CHAPTER 5: STRATEGIC CAPACITY 1.

Design capacity: The maximum output

PLANNING FOR PRODUCT AND rate or service capacity an operation,
SERVICE process, or facility is designed for.
2. Effective capacity: Design capacity
Capacity Planning - involves making minus allowances such as personal time,
decisions for an organization in the long and maintenance.
term.

Capacity - The upper limit or ceiling on the

load that an operating unit can handle.

CAPACITY DECISIONS ARE STRATEGIC

For a number of reasons, capacity decisions
are among the most fundamental of all the
design decisions that managers must make.
In fact, capacity decisions can be critical for
an organization:
1. Capacity decisions set an upper limit on
the rate of output, and the right capacity
decisions can yield a huge pay-off. Too little
capacity can mean lost sales and unhappy Efficiency - can be defined as the ratio of
customers. Similarly, too much capacity can actual output to design capacity.
also reflect in lost sales in addition to other
problems. DETERMINANTS OF EFFECTIVE
2. Capacity decisions can alter operating CAPACITY
costs by shifting between the costs of over- Facilities: Facilities design is the key
and under capacity. determinant of a company's effective
3. Capacity has a big impact on initial cost capacity, which is the maximum output that
— the bigger units cost more. But that does can be achieved under normal operating
not really imply a one-to-one relationship; conditions.
bigger units tend to cost less. 1. Design
4. Many capacity decisions involve a 2. Location
long-term commitment of resources and 3. Layout
hence are difficult or costly to change. 4. Environment
Excess capacity or the ability to add Product and Service Factors: Uniformity
capacity quickly can create a barrier to entry in the output means the production or
and to fast delivery, and hence may confer turning out of uniform products or services
an advantage. in accordance with predetermined
5. Greater or excess capacity can create a standards.
barrier to entry and quick delivery, and 1. Design
hence advantage. 2. Product or Service Mix
6. Capacity eases management; it's easier Process Factors: Relate to the
to manage when capacity is too much methodologies and systems involved in the
compared to when manufacture of products or dispensation of
it's mis-matched. services.
7. Globalization has added complexity to 1. Quantity Capabilities
capacity decisions because of far-flung 2. Quality Capabilities
supply chains and Human Factors: Refer to the capabilities
distant markets. and attitudes of employees. Human factors
8. Capacity decisions require careful are equally important. Capacities, training,
long-term planning due to significant experience, and motivation of people will
financial and resource directly impact potential and actual output.
investments. For instance, building a new 1. Job Content
power-generating plant can take years, 2. Job Design
raising the risk that 3. Training and Experience
the planned capacity may not align with 4. Motivation
actual demand when it becomes 5. Compensation
operational. 6. Learning Rates
7. Absenteeism and Labor Turnover
DEFINING AND MEASURING CAPACITY Policy Factors: These are guidelines and
strategies put in place by management to
regulate activities.
Operational Factors: Pertain to the daily
supervision of manufacturing operations.
For example, scheduling problems can
occur due to variations in equipment
capability or job requirements, among
others.
1. Scheduling
2. Materials Management
3. Quality Assurance
4. Maintenance Policies
5. Equipment Breakdowns
Supply Chain Factors: Relate to the
network of suppliers and logistics that
support production.
External Factors: Include laws, regulations, FORECASTING CAPACITY
and economic situations that may have an REQUIREMENTS
impact on the operation, and minimum Seasonal Patterns - can be observed in
quality and performance criteria may limit monthly, weekly and daily capacity
management's options for increasing requirements using standard forecasting
capacity. techniques.
1. Product Standards Short Intervals - variations can be
2. Safety Regulations described using probability distributions
3. Unions normal, uniform, or Poisson.
4. Pollution Control Standards Waiting-line and simulation models - can
help analyze service systems.
STRATEGY FORMULATION Irregular variations - are difficult to predict
The three main capacity strategies and can be caused by various factors.
primarily used by organizations:
1. Leading: Building capacity in ADDITIONAL CHALLENGES OF
anticipation of future demand PLANNING SERVICE CAPACITY
increases. Three Key Factors include:
2. Following: Increasing capacity when 1. the need to be near customers,
demand exceeds current levels. 2. the inability to store services, and
3. Tracking: Incrementally adding 3. the degree of demand volatility
capacity to match demand changes.
DO IT IN-HOUSE OR OUTSOURCE IT?
Steps in the Capacity Planning Process: Available Capacity: In-house production or
1. Estimate future capacity requirements. service can be more costeffective if the
2. Evaluate existing capacity and facilities organization has the necessary equipment,
and identify gaps. skills, and time.
3. Identify alternatives for meeting Expertise: Outsourcing can increase
requirements. capacity and flexibility if the organization
4. Conduct financial analyses of each lacks the necessary expertise.
alternative. Quality Considerations:Specialized firms
5. Assess key qualitative issues for each can offer higher quality than the
alternative. organization can achieve.
6. Select the alternative to pursue that will Nature of Demand: High and steady
be best in the long term. demand can be better handled by
7. Implement the selected alternative. specialists.
8. Monitor results. Cost:Cost savings from buying or making
must be weighed against the above factors.
FORECASTING CAPACITY Risks:Outsourcing may cause loss of
REQUIREMENTS: control over the operations, sharing of
Capacity planning must consider both knowledge, and disclosure of proprietary
long-term and short-term factors. information.
● Long-term factors - include overall
capacity levels. DEVELOPING CAPACITY STRATEGIES
● Short-term factors - involve ● Designing Flexibility into Systems
seasonal and irregular demand ● Take Stage of Life Cycle into
fluctuations. Account
● Take a “Big-picture” Approach to
Capacity Changes
 ● Prepare to deal with capacity ● Material: Too little of one or more
“chunks.” materials.
● Attempt to smooth out capacity ● Financial: Insufficient funds.
requirements. ● Supplier: Unreliable, long lead time,
substandard quality.
Bottleneck Operation - an operation in a ● Knowledge or competency:
series with a capacity that is less than the Needed knowledge or skills missing
other operations. or incomplete.
● Policy: Laws or regulations
IDENTIFY THE OPTIMAL OPERATING interfere.
LEVEL
Economies of scale - occur when the COST-VOLUME ANALYSIS
output rate is above the optimal level, Cost-volume analysis
resulting in decreased average unit costs - used to estimate an organization's income
when the output rate is increased. under different operating conditions by
Reasons for Economies of Scale: focusing on the relationship that cost,
• Fixed costs spread over more revenue, and output volume have with one
units, reducing per unit cost. another. It comprises identification of all
• Construction costs increase at a costs associated with production, which
decreasing rate with facility size. may be fixed or variable.
• Processing costs decrease as - a quantitative tool to help combine or
output rates increase due to integrate the cost, revenue, and profit
standardized operations. estimates into capacity decisions.
Diseconomies of scale - occur when the - it requires that fixed and variable costs
output rate exceeds the optimal level, need to be separated—an action not so
leading to an increase in average unit costs. easy to perform.
Reasons for Diseconomies of - it works the best in case of one or a few
Scale: products having homogeneous cost
• Distribution costs increase due to characteristics.
traffic congestion and shipping from
one large centralized facility. Fixed Cost vs. Variable Cost
• Complexity increases costs,
making control and communication Fixed Cost Variable Cost
more problematic.
• Inflexibility can be an issue. rent, property taxes, directly dependent on
• Additional bureaucracy slows equipment, heating, the volume of output
decision making and change cooling, and and include materials
administrative expenses and labor. It is assumed
approvals. that remain constant that variable cost per
with respect to the unit is constant, and all
Factors to consider in expansion: level of output. output can be sold.
● competitive pressures,
● market opportunities,
● costs, Break-even point (BEP) - the volume of
● funding availability, output at which total cost and total revenue
● extent of disruption to operation, and are equal.
● training needs.
Indifference point - the quantity that would
CONSTRAINT MANAGEMENT make two alternatives equivalent.
● Constraint - something that limits
the performance of a process or Cost–volume analysis can be a valuable
system in achieving its goals. tool for comparing capacity alternatives
● Constraint management - often if certain assumptions are satisfied:
based on the work of Eli Goldratt 1. One product is involved.
(The Theory of Constraints), and Eli 2. Everything produced can be sold.
Schragenheim and H. William 3. The variable cost per unit is the same
Dettmer (Manufacturing at Warp regardless of the volume.
Speed). 4. Fixed costs do not change with volume
changes, or they are step changes.
There are seven categories of 5. The revenue per unit is the same
constraints: regardless of volume.
● Market: Insufficient demand. 6. Revenue per unit exceeds variable cost
per unit.
 nonbottleneck operations to maximize
FINANCIAL ANALYSIS utilization.
Financial Analysis
- able to allocate limited resources as best Two strategies for determining capacity
as possible. expansion:
● Expandearly strategy - aims to
Cash flow - the difference between cash achieve economies of scale, expand
received from sales and other sources, and market share, or preempt
cash outflow for labor, material, over- head, competitors from expanding.
and taxes. ● Wait-and-see strategy - expands
capacity only after demand
Present value - the sum, in current value, materializes, offering lower
of all future cash flows of an investment oversupply and higher capacity
proposal. utilization

Payback Method - a very common Capacity Disposal Strategies - in cases of

technique that computes how much time an capacity contraction, capacity disposal
investment takes to pay back its original strategies become important, such as
cost. replacing aging equipment with newer ones
or outsourcing and downsizing operations.
Decision Theory - a useful tool in financial The cost or benefit of asset disposal should
comparison of alternatives under risk or be considered when considering these
uncertainty. It has been particularly useful in actions.
capacity decisions, as well as other major
managerial decisions. It basically involves
identifying possible future conditions, listing
alternative courses, and then developing a
financial outcome for each combination.

Waiting-Line Analysis - important in the

design or redesign of any service system,
as most the systems basically possess
waiting lines, such as those at airport ticket
counters and hospital casualty departments. CHAPTER 6: PROCESS SELECTION AND
This helps managers make efficient choices FACILITIES LAYOUT
in picking capacity levels to balance
customer wait costs against the provision of Capacity Intensity - the mix of equipment
additional capacity to meet estimated costs and labor that would be used by the
for a given service capacity level. organization.

Simulation - can be a useful tool in Process Flexibility - the degree to which

evaluating what-if scenarios. Simulation is the system can be adjusted to changes in
described on the book’s Web site. processing requirements due to such
factors as changes in product or service
OPERATIONS STRATEGY design, changes in volume processed, and
Capacity Decisions - have significant changes in technology.
strategic implications for organizations,
impacting all areas of operations PROCESS SELECTION
management. Process choice is demand driven. Three
primary questions bear on process
Capacity Decisions - flexibility is crucial in selection:
capacity decisions, allowing organizations to 1. How much variety in products or services
be responsive to market changes and will the system need to handle?
reduce dependence on long-range 2. What degree of equipment flexibility will
forecasts. be needed?
3. What is the expected volume of output?
Capacity Cushion - maintaining excess
capacity, or a capacity cushion, can provide PROCESS TYPES
flexibility but at added costs. Job Shop - a job shop usually operates on
a relatively small scale. It is used when a
Bottleneck Management - can increase low volume of high-variety goods or
effective capacity by scheduling services will be needed. Processing is
intermittent; work includes small jobs, each AN EFFECTIVE SCHEDULING
with somewhat different processing 1.Cost Saving
requirements. High flexibility using general- 2.Increases In Productivity
purpose equipment and skilled workers are 3.Reduce Lead Time
important characteristics of a job shop. A 4.Enhance Customer Satisfaction
manufacturing example of a job shop is a 5.Improve Balance Workload
tool and die shop that is able to produce. 6.Strategic Decision Making
Batch - batch processing is used when a
moderate volume of goods or services is Scheduling Operations - Involves planning
desired, and it can handle a moderate how and when tasks are completed in
variety in products or services. The different types of production systems.
equipment need not be as flexible as in a
job shop, but processing is still intermittent. SCHEDULING OPERATIONS
The skill level of workers doesn’t need to be 1. HIGH-VOLUME SYSTEM - also known
as high as in a job shop because there is as flow systems, are built for tasks that
less variety in the jobs being processed. happen repeatedly and in the same order.
Examples of batch systems include Definition of Terms:
bakeries, which make bread, cakes, or > Flow System - High-volume
cookies in batches; movie theaters, which systems where jobs follow the same
show movies to groups (batches) of people; sequence.
and airlines, which carry planeloads > Flow-shop Scheduling -
(batches) of people from airport to airport. Scheduling for flow system
Other examples of products that lend Scheduling Needs In High Volume
themselves to batch production are paint, System:
ice cream, soft drinks, beer, magazines, and • Line Balancing - this ensures that
books. Other examples of services include tasks are divided evenly among
plays, concerts, music videos, radio and workers to maximize output and
television programs, and public address machine use.
announcements. • Worker Considerations - Dividing
tasks can make production faster, it
can also make jobs boring and lead
to worker dissatisfaction.

CHAPTER 7: 2. Intermediate-Volume System

3. Low-Volume System or Job Shop System

CHAPTER 8: SCHEDULING CHAPTER 9: AGGREGATE PLANNING

AND MASTER SCHEDULING
SCHEDULING OPERATIONS
Scheduling - establishing the timing of the Aggregate planning
use of equipment, facilities, and human ● intermediate-range capacity
activities in an organization. planning that typically covers a time
horizon of 2-12 months, although in
some companies it may extend to as
much as 18 months. The goal of
aggregate planning is to achieve a
production plan that will effectively
utilize the organization's resources
to match expected demand.
● focus on the “bigger picture”; the
focus on a group of similar products
or services, or sometimes an entire
product or service line.

Sales and Operations Planning - making

intermediate-range decisions to balance
supply and demand, integrating financial
Scheduling Hierarchies and operations planning.

INTERMEDIATE PLANNING IN
WHAT ARE THE BENEFITS OF HAVING PERSPECTIVE
Long Term - product and service selection, intensive determines the impact that
facility size and location, equipment changes in the workforce level will
decisions, and layout of facilities. have on capacity.
Intermediate Term - general levels of 2. Overtime/Slack Time - less severe
employment, output and inventories method for changing capacity than
(establish boundaries). hiring and laying off workers.
Short Term - deciding the best way to 3. Part Time Workers - variable option
achieve desired results within the and it depends on the nature of the
constraints. *It is like a way to achieve work, training and skills needed.
intermediate and long term decisions* 4. Inventories - allows firms to
produce goods in one period and
Most organizations use rolling 3,6,9, and 12 sell or ship them in another period
month forecasts rather than relying on a 5. Subcontracting - enables planners
once-a-year forecast. to acquire temporary capacity,
● 3,6,9, and 12-month forecast - although it affords less control over
forecast that obviously updated the output and may lead to higher
periodically. It allows planners to cost and quality problems.
take into account any changes in
either expected supply and to BASIC STRATEGIES FOR MEETING
develop revised plans. UNEVEN DEMAND
1. Maintain a level workforce.
AN OVERVIEW OF AGGREGATE 2. Maintain a steady output rate.
PLANNING 3. Match demand period by period.
● Begins with forecast demand, 4. Use a combination of decision
followed by a general plan to meet variables.
demand (setting output,
employment, and finished-goods). BASIC STRATEGIES FOR MEETING
UNEVEN DEMAND
Production Plan - the output of aggregate Level Capacity Strategy - maintaining a
planning. steady rate of regular -time output while
Demand and Supply - quantity and timing meeting variations in demand by a
of expected demand is the concern here. combination of options.
Inputs to Aggregate Planning - first, the Chase Demand Strategy - matching
available resources over the planning period capacity to demand, the planned output for
must be known. Then, a forecast of a period is set at the expected demand for
expected demand must be available. Last, the period.
planners must take into account any policies
regarding changes in employment levels. CHOOSING A STRATEGY

Take the supply chain into account to Chase Level

assure that there are no quantity or timing Approach Approach
issues.
Definition Capacities Capacities
DEMAND AND SUPPLY OPTIONS (workforce (workforce
levels, output levels, output
Demand Options rates, etc.) are rates, etc.) are
1. Pricing - pricing differentials used to adjusted to kept constant
shift demand from peak periods to match demand over the
off-peak periods. requirements planning
over the horizon. A
2. Promotions - advertising and other planning level strategy
forms of promotion, can be effective horizon. A works best
in shifting demand. chase strategy when inventory
3. New Demand - many organizations works best carrying costs
faced the problem of having to when inventory and backlog
carrying costs costs are
provide product and services for are high and relatively low.
peak demand in situations where costs of
demand is very uneven. changing
4. Back Orders - organizations can capacity are
low
shift demand fulfillment to other
periods by allowing back orders. Advantages •Investment in Stable output
Supply Options inventory is rates and
1. Hire and Lay Off Workers - the low. workforce
extent to which operations are labor •Labor levels.
 utilization is to identify reasonably acceptable (although
kept high. not always optimal) solutions to problems.

Disadvantages The cost of •Greater AGGREGATE PLANNING IN SERVICES

adjusting inventory Aggregate planning for services takes into
output rates costs.
and/or •Increased account projected customer demands,
workforce overtime and equipment capacities, and labor capabilities.
levels. idle time. The resulting plan is a time-phased
Resource projection of service staff requirements.
utilizations that
vary over time.
Examples of Service Organizations That
Use Aggregate Planning
TECHNIQUES FOR AGGREGATE ● Hospitals - to allocate funds, staff,
PLANNING and supplies to meet the demands
1. Informal trial-and-error techniques of patients for their medical services.
(frequently used) ● Airlines - planes, flight personnel,
2. Mathematical techniques ground personnel and multiple
routes and landing/departure sites.
A general procedure for aggregate Also, the percentage of seats to be
planning consists of the following steps: allocated to various fare classes in
1. Determine demand for each period order to maximize profit or yield
2. Determine capacities (regular time, over ● Restaurant - smoothing the service
time, and subcontracting) for each rate, determining the size of the
period. workforce, and managing demand to
3. Identify policies that are pertinent. match a fixed capacity.
4. Determine units costs for regular time, ● Other Services: Financial,
overtime, subcontracting, holding hospitality, transportation, and
inventories, back orders, layoffs, and other recreation services provide a
relevant costs. high-volume, intangible output.
5. Develop alternative plans and compute Aggregate planning for these and
the costs for each. similar services involves managing
6. Select the best plan that satisfies demand and planning for human
objectives. Otherwise return to step 5. resource requirements. The main
goals are to accommodate peak
TRIAL-AND-ERROR TECHNIQUES demand and to find ways to
USING GRAPHS AND SPREADSHEETS effectively use labor resources
● Trial and error approaches consist of during periods of low demand.
developing simple tables or graphs
that enable planners to visually DIFFERENCE BETWEEN AGGREGATE
compare projected demand PLANNING FOR MANUFACTURING AND
requirements with existing capacity. AGGREGATE PLANNING FOR SERVICE
● Different plans are conducted and 1. Demand for service can be difficult
evaluated in terms of their overall to predict.
costs. The one with the minimum 2. Capacity availability can be difficult
cost will be chosen. to predict.
● The disadvantage of such 3. Labor flexibility can be an advantage
techniques is that they do not in services.
necessarily result in the optimal 4. Services occur when they are
aggregate plan. rendered.

MATHEMATICAL TECHNIQUES YIELD MANAGEMENT

Linear programming: Methods for Yield Management - the application of
obtaining optimal solutions to problems pricing strategies to allocate capacity
involving allocation of scarce resources in among various categories of demand.
terms of cost minimization.
Linear decision rule: Optimizing technique Users of Yield
that seeks to minimize combined costs, ● Management
using a set of cost-approximating functions ● Airlines
to obtain a single quadratic equation. ● Restaurants
Simulation models: Developing ● Theaters
computerized models that can be tested ● Hotels
under a variety of conditions in an attempt ● Resorts
 ● Cruise lines ● it provides the necessary information
● Parking lots for production and marketing to
negotiate when customer requests
DISAGGREGATING THE AGGREGATE cannot be met by normal capacity.
PLAN ● it provides senior management with
Breaking down the aggregate plan into the opportunity to determine whether
specific product requirements in order to the business plan and its strategic
determine labor requirements (skills, size of objectives will be achieved.
workforce), materials, and inventory
requirements. THE MASTER SCHEDULER
The Master Scheduler - the central person
MASTER PRODUCTION SCHEDULE in the master scheduling process
(MPS) / MASTER SCHEDULE
● this schedule indicates the quantity DUTIES OF THE MASTER SCHEDULER:
and timing of planned completed 1. Evaluating the impact of new orders.
production. 2. Providing delivery dates for orders.
● shows the planned output for 3. Dealing with problems:
individual products rather than an a. Evaluating the impact of
entire product group, along with the production delays or late deliveries
timing of production. of purchased goods.
● contains important information for b. Revising the master schedule
marketing as well as for production. when necessary because of
● it reveals when orders are scheduled insufficient supplies or capacity.
for production and when completed c. Bringing instances of insufficient
orders are to be shipped. capacity to the attention of
production and marketing personnel
so that they can participate in
resolving conflicts.

THE MASTER SCHEDULING PROCESS

● A master schedule indicates the
quantity and timing (i.e., delivery
times) for a product, or a group of
products, but it does not show
planned production.
● The master production schedule is
one of the primary outputs of the
master scheduling process, as
illustrated in Figure 11.6

➤ Once a tentative MPS has been

developed, it must be validated

MASTER SCHEDULING
Master Schedule
● is the heart of production planning
and control.
● it determines the quantities needed
to meet demand from all sources,
and that governs key decisions and
activities throughout the
organization.

THE MASTER SCHEDULE INTERFACES

WITH MARKETING, CAPACITY
PLANNING, PRODUCTION PLANNING,
AND DISTRIBUTION PLANNING: TIME FENCES
● it enables marketing to make valid As production gets closer to the delivery
delivery commitments to time, the cost of making a change increases
warehouses and final customers. and the company's flexibility decreases.
● it enables production to evaluate
capacity requirements.
Changes to production schedules can result
in the following:
● Increased costs. Cost increases
due to rerouting, rescheduling, extra
setups, expediting, and buildup of
work- in-process inventory.
● Decreased customer service. A
change in quantity of delivery can
disrupt the schedule of other orders.
● Reduced credibility. Loss of
credibility for the MPS and the
planning process.

To help in the decision-making process,

companies establish zones divided by time
fences.

Frozen Zone. Capacity and materials are

committed to specific orders. Since changes
would result in excessive costs, reduced
manufacturing efficiency, and poor customer
service, senior management's approval is
usually required
to make changes.
Slushy Zone. Capacity and material are
committed to a lesser extent. This is an area
for trade-offs that must be negotiated
between marketing and manufacturing. In
this zone, materials have been ordered and
capacity established; these are difficult to
change.
Liquid Zone. Any change can be made to
the MPS as long as it is within the limits set
by the production plan.