Capacity and
Aggregate
Planning
Aggregate Planning
• The process of planning the quantity and
timing of output over the intermediate
range (3-18 months) by adjusting
production rate, employment, inventory
• Master Production Schedule: formalizes
the production plan and translates it into
specific end item requirements over the
short to intermediate horizon
Capacity Planning
• The process of determining the
amount of capacity required to
produce in the future. May be at the
aggregate or product line level
• Master Production Schedule anticipated build schedule
• Time horizon must exceed lead times
for materials
Capacity Planning
• Look at lead times, queue times, set up times, run
times, wait times, move times
• Resource availability
• Material and capacity - should be in synch
• driven by dispatch list - listing of manufacturing
orders in priority sequence - ties to layout
planning
• load profiles - capacity of each section
Capacity Planning
• Rough Cut Capacity Planning process of converting the master
production schedule into
requirements for key resources
• capacity requirements plan - timephased display of present and future
capacity required on all resources
based on planned and released
orders
Capacity Planning
• Capacity Requirements Planning
(CRP) - process of determining in
detail the amount of labor and
machine resources required to meet
production plan
• RCCP may indicate sufficient
capacity but the CRP may indicate
insufficient capacity during specific
time periods
Theory of Constraints
• Every system has a bottle neck
• capacity of the system is constrained
by the capacity of the bottle neck
• increasing capacity at other than
bottle neck operations does not
increase the overall capacity of the
system
• inertia of change can create new
bottle necks
Capacity Planning
 Establishes overall level of
productive resources
 Affects lead time
responsiveness, cost &
competitiveness
 Determines when and how
much to increase capacity
Capacity Expansion
 Volume & certainty of anticipated
demand
 Strategic objectives for growth
 Costs of expansion & operation
 Incremental or one-step
expansion
Capacity Expansion Strategies
(a) Capacity lead strategy
(b) Capacity lag strategy
Capacity
Demand
Units
Units
Demand
Capacity
Time
Time
(c) Average capacity strategy
(d) Incremental vs. one-step expansion
One-step expansion
Capacity
Units
Units
Demand
Incremental
expansion
Demand
Figure 9.1
Time
Time
Lead
• Advantages
• anticipates
demand
• first to market
• lure from
competitors
• Disadvantages
• product problems
• product
acceptability
• consumers
unfamiliar with
product
• R&D costs
Lag
• Advantages
• established
demand for
product
• less R&D
• growth market
• Follower strategy
• when to enter
market - downside
if too late in life
cycle
• loss of customers
to first to market
Assumes customers lost to Lead strategy
will return - Western Sizzlin’
Average Capacity
•
•
•
•
Advantages
level production
stable work force
excess capacity
potential
• Chasing half the
time
• market timing
• excess product
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
 also called Sales and Operations Planning
Sales and Operations
Planning (S&OP)
• Brings together all plans for
business
• performed at least once a month
Inputs and Outputs to APP
Capacity
Constraints
Demand
Forecasts
Size of
Workforce
Figure 9.3
Strategic
Objectives
Aggregate
Production
Planning
Production
per month
(in units or $)
Inventory
Levels
Company
Policies
Financial
Constraints
Units or dollars
subcontracted,
backordered, or lost
Adjusting Capacity to
Meet Demand
1. Producing at a constant rate and using inventory
to absorb fluctuations in demand (level
production)
2. Hiring and firing workers to match demand (chase
demand)
3. Maintaining resources for high demand levels
4. Increase or decrease working hours (overtime
and undertime)
5. Subcontracting work to other firms
6. Using part-time workers
7. Providing the service or product at a later time
period (backordering)
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
Strategy Details
 Overtime & undertime - common when
demand fluctuations are not extreme
 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
Level Production
Demand
Units
Production
Time
Figure 9.4 (a)
Level Production
• Advantages
• stable work force
• no overtime or
additional hiring
costs
•
•
•
•
•
Disadvantages
inventory
obsolescence
carrying costs
depends on real
good forecasts
Chase Demand
Demand
Units
Production
Time
Figure 9.4 (b)
Chase Strategy
• Advantages
• less inventory
• less chance for
obsolete
merchandise
• Disadvantages
• Never a stable
production level
• work force
instability
• hiring/firing costs
• always a priority
Demand Management
 Shift demand into other periods
 Incentives, sales promotions,
advertising campaigns
 Offer product or services with
countercyclical demand patterns
 Partnering with suppliers to reduce
information distortion along the
supply chain
Demand Distortion along
the Supply Chain
Available to Promise -ATP
• Why is it important?
• What is its use?
The uncommitted portion of a company’s
inventory and planned production maintained
in the master schedule to support customer
ordering promising.
Portion of on hand inventory and planned
production not already tied to a customer order
Available-to-Promise
Product
Request
Yes
Is the product
available at
this location?
No
Availableto-promise
Yes
No
Allocate
inventory
Yes
Figure 9.6
Is an alternative
product available
at this location?
Is this product
available at a
different
location?
No
Is an alternative
product available
at an alternate
location?
Yes
No
Allocate
inventory
Capable-topromise date
Is the customer
willing to wait for
the product?
No
Lose sale
Availableto-promise
Yes
Revise master
schedule
Trigger production
Aggregate Planning
for Services
Most services can’t be inventoried
Demand for services is difficult to predict
Capacity is also difficult to predict
Service capacity must be provided at the
appropriate place and time
5. Labor is usually the most constraining
resource for services
1.
2.
3.
4.
Chapter 12
Inventory
Management
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Why is Inventory Important to
Operations Management?
• The average manufacturing
organization spends 53.2% of every
sales dollar on raw materials,
components, and maintenance repair
parts
• Inventory Control – how many parts,
pieces, components, raw materials
and finished goods
Inventory Conflict
• Accounting – zero inventory
• Production – surplus inventory or
“just in case” safety stocks
• Marketing – full warehouses of
finished product
• Purchasing – caught in the middle
trying to please 3 masters
Inventory
 Stock of items held to meet
future demand
 Insurance against stock out
 Coverage for inefficiencies in
systems
 Inventory management answers
two questions
 How much to order
 When to order
Types of Inventory
 Raw materials
 Purchased parts and supplies
 Labor
 In-process (partially completed) products
 Component parts
 Working capital
 Tools, machinery, and equipment
 Safety stock
 Just-in-case
Reasons to Hold
Inventory
 Meet unexpected demand
 Smooth seasonal or cyclical demand
 Meet variations in customer demand
 Take advantage of price discounts
 Hedge against price increases
 Quantity discounts
Inventory Hides Problems
Two Forms of Demand
 Dependent
 Items used to produce final products
 Easier to forecast
 Independent
 Items demanded by external customers
 Example – repair parts
Aggregate Inventory
Management
1.
2.
3.
4.
How much do we have now?
How much do we want?
What will be the output?
What input must we get?
•
Correctly answering the question about
when to order is far more important than
determining how much to order.
Inventory Costs
 Carrying Cost
 Cost of holding an item in inventory
 As high as 25-35% of value
 Insurance, maintenance, physical
inventory, pilferage, obsolete,
damaged, lost
 Ordering Cost
 Cost of replenishing inventory
 Shortage Cost
Inventory Control
Systems
 Continuous system
 Constant amount ordered when
inventory declines to predetermined
level
 variable amount ordered when
inventory reaches Reorder Point
 Periodic system (fixed-time-period)
 Order placed for variable amount
after fixed passage of time
ABC Classification
System
 Demand volume and value of items vary
 Classify inventory into 3 categories,
typically on the basis of the dollar value
to the firm
CLASS
A
B
C
PERCENTAGE
OF UNITS
5 - 15
30
50 - 60
PERCENTAGE
OF DOLLARS
70 - 80
15
5 - 10
ABC Classification
PART
1
2
3
4
5
6
7
8
9
10
UNIT COST
ANNUAL USAGE
$ 60
350
30
80
30
20
10
320
510
20
90
40
130
60
100
180
170
50
60
120
Example 10.1
ABC Classification
PART
9
8
2
1
4
3
6
5
10
7
TOTAL
PART
VALUE
$30,600
1
16,000
2
14,000
3
5,400
4
4,800
5
3,900
3,600
6
3,000
7
2,400
8
1,700
9
$85,400
10
% OF TOTAL % OF TOTAL
UNIT
ANNUAL
USAGE
VALUECOSTQUANTITY
% CUMMULATIVE
35.9
$ 60
18.7
350
16.4
30
6.3
5.680
4.630
4.220
3.510
2.8
320
2.0
510
20
6.0
5.0
4.0
9.0
6.0
10.0
18.0
13.0
12.0
17.0
90
40
130
60
100
180
170
50
60
120
6.0
11.0
15.0
24.0
30.0
40.0
58.0
71.0
83.0
100.0
Example 10.1
ABC Classification
PART
9
8
2
1
4
3
6
5
10
7
TOTAL
PART
VALUE
$30,600
1
16,000
2
14,000
3
5,400
4
4,800
5
3,900
3,600
6
3,000
7
2,400
8
1,700
9
$85,400
10
% OF TOTAL % OF TOTAL
UNIT
ANNUAL
USAGE
VALUECOSTQUANTITY
% CUMMULATIVE
35.9
$ 60
18.7
350
16.4
30
6.3
5.680
4.630
4.220
3.510
2.8
320
2.0
510
20
6.0
5.0
4.0
9.0
6.0
10.0
18.0
13.0
12.0
17.0
90
A
40
130
60
B
100
180
170
C
50
60
120
6.0
11.0
15.0
24.0
30.0
40.0
58.0
71.0
83.0
100.0
Example 10.1
Why ABC?
•
•
•
•
Inventory controls
Security controls
Monetary constraints
Storage locations
Another Form of ABC
• Not monetary based
• Use annual demand quantities
• Used to determine storage locations
in warehouse/distribution center
• Establish golden zones in the
warehouse for items that are fast
moving, at ergonometric picking
levels
• Cross Docking
Economic Order
Quantity
Assumptions of Basic
EOQ Model
 Demand is known with certainty
and is constant over time
 No shortages are allowed
 Lead time for the receipt of orders
is constant
 The order quantity is received all
at once
No reason to use EOQ if:
• Customer specifies quantity
• Production run is not limited by
equipment constraints
• Product shelf life is short
• Tool/die life limits production runs
• Raw material batches limit order
quantity
The Inventory Order Cycle
Order quantity, Q
Inventory Level
Demand
rate
Reorder point, R
0
Lead
time
Order Order
placed receipt
Lead
time
Order Order
placed receipt
Time
EOQ Cost Model
Co - cost of placing order
Cc - annual per-unit carrying cost
D - annual demand
Q - order quantity
Co D
Annual ordering cost =
Q
CcQ
Annual carrying cost =
2
CoD
CcQ
Total cost =
+
Q
2
EOQ Cost Model
Annual
cost ($)
Total Cost
Slope = 0
CcQ
Carrying Cost =
2
Minimum
total cost
cd
Ordering Cost = Q
Optimal order
Qopt
Order Quantity, Q
EOQ Formula
2CoD
EOQ =
Cc
Co = Ordering costs
D= Annual Demand
Cc = Carrying Costs
Cost per order can increase
if size of orders decreases
Most companies have no idea
of actual carrying costs
When to Order
Reorder Point is the level of inventory
at which a new order is placed
R = dL
where
d = demand rate per period
L = lead time
Forms of Reorder Points
•
•
•
•
•
•
Fixed
Variable
Two Bin
Card
Judgmental
Projected shortfall
Why Safety Stock
•
•
•
•
Accurate Demand Forecast
Length of Lead Time
Size of order quantities
Service level
Safety Stocks
 Safety stock
 buffer added to on hand inventory during
lead time
 Stockout
 an inventory shortage
 Service level
 probability that the inventory available
during lead time will meet demand
Inventory Control
•
•
•
•
Cyclic Inventory
Annual Inventory
Periodic Inventory
Sensitive Item Inventory
Next Week
• Chapter 15
• Reverse Logistics – “The Forklifts
Have Nothing to Do!”