Discussion 7 - 327

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Chapter 12:

Capacity Planning

Operations Management in the

Supply Chain: Decisions and Cases,

6th edition

12-2

Chapter 12 Outline • Facilities Decisions

• Facilities Strategy

• Sales & Operations Planning Definition

• Cross-Functional Nature of S&OP

• Planning Options

• Basic Aggregate Planning Strategies

• Aggregate Planning Costs

• Aggregate Planning Example

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Hierarchy of Capacity Decisions

Facilities

decisions

Aggregate

planning

Scheduling

0 6 12 18 24 Months

Planning Horizon

Scheduling

Facilities

decisions

Aggregate

planning

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Definition of Capacity

Maximum output that can be produced over a given period of time.

• Theoretical capacity • Labor availability and overtime • Physical assets, delayed maintenance, etc. • Can be used for short-term demand spikes

• Effective capacity • Should be used in planning • Subtracts maintenance downtime, shift breaks,

absenteeism, etc.

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Capacity Utilization

Utilization = Actual output

Capacity

Utilization is seldom 100%.

Estimates capacity usage and ‘busyness.’

x 100%

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Facilities Decisions

• How much capacity is needed?

• How large should each facility be?

• When is the capacity needed?

• Where should the facilities be located?

• What type of facilities/capacity are needed?

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Facilities Strategy Considers:

• Amount of capacity • Size of capacity cushion

• Size of facilities • Economies/diseconomies of scale

• Timing of facility decisions • Preemptive, wait-and-see

• Types of facilities • Product-focused, market-focused, process-focused, general-

purpose

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Factors Affecting Facilities Strategy • Predicted demand

• Cost of facilities

• Likely behavior of competitors

• Business strategy

• International considerations

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How Much? Strategies for Capacity Cushion

• Capacity cushion = 100% – utilization

• Three strategies:

• Large cushion (e.g., make-to-order)

• Moderate cushion (cost of running out balanced with cost of

excess capacity)

• Small cushion (e.g., make-to-stock)

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How Large? What is Optimum Facility Size?

• Economies of scale • Production costs are not linear

• Overhead spread over more units

• Diseconomies of scale • Increased transportation costs

• Cost of more bureaucracy

• Increased organizational complexity

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When? Timing of Facility Additions

• Preempt the competition • Build capacity ahead of need

• Positive capacity cushion

• Wait-and-see strategy

• Small or negative capacity cushion

• Lower risk strategy

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Where? Location of Facilities

• Quantitative Factors

• ROI, NPV

• Transportation, Taxes

• Lead times

• Qualitative Factors

• Language, norms

• Worker and customer attitudes

• Proximity to customers, suppliers, competitors

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What Type? Types of Facilities

• Product-focused (55%)

• One family of products/services (e.g., computers)

• Market-focused (30%)

• Located near sales (e.g., electricity, bakeries)

• Process-focused (10%)

• Few technologies (e.g., computer chips, MRI center)

• General purpose (5%)

• Several products/services (e.g., furniture, banking)

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Sales & Operations Planning (S&OP) • Matching supply & demand over a medium time

range

• Time horizon of about 12 months

• Aggregated demand for one or few categories of

product. Demand may fluctuate or be uncertain.

• Possible to change both supply and demand

• Variety of management objectives

• Facilities are fixed (cannot be expanded or reduced)

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Cross-Functional Nature of S&OP

• Budgeting: closely tied to aggregate plan

• HR: workforce availability

• Operations: capacity/inventory planning

• Accounting: cost analysis

• Finance: capital investments

• Marketing: sales plan

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Options for Managing (Influencing) Demand

• Pricing

• Advertising and promotion

• Backlogs or reservations (shift demand)

• Development of complementary offerings

• Seasonal products/service spread demand

• Lawn mower, snow blower

• Ski resort, mountain biking

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Options for Managing (Influencing) Supply

• Hiring and layoff of employees

• Using overtime and undertime

• Using part-time or temporary labor

• Carrying inventory

• Outsourcing/subcontracting

• Cooperative arrangements

• Share capacity during demand peaks

• Airlines, hotels, utilities

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Aggregate Planning Strategies

• Level strategy • Constant work force

• Inventory as buffer

• Chase strategy • Vary workforce

• Produce to demand

• Typical for services

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Comparison of Chase and Level Strategies (Table 12.1)

Chase

Strategy

Level

Strategy

Level of labor skill required Low High

Job discretion Low High

Compensation rate Low High

Training required per employee Low High

Labor turnover High Low

Hire-layoff cost per employee Low High

Amount of supervision required High Low

Type of budgeting and forecasting required Short-run Long-run

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Aggregate Planning Costs • Hiring and firing costs (Chase strategy)

• Overtime and undertime costs (Chase)

• Subcontracting costs (Chase)

• Part-time labor costs (Chase)

• Inventory-carrying costs (Level strategy)

• Cost of stockout or back order (Level)

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Chapter 12 Summary • Facilities Decisions