5-1 Capacity Planning

CHAPTER
4

OPERATIONS PLANNING AND

CONTROL

4.1. Aggregate Production Planning

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Aggregate Production Planning

Aggregate planning
 Determine the quantity and timing of production
for the immediate future (usually 3 to 18 months ) by
adjusting the production rate, employment,
inventory, and other controllable variables.

Aggregate planning links long-range and short-range

planning activities.

Aggregate Planning Strategies

 Several different strategies have been employed to
assist in aggregate planning. Three ―pure strategies
are recognized.
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1. Vary production to match demand by changes in

employment (Chase demand strategy): This strategy
permits hiring and layoff of workers, use of overtime, and
subcontracting as required in each period. However, inventory
build-up is not used.

2. Produce at a constant rate and use inventories. (Level

production strategy): This strategy retains a stable work
force producing at a constant output rate. Inventory can be
accumulated to satisfy peak demands.

3. Produce with stable workforce but vary the utilization

rate (Stable work-force strategy): This strategy retains a
stable work force but permits overtime, part-time, and idle
time.
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 These controllable variables constitute pure strategies by which

fluctuations in demand and uncertainties in production activities can
be accommodated by using the following steps:
1. Vary the size or the workforce: Output is controlled by hiring or
laying off workers in proportion to changes in demand.

2. Vary the hours worked: Maintain the stable workforce, but permit
idle time when there is a slack and permit overtime (OT) when
demand is peak.

3. Vary inventory levels: Demand fluctuations can be met by large

amount of inventory.
4. Subcontract: Constant production rates can be met by using
subcontractors to provide extra capacity.
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 Aggregate Planning Guidelines

The following are the guidelines for aggregate planning:
1. Determine corporate policy regarding controllable
variables.
2. Use a good forecast as a basis for planning.
3. Plan in proper units of capacity.
4. Maintain the stable workforce.
5. Maintain needed control over inventories.
6. Maintain flexibility to change.
7. Respond to demand in a controlled manner.
8. Evaluate planning on a regular base.
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Planning Horizon

Aggregate planning: Intermediate-range

capacity planning, usually covering 3 to 18
months.
Long range

Intermediate
range
Short
range

Now 3 months 18 months

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Aggregate Planning Strategies

 Proactive

 Alter demand to match capacity

 Reactive

 Alter capacity to match demand

 Mixed

 Some of each
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APS: Demand Options

 Demand management is proactive strategy.
1. Influencing demand
 Using advertising or promotion to increase
demand in low periods
 Using pricing differentials to shift demand
from peak periods to off-peak periods
 Attempt to shift demand to slow periods
 May not be sufficient to balance demand and
capacity
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APS: Demand Options

2. Back ordering during high- demand periods
 Requires customers to wait for an order without
loss of goodwill or the order
 Orders are taken in one period and deliveries
promised for a later period
 The success of this approach depends on how
willing customers are to wait for delivery
 Most effective when there are few if any
substitutes for the product or service
 Often results in lost sales, disappointed
customers, and perhaps additional paperwork.
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APS: Demand Options

3. Counter seasonal product and service
mixing/New demand
 Develop a product mix of counter
seasonal items
 May lead to products or services
outside the company’s areas of
expertise
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Capacity/Supply Options
1. Changing inventory levels
 Increase inventory in low demand periods
to meet high demand in the future
 Increases costs associated with storage,
insurance, handling, obsolescence, and
capital investment 15% to 40%
 Shortages can mean lost sales due to long
lead times and poor customer service
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Capacity/Supply Options
2. Varying workforce size by hiring or
layoffs
 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
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Capacity/Supply Options
3. Varying production rate through
overtime or idle time
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
5-14 Capacity Planning

Capacity/Supply Options
4. Subcontracting
 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
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Techniques for Aggregate Planning

 General procedure:
1. Determine demand for each period
2. Determinecapacities (regular time, overtime,
subcontracting) for each period
3. Identify company or departmental policies that are pertinent
4. Determine units costs
5. Develop alternative plans and costs
6. Selectthe best plan that satisfies objectives. Otherwise
return to step 5.
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Techniques for Aggregate Planning

Techniques for Aggregate Planning:
1.Graphical Techniques/Trial-and-Error Techniques

2.Mathematical Techniques-linear programming

Graphical Techniques
 Popular techniques
 Easy to understand and use
 Trial-and-error approaches that do not guarantee
an optimal solution
 Require only limited computations
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Mathematical Techniques
1. Linear programming: Methods for obtaining
optimal solutions to problems involving allocation
of scarce resources in terms of cost minimization.
2. Linear decision rule: Optimizing technique that
seeks to minimize combined costs, using a set of
cost-approximating functions to obtain a single
quadratic equation.
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Master Scheduling
 The Master Production Schedule (MPS) formalizes the
production plan and translates it into specific end-item
requirements over a short to intermediate planning
horizon.
 The MPS essentially drives the entire production and
inventory system.
 The major inputs to the master production schedule are:

1) Forecasts of demand, e.g., of end items and service

parts.
2) Customer orders, i.e., including any warehouse and
interplant needs.
3) Inventory on-hand from the previous period.
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Aggregate Planning in Services

 Services occur when they are rendered
 Demand for service can be difficult to
predict
 Capacity availability can be difficult to
predict
 Labor flexibility can be an advantage in
services
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Aggregate Planning in Services

 Controlling the cost of labor is critical
 Accurate scheduling of labor-hours to
assure quick response to customer
demand
 An on-call labor resource to cover
unexpected demand
 Flexibility of individual worker skills
 Flexibility in rate of output or hours of
work
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Yield Management
 Yield management is the process of allocating
scarce resources to customers at prices that
maximize the yield to the company.
 Although we normally assume that companies
charge all customers the same price for a product or
service, sometimes that is not the case.
 Think of the airlines as one such organization.

 All passengers reach the destination together, but

the ticket prices for the flight vary considerably.
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Yield Management includes:

 The application of pricing strategies to allocate capacity
among various categories of demand
 Allocating resources to customers at prices that will
maximize yield or revenue

1. Service or product can be sold in advance of consumption

2. Demand fluctuates
3. Capacity is relatively fixed
4. Demand can be segmented
5. Variable costs are low and fixed costs are high
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Operations Scheduling
 Scheduling: Establishing the timing
of the use of equipment, facilities and
human activities in an organization.
 Effective scheduling can yield
 Cost savings
 Increases in productivity
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Strategic Importance of Scheduling

 Effective and efficient scheduling can be
a competitive advantage
 Faster movement of goods through a
facility means better use of assets and
lower costs
 Additional capacity resulting from faster
throughput improves customer service
through faster delivery
 Good schedules result in more
dependable deliveries
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Forward and Backward Scheduling

 Forward scheduling፡ Schedule that determines

the earliest possible completion date for a job.

 With forward scheduling, processing starts

immediately when a job is received, regardless of
its due date.

 Each job activity is scheduled for completion as

soon as possible, which allows you to determine the
job‘s earliest possible completion date.
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Backward scheduling፡
 It is a scheduling method that determines when the job
must be started to be done on the due date.

 With backward scheduling, you begin scheduling the

job‘s last activity so that the job is finished right on the
due date.

 To do this, you start with the due date and work

backward, calculating when to start the last activity,
when to start the next-to-last activity, and so forth.

 Backward scheduling shows you how late the job can

be started and still be finished on time.
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 When you are using backward scheduling and

forward scheduling together, a difference between
the start times of the first activity indicates slack in
the schedule.

 Slack means that you can start a job immediately

but you do not have to do so.

 You can start it any time up to the start time in your

backward schedule and still meet the due date.
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Forward and Backward Scheduling

 Forward scheduling starts as soon as the
requirements are known
 Produces a feasible schedule though it may
not meet due dates
 Frequently results in buildup of work-in-
process inventory

Due
Now Date
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Forward and Backward Scheduling

 Backward scheduling begins with the due
date and schedules the final operation first
 Schedule is produced by working backwards
though the processes
 Resources may not be available to
accomplish the schedule
 Often these approaches are combined to
develop a trade-off between a feasible
schedule and customer due dates

Due
Now Date
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Scheduling Issues
 Scheduling deals with the timing of
operations
 The task is the allocation and
prioritization of demand
 Significant issues are
The type of scheduling, forward or
backward
The criteria for priorities
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Scheduling Criteria
1. Minimize completion time
2. Maximize utilization of facilities
3. Minimize work-in-process (WIP)
inventory
4. Minimize customer waiting time
Optimize the use of resources so that
production objectives are met
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High-Volume Systems

 Flow system: High-volume system with

Standardized equipment and activities
 Flow-shop scheduling: Scheduling for high-
volume flow system

Work Center #1 Work Center #2 Output

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High-Volume Success Factors

 Process and product design
 Preventive maintenance
 Rapid repair when breakdown occurs
 Optimal product mixes
 Minimization of quality problems
 Reliability and timing of supplies
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Scheduling Intermediate-Volume Systems

 Outputs are between standardized high-
volume systems and made-to-order job shops
 Run size, timing, and sequence of jobs.
 Low-Volume System
 Scheduling for low-volume systems with many
variations in requirements.
 Products are made to order and orders usually
differ considerably in terms of processing
requirements, materials needed, processing time
and processing sequence and setups.
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Loading
 Loading - assignment of jobs to process
centers
 Infiniteloading: Refers to jobs are assigned
to work centers with out regard to the capacity
of the work centers.
 Finite loading: Refers to jobs are assigned to
work centers taking into account the work
center capacity and job processing times.
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Assignment Method/model
 A special class of linear
programming models that assign
tasks or jobs to resources
 Finds optimal assignment of tasks
and resources
 Objective is to minimize cost or time
 Only one job (or worker) is assigned
to one machine (or project)
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Assignment Model: Hungarian Method

1. Row reduction: subtract the smallest number in each row
from every number in the row
a. Enter the result in a new table

2. Column reduction: subtract the smallest number in each

column from every number in the column
a. Enter the result in a new table

3. Test whether an optimum assignment can be made

a. Determine the minimum number of lines needed to
cross out all zeros
b. If the number of lines equals the number of rows, an
optimum assignment is possible. Go to step 6
c. Else, go to step 4
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Hungarian Method (Cont’d)

4. If the number of lines is less than the number of rows, modify the
table:
a. Subtract the smallest number from every uncovered number in
the table
b. Add the smallest uncovered number to the numbers at
intersections of cross-out lines
c. Numbers crossed out but not at intersections of cross-out lines
carry over unchanged to the next table
5. Repeat steps 3 and 4 until an optimal table is obtained
6. Make the assignments
a. Begin with rows or columns with only one zero

b. Match items that have zeros, using only one match for each row
and each column
c. Eliminate both the row and the column after the match
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Example: Hungarian Method

 Determine the optimum assignment of jobs to
workers for the following data:

Worker

A B C D

1 8 6 2 4

2 6 7 11 10
Job
3 3 5 7 6

4 5 10 12 9
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Example: Hungarian Method (contd.)

Worker
Row
A B C D minimum
Subtract the smallest
1 8 6 2 4 2 number in each row from
2 6 7 11 10 6 every number in the row
Job
3 3 5 7 6 3
4 5 10 12 9 5

Worker
A B C D
1 6 4 0 2
2 0 1 5 4
Job
3 0 2 4 3
4 0 5 7 4
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Example: Hungarian Method (contd.)

Worker
A B C D
1 6 4 0 2 Subtract the smallest
2 0 1 5 4 number in each column
Job from every number in the
3 0 2 4 3 column
4 0 5 7 4
Column min. 0 1 0 2

Worker
A B C D
1 6 3 0 0
2 0 0 5 2
Job
3 0 1 4 1
4 0 4 7 2
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Example: Hungarian Method (cont’d)

Worker
A B C D
Determine the minimum
1 6 3 0 0
number of lines needed to
2 0 0 5 2 cross out all zeros. (Try to
Job cross out as many zeros as
3 0 1 4 1
possible when drawing lines
4 0 4 7 2

Since only three lines are needed to cross out all

zeros and the table has four rows, this is not the
optimum. Note: the smallest uncovered value is 1
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Example: Hungarian Method (cont’d)

Worker
A B C D
Subtract the smallest
1 6 3 0 0
uncovered value from every
2 0 0 5 2 uncovered number, and add
Job it to the values at the
3 0 1 4 1
intersection of covering
4 0 4 7 2 lines.

Worker
A B C D
1 7 3 0 0
2 1 0 5 2
Job
3 0 0 3 0
4 0 3 6 1
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Example: Hungarian Method (cont’d)

Worker
A B C D
1 7 3 0 0 Determine the minimum
number of lines needed to
2 1 0 5 2 cross out all zeros. (Try to
Job
3 0 0 3 0 cross out as many zeros as
possible when drawing lines
4 0 3 6 1

Since four lines are needed to cross out all zeros and
the table has four rows, this an optimal assignment
can be made
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Example: Hungarian Method (cont’d)

Worker
A B C D
1 7 3 0 0 Make assignments: Start
with rows and columns with
2 1 0 5 2 only one zero. Match jobs
Job
3 0 0 3 0 with machines that have a
zero cost
4 0 3 6 1

Assignment Cost
2-B $7
4-A $5
1-C $2
3-D $6
Total $20
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Sequencing
 Sequencing: Determine the order in which
jobs at a work center will be processed.
 Workstation: An area where one person
works, usually with special equipment, on a
specialized job.
 Priority rules: Simple heuristics used to select
the order in which jobs will be processed.
 Job time: Time needed for setup and
processing of a job.
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Priority Rules
 FCFS - first come, first served
 SPT - shortest processing time
 EDD - earliest due date
 CR - critical ratio
 S/O - slack per operation
 Rush – emergency
 LPT- Longest Processing Time
Top Priority
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 Job flow time: this is the length of time a job is at

a particular work station or work center.

 The average flow time for a group of jobs is equal

to the total flow time for the jobs divided by the
number of jobs.

 Job lateness: is the length of time the job

completion date is expected to exceed the date the
job was due or promised to a customer.
 It is the difference between the actual completion
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 If we only record differences for jobs with the

completion times that exceed due dates and assign
zeros to jobs that are early, the term we use refer to
that is job tardiness.
 Make span: is the total time needed to complete a
group of jobs from the beginning of the first job to
the completion of the last job.
5-51 Capacity Planning

 Example: processing time (including set up times)

and due dates for six jobs waiting to be processed
at work center are given in the following table.

 Determine the sequence of jobs, average flow

time, average tardiness and average number of
jobs at the work center for each of these rules.

A. FCFS B. SPT C. EDD D. CR

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..
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Scheduling Difficulties
 Variability in
 Setup times

 Processing times

 Interruptions

 Changes in the set of jobs

 No method for identifying optimal schedule

 Scheduling is not an exact science

 Ongoing task for a manager

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Minimizing Scheduling Difficulties

 Set realistic due dates
 Focus on bottleneck operations
 Consider lot splitting of large
jobs
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Scheduling Service Operations

 Appointment systems
 Controls customer arrivals for service
 Reservation systems

 Estimates demand for service

 Scheduling the workforce

 Manages capacity for service

 Scheduling multiple resources

 Coordinates use of more than one resource

5-62 Capacity Planning

Service Operation Problems

 Cannot store or inventory services
 Customer service requests are random

 Scheduling service involves

 Customers
 Workforce
 Equipment
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Thank You!!!