MBA 8452 Systems and Operations Management
Strategic Capacity
Planning & Aggregate
Planning
Introduction to Operations Management/
Operations Strategy
Process Analysis
and Design
Project
Management
Process
Analysis
Planning for Production
Process Control
and Improvement
Capacity Management
Quality
Management
Aggregate Planning
Job Design
Just in Time
Manufacturing
Layout/
Assembly Line Balancing
Services
Statistical
Process Control
Scheduling
Inventory Control
Supply Chain
Management
Waiting Line Analysis
2
Objective: Capacity Management

Overview of Capacity Management


Best Operating Level


What does capacity focus mean
Capacity Requirements


Be able to describe the best operating level
Capacity Focus


Be able to explain why capacity management is important
Calculate capacity requirements and compare to available
capacity
Strategies for Meeting Demand

Be able to explain the concept of Chase and Level Strategies
3
Major Operations Planning Activities
Overview
Long
Range
Process Planning
Strategic Capacity Planning
Aggregate Planning
Medium
Range
Manufacturing
Master Production Scheduling
Services
Material Requirements Planning
Order Scheduling
Short
Range
Weekly Workforce &
Customer Scheduling
Daily Workforce &
Customer Scheduling
4
“You can’t build it if you don’t have the capacity”
Strategic Capacity Planning

Planning of the overall capacity level of
capital-intensive resources—facilities,
equipment, and overall labor force size
—that supports the company’s longrange competitive strategy.
5
Capacity Planning
Basic Questions

What kind of capacity is needed?

How much is needed?

When is needed?
6
What Is Capacity?

The amount of output that a system is
capable of achieving over a specific
period of time



has a time frame
can be also measured in terms of resource
inputs
cannot be stored for later use
7
Capacity Planning Concept
Best Operating Level

Design capacity for which average unit
cost is at the minimum
Average
unit cost
of output
Underutilization
Overutilization
Best Operating
Level
Volume
8
Capacity Planning Concept
Capacity Utilization
Capacity used
Utilizati on 
Best operating level

Capacity used


rate of output actually achieved
Best operating level

design capacity
9
Capacity Planning Concept
Example - Capacity Utilization

Design capacity = 50 trucks/day

Actual output = 36 trucks/day

Utilization = ?
Solution:
Capacity used
36 trucks/da y
Utilizatio n 
=
 0.72
Best operating level 50 trucks/da y
10
Economies & Diseconomies of Scale
Economies of Scale and the Experience Curve working
Average
unit cost
of output
100-unit
plant
200-unit
plant
300-unit
plant
400-unit
plant
Diseconomies of Scale start working
Volume
11
Capacity Planning Concept
The Experience Curve
Cost or
price
per unit
Total accumulated production of units
12
Capacity Expansion Issues

Maintaining system balance
Inputs
Stage 1
Stage 2
Stage 3
200/hr
50/hr
(bottleneck)
200/hr
Outputs

External sources of capacity

Timing and frequency of capacity expansions
Volume
Timing
Strategy
Volume
Time
Capacity leads demand
Time
Capacity lags demand
13
Capacity Expansion Issues
Frequency of Capacity Expansion
14
Determining Capacity Requirements



Forecast sales within each individual
product line
Calculate equipment and labor
requirements to meet the forecasts
Project equipment and labor availability
over the planning horizon
15
Determining Capacity Requirements
Example
A manufacturer produces two lines of ketchup, FancyFine
and a Generic line. Each is sold in small and family-size
plastic bottles. Are we really producing two different types of ketchup
from the standpoint of capacity requirements?
No!
The following table shows forecast demand for the next
four years.
Year:
FancyFine
Small (000s)
Family (000s)
Generic
Small (000s)
Family (000s)
1
2
3
4
50
35
60
50
80
70
100
90
100
80
110
90
120
100
140
110
16
Determining Capacity Requirements
Example (cont.)
Currently, three 100,000-units-per-year machines are
available for small-bottle production. Two operators
required per machine.
Two 120,000-units-per-year machines are available for
family-sized-bottle production. Three operators required
per machine.
Total combined demand forecasts
Year:
Small (000s)
Family (000s)
1
150
115
2
170
140
3
200
170
4
240
200
17
Capacity Requirements
Example--Calculation
Year:
Small (000s)
Family (000s)
Small
Family-size
Small
Percent capacity used
Machine requirement
Labor requirement
Family-size
Percent capacity used
Machine requirement
Labor requirement
1
150
115
2
170
140
3
200
170
4
240
200
Mach. Cap.
Mach. Cap.
300,000
240,000
Labor
Labor
6
6
50.00%
1.50
3.00
47.92%
0.96
2.88
18
Capacity Requirements
Example--Projection
Year:
Small (000s)
Family (000s)
Small
Family-size
Small
Percent capacity used
Machine requirement
Labor requirement
Family-size
Percent capacity used
Machine requirement
Labor requirement
1
150
115
2
170
140
3
200
170
4
240
200
Mach. Cap.
Mach. Cap.
300,000
240,000
Labor
Labor
6
6
50.00%
1.50
3.00
56.67%
1.70
3.40
66.67%
2.00
4.00
80.00%
2.40
4.80
47.92%
0.96
2.88
58.33%
1.17
3.50
70.83%
1.42
4.25
83.33%
1.67
5.00
19
Planning Service Capacity

Time –

Location –

Volatility of Demand
service is perishable and must be
consumed when it is produced
people are not willing to travel
long distances to obtain a service so they
must be located near the customer
– demand for
services is subject to change
20
Capacity Utilization
& Service Quality



Best operating point is near 70% of
capacity
From 70% to 100% of service capacity,
what might happen to service quality?
Why?
Context specific tradeoff
21
Aggregate Planning (Chap. 12)



Matches market demand to company
resources
Medium-range: 6-18 months
Goal: Specify the optimal combination of
production rate
 workforce level
 inventory on hand

22
Inputs and Outputs to
Aggregate Production Planning
Capacity
Constraints
Demand
Forecasts
Size of
Workforce
Strategic
Objectives
Aggregate
Production
Planning
Production
per month
(in units or $)
Inventory
Levels
Company
Policies
Financial
Constraints
Units or dollars
subcontracted,
backordered, or
lost
23
Strategies for Meeting Demand



Level production - produce at constant rate &
use inventory as needed to meet demand
Chase demand - change workforce levels so
that production matches demand
Subcontracting - useful if supplier meets
quality & time requirements
24
Level Production
Demand
Production
Units
Time
25
Chase Demand
Demand
Units
Production
Time
26