel on a vacant lot your friend owns. How big of a hotel (how many rooms) should you build? Capacity is calculated as number of rooms x 365 x utilization rate (not 100% rooms are available every night). Occupancy rate is the percentage of occupied rooms in your property at a given time. It is one of the most important KPIs and is calculated by dividing the total number of rooms occupied, by the total number of rooms available, times 100, creating a percentage such as 75% occupancy.

U.S. Hotel Occupancy Rate

Airlines Load Factor Load factor for a single flight is calculated by dividing the number of (fare paying) passengers by the number of seats (available for sale). Load factor for an airline represents the proportion of airline output that is actually consumed. To calculate this figure, divide Revenue Passenger Miles (RPMs) by Available Seat Miles (ASMs). The higher the load factor, the more an airline can spread its fixed costs amongst passengers.

Worldwide Passenger Airlines Load Factor

Managing Demand Demand forecasting is the process using

historical sales or other data to estimate customer demand. It’s an estimate of the amount of goods and services that customers will purchase in the specific time period.

Methods:  Use historical data (time series)  Use external factors (regression)  Use expert opinions  Use machine learning/AI

Demand management:  Adjust price  Adjust arrival (reservation/appointment/queuing)

Managing Demand

Queueing  Customers oftentimes are asked to be in queue, or

waiting line, before they get the service.  Too many agents/cashiers at any given time means that

you are wasting money for your employees to do nothing. Too few, you may agitate customers who either leave or wait for a long time to get service.

 Service provider has to determine what level of service they provide at how much cost (i.e. what is the expected wait time, how many customers can they handle in a day/hour, etc.)

 Many service providers use an appointment system to help handle customer arrivals so they can schedule services accordingly. (i.e. doctor’s office, DMV)

Queueing Solutions (I)

Mathematical:  Arrival: customer

arrival rate and pattern

 Queue: single line or multiple, single phase or multiple, first-come first-serve or priority/triage, single or batch

 Service: service rate and number of servers

Queueing Solutions (II)

Psychological:  Keep them occupied  Get them started  Explain why  Give time estimate  Be fair  Arrange group wait  Make the wait more

valuable

Optimal Waiting Line Cost Cashiers are on your payroll; customers are not!

Discussion Questions Please answer the following questions with reference to class and provide evidence to support your answers. Everyone: What factors do you take into account when building an N95 plant in mid-2020? Be methodical. Everyone: In your current or previous position, how is capacity managed? How can it be improved? Everyone: Describe a good waiting line management from your own personal experience. How can it be even better (definition first)? Everyone: Which plane boarding method do you think is the best and why? What can you do to speed it up?

Group Discussion Be sure your group is ready to lead and/or discuss the following question in class, with research or facts-based evidence. Learn how California DMV manages demand and queueing. Critique their management, using what we have discussed so far in class. Propose a better (define how you would measure “better”) way as if you were the head of DMV.