1. Chapter 9
Capacity Planning
2000 by Prentice-Hall, Inc

2. 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

3. 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

4. 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

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

6. 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

7. 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

8. 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

9. 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

10. 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

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

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

13. 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

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

15. 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

16. 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

17. 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

18. Yield Management NO-SHOWS PROBABILITY P(N < X) 0 .15 .00 1 .25 .15
.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
Example 9.4
2000 by Prentice-Hall, Inc

19. 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
$61.00 Total cost of overbooking by
2 rooms
Expected savings = ($ $61) = $70.25 a night
NO-SHOWS PROBABILITY P(N < X)
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
.517
Example 9.4
2000 by Prentice-Hall, Inc