Capacity and agrregate planning

Capacity Planning

28th October

Capacity Planning (Book: B. Mahadevan)

• It is a long term strategic decision that establishes a firm overall level of resources

• It is the process of determining the necessary people, machines and physical resources to meet the production objectives of the firm

Strategies for capacity expansion

• Capacity lead strategy: capacity expansion in anticipation of demand growth

• Capacity lag strategy: Capacity is increased after an increase in demand has been documented

• Average capacity strategy: Capacity is expanded to coincide with average expected demand

Capacity planning framework

Estimate the capacity requirement for the planning horizon

Compute the available capacity and identify quantum of capacity to be augmented

Identify available alternatives and select the best one for capacity augmentation

Example

Alternatives for capacity augmentation

• Waste elimination• Multi skilling of work force• Sub- contracting / Outsourcing

Decision tree for capacity planning:• It is a schematic model in which different sequences and steps

involved in the problem and the consequences of the decision are systematically portrayed

• Decision tree comprised of nodes and branches. Each node represent the decision point and branches represent the potential outcome of the decision

Example 9.4, pg.no. 236

Aggregate Planning

11th Nov 2010Production and Operations Management:

Everette E. adam, Jr. Ronald J. Ebert

Operational planning & scheduling systems

Output planning Capacity planning

Aggregate output planning

Aggregate capacity planning

Master production scheduling

Rough-cut capacity planning

Material requirements planning

Detailed capacity planning

Loading

Sequencing

Detailed scheduling

Shop floor control

Disaggregation

Aggregation

Operational planning & scheduling systems

Output planning Capacity planning

Aggregate output planning

Aggregate capacity planning

Master production scheduling

Rough-cut capacity planning

Material requirements planning

Detailed capacity planning

Loading

Sequencing

Detailed scheduling

Shop floor control

Monthly output levels (6- 18 months) for the

finished product groups

Process for testing feasibility of output plan. Output plan

converted into input terms (man-hours, machine hours etc)

Temp capacity adjustment strategies

Disaggregation

Aggregation

The aggregate planning process

•maximize customer service •minimize inventory investment •minimize changes in workforce levels •minimize changes in production rates •maximize utilization of plant and equipment

Objective of aggregate planning frequently is to minimize total cost over the planning horizon. Other objectives should be considered:

The aggregate planning process

Concept of aggregation : Deciding the unit for aggregation (# of PC, Tons of output etc)

Identify groups/families of products that although different from one another, share commonproduction process, share common machines e.g.

FMCG (# of powder bottles as one, # of shampoo bottles as another, # of shampoo sachet).

For some others it can be straight forward

• Service Industry : Airlines : # of passengers

• Steel producer : Tons/Kg of steel produced

• Paint company : Kilo liters of paints produced

The aggregate planning process

Goals : The goals to be kept in mind while deciding aggregate plan which later on in planning process becomes input to MPS

• Overall output & inventory norms as per company policy (eg seasonal build up etc)

• Facility capacity utilization as per company policy (Full capacity utilization for stable products, 10 % free capacity for meeting sudden demand)

• Employee Policy (Stable employee work force in case of skilled jobs, Hire/Fire for standard jobs : Loading )

Forecast of aggregate demand (Input to aggregate planning process)

The aggregate planning process

January Forecast

January Actual

Forecast Error % Error

Product A 100 120 -20 -17%Product B 200 180 20 11%Aggregate 300 300 0 0

Aggregate forecast is more accurate compared to individual hence useful for Long term planning purpose

Options for adjusting short term capacity to meet overall organization goals.

Following are commonly used strategies

Internal1. Vary number of productive employees to meet varying output requirement (Chase strategy)

2. Maintain constant workforce but vary utilization of work force (Chase strategy)

3. Vary size of inventory

4. Mix of any of above

External5. Subcontractor

6. Rent / Lease equipment

The aggregate planning process

Data for exercise

Refer to page 381 & 382 of handout

The aggregate planning process

Varying Work Force Size By Hiring Or Layoffs

This is to Hire Or Lay Off Workers To Meet Production Rates.

Limitations

• In this option, often new employees need to be trained will involve training cost.• High hiring and lay off costs• Lowered employee morale during layoff• Skills may not be available when needed• Negative community reaction• Cannot do in case of labor laws etc

1.Vary number of productive employees to meet varying output requirement

Can be used for non critical jobs such as loading/unloading etc

The aggregate planning process

Results in idle time during lean period/overtime during peak

Can eliminate limitation of Hire & Fire however has following limitation.

Limitations

• Overtime cost can be expensive• Overtime can result in errors• During idle time output would be lost forever .• Idle time may affect employee morale as they may fear layoff

2. Maintain constant workforce but vary utilization of work force

The aggregate planning process

Fix # of employees such that little or no overtime/idle timeProduction at constant rate (Inventory build up in lean, depletion in peak period)

Can eliminate limitation of Hire & Fire however has following limitation.

Limitations

• Money tied up in inventory• Obsolescence• Storage space requirement So every strategy has limitation hence need to use combination

3. Vary size of inventory

The aggregate planning process

Graphical method can be used

Exercise (Page 384)

Step 1 : Draw graph (X axis : productive days in planning horizon, Y axis : units output in thousands), plot cumulative forecast on basis of fig 10.2

Step 2 : Select planning strategy level output

• Find out level output rate for no stock out

• How many employees are needed

• Fill the following table (Provided in next slide)

• Find total cost (Assuming inv carrying cost $ 1 / unit/month)

3. Combination method (To combine good points of each strategy)

Month Days Output(units/day) Output (Units) Demand (Units) Beginning in (Units)

Net addition (Subtraction to inv)

Ending inv Avg Inv (Beg + Ending)/2

Jan 22

feb 19

Mar 21

April 22

May 21

Jun 21

Jul 22

Aug 11

Sep 21

Oct 22

Nov 18

Dec 21

Table for level strategy

The aggregate planning process

• Step 3 : Select planning strategy Chase

• Fill the following table (Provided in next slide)• Find total cost assuming following

– Estimated cost for changing output rate

– Max output (1000 wagons/day), OT : $4/unit

Change in output rate from prev month (Incr/decr) Estimated cost

1-200 4000

201-400 10,000

401-600 18,000

601-800 28,000

The aggregate planning process

Month Days Change in output

Output Rates (units/day)

Output (Units)

Demand (Units)

Cost

Jan 22 182 0

feb 19 527

Mar 21 619

April 22 1000

May 21 1143

Jun 21 952

Jul 22 682

Aug 11 1454

Sep 21 857

Oct 22 637

Nov 18 499

Dec 21 286

Table for level strategy

The aggregate planning process

• Combination method

The aggregate planning process

Month Days Output(units/day)

Change in output

Output (Units) Demand (Units)

Beginning in (Units)

Net addition (Subtraction to inv)

Ending inv Avg Inv (Beg + Ending)/2

Output rate change cost

Jan 22 548 0

feb 19 548

Mar 21 548

April 22 1000

May 21 1000

Jun 21 1000

Jul 22 1000

Aug 11 689

Sep 21 689

Oct 22 689

Nov 18 689

Dec 21 689

Table for mix strtaegy

The aggregate planning process

Compare the cost for each strategy

Type of cost Level Output Variable Output

Mixed

Overtime

Inventory

Output change rate

Total cost