More Related Content Similar to Chapter-8 Capacity Planning, Aggregate Planning and Scheduling.pptx (20) More from amanuel236786 (20) Chapter-8 Capacity Planning, Aggregate Planning and Scheduling.pptx1. Operations Management For Competitive Advantage
©The McGraw-Hill Companies, Inc., 2001
CHASE AQUILANO JACOBS
ninth edition 1
CHAPTER 8
STRATEGIC CAPACITY
MANAGEMENT, AGGREGATE
PLANNING AND SCHEDULING
Kahsu Mebrahtu (Asst. Prof.)
Mekelle University
College of Business and Economics
Department of Management
Postgraduate Program (MBA)
ninth edition
2. Operations Management For Competitive Advantage
©The McGraw-Hill Companies, Inc., 2001
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ninth edition 2
Part I: Strategic Capacity Planning
Strategic Capacity Planning Defined
Capacity Utilization & Best Operating Level
Economies & Diseconomies of Scale
Capacity Focus, Flexibility & Planning
Determining Capacity Requirements
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Strategic Capacity Planning
Defined
Capacity can be defined as the ability to hold, receive,
store, or accommodate.
Capacity is the maximum capability to produce .
It can be measured as units of output, amount of birr, hour
of work, or number of customers processed over a specified
time
Or the amount of output that a system is capable achieving
over a specific period of time .
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Examples
The number of automobiles produced in a
shift
The number of customers served in
restaurant in a given time
The number of students in a class etc.
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Time Durations for capacity Planning
o Long range planning: greater than one year.
Eg. Building, equipment, or facilities
oIntermediate range planning: monthly or
quarterly plans for the next 6 to 18 months .
Eg. Hiring, layoffs , new tools , subcontracting
oShort Range Planning: less than one month
Eg. Weekly or daily scheduling process
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Capacity Planning
Capacity planning- is the long-term strategic
decision that establishes a firm’s overall
level resources
Strategic capacity planning is an approach
for determining the overall capacity level of
capital intensive resources, including
facilities, equipment, and overall labor force
size.
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Copyright 2006 John Wiley & Sons, Inc. 6-7
Capacity Expansion Strategies
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Type of capacity
1. Rated capacity(Designed capacity) –the
theoretical output that could be attained if a
process were operated at full speed without
interruption, exceptions or downtime .
2. Effective capacity- takes into account the
efficiency with which a particular product or
customer can be processed, and the
utilization of the scheduled hours or work.
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Effective daily capacity=(no. of machines or
workers ) X (hours per shift)x(no. of shifts)
x(utilization)x(efficiency)
Utilization-refers to the percentage of
available working time that a worker actually
works or a machine actually runs.
Efficiency-refers to how well a machine or
worker performs compared to a standard
output level.
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Capacity Utilization
Capacity used
– rate of output actually achieved
Best operating level
– capacity for which the process was designed ( or
the volume of output at which average unit cost is
minimized)
Capacity utilization rate = Capacity used x 100
Best operating level
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Best Operating Level
Underutilization
Best Operating
Level
Average
unit cost
of output
Volume
Overutilization
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Example of Capacity Utilization
During one week of production, a plant
produced 83 units of a product. Its historic
highest or best utilization recorded was 120
units per week. What is this plant’s capacity
utilization rate?
Answer:
Capacity utilization rate = Capacity used .
Best operating level
= 83/120
=0.69 or 69%
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Capacity Planning-
Frequency of Capacity Additions
External Sources of Capacity
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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.
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Example of Capacity Requirements
A manufacturer produces two lines of mustard,
Fancy Fine and Generic line. Each is sold in
small and family-size plastic bottles.
The following table shows forecast demand for
the next four years.
Year: 1 2 3 4
FancyFine
Small (000s) 50 60 80 100
Family (000s) 35 50 70 90
Generic
Small (000s) 100 110 120 140
Family (000s) 80 90 100 110
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Example of Capacity Requirements:
The Product from a Capacity Viewpoint
Question: Are we really producing two
different types of mustards from the
standpoint of capacity requirements?
Answer: No, it’s the same product just
packaged differently.
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Example of Capacity Requirements:
Equipment and Labor Requirements
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
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.
18. Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6
Family-size Mach. Cap. 240,000 Labor 6
Small
Percent capacity used 50.00%
Machine requirement 1.50
Labor requirement 3.00
Family-size
Percent capacity used 47.92%
Machine requirement 0.96
Labor requirement 2.88
Question: What are the Year 1 values for capacity, machine, and labor?
150,000/300,000=50% At 1 machine for 100,000, it
takes 1.5 machines for 150,000
At 2 operators for
100,000, it takes 3
operators for 150,000
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18
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Cont…
For Small size: Year I
• Percent capacity used=Actual capacity/Designed capacity
= 150,000/300000 =50%
•Machine Requirement = Actual capacity/Designed
capacity per year machines
= 150,000units/100,000 units/machine
= 1.5 machines
• Labor requirement= Number of operators*Actual
capacity/Designed capacity per machine
= 2 operators*150,000 units/100,000units
= 3 operators or machine
requirement*number of operators=1.5*2=3 oper.
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Cont…
For family size : Year I
• Percent capacity used=Actual capacity/Designed capacity
= 115,000/240,000 =47.92%
•Machine Requirement = Actual capacity/Designed
capacity per year machines
= 115,000units/120,000 units/machine
= 0.96 machines
• Labor requirement=machine requirement*number
of operators
= .96machines*3 operators
= 2.88 operators
21. Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6
Family-size Mach. Cap. 240,000 Labor 6
Small
Percent capacity used 50.00%
Machine requirement 1.50
Labor requirement 3.00
Family-size
Percent capacity used 47.92%
Machine requirement 0.96
Labor requirement 2.88
Question: What are the values for columns 2, 3 and 4 in the table below?
56.67%
1.70
3.40
58.33%
1.17
3.50
66.67%
2.00
4.00
70.83%
1.42
4.25
80.00%
2.40
4.80
83.33%
1.67
5.00
21
©The McGraw-Hill Companies, Inc., 2001
22. Operations Management For Competitive Advantage
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Home work/Reading Assignment
•Read and understand the different
techniques of demand forecasting
•Read about the use of decision tree as a
method of capacity choice
23. Operations Management For Competitive Advantage
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ninth edition 23
PART II: Aggregate Planning
Operations Planning Overview
Aggregate production planning
Examples: Chase and Level strategies
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What is Aggregate Planning ?
• Aggregate planning is an attempt to
balance capacity and demand in ways that
costs are minimized .
• The term “aggregate “ is used because
planning at this level includes all resources ,
e.g product line or product family .
•The aggregate resources could be total
number of workers , hours of machine time ,
tons of raw materials .
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Meet demand
(Sales Forecast)
Use capacity efficiently
Meet inventory policy
Minimize cost
– Labor
– Inventory
– Plant & equipment
– Subcontract
Aggregate Planning Goals
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Aggregate Planning
Strategies
Pure Strategies
Demand Options — change demand:
(options to increase demand
Pricing (e.g. change price)
Promotion –advertising, direct marketing
backordering during high demand periods
New demand creation-a new , but complementary
demand is created for a product or service .E.g. in
restaurant customers may demand the bar services
due to high waiting time .
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Aggregate Planning
Strategies
Pure Strategies
Capacity Options — change capacity:
(options to increase or decrease capacity)
changing inventory levels
varying work force size by hiring or layoffs
varying production capacity through
overtime or idle time
subcontracting (aka “outsourcing”)
using part-time workers
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The Extremes
Level
Strategy
Chase
Strategy
Production
equals sales
forecast
Production rate
is constant
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Level scheduling strategy
– Produce same amount every day
– Keep work force level constant
– Vary non-work force capacity or demand options
– Often results in lowest production costs
Chase scheduling strategy
– Vary the amount of production to match (chase) the
sales forecast
– This requires changing the workforce (hiring & firing)
Mixed strategy
– Combines 2 or more aggregate scheduling options
Aggregate Planning Strategies
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The Trial & Error Approach to
Aggregate Planning
1.Forecast the demand for each period
2. Determine the capacity for regular time,
overtime, and subcontracting, for each
period
2. Determine the labor costs, hiring and firing
costs, and inventory holding costs
3. Consider company policies which may
apply to the workers, overtime,
outsourcing, or to inventory levels
4. Develop alternative plans, and examine
their total costs
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.Kahsu Mebrahtu(Assistant Professor)
Pure Strategies
Hiring cost = Birr100 per worker
Firing cost = Birr500 per worker
Regular production cost per pound = Birr2.00
Inventory carrying cost = Birr0.50 per quarter
Production per employee = 1,000 units per quarter
Beginning work force = 100 workers
QUARTER SALES FORECAST (LB)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000
Example:
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.Kahsu Mebrahtu(Assistant Professor)
Level Production Strategy
Level production
= 100,000 pounds
(50,000 + 120,000 + 150,000 + 80,000)
4
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 0
400,000 140,000
Cost of Level Production Strategy
(400,000 X Birr2.00) + (140,00 X Birr.50) = Birr870,000
SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
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.Kahsu Mebrahtu(Assistant Professor)
Chase Demand Strategy
Spring 80,000 80,000 80 0 20
Summer 50,000 50,000 50 0 30
Fall 120,000 120,000 120 70 0
Winter 150,000 150,000 150 30 0
100 50
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED
Cost of Chase Demand Strategy
(400,000 X Birr2.00) + (100 x Birr100) + (50 x Birr500) = Birr835,000
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Copyright 2006 John Wiley & Sons, Inc. 13-34
Mixed Strategy
Combination of Level Production and
Chase Demand strategies
Examples of management policies
– no more than x% of the workforce can be
laid off in one quarter
– inventory levels cannot exceed x dollars
Many industries may simply shut down
manufacturing during the low demand
season and schedule employee
vacations during that time
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PART III .Operations Scheduling
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Work Center
Defined
A work center is an area in a business in
which productive resources are organized
and work is completed.
May be a single machine, a group of
machines, or an area where a particular type
of work is done.
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Scheduling and Controlling Functions
1. Allocate orders , equipment, and personnel to work
centers or other specified locations
2. Determining the sequence of order performance (that is
establishing job priorities )
3. Initiating performance of the scheduled work. This is
commonly termed dispatching of orders ( This includes
start date, Job# , description and run time )
4. Shop floor control (or production activity control)
involving:
a. Reviewing the status and controlling the progress of
orders as they are being worked on.
b. Expediting late and critical orders
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Work-Center Scheduling Objectives
Meet due dates
Minimize lead time
Minimize setup time or cost
Minimize work-in-process inventory
Maximize machine utilization
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Priority Rules for Job Sequencing
1. First-come, first-served (FCFS)
2. Shortest operating time (SOT)
3. Earliest due date first
4. Earliest start date first (due date-lead time)
5. slack time remaining (STR) first: Time remaining before due
date – the processing time remaining. Run the shortest
STR first
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6. slack time remaining (per operation as opposed to per job)
first. Run orders with shortest STR/OP.
STR/OP= Time remaining - Remaining processing
before due date Time________
Number of remaining operation
7. Smallest critical ratio (CR) first
(due date-current date)/(number of days remaining)
8. Smallest queue ratio (QR) first
(slack time remaining in schedule)/(planned remaining
queue time)
9. Last come, first served (LCFS)
10. Random order or whim
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Schedule Performance Measures
Meeting due dates of customers or
downstream operations.
Minimizing the flow time (the time a job
spends in the process).
Minimizing work-in-process inventory.
Minimizing idle time of machines or workers.
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Example of Job Sequencing: First-
Come First-Served
Jobs (in order Processing Due Date Flow Time
of arrival) Time (days) (days hence) (days)
A 4 5 4
B 7 10 11
C 3 6 14
D 1 4 15
Answer: FCFS Schedule
Jobs (in order Processing Due Date
of arrival) Time (days) (days hence)
A 4 5
B 7 10
C 3 6
D 1 4
Suppose you have the four
jobs to the right arrive for
processing on one machine.
What is the FCFS schedule?
Do all the jobs get done on time?
No, Jobs B, C, and D
are going to be late.
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Total Flow Time = 4+11+14+15= 44 days
Mean Flow Time =44days/4jobs= 11days
Average lateness/job=(0+1+8+11)/4jobs=5
days (i.e on the average a job will be late by
5 days )
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Example of Job Sequencing: Shortest
Operating Time
Jobs (in order Processing Due Date
of arrival) Time (days) (days hence)
A 4 5
B 7 10
C 3 6
D 1 4
Answer: Shortest Operating Time Schedule
Jobs (in order Processing Due Date Flow Time
of arrival) Time (days) (days hence) (days)
D 1 4 1
C 3 6 4
A 4 5 8
B 7 10 15
Suppose you have the four
jobs to the right arrive for
processing on one machine.
What is the SOT schedule?
Do all the jobs get done on time?
No, Jobs A and
B are going to
be late.
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Example of Job Sequencing:
Last-Come First-Served
Jobs (in order Processing Due Date
of arrival) Time (days) (days hence)
A 4 5
B 7 10
C 3 6
D 1 4
Answer: Last-Come First-Served Schedule
Jobs (in order Processing Due Date Flow Time
of arrival) Time (days) (days hence) (days)
D 1 4 1
C 3 6 4
B 7 10 11
A 4 5 15
No, Jobs B and
A are going to
be late.
Suppose you have the four
jobs to the right arrive for
processing on one machine.
What is the LCFS schedule?
Do all the jobs get done on time?
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Example of Job Sequencing: Earliest
Due Date First
Jobs (in order Processing Due Date
of arrival) Time (days) (days hence)
A 4 5
B 7 10
C 3 6
D 1 4
Answer: Earliest Due Date First
Jobs (in order Processing Due Date Flow Time
of arrival) Time (days) (days hence) (days)
D 1 4 1
A 4 5 5
C 3 6 8
B 7 10 15
Suppose you have the four
jobs to the right arrive for
processing on one machine.
What is the earliest due date first
schedule?
Do all the jobs get done on time?
No, Jobs C and
B are going to
be late.
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Example of Job Sequencing: STR
Jobs (in order Processing Due Date
of arrival) Time (days) (days hence)
A 4 5
B 7 10
C 3 6
D 1 4
Suppose you have the four
jobs to the right arrive for
processing on one machine.
What is the CR schedule?
Do all the jobs get done on time?
No, Job D,
C,and B will be
late
Answer: STR First
Jobs (in order Processing Due Date Flow Time
of arrival) Time (days) (days hence) (days)
A 4 5 4
D 1 4 5
C 3 6 8
B 7 10 15
48. Operations Management For Competitive Advantage
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Cont…
STR= Time remaining before due date
minus the processing time remaining
For Job A=4-4= 0
Job B= 9-7=2 days
Job C=5-3=2 days
Job D=3-1=2 days
Decision: Job A, Job D, Job C, and Job B
based on the minimum operating time
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Comparison of Priority Rules
Rule Total Completion
Time(Days)
Average
Completion Time
or Mean flow
time (Days)
Average
Lateness(Days)
FCFS 44 11 4.5
SOT 28 7 2
LCFS 31 7.75 2.75
EDDate 29 7.25 1.75
STR 32 8 2
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Reading Assignment :
1. Assignment Method
2. Employee Scheduling
3. Enterprise Resource Planning Systems