IPPTChap012

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Chapter 12:
Capacity Planning
Operations
Management in the
Supply Chain:
Decisions and Cases,
6th edition
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 12 Outline
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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
12-2
Hierarchy of Capacity Decisions
Facilities
decisions
Facilities
decisions
Aggregate
planning
Aggregate
planning
Scheduling
Scheduling
0
6
12
18
24
Months
Planning Horizon
12-3
Definition of Capacity
Maximum output that can be produced
over a given period of time.
• Theoretical capacity
• Labor availability and overtime
• Physical assets, delayed maintenance, etc.
• Can be used for short-term demand spikes
• Effective capacity
• Should be used in planning
• Subtracts maintenance downtime, shift breaks,
absenteeism, etc.
12-4
Capacity Utilization
Utilization = Actual output
Capacity
x 100%
Utilization is seldom 100%.
Estimates capacity usage and ‘busyness.’
12-5
Facilities Decisions
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How much 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?
12-6
Facilities Strategy
Considers:
• Amount of capacity
• Size of capacity cushion
• Size of facilities
• Economies/diseconomies of scale
• Timing of facility decisions
• Preemptive, wait-and-see
• Types of facilities
• Product-focused, market-focused, process-focused, generalpurpose
12-7
Factors Affecting Facilities Strategy
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Predicted demand
Cost of facilities
Likely behavior of competitors
Business strategy
International considerations
12-8
How Much? Strategies for Capacity Cushion
• Capacity cushion = 100% – utilization
• Three strategies:
• Large cushion (e.g., make-to-order)
• Moderate cushion (cost of running out balanced with cost of
excess capacity)
• Small cushion (e.g., make-to-stock)
12-9
How Large? What is Optimum Facility 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
12-10
When? Timing of Facility Additions
• Preempt the competition
• Build capacity ahead of need
• Positive capacity cushion
• Wait-and-see strategy
• Small or negative capacity cushion
• Lower risk strategy
12-11
Where? Location of Facilities
• Quantitative Factors
• ROI, NPV
• Transportation, Taxes
• Lead times
• Qualitative Factors
• Language, norms
• Worker and customer attitudes
• Proximity to customers, suppliers, competitors
12-12
What Type? Types of Facilities
• Product-focused (55%)
• One family of products/services (e.g., computers)
• Market-focused (30%)
• Located near sales (e.g., electricity, bakeries)
• Process-focused (10%)
• Few technologies (e.g., computer chips, MRI center)
• General purpose (5%)
• Several products/services (e.g., furniture, banking)
12-13
Sales & Operations Planning (S&OP)
• Matching supply & demand over a medium time
range
• Time horizon of about 12 months
• Aggregated demand for one or few categories of
product. Demand may fluctuate or be uncertain.
• Possible to change both supply and demand
• Variety of management objectives
• Facilities are fixed (cannot be expanded or reduced)
12-14
Cross-Functional Nature of S&OP
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Budgeting: closely tied to aggregate plan
HR: workforce availability
Operations: capacity/inventory planning
Accounting: cost analysis
Finance: capital investments
Marketing: sales plan
12-15
Options for Managing (Influencing) Demand
• Pricing
• Advertising and promotion
• Backlogs or reservations (shift demand)
• Development of complementary offerings
• Seasonal products/service spread demand
• Lawn mower, snow blower
• Ski resort, mountain biking
12-16
Options for Managing (Influencing) Supply
• Hiring and layoff of employees
• Using overtime and undertime
• Using part-time or temporary labor
• Carrying inventory
• Outsourcing/subcontracting
• Cooperative arrangements
• Share capacity during demand peaks
• Airlines, hotels, utilities
12-17
Aggregate Planning Strategies
• Level strategy
• Constant work force
• Inventory as buffer
• Chase strategy
• Vary workforce
• Produce to demand
• Typical for services
12-18
Comparison of Chase and Level Strategies
(Table 12.1)
Level of labor skill required
Job discretion
Compensation rate
Training required per employee
Labor turnover
Hire-layoff cost per employee
Amount of supervision required
Type of budgeting and forecasting required
Chase
Strategy
Low
Low
Low
Low
High
Low
High
Short-run
Level
Strategy
High
High
High
High
Low
High
Low
Long-run
12-19
Aggregate Planning Costs
• Hiring and firing costs (Chase strategy)
• Overtime and undertime costs (Chase)
• Subcontracting costs (Chase)
• Part-time labor costs (Chase)
• Inventory-carrying costs (Level strategy)
• Cost of stockout or back order (Level)
12-20
Chapter 12 Summary
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•
•
•
•
•
•
•
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
12-21
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