Capacity Planning

Created by:

Cristina Olivan
Chad Fuss
Tarik Bensehil

    The focus of this web page is to demonstrate general principals of  LONG-TERM,
AGGREGATE,
&
SHORT-TERM
Capacity planning
 
 
 
 
 
 

Long-Term Capacity Planning

    The importance of capacity planning
      -Too much capacity can cause the inventory level to rise, or it may under us the company's work     force and equipment
         - Too little capacity cause loss of customers to competitors

    Capacity Decisions are also very important
     - Building capacity usually requires significant capital
          - The company can incur significant losses if its capacity needs are reduced
    Defining and measuring capacity
   - Definition of capacity
                It is the productive capability of a facility
          -There are several measures & definitions of capacity, however.
                Most common, capacity refers to the maximum productive capability of a facility or the maximum rate of output from a process
            -It is measured as a quantity of output per unit of time
            -Measuring capacity could be difficult for companies with divers product lines
    What are the ways for viewing maximum capacity?
          -Design capacity: It is the target output rate, or maximum capacity, for which the production facility was designed
            -Effective capacity: Refers to the maximum rate of output achievable, given the quality standards, scheduling constraints and so forth
            -Actual capacity: Reflects the rate of output that the plant actually achieves
            - Bottleneck: Refers to any operation that limits output in the production or service sequence
 

    Measures of production system effectiveness:
     *Capacity Utilization=Actual Capacity/Design Capacity
             *Capacity Effienciency=Actual Capacity/Effective Capacity
              Effiency is a short- and medium- range measure of how well the company is using its production system
    A firm's capacity strategy is based on:

          A company typically bases its capacity strategy on as eries of assumptions and predictions about technological innovations, long-term marketing, and the behavior of competitors, including
                   1)The predicted growth and variability of primary demand
                   2)The costs of building and operating plants of different sizes
                   3)The rate and direction of technological innovation
                   4)The likely behavior of competitors
                   5)The anticipated effects of international competitors, markets, and resources of supply
 

    There are three aspects of capacity:
              1.Capacity cushion
           *Capacity cushion=100- Capacity Utilization
              2.Strategic timing of capacity change
                            *Strategy 1:Anticipate and Lead Demand
                            *Strategy 2:Closely follow Demand
                            *Strategy 3:Lag Demand
              3.Sizing capacity changes
               The level of capacity at which the average unit costs is at a minimum is called the Best operating level: at low levels of output a few units must absorb the fixed costs of the facilities, which produce a high average unit costs of output. As the out increase, average costs of costs decrease, until the company achieves some minimum average unit costs.
    Making capacity planning decisions
        There are five major reasons that companies initiate Capacity Planning projects
               *Increasing Demand
                            *Dropping Demand
                            *Changing Technology
                            *Changing Environment
                            *Spotting Opportunities
    Steps in capacity planning process
        There are 8 steps in a Capacity Planning process
                  1. Audit and Evaluate Existing Capacity and Facilities
                            2. Forecast Capacity or Facilities Requirements
                            3. Define Alternatives for Meeting Requirements
                            4. Perform Financial Analyses of Each Alternative
                            5. Asses Key Qualitative Issues for Each Alternative
                            6. Select One Alternative to Pursue
                            7. Implement Alternative Chosen
                            8. Audit and Review Actual Needs

    Decision tree analysis
                A decision tree is a graphic model of a set of alternatives and their consequences.  It provides a clear picture of capacity decisions and their outcomes overtime.
  Break-Even Analysis
                            A break-even analysis is commonly used choose between processing alternative.  These alternative can either be shown graphically or algebraically

Aggregate Capacity Planning

     The Concept of Aggregation
      Aggregate Planning is  a medium- term capacity planning that typically encompasses a time period of two to eighteen months. It involves determining the best quantity to produce and selecting the lowest-cots  method that will provide flexibility in capacity while meeting production requirements.
 Aggregation is done according to :

  • Products:  a product family is a group of products that are manufactured similar and have common labor and materials requirements.
  • Labor:  a company can aggregate work force  by product family
  • Time:  the time period is usually about 1 year.
  •     Aggregate production planning involves managing
    Work Force levels-- is the number of workers required for production.
    Production Rate-- is the number of units produced per time period.
    Inventory levels-- is the balance of unused units carried forward from the previous period.
        Common objectives

            Aggregate Product Planning takes place in a complex environment that has a number of external and internal factors.
           Among the common objectives of Production planning are to:
                1. Minimize costs
                2. Maximize profits
                3. Minimize inventory levels
                4. Minimize changes in work force levels.
                5. Minimize use of overtime
                6. Minimize use of subcontracting
                7. Minimize changes in production rates
                8. Minimize number of machine setups
                9. Minimize idle time for plant and personnel
               10. Maximize customer service

        Ways to modify the demand

        Ways to modify the supply     Aggregate production planning variable cost     What are the ways for viewing maximum capacity?
        This planning encompasses a time period for two or eighteen months
         - It involves determining the best quantity to produce and selecting the low-cost method that will provide flexibility in capacity while meeting production requirement.
             - In broad terms aggregate planners look at the demand forecast or expected demand from the perspective of both quantity and timing.  That is, if the total demand and total capacity do not match, the planners will aver to find ways to reach a balance of demand and capacity for aggregate planning purposes.
            - Two of these methods are referred to as pure operation strategies.
         -The rest are virtually a combination of these two(an example of pure     operation strategy).
         -Chase strategy: Is a strategy in which planners adjust production rates or work force levels to match the demand requirements of the planning period.
            - Level strategy: Is a strategy in which planners maintain a constant production rate or work force level for the duration  of the plan.
            - An example of non-pure operation strategy:
            - Mixed strategy: Involves period fluctuations in both inventory levels and work force and production rates in often most appropriate.
        Techniques for aggregate production planning
         -They are categorized as two types:
              - Trial-and error method.
              - Mathematical techniques
              - Among the mathematical techniques we have:
                     - linear decision rule
                     - Management coefficient model
                     - Parametric production planning
                     - Search decision rule
                     - Production switching heuristic
                     - Linear programming(simple method)

        Aggregate planning in service companies
                                Service companies do not produce inventories, they typically make to order rather than make to stock.
        Implementing aggregate production plans
                                 When an aggregate production plan goes into effect, the company has to state its production schedule in terms of units of specific products or services.
        Hierarchical production planning(HPP)
                                An approach to analyze aggregate capacity incorporates a philosophy of matching product aggregations to decision-making levels in the organization.
                                Hierarchical production planning is the term used to describe the process of tailoring the planning structure to the organization.

    Short-Term capacity planning

        Capacity planning & the production planning & scheduling framework
        Rough-Cut capacity planning methods
            Capacity planning using overall factors
                                *Simplest rough cut capacity planning technique
                                *Uses the Master Production Schedule to:
                                            1. find standard time
                                            2. find historical work center usage percentage
                    Capacity planning using capacity bills
                                *Requires more information than Capacity Planning Using Overall Resources.
                                *Capacity Bills uses Bills of Materials information, routing, and standard time data.
                                *Generally generates more precise capacity estimates
                                *This method approximates the capacity required for setups.
                                *The Capacity Bill calculates a standard setup time per unit by dividing the standard setup time by actual lot size (if it is available) or can estimate lot size (average lot size).
                    Capacity planning using resource profiles
                                *The Resourec Profiles method extends Capacity Bills approach by considering lead time information.
                                *Resource Profiles Capacity Planning requires lead time for each component operation to estimate work center loads
                                        -lead time for a component in a given work center is the sum of the setup, processing and queue (waiting time that the component order experiences).
        Rough-Cut capacity planning comparison
                                *The total facility workload for CPOF and CB methods are identical, but RP method shows a substantial difference because of the time phasing of capacity requirements and the associated loss of visibility.
                                *Although RP is the most accurate rough cut planning technique it does not consider the current status of finished goods and WIP inventories and lot sizing.
                                *In contrast, CRP a detailed capacity planning method considers the current status of all finished and WIP inventories in calculating capacity requirement estimates.

        Here are some links that also deal with Capacity Planning

              *Capactiy Planning    capacity planning ,
                                                                         capacity planning concord ,
                                                                        http://www.astes.com/Default.htm
                                                                        http://www.summitonline.com/netmanage/papers/caci1.html
                                                                        http://www.combination.com/prodnsrv/prodnsrv.html
                                                                        http://www.cybor.co.nz/news/capplan.html
     
     
     
     

                                     Operations/Production Management
                                           BA333

                                                                      Return to BA333 Homepage
     

                                                                         Return to Class Sylabus