Chapter8 CapacityandAggregatePlanning

CAPACITY AND
AGGREGATE PLANNING
UiTMK/Chapter 8 1
Capacity: The “throughput,” or number of units a facility
can hold, receive, store, or produce in a period
of time.
Effective Capacity a firm can expect to receive given its

capacity: product mix, methods of scheduling,
maintenance, and standards of quality.
Utilization: Actual output as a percent of design capacity.
Efficiency: Actual output as a percent of effective capacity.
 Design capacity is the maximum
theoretical output of a system
 Normally expressed as a rate
 Effective capacity is the capacity a firm
expects to achieve given current
operating constraints
 Often lower than design capacity
Utilization is the percent of design capacity
achieved
Utilization = Actual output/Design capacity
Efficiency is the percent of effective capacity

achieved
Efficiency = Actual output/Effective capacity
 Forecast demand accurately
 Understand the technology and capacity
increments
 Find the optimum operating size
 Build for change
5
 Demand exceeds capacity
 Curtail demand by raising prices, scheduling
longer lead time
 Long term solution is to increase capacity
 Capacity exceeds demand
 Stimulate demand through price reductions or
aggressive marketing
 Product changes
 Adjusting to seasonal demands
 Produce products with complementary
demand patterns
1. Making staffing changes (increasing or decreasing the
number of employees)
2. Adjusting equipment and processes – which might
include purchasing additional machinery or selling or
leasing out existing equipment
3. Improving methods to increase throughput;
4. Redesigning the product to facilitate more throughput
5. Adding process flexibility to better meet changing
product preferences
6. Closing facilities
7
 Each work area can have its own unique capacity
 Capacity analysis determines the throughput
capacity of workstations in a system
 A bottleneck is a limiting factor or constraint
 A bottleneck has the lowest effective capacity in
a system
 The process time of a station is the time to
produce a unit at that single workstation
 The process time of a system is the time of
the longest process in the system … the
bottleneck
 The process cycle time is the time it takes
for a product to go through the production
process with no waiting
10
UiTMK/Chapter 8
Aggregate planning - Determine the quantity and
timing of production for the intermediate future (usually
3 to 18 months)
 Objective is to minimize cost over the planning
period by adjusting
 Production rates
 Labor levels
 Inventory levels
 Overtime work
 Subcontracting rates
 Other controllable variables
 Logical overall unit for measuring sales and
outputs
 Forecast of demand for intermediate planning
period in these aggregate units
 Method for determining costs
 Model that combines forecasts and costs so
that planning decisions can be made
12
1. Capacity options
 the firms do not try to change the demand
but to absorb demand fluctuations
2. Demand options
 Firms try to smooth out changes in the
demand pattern over the planning period
1. Changing inventory levels
2. Varying work force size by hiring or layoffs
3. Varying production capacity through
overtime or idle time
4. Subcontracting
5. Using part-time workers
 Increase inventory in low demand periods to
meet high demand in the future
 Increases costs associated with storage,
insurance, handling, obsolescence, and
capital investment
 Shortages may mean lost sales due to long
lead times and poor customer service
 Match production rate to demand
 Training and separation costs for hiring and
laying off workers
 New workers may have lower productivity
 Laying off workers may lower morale and
productivity
 Allows constant workforce
 May be difficult to meet large increases in
demand
 Overtime can be costly and may drive down
productivity
 Absorbing idle time may be difficult
 Temporary measure during periods of peak
demand
 May be costly
 Assuring quality and timely delivery may be
difficult
 Exposes your customers to a possible
competitor
5. Using part-time workers
 Useful for filling unskilled or low skilled positions,
especially in services
1. Influencing demand
2. Backordering during high demand
periods
3. Counterseasonal product and seasonal
mixing
 Use advertising or promotion to increase demand in low
periods
 Attempt to shift demand to slow periods
 May not be sufficient to balance demand and capacity
2. Back ordering during high- demand periods

 Requires customers to wait for an order without loss of
goodwill or the order
 Most effective when there are few if any substitutes for the
product or service
 Often results in lost sales
 Develop a product mix of counter-seasonal
items
 May lead to products or services outside
the company’s areas of expertise
Option Advantages Disadvantages Some Comments
Changing Changes in Inventory holding Applies mainly to
inventory human resources cost may production, not
levels are gradual or increase. service,
none; no abrupt Shortages may operations.
production result in lost
changes. sales.
Varying Avoids the costs Hiring, layoff, and Used where size
workforce of other training costs of labor pool is
size by hiring alternatives. may be large.
or layoffs significant.
Table 13.1
Varying Matches Overtime Allows flexibility
production seasonal premiums; tired within the
rates through fluctuations workers; may aggregate plan.
overtime or without hiring/ not meet
idle time training costs. demand.
Sub-contracting Permits flexibility Loss of quality Applies mainly in

and smoothing control; reduced production
of the firm’s profits; loss of settings.
output. future business.
Using part- Is less costly and High turnover/ Good for unskilled
time workers more flexible training costs; jobs in areas with
than full-time quality suffers; large temporary
workers. scheduling labor pools.
difficult.
Influencing Tries to use Uncertainty in Creates marketing
demand excess capacity. demand. Hard to ideas.
Discounts draw match demand to Overbooking
new customers. supply exactly. used in some
businesses.
Back ordering May avoid Customer must be Many companies
during high- overtime. Keeps willing to wait, but back order.
demand capacity goodwill is lost.
periods constant.
Counter- Fully utilizes May require skills Risky finding

seasonal resources; allows or equipment products or
product and stable workforce. outside the firm’s services with
service areas of opposite demand
mixing expertise. patterns.
 Chase strategy
 Match output rates to demand forecast
for each period
 Vary workforce levels or vary
production rate
 Favored by many service organizations
 Level strategy
 Daily production is uniform
 Use inventory or idle time as buffer
 Stable production leads to better
quality and productivity
 Some combination of capacity
options, a mixed strategy, might be
the best solution
 Graphical & charting techniques
 Popular & easy-to-understand
 Trial & error approach
 Require only limited computations
 Mathematical approaches
 Transportation method
 Linear decision rule
 Management coefficients model
 Simulation
 Most services pursue a combination of capacity and
demand options
 Controlling the cost of labor in services
 Approaches to aggregate planning differ by the
type of services provided:
 Restaurants
 Hospitals
 National chains of small services firms
 Miscellaneous services
 Airline industry
a) Restaurants
- Aggregate planning is directed toward smoothing
production rate and finding the size of workforce to be
employed
b) Hospitals
- Aggregate planning in allocating money, staff and
supplies to meet demand of patients
c) National chains of small services firms
- Example: fast food outlets, photocopy centers and
computer centers
- Output and purchasing may be centrally planned
because it reduces costs
d) Miscellaneous services
- Example : financial, transportation, communication and
recreation services
- Aggregate planning deals mainly with planning for human
resources requirements and managing demand
- Goal is to level demand peaks and to design methods for fully
utilizing labor resources during forecasted low demand periods
e) Airline industry
- Aggregate planning consists of schedules for number of flights
in and out of each city, number of flights on all routes, number
of passengers and number of personnel at each airport

Chapter8 CapacityandAggregatePlanning

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CAPACITY AND

Effective Capacity a firm can expect to receive given its

Utilization: Actual output as a percent of design capacity.

Efficiency: Actual output as a percent of effective capacity.

Utilization = Actual output/Design capacity

Efficiency is the percent of effective capacity

Efficiency = Actual output/Effective capacity

2. Back ordering during high- demand periods

Sub-contracting Permits flexibility Loss of quality Applies mainly in

Counter- Fully utilizes May require skills Risky finding

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