CAPACITY AND AGGREGATE PLANNING
ARIZONA STATE UNIVERSITY
TMC 410 - ENTERPRISE OPERATIONS
SPRING 2024
Introduction:
Aggregate scheduling (aggregate planning) involves determining the amount and
timing of production to take place in the near future, usually in the next 3-18 months.
Operations managers attempt to determine how best to meet forecast demand by adjusting
production levels, labor requirement levels, inventory levels, overtime, subcontract value
levels, and all other controllable variables.
The goal of the production process is to minimize costs throughout the planning period.
However, other strategic issues may be more important than low costs. These strategies may
include smoothing out labor requirements, lowering inventory levels, or achieving the highest
level of customer fulfillment regardless of cost.
For manufacturing companies, the aggregate schedule links the strategic goals of the
company to production plans for specific products. For service companies, the aggregate
schedule links strategic goals and detailed schedules for labor.
The purpose of this material is to explain aggregate and capacity planning decisions, to
show which aggregate plans and capacity determination plans fit into the overall planning
process, and to explain some of the techniques managers use in developing plans. In this case,
the emphasis is on both manufacturing and service companies.
A. Basic Concept:
1. Definition of Capacity Planning
There are two views on the meaning of "capacity". First, when viewed from a business
perspective, capacity is the amount of output that can be achieved by a system over a certain
period of time. Secondly, from a service industry perspective, capacity is defined as the
number of customers that can be handled over a period of time.
Chase and Jacobs (2005: 430) define capacity as the ability to accommodate, receive,
store or accommodate.
Bartal and Martin (1999) define capacity and aggregate planning as the process of
determining goals and establishing the best ways to achieve them.
According to G.R. Terry (1997), planning is the act of selecting and connecting facts
and making and using assumptions about the future in terms of visualizing and formulating
activities that are considered necessary to achieve the desired results. Capacity is the
throughput or number of units that can be held, received, stored, or produced by a facility in a
certain period of time.
In essence, capacity can affect most fixed costs. Capacity also serves to determine
whether or not demand can be met and whether or not existing facilities will be oversized. If
the facility is too large, part of the facility will be idle and require additional costs to be
charged on production or become a customer burden. This has the effect of increasing costs.
In practice, capacity planning is the determination of future capacity requirements
based largely on future demand. If the demand for goods and services can be forecast with a
sufficient degree of accuracy, capacity determination can be straightforward. In the
manufacturing industry, capacity is defined as the amount that a machine can produce in a
given amount of time.
According to Chase and Aquilano (1955), Chase and Russel Taylor (2000), capacity is
the amount of output that can be produced by a production system within a certain time
horizon, namely for one year or in the next few years.
According to Buffa (1999: 121), some definitions of capacity are not definitive because
capacity must be related to the extent to which equipment is used. Therefore, the capacity of
an operation can change due to the alteration of capacity limits by doing overtime or
subcontracting.
By changing policies regarding the utilization of equipment and facilities, it is possible
to change capacity without increasing the amount of equipment, this source of capacity
demands managers to be more flexible in developing capacity planning.
2. Capacity Planning Objectives:
A decision made by an operations management in planning capacity will have different
effects on performance. According to Pycraft (2000: 379), these effects include cost, revenue,
working capital, quality, and speed in responding to customer needs.
a. Cost Aspect
The cost aspect is affected by the balance between capacity and demand (output
level). A level of capacity that exceeds demand means under-utilization of capacity, or
the level of capacity utility is low. This results in high per-unit costs and revenue is also
affected by the balance between capacity and demand, but in contrast to the cost aspect
mentioned earlier. If the capacity level is equal to or higher than demand, all demands
are met and no revenue is lost.
b. Working Capital
Working capital will be affected if there is an operating decision to produce
finished goods inventory. This means that demand will be met, but the company must
incur inventory costs until the product is sold.
c. Product or Service Quality
The quality of products or services will be affected by capacity planning
decisions, especially those that involve major changes in capacity levels, such as
through the temporary hiring of new workers. It should be noted that new staff or labor
may increase the error rate in the operation process.
d. Speed of Responding to Consumer Needs
The speed of responding to consumer needs is also affected, such as
implementing an inventory policy will result in satisfaction for consumers because
consumers can quickly enjoy products that come from inventory, without having to
wait for the production of these goods.
3. Capacity Planning Strategy
Taylor (2000) differentiates capacity planning strategies into three types, which are as
follows.
a. Capacity lead strategy, an aggressive capacity development strategy intended to
anticipate future demand growth.
b. Capacity lag strategy, a conservative capacity expansion strategy, where capacity is
increased after market growth. This strategy aims to maximize the economic benefits of
investment, but may have adverse effects on customer service.
c. Average capacity strategy, a capacity development strategy that is aligned with the
average increase in estimated demand.
There are two strategies that companies can pursue. First, the watch and wait strategy is
a cautious strategy because production capacity will be increased if consumer demand has
increased. Second, an expansionist strategy is a strategy of exceeding production above
demand, so that there is no shortage of products on the market which causes opportunities for
other competitors to enter and ensure the best service with the availability of products on the
market.
a.
Dimensions of Capacity Planning:
Strategies for capacity planning are separated based on three dimensions of time, as
projected by Brown (2001: 184), which is shown in figure 5.1 below.
The following is an explanation of capacity planning in general, viewed in three time
dimensions according to Brown).
1) Long-term Planning
This planning takes more than 1 year. Productive resources (such as buildings,
equipment or facilities) take a long time to acquire or dispose of. Long-term capacity
planning requires the participation of top management as decisions are made regarding
the function of adding facilities and equipment that have long lead times.
2) Medium-Term Planning
This planning takes place monthly or quarterly for the next 3 to 18 months. As
such, capacity can be varied by utilizing available resources, i.e. by using alternatives
such as increasing the number of employees or the number of shifts, or subcontracting
and using inventory.
3) Short-Term Planning
This planning takes less than 1 month. It is tied to the process of scheduling tasks
and employees on a daily or weekly basis or allocating machines, and requires
adjustments to eliminate differences between actual and planned output.
b.
Measuring Capacity Strategy in Service Companies:
In principle, measuring capacity in service companies is much more difficult than in
manufacturing companies because service quality is difficult to measure and its value is
highly dependent on consumer perception.
Greasley (2008: 67) describes three main strategies in service capacity planning,
namely level capacity, chase capacity, and demand management.
The level capacity and chase capacity strategies emphasize adjusting capacity to
demand. In this strategy, The variable that is changed is capacity, while in the demand
management strategy the variable that is changed is demand. In this strategy, the company
can adjust demand to its capacity. One way is by implementing a marketing mix strategy.
Furthermore, Greasley (2008: 68) argues that in the service industry it is not possible to
carry out a level capacity strategy. That is because in this strategy the capacity is made fixed,
unchanged and the addition of capacity is carried out by carrying out an inventory buildup
policy.
Greasley's opinion above is also supported by Chase (2006: 441), who states that
service capacity tends to be influenced by time, location, and changing demand. It is unlike
goods and services that cannot be stored for later use. Capacity must be available when
services are to be produced. In addition, the location of service capacity must be close to
consumers.
In manufacturing businesses, production takes precedence after the production process
is carried out, the goods are distributed to consumers. As for the service business, it is treated
the other way around, namely prioritizing distribution, after which it is produced. Thus, the
process of service production and consumption is carried out simultaneously, that is, services
must be available when consumers need them.
1) Demand Strategy Management
In demand-side strategies, companies try to change the level of demand to match the
capacity they have so that there is no excess demand over capacity. Strategic options include
offering complementary services, reservations, promotions, discounts, and field management.
2) Offering Strategy Management
On the supply side, the strategies employed include the following.
a) Sharing capacity, which is sharing resources that are difficult to obtain between different
operations, such as sharing seats in a cafeteria.
b) Increase consumer participation by encouraging consumers to be part of the service, such as
the self-service system at the salad table in a restaurant. Consumers also benefit from the
process because of more customization and faster service.
c) Cross-train employees, by training employees for different operations so that they can be
deployed according to changing demands.
d) Using part-time workers to meet demand during peak periods.
e) Creating customizable capacity, varying capacity for different services or different consumer
segments, such as changing the seat allocation for business class and economy class on an
airplane.
Basically, a production business can work well if it is run by producers or referred to as
entrepreneurs. An entrepreneur is a person who looks for profitable opportunities and takes
necessary risks to plan and manage a business.
B. Production Capacity Planning
1. Duties and Functions of the Production Department:
The main task of the production department in relation to the achievement of general
corporate goals is to strive to achieve low production costs, high product quality, rapid
response to demand, and flexibility to meet the needs of the company making a variety of
goods to suit customer tastes and specifications (Amirullah, 2002).
The operation functions include:
a. product planning and design;
b. product capacity planning;
c. factory layout planning;
d. layout planning of factory machinery;
e. raw material planning.
In a business unit, there are various functions that are interrelated with one another,
including three main functions that are always found, namely as follows.
a. Marketing is the spearhead of the business unit because this section is directly related to
consumers.
b. This connection starts from the identification of consumer needs (type and quantity) or
the service and delivery of products to consumers.
c. Finance is responsible for obtaining funds to finance the activities of the business unit
and managing funds economically so that the continuity and development of the
business unit can be maintained.
d. Production (operations) is the producer of products or services that will be marketed to
consumers.
According to Yamit (2003), production capacity planning is the maximum amount of
output that can be produced in a certain unit of time. For example, a bus has a capacity of 40
seats at one time, a fertilizer factory has a capacity of 100,000 kg at one time. Production
capacity is associated with the capacity of resources owned, such as labor capacity, machine
capacity, raw material capacity, and capital capacity.
2. Key Differences between Service Businesses and Manufacturing Businesses:
There are four things that distinguish service businesses and manufacturing businesses,
which are as follows.
a. In a manufacturing business unit, the output is real goods so that productivity is easier
to measure compared to a service business unit whose output is a service.
b. The quality of products produced from manufacturing businesses is easier to
standardize.
c. Direct contact with consumers does not always occur in manufacturing businesses,
while in service businesses direct contact with consumers is inevitable.
d. There will be no ending inventory in a service business, whereas in a manufacturing
business, inventory is something that is difficult to avoid.
3. Production/Transformation Classification
Broadly speaking, production transformation can be classified as follows.
a. Manufacturing transformation, which is a transformation that is discrete and produces
real products. A transformation is said to be discrete if between one operation and
another operation can be clearly distinguished, such as a car factory.
b. Process transformation, which is a continuous transformation, between one operation
and another operation is less clearly distinguishable, such as fertilizer and cement
factories.
c. Service transformation, which is a transformation that does not physically transform
inputs into outputs. Physically, the output will be the same as the input. However, this
type of transformation will increase the value of the input, for example a transportation
company. Service transformation systems are often referred to as operating systems.
In terms of the arrival of consumers and the quantity demanded, production
transformation can be divided into:
a. job shop, production transformation works when there is an order. The number of
orders is relatively not too large and the types of products ordered are not standardized
according to consumer demand;
b. In a flow shop, production transformation will always work, whether there is an order
or not. The number of orders is relatively large and the type of production is
standardized. Flow shop can be divided into flow line/batch, assembly line, continuous;
c. A project is a special form of production transformation, meaning that there are only
one or a few specific orders from customers.
4. Capacity Planning Method
In Yamit (2003), production capacity planning methods consist of the break even point
(BEP) method and the linear programing (LP) method.
The BEP method can be used to determine production capacity. BEP is defined as a
situation when the total revenue is equal to the total cost (TR=TC) or profit.
= 0.
The linear programming (LP) method is a mathematical technique to assist
management in making decisions. The linear programming method in determining the
optimum production capacity uses a mathematical model formulation with the following
steps.
a. Define the decision variables and put them in mathematical notation.
b. Determine the objective function to be achieved by maximizing profit or minimizing cost,
which is equal to the variable cost per unit.
c. Determine the constraint function.
The linear programming (LP) model can be divided into two methods, namely the
graph method and the simplex method.
C. Aggregate Planning Model
1. Definition of Aggregate Planning:
The word aggregate implies that planning is done with one overall measure of output.
The purpose of aggregate planning is to create an overall level of output to meet fluctuating
future demand. Aggregate planning is linked to other business decisions such as finance,
marketing, and HR management.
The word aggregate is interpreted as planning made at a coarse level, done to meet the
total of all products produced, not per individual product. For example, for a paint factory,
aggregate planning is expressed in how many liters of paint will be produced even though
demand consists of different colors, qualities, and can sizes. Nasution (2006: 66) defines
aggregate planning as production planning to determine the number of product volume units
that must be produced each monthly period using the maximum available capacity.
According to Schroeder (2003: 243), aggregate planning is concerned with adjusting
the level of supply and the level of demand for output over the medium term, i.e. up to 12
months ahead.
Furthermore, Render (2004: 114) explains that aggregate planning or aggregate
scheduling is an approach to determining the quantity and timing of production in the
medium term (3 to 18 months ahead).
Based on another definition, aggregate planning is an operational activity that has an
aggregate plan for the production process, for the next 3 to 18 months, and to bring ideas to
the management such as the quantity of material or other resources to be produced and the
time to be produced, so that the total operating cost of the organization remains at the
minimum level in that period.
Based on the definitions presented above, it can be concluded that aggregate planning
is:
a. operational planning to provide the level of output that a facility should produce over a
period of 3 to 18 months, to match the level of uncertain future demand;
b. Planning is done by maximizing the use of available facilities, while still considering
the minimization of total operating costs;
c. This plan should be consistent with top management's long-term strategy and work with
the resources allocated by previous strategic decisions.
2. The Importance of Aggregate Planning:
Aggregate planning is needed by operational managers to determine the best way to
increase capacity and meet demand obtained from forecasting by adjusting production rates,
labor rates, inventory levels, overtime work, subcontracting rates, and other controllable
variables in order to minimize total production costs (Render, 2004: 114).
There are four important reasons for aggregate planning, namely:
a) To maximize the use of facilities and minimize the risk of overuse and idle facilities;
b) ensure the availability of sufficient capacity to satisfy expected demand;
c) Plan systematic changes to production capacity to achieve peaks and valleys in the
customer demand curve;
d) obtaining the most optimum output from the available resources.
Planning
The concept of aggregate planning, according to Brown (2000: 171) is to select
strategies that can absorb fluctuations in demand economically.
According to Render (2004: 114), the inputs of aggregate planning consist of four main
things: resources, demand forecasting, company policies, and costs.
For more details on the concept of aggregate planning, Render (2004) illustrates it in
Figure 5.4 below.
The following explains each of these four things.
a. Resources, consisting of human resources and facilities owned by the company.
b. Demand forecasting is obtained from historical past demand data, which is used to
predict the amount of demand in the future.
c. Company policies, such as subcontracting with other companies, policies regarding
inventory levels, reordering, and working overtime.
d. Costs, inventory storage, ordering costs, costs incurred when subcontracting, and
Recommendation
overtime costs and costs when there are inventory changes.
The desired outputs or outcomes of aggregate planning are:
a. minimize the total cost that must be incurred for the planning made;
b. projection of inventory levels, including inventory, output, labor, subcontracting,
backorders;
c. maximize customer service levels;
d. minimize changes in the level of the labor force and the level of production;
e. maximize the use of production units and production equipment.
3. Aggregate Planning Function
According to Nasution (2003: 255), the function of aggregate planning is to adjust
production capabilities in the face of uncertain market demand by optimizing the use of
available labor and production equipment so that total production costs can be kept to a
minimum.
Nasution's opinion above is also supported by Chase (2005: 516) who states that the
function of aggregate planning is to determine the optimal combination of production levels,
labor quantities, and inventory levels.
Based on the timeframe, aggregate planning is classified as medium-term planning with
a period of 3 to 18 months. It plays an important role in overall operations planning.
Thus, the function of aggregate planning is to determine the medium-term operation
plan that optimizes the combination of resources owned by the company to meet the
uncertain market demand while still considering cost efficiency.
Aggregate planning can support long-term planning in the form of future capacity
strategy planning or support short-term daily or weekly operational plans for raw material
planning or production scheduling.
4. Aggregate Planning Properties
In general, managers want to plan and control their operations at the broadest possible
level through aggregate planning that addresses products and detailed schedules, equipment
and labor. This reality is a good example of true managerial behavior using the whole system
concept.
Management chooses to address the fundamental relevant decisions in planning the use
of its resources. This is achieved by reviewing the projected labor force and determining the
rate of activity that can be changed with the available labor force by changing the working
hours.
These basic decisions are made for the planning horizon ahead, so that master schedules
and detailed schedules can be developed at a lower level within the constraints of the master
plan.
Finally, last-moment changes to the level of work execution should be made by being
aware of the effects on the cost of changes in production levels and on inventory costs.
Therefore, Buffa (1999: 255) describes the steps required for aggregate planning,
namely:
a. logical arrangement of overarching units to measure outputs;
b. management must be able to forecast for a reasonable planning horizon in this
aggregate form;
c. Management must be able to separate and measure relevant costs:
- These costs can be reconstituted in a model that allows near-optimal decisions to be made for
a sequence of planning periods within the planning horizon, the sequential nature of the
decision must always be considered.
According to Buffa, decisions about the amount of labor and the pace of activity made
for one future period cannot be judged as right or wrong, good or bad. Decisions will also be
made for the next two periods based on newly made decisions, new information about actual
sales progress, and forecasts for the remaining range of planning time.
The result is that all decisions are right or wrong only in the sense of a sequence of
decisions within an extended period of time (Buffa, 1999: 255). Therefore, there are several
options, including the following.
a.
Planning Options
Aggregate planning problems can be solved by considering the various options
available. These planning options according to Render (2004, p118) can be divided into two,
namely modifying demand and modifying capacity.
b.
Capacity Options
Capacity options are options that do not seek to change demand, but to absorb
fluctuations in demand by changing the available capacity. The capacity option consists of
five options, which are as follows.
1) Changing inventory levels, by increasing inventory during periods of low demand to
meet future high demand. Consequently, there are costs associated with storage.
2) Diversify the workforce by hiring or laying off. The number of employees is adjusted
to the desired level of production. The consequence is that worker morale and
productivity are affected, as well as training and recruitment costs.
3) Diversifying production levels through overtime or free time. According to the Decree
of the Minister of Manpower No.102 of 2004, overtime is working time that exceeds
the regular working time, 7 hours a day and 40 hours a week for 6 working days in a
week, or 8 hours a day and 40 hours a week for 5 working days in a week, or working
time on weekly rest days and or on official holidays set by the Government. In this
option, the number of workers is kept constant, but working time is varied by reducing
working hours when demand is low, and doing overtime when demand is high.
Consequently, overtime wages are higher than regular wages.
4) Subcontracting. A company can gain temporary capacity by subcontracting during
periods of high demand. The definition of subcontracting in manufacturing is to
reallocate production needs between companies in order to streamline the production
process. This option has some drawbacks, such as high prices or unsuitable quality
from subcontracted suppliers.
5) Use of part-time employees. Generally in the service sector and to meet the needs of
unskilled labor.
c.
Demand Options
Demand options are options that seek to mitigate changes in demand patterns over the
planning period. Demand options consist of three options, which are as follows.
1) Influencing demand. Promotional activities, advertising, and discounts are used when
demand is low. However, special advertising, promotions, sales, and pricing are not
always able to balance demand with production capacity.
2) Order arrears during periods of high demand. Order arrears are orders for goods or
services that a company receives, but is unable (intentionally or accidentally) to fulfill
at that time. This option is used when the customer is willing to wait without losing
the will for his order. The consequence is that it may result in lost sales.
3) A mix of counterseasonal products and services (with different seasons). Companies
develop products that are a mix of counterseasonal goods. For example, a company
that makes heating and air conditioning, a company that takes this approach may
encounter products or services outside their area of expertise or outside their target
market.
5. Aggregate Planning Strategy:
According to Render (2004: 121), aggregate planning can be done by making a choice
of two strategies, namely the chase strategy and the level scheduling strategy. According to
the chase strategy, there is one more strategy, namely stable workforce-variable work hours.
In addition, the aggregate planning strategy can also be divided into two parts based on the
number of variables controllable variables, which are included in the strategy alternatives.
a. Chase Strategy
This strategy adjusts production levels to the number of orders available, by hiring or
releasing labor according to production needs. This strategy relies on the ease of recruiting
and training workers. This strategy has an impact on the motivational and psychological
aspects of employees due to the threat of labor reduction at any time.
The advantages of the chase strategy are low investment in inventory, and high labor
utilization.
The disadvantages of the chase strategy include the cost of improving output levels
and/or labor force levels.
b. Level Scheduling Strategy:
This strategy maintains production levels at a constant volume. Excess quantities
produced will be stored in anticipation of shortages in other periods.
The main impact of this strategy is the cost of storing finished goods or the risk of
inventory spoilage. The advantages of the level strategy are stable output levels and labor
force. The disadvantages are high inventory costs, increased overtime and idle time, variable
resource utilization over time.
c. Stable Workforce-Variable Work Hours Strategy:
This strategy maintains the number of workers, but changes the working hours to match
the production level. Adjustments to production levels are made by adjusting working hours
such as overtime or overtime so that temporary additional capacity is obtained. The main
impact of this strategy is the incurrence of overtime costs for production.
d. Pure Strategy:
The company is said to use this strategy if what is modified is one variable. Variables
here are variables in production planning that can be controlled and determined in accordance
with the production targets set by management.
There are several variables that can be changed, called controllable (decision)
variables, namely inventory levels, production rates, labor, capacity, subcontracting.
e. Mixed Strategy:
This strategy involves changing more than one controllable decision variable. Some
combination of changing the controllable decision variable may result in the best aggregate
planning strategy. This strategy is used when the pure strategy is not feasible.
6. Implementation of Aggregate Planning Model in Service Sector
Aggregate planning in services differs from manufacturing for the following reasons.
a. Services cannot be stored.
b. Demand for services is difficult to predict because it is generally faced with extreme
variations in demand over short periods of time.
c. Capacity is also difficult to predict and service capacity is provided according to time
and place.
d. Service operations are labor-intensive, so labor is the most constraining resource in the
service sector.
e. The location of the service operation follows the location of the service user.
In the service sector, the products (services) offered cannot be stored as inventory. As
such, unused capacity will be wasted, e.g. empty hotel rooms or empty airplane seats cannot
be stored for future use sold later. Service capacity is difficult to measure because services
generally have variable process requirements depending on demand. This makes it difficult to
create a suitable capacity measure.
According to Eddy Herjanto (2006: 199), inventory management as a source of
capacity to meet seasonal demand, such as manufacturing companies. In service companies,
the strategy is more often towards demand control or labor control.
Demand control is done by promotion, cooperation/subcontracting, or pricing, while
labor control is done in the form of setting the number of employees or the number of
working hours.
Render (2004: 132) states that labor cost control in service companies includes:
a. Strict control over working hours in service companies can ensure a quick response to
customer responses;
b. some form of on-call labor source can be recruited or laid off to meet unforeseen
demand;
c. flexibility of individual worker skills that allows re-allocation of available labor;
d. flexibility in output levels or employee working hours to meet increased demand.
D. Capacity and Aggregate Strategy Issues In The Production Process
The introduction of new management techniques from the business sector to the public
sector faces two major challenges, which are as follows.
1. Difficult to Fulfill Aspects of Policy Consistency
It is difficult to achieve the long-term policy consistency needed to accommodate
organizational changes in planning and implementation, when such changes are often
triggered by the emergence of new management techniques.
The general concern about the political process in Western countries and in developing
countries such as Indonesia is that politicians are more concerned or focused on short-term
issues. This is contrary to the need for consistency (Alford, 2000; Steward 1996; Polliitt and
Bouckaert, 1999), which should focus on long-term strategic issues.
2. Relatively Simple Accountability Model
The relatively simple models of accountability found in the modern era in business
sector organizations, where executive directors are accountable to the board for two things:
strategy formulation (including the organization's strategic goals and priorities) and strategy
implementation (how to achieve those goals).
In public organizations, the accountability model is more complex. It can be
characterized by political leadership responsible for strategy formulation (in the form of
policy and strategic priorities) and executive leadership responsible for strategy
implementation of the overall policy.
The division of responsibilities by design has led to conflict and avoidance of
responsibility (Pierre, 1995). This condition has placed the strategic relationship between
political leaders and executives in an area that requires a mechanism that can manage the
relationship through a more effective strategic management process (Poister and Streib, 1999;
Stewart, 1996). The leadership system must be accommodated in the strategic management
system to synergize the two poles of leadership so that it leads to productivity, not to
counterproductive areas.
If this cannot be achieved, the idea of public management as an activity involving the
determination of strategies and goals becomes unrealistic (Stewart, 1996). This is in contrast
to public administration, which is more concerned with the maintenance of processes and
regulations (Hughes, 1992).
3. Need for Capacity and Aggregate Planning
Aggregate planning is a plan made to determine the total demand of all production
elements and the amount of labor required.
Determining future capacity requirements can be a complicated procedure, which is
largely based on future demand. If demand for goods and services can be forecast with
sufficient accuracy, determining capacity requirements can be straightforward.
Determining the amount of capacity usually requires two stages. In the first stage,
future demand is forecasted using traditional models. In the second stage, this forecasting is
used to determine the capacity requirement as well as the size increase for each capacity
addition.
Interestingly, demand growth usually occurs gradually in small units. Capacity
additions occur simultaneously and in large units. This conflict often makes capacity
expansion difficult.
Sustainable profits are derived from the establishment of competitive advantages, not
just from good financial returns on a particular process. Capacity decisions must be integrated
into the organization's mission and strategy. Investments are not made as discrete
expenditures, but as part of an integrated plan that can put the organization in an
advantageous position.
Demand forecasting can address short-, medium-, and long-term issues that can help
managers address capacity and demand issues. Strategic planning is the responsibility of top
management.
Capacity and aggregate planning are closely related to raw material supply planning.
The amount of inventory capacity produced depends on the amount of raw materials
available in the company.
Break-even analysis is a tool for determining the capacity that a facility must have in
order to make a profit. The goal of break-even analysis is to find a point in dollars and units
where costs equal profits.
The capacity and aggregate planning process used by the company must prioritize the
quality of goods produced by the company.
Capacity and aggregate planning relate to location strategies in terms of storing excess
goods, in order to save storage costs and storage risks.
The relationship with inventory management is that when production capacity at one
time requires relatively many inventory items, the production capacity should be increased,
and vice versa.
