Capacity Planning and Aggregation Chapter 11

Capacity planning is a critical process that involves determining the production capacity needed by an organization to meet changing demands for its products or services. It requires a strategic balance between meeting customer demand and optimizing resource utilization to ensure efficiency and cost-effectiveness. The goal of capacity planning is to minimize the risk of over or underproduction, both of which can lead to significant financial implications. Effective capacity planning involves a thorough analysis of current production capabilities, forecasted demand, and potential changes in market conditions. This process typically includes assessing current capacity, predicting future needs, and identifying any gaps between the two. To achieve this, businesses utilize various tools and techniques such as demand forecasting, capacity requirement planning (CRP), and capacity utilization analysis. Demand forecasting involves predicting future customer demand using historical data, market analysis, and statistical methods. Capacity requirement planning ensures that the necessary resources, such as labor, machinery, and materials, are available when needed. Capacity utilization analysis measures the extent to which an organization uses its installed productive capacity, providing insights into potential inefficiencies. Additionally, capacity planning must consider both short-term and long-term horizons. In the short term, it focuses on scheduling and resource allocation to meet immediate demand fluctuations, while long-term capacity planning involves strategic decisions about expanding or contracting production capabilities to align with projected market trends. This may include investing in new technology, scaling up operations, or even downsizing. Moreover, capacity planning is not a one-time activity but an ongoing process that requires continuous monitoring and adjustment in response to internal and external changes. It often involves collaboration across various departments, including operations, finance, and marketing, to ensure alignment with the organization's overall strategic goals. By accurately anticipating and responding to demand changes, businesses can avoid the pitfalls of excess inventory, production delays, and resource underutilization, thereby enhancing customer satisfaction and competitive advantage. In essence, capacity planning is a vital aspect of operational management that ensures a company can meet its demand efficiently while optimizing its resources and maintaining flexibility in a dynamic market environment.
Capacity planning is a critical process that involves determining the production capacity needed by an organization to meet changing demands for its products or services. It requires a strategic balance between meeting customer demand and optimizing resource utilization to ensure efficiency and cost-effectiveness.

1. Business Processes
Sales Order
Management
Aggregate
Planning
Master
Scheduling
Production Activity
Control
Quality
Control
Distribution
Mngt.
© 2001 Victor E. Sower, Ph.D., C.Q.E.

2. © 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Chapter 11
Capacity Planning And
Aggregate Production Planning

3. Ch 11 -2
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Capacity Planning
•Establishes overall level of productive resources
•Affects lead time responsiveness, cost &
competitiveness
•Determines when and how much to increase capacity

4. Ch 11 -3
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Capacity Expansion
•Volume & certainty of anticipated demand
•Strategic objectives for growth
•Costs of expansion & operation
•Incremental or one-step expansion

5. Ch 11 -4
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Capacity Expansion Strategies
Units
Capacity
Time
Demand
Units
Capacity
Time
Demand
Units
Capacity
Time
Demand
Units
Incremental
expansion
Time
Demand
Capacity lead strategy Capacity lag strategy
Average capacity strategy Incremental vs. one-step expansion
One-step
expansion

6. Ch 11 -6
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Aggregate Production Planning (APP)
•Matches market demand to company resources
•Plans production 6 months to 12 months in advance
•Expresses demand, resources, and capacity in general terms
•Develops a strategy for economically meeting demand
•Establishes a company-wide game plan for allocating
resources

7. Ch 11 -7
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Inputs and Outputs to Aggregate
Production Planning
Aggregate
Production
Planning
Company
Policies
Financial
Constraints
Strategic
Objectives
Units or dollars
subcontracted,
backordered, or
lost
Capacity
Constraints
Size of
Workforce
Production
per month
(in units or $)
Inventory
Levels
Demand
Forecasts

8. Ch 11 -8
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Strategies for Meeting Demand
1. Use inventory to absorb fluctuations in demand
(level production)
2. Hire and fire workers to match demand (chase demand)
3. Maintain resources for high demand levels
4. Increase or decrease working hours (over & undertime)
5. Subcontract work to other firms
6. Use part-time workers
7. Provide the service or product at a later time period (backordering)

9. Ch 11 -9
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Strategy Details
•Level production -produce at constant rate & use
inventory as needed to meet demand
•Chase demand -change workforce levels so that
production matches demand
•Maintaining resources for high demand levels -ensures
high levels of customer service
•Overtime & undertime -common when demand
fluctuations are not extreme

10. Ch 11 -10
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Strategy Details
•Subcontracting -useful if supplier meets quality
& time requirements
•Part-time workers -feasible for unskilled jobs or
if labor pool exists
•Backordering -only works if customer is willing
to wait for product/services

11. Ch 11 -11
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Level Production
Time
Production
Demand
Units

12. Ch 11 -12
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Chase Demand
Time
Units
Production
Demand

13. Ch 11 -13
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
APP Using Pure Strategies
Hiring cost = $100 per worker
Firing cost = $500 per worker
Inventory carrying cost = $0.50 pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers
Quarter Sales Forecast (lb)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

14. Ch 11 -14
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Level Production Strategy
Sales Production
Quarter Forecast Plan Inventory
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 0
400,000 140,000
Cost = 140,000 pounds x 0.50 per pound = $70,000

15. Ch 11 -15
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Chase Demand Strategy
Sales ProductionWorkersWorkersWorkers
Quarter Forecast Plan Needed Hired Fired
Spring 80,000 80,000 80 - 20
Summer 50,000 50,000 50 - 30
Fall 120,000 120,000 120 70 -
Winter 150,000 150,000 150 30 -
100 50
Cost = (100 workers hired x $100) + (50 workers fired x $500)
= $10,000 + 25,000 = $35,000

16. Ch 11 -21
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Strategies for Managing Demand
•Shift demand into other periods
–incentives, sales promotions, advertising campaigns
•Offer product or services with countercyclical
demand patterns
–create demand for idle resources

17. Ch 11 -22
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Demand Distortion along the
Supply Chain

18. Ch 11 -23
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Hierarchical Planning Process
Items
Product lines
or families
Individual
products
Components
Manufacturing
operations
Resource level
Plants
Individual
machines
Critical work
centers
Production PlanningCapacity Planning
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 work
centers

19. Ch 11 -24
© 2000 by Prentice-Hall Inc
Russell/Taylor Oper Mgt 3/e
Aggregate Planning for Services
1. Most services can’t be inventoried
2. Demand for services is difficult to predict
3. Capacity is also difficult to predict
4. Service capacity must be provided at the
appropriate place and time
5. Labor is usually the most constraining
resource for services