Lecture Introduction to operations management - Chapter 12: Capacity planning

In this chapter we will discuss: 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.

Operations Management Contemporary Concepts and Cases Chapter Twelve Capacity Planning  McGraw­Hill/Irwin Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved Chapter 12 Outline Facilities Decisions Facilities Strategy Sales & Operations Planning Definition Cross­Functional Nature of S&OP Planning Options Basic Aggregate Planning Strategies Aggregate Planning Costs Aggregate Planning Example 12­2 Hierarchy of Capacity Decisions (Fig 12.1) Facilities decisions Facilities decisions Aggregate Planning Aggregate planning Scheduling Scheduling 12 18 Months Planning Horizon 24 12­3 Definition of “Capacity” Capacity is defined as the maximum output that can be  produced over a given period of time  Theoretical capacity primarily determined by – Physical assets – Labor availability  Actual output (effective capacity) – Accounts for downtime, shift breaks, etc – Is the capacity that should be used in planning 12­4 Capacity Utilization Capacity utilization is defined relative to actual  output and capacity: Utilization = actual output/capacity X 100% Capacity is seldom at 100% utilization 12­5 Facilities Decisions How much total 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? 12­6 Facilities Strategy Facilities strategy typically considers: Amount of capacity Size of the facilities Timing of capacity changes Facility locations Types of facilities needed for the long run 12­7 Factors Affecting Facilities Strategy Predicted demand Cost of facilities Likely behavior of competitors Business strategy International considerations 12­8 How Much?: Strategies for “Capacity Cushion” Capacity cushion = 100% – Utilization Three strategies – Large cushion (e.g., make­to­order) – Moderate cushion (cost of running out balanced  with cost of excess capacity) – Small cushion (e.g., make­to­stock) 12­9 How Large? What is “Optimum” Unit 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 12­10 Where? Location of Facilities Quantitative Factors – – – – – ROI NPV Transportation Taxes Lead times Qualitative Factors  – – – Language and norms Attitudes among workers & customers Proximity to customers, suppliers & competitors 12­12 What Type? Types of Facilities Product­focused (55%) ­ computers, chain  saws, dishwashers Market­focused (30%) ­ electricity, bakeries Process­focused (10%) ­ computer chips General purpose (5%) – furniture, banking 12­13 Sales & Operations Planning Definition Matching supply & demand over a medium time frame Time horizon of about 12 months An aggregated level of demand for one or a few  categories of product.  Demand fluctuates or is uncertain Possibility of changing both supply and demand Variety of management objectives Facilities that are considered fixed (cannot be expanded  or reduced) 12­14 Cross-Functional Nature of S&OP Engineering:  product definition HR:  workforce availability Operations:  capacity, inventory, forecast Management:  business plan Finance:  capital Marketing:  product demand Sales:  forecast 12­15 Iterative Nature of S&OP (made possible by concurrent planning) Develop production plan Check implications for inventory/backlog plan If necessary, adjust production plan Check against resource plan and availability If necessary, adjust production plan Recheck against inventory/backlog and  resources Continue (go to 5) until you meet all constraints 12­16 Planning Options Options for managing demand – influencing demand from customers – delivering orders as promised Options for managing supply – delivering what is promised – managing capacity & other resources 12­17 Options for Influencing (Managing) Demand Pricing Advertising and promotion Backlog or reservations (shifting demand) Development of complementary offerings 12­18 Options for Influencing (managing) Supply Hiring and layoff of employees Using overtime and undertime Using part­time or temporary labor Carrying inventory Outsourcing or subcontracting Cooperative arrangements 12­19 Basic Production Strategies “Level” strategy (constant work  force, use inventory as buffer) “Chase” strategy (produce to  demand, vary workforce) 12­20 Level Load Strategy Produce products and services at a  constant rate  Avoid making changes to  operations 12­21 Chase Strategy Produce only what you sell Produce products or services just­in­time If there are no sales—do not produce Typical for services 12­22 Table 12.1: Comparison of Chase versus Level Strategy Level of labor skill required J ob discretion Compensation rate Training required per employee Labor turnover Hire-layoff cost per employee Amount of supervision required Type of budgeting and forecasting required Chas e   S trate gy Low Low Low Low High Low High Short-run Le v e l  S trate gy High High High High Low High Low Long-run 12­23 Aggregate Planning Costs Hiring and firing costs (Chase) Overtime and undertime costs (Chase) Subcontracting costs (Chase) Part­time labor costs (Chase) Inventory­carrying costs (Level)  Cost of stockout or back order (Level) 12­24 Summary Facilities Decisions Facilities Strategy Sales & Operations Planning Definition Cross­Functional Nature of S&OP Planning Options Basic Aggregate Planning Strategies Aggregate Planning Costs Aggregate Planning Example 12­25 End of Chapter Twelve 12­26 ...  Actual output (effective? ?capacity) – Accounts for downtime, shift breaks, etc – Is the? ?capacity? ?that should be used in? ?planning 12­4 Capacity Utilization Capacity? ?utilization is defined relative? ?to? ?actual ... Basic Aggregate? ?Planning? ?Strategies Aggregate? ?Planning? ?Costs Aggregate? ?Planning? ?Example 12­2 Hierarchy of Capacity Decisions (Fig 12.1) Facilities decisions Facilities decisions Aggregate Planning Aggregate planning Scheduling.. .Chapter 12 Outline Facilities Decisions Facilities Strategy Sales &? ?Operations? ?Planning? ?Definition Cross­Functional Nature of S&OP Planning? ?Options Basic Aggregate? ?Planning? ?Strategies