Chapter 9 Capacity Planning 2000 by Prentice-Hall, Inc

Capacity Planning Establishes overall level of productive resources Affects lead time responsiveness, cost & competitiveness Determines when and how much to increase capacity Capacity lead strategy expand capacity in anticipation of growth Capacity lag strategy increase capacity after increase in growth Average capacity strategy expand capacity to coincide with average demand 2000 by Prentice-Hall, Inc 2

Capacity Expansion Volume & certainty of anticipated demand Strategic objectives for growth Costs of expansion & operation Incremental or one-step expansion 2000 by Prentice-Hall, Inc

Capacity Expansion Strategies (a) Capacity lead strategy (b) Capacity lag strategy (c) Average capacity strategy (d) Incremental vs. one-step expansion Units Capacity Time Demand Incremental expansion One-step expansion Figure 9.1 2000 by Prentice-Hall, Inc

Best Operating Levels Average cost per room Best operating level Economies of scale Diseconomies of scale 250 500 1000 # Rooms Figure 9.2 2000 by Prentice-Hall, Inc

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 2000 by Prentice-Hall, Inc

Inputs and Outputs to APP Company Policies Strategic Objectives Capacity Constraints Units or dollars subcontracted, backordered, or lost Size of Workforce Production per month (in units or $) Inventory Levels Financial Demand Forecasts Aggregate Planning Figure 9.3 2000 by Prentice-Hall, Inc

Adjusting Capacity to Meet Demand Producing at a constant rate and using inventory to absorb fluctuations in demand (level production) Hiring and firing workers to match demand (chase demand) Maintaining resources for high demand levels Increase or decrease working hours (overtime and undertime) Subcontracting work to other firms Using part-time workers Providing the service or product at a later time period (backordering) 2000 by Prentice-Hall, Inc

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 2000 by Prentice-Hall, Inc

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 2000 by Prentice-Hall, Inc

Level Production Demand Production Units Time Figure 9.4 (a) 2000 by Prentice-Hall, Inc

Chase Demand Demand Production Units Time Figure 9.4 (b) 2000 by Prentice-Hall, Inc

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 2000 by Prentice-Hall, Inc

Demand Distortion along the Supply Chain 2000 by Prentice-Hall, Inc

Hierarchical Planning Process Items Product lines or families Individual products Components Manufacturing operations Resource Level Plants Individual machines Critical work centers Production Planning Capacity Planning Resource requirements plan Rough-cut capacity plan Capacity requirements plan Input/ output control Aggregate production plan Master production schedule Material requirements plan Shop floor schedule All work centers Figure 9.5 2000 by Prentice-Hall, Inc

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 Labor is usually the most constraining resource for services 2000 by Prentice-Hall, Inc

Yield Management Cu Cu + Co P(n < x)  where n = number of no-shows x = number of rooms or seats overbooked Cu = cost of underbooking; i.e., lost sale Co = cost of overbooking; i.e., replacement cost P = probability 2000 by Prentice-Hall, Inc

Yield Management NO-SHOWS PROBABILITY P(N < X) 0 .15 .00 1 .25 .15 0 .15 .00 1 .25 .15 2 .30 .40 3 .30 .70 .517 Expected number of no shows 0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75 Optimal probability of no-shows P(n < x)  = = .517 Cu Cu + Co 75 75 + 70 Example 9.4 2000 by Prentice-Hall, Inc

Yield Management NO-SHOWS PROBABILITY P(N < X) Cost of overbooking [2(.15) + 1(.25)]$70 = $38.50 Cost of bumping customers (.30)$75 = $22.50 Lost revenue from no-shows $61.00 Total cost of overbooking by 2 rooms Expected savings = ($131.225 - $61) = $70.25 a night NO-SHOWS PROBABILITY P(N < X) 0 .15 .00 1 .25 .15 2 .30 .40 3 .30 .70 Expected number of no shows 0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75 Optimal probability of no-shows P(n < x)  = = .517 Cu Cu + Co 75 75 + 70 .517 Example 9.4 2000 by Prentice-Hall, Inc