1. Topics to be Covered 1. Capacity Planning
2. Aggregate Planning in Perspective
3. Scope of Aggregate Planning
4. Factors Impacting the Supply Capacity
5. Strategies for Aggregate Planning
6. Techniques for Aggregate Planning
7. Mathematical Techniques
8. Disaggregating the Aggregate Plan

2. How Does Capacity Planning Fit In The Production Cycle.
Make or Buy
Forecasting
Facility Definition
Resource Planning
Aggregate Plan
Master Production Schedule
Rough Cut Capacity
Planning
MRP
Detailed Capacity
Planning
Purchasing
Shop Floor Control

3. Capacity VS Utilization
- Peak quantity created over a period of time
- Peak Capacity does not include scheduled breaks & planned maintenance
- Effective Capacity does include scheduled breaks & planned maintenance &
other planned events.
Utilization
the relationship between what is actually produced vs what can be produced.
(Actual/Capacity x 100%)
Capacity Cushion
- The difference between full capacity and Utilization
(Cushion = 100% - Utilization)

4. Facility Planning Economies of scale vs Diseconomies of scale
Need to be part of the total operations strategy and not a series of capital budget decisions
Amount of capacity; size of unit; timing of capacity changes; long run needs
Economies of scale vs
Diseconomies of scale
Factors:
Predicted demand
Costs of facilities
Likely behavior of competitors
Business strategy
International Considerations
Economies of scale are based on the notion that large units are more economical because fixed costs are spread over more units.
- capital costs are not linear to volume but are more of a block type
Diseconomies of scale refer to the excessive increase in the size which reduces communication, increased transportation cost to varied customers coming from one plant. Too bureaucratic. Make rules because we can not be every where.

5. Facilities Strategy Cushion? Styles: Try not to run out
Build to average demand
Maximize utilization
Cushion?
Timing is an issue which is defined by the corporate strategy towards how it introduces products into the market.
Preempt strategy says we are market leaders; hoping to get market share and create a brand name
Wait & See says we will let the competition make the mistakes and then we will enter because we already have brand loyalty with our other products or we have a competitive advantage of reengineering.
Try not to run out means we have much cushion
Build to average demand says we use cushion to level our work force output
Max utilization says we will use a minimal operations because the customer will wait. No or negative cushion
Which cushion is best;
Large is best when market is expanding or when the cost of building and maintaining goods is less than the cost of running out.
Make to order
Medium is best when cost of running out vs cost of building is about the same
Small is when cost of building is more than cost of running out.
- product is at a high utilization and such as a make to stock
Timing:
Preempt the competition
Wait and see

6. Strategy & Facility Types
Product Focus (55%):
One product family; large market
Transportation costs low & high economies of scale
Market Focused (30%):
located in singular or few market served; service oriented
High transportation cost & quick service needed
Process Focused (10%):
1 or 2 key technologies; component parts
General Purpose (5%)
several product types; several different processes
low volumes of any one product type
Product focus – typically a high volume product layout type; Centralized manufacturing and engineering
Market focus -

7. Aggregate Planning in Perspective
Capacity Decisions are on Three Levels.
Long Term Intermediate Term Short Term
Long Term Decisions - Decisions necessary to decide the absolute max capacity.
Product or Service Selection
Facility Size & Layout
Location
Equipment Type
Intermediate or Aggregate Decisions - Decisions necessary to meet expected
demand not in the immediate future.
General levels of employment
Output per year
Inventories (Average Target)
Long Term decisions set the baseline or constraints for the intermediate decisions.
Short Term Decisions
This month’s output
Machine loading
Job sequencing
Aggregate decisions set the constraints for short term decisions

8. Minimizing Costs thru Balancing
Aggregate Planning seeks to balance Demand and Capacity by minimizing total costs. (Big Picture)
Demand
Capacity
Labor
Equipment
Capital
Inventory
Subcontracting
Backordering
Pricing
Promotion
Backorders
New Demand $
Costs When:
Demand > Capacity
Capacity > Demand

9. Factors Impacting the Supply Capacity
Hire & Fire Workers
Low Morale; Costs; Restrictions
Overtime
Good Short term solution; Burn-out; Lower Production
Part-Time Workers
Good for certain industries
Possible restrictions
Inventories
Good Supply Control
Costs: Warehousing; Obsolesce; Deterioration; Breakage; Spoilage; Cost of Capital
Subcontracting
Make or Buy
Sometimes cheaper for one of your non-core capabilities
Constraints: Quality Control; schedule control; transportation
Backorders
Cost depends on Product, market position & customer loyalty

10. Scope of Aggregate Planning
Aggregate Planning combines the capacity requirements for
the demand of all products or services provided by the company.
Why do we Use Aggregate Planning?
Match Supply and Demand.
Plan for adequate production capability is available. (Rough Cut Capacity Planning)
Plan for adequate input resources. (labor & raw materials)
Plan for adequate product demand.
Aggregate Planning begins with a Forecast of Demand.
Time horizon is typically 1 year.
Combine individual product demand forecast.
Forecast aggregate demand directly.
What do we need to Know to Begin Aggregate Planning?
Facility Capacity.
Available Resources, Raw Materials, Labor, etc.
Forecast Demand For each period.
Any Special Company Constraints.
labor policies; Inventory policies

11. Strategies for Aggregate Planning
The Operations Manager generally has control only over capacity.
Several Strategies are Available
Maintain a Level Work Force.
Maintain a Steady Output Rate
Match Demand period by period
Abrupt changes in Output and Workforce required.
Use a combination of decision strategies
The most common and flexible is to use a combination of strategies.
The specific strategy will depend on the market trend.
If there is only a short term change in demand then maintaining a steady
workforce is preferred.
If there is a long term change in demand then a change in Output and workforce
may be required.
Use variations in inventories, subcontracting, backlog, & overtime to supplement
short term changes.
The preferred strategy is sufficiently flexible to feasibly match supply and demand
within legal constraints, Company policy and at a minimal cost when faced with
varying conditions.

12. Aggregate Planning Problem
Demand:
Jan
Feb
Mar
Apr
May
Jun
650
700
850
500
Supply:
Regular Workers: 120 units per worker per month
Inventory: 200 units at beginning; need 100 at end
Overtime: 15% max
Subcontract: 10%
Backorder: Not allowed
Total units = 4050
# of workers = 5.62; if inventory is allowed then select 5
Costs:
Regular Time : $15/hour per worker
Inventory: $1/unit /month
OT :150% of Regular
Subcontract: $20 per unit
Hiring = $100
Firing = $250

13. Techniques for Aggregate Planning
Aggregate Planning techniques fall within two categories: Informal & Mathematical
Informal is used most, as Mathematical requires some model development.
General Procedure for Developing an Aggregate Plan:
1. Determine demand for each period.
2. Determine capacities for each period. (Regular time, overtime, subcontracting)
3. Determine company policies that are pertinent.
(Safety stock, max inventory, allowable overtime)
4. Determine unit costs for regular time, overtime, subcontracting, holding costs,
backorders, and other relevant costs.
5. Develop alternative plans and compute the cost for each.
6. Select the most satisfactory feasible solution.
Informal Approach
Consists of developing simple tables or graphs that enable the planners to visually
compare projected demand requirements with existing capacity. (spreadsheets)
Alternatives are usually evaluated in terms of their overall costs.
The chief disadvantage is the significant amount of time to achieve an optimal solution.
Alternatives are not always feasible nor optimal based on company constraints.
The main advantages are the simplicity and the visual nature.
Persistence, experience and luck are part of defining a good plan

14. Informal Method Reg = $10 OT = $15 SC = $13 Inv = $ 1 BL = $ 5
Hire = $ 17
Fire = $22

15. Mathematical Techniques
Linear Decision Rule (Holt, Modigliani, & Simon)
Management Coefficient
Parametric Production Planning
Search Decision Rule
Production Switching Heurestic
Linear Programming
Transportation Method
Goal Programming’
Mixed Integer Programming
Simulation
Objective Equation:
Minmize Z = Reg Prod Costs + Hiring Costs + Firing Costs + Holding Costs + Subcontracting Costs + Overtime Costs
Minimize Z= (Cw Wt Ch Ht Cf Ft Ci It Cs St Co Ot)
Constraints: W t-1 + H t - F t = W t (Balance Work Force)
I t-1 + k W t + S t + O t - D t = I t ( Balance of Inventory)
D t - k W t + I t = P t (Balance Production)

16. Disaggregating the Aggregate Plan
As the short term plan is dependent upon the aggregate plan, it is necessary to
translate this plan into meaningful numbers in the short term.
Breakdown the aggregate plan into specific product requirements.
To determine labor, material and inventory requirements
A general plan was developed in units that applied across product lines. Now how
do we convert those units into specific product lines?
This can be difficult.
This disaggregation results in a Master Production Schedule.
Shows quantity and timing of specific goods

17. Review of Aggregation
The Purpose of Aggregate Planning is to develop a feasible Production Plan on an
aggregate level that achieves a balance of expected demand and supply, while
considering the minimization of cost.
Because the Supply of resources and the Demand for product can vary, Aggregate
Planning tries to provide a leveling effect to reduce abrupt changes to the factors of
production.
Aggregate Planning is medium range capacity planning
typically 3 to 18 months horizon
Aggregate Planning is essentially a big-picture approach to planning.
The focus is on capacity
Think in terms of units that are common across product lines
Labor hours
Machine Hours/ month
Output rates of similar products