Capacity Management

1. Capacity Management Planning the resource capacity that a firm will need to meet its demand.

2. Capacity Management and Its Relationship to Value • Capacity management:critical component of long-term decision making due to facility investment decisions. • Capacity: the maximum output of an organization, piece of equipment, or worker • There are costs to having too much capacity, just as there are costs to not having enough.

3. Peak and Effective Capacity Peak capacity: the maximum output rate that a process or facility can achieve in the short term under ideal conditions Effective capacity: the maximum output that a company or process can economically sustain under normal circumstances for an extended time period

4. Capacity Strategy: Wait and See Wait-and-see strategy: postponing firm commitments to build expensive new facilities until demand has already exceeded capacity Typically fits best in industries with slow growth where facilities are very expensive Such as?

5. Wait-and-See Capacity Strategy

6. Capacity Strategy:Aggressive Expansion Aggressive expansion: a strategy in which capacity is added in large leaps, with the expectation that demand will eventually catch upSuch as?

7. An Aggressive Capacity Strategy

8. Capacity Cushion Capacity cushion: the difference between average utilization and 100 percent capacity A central component of capacity strategy is the recognition that it is impossible to exactly match capacity to demand = most companies maintain a capacity cushion of some size

9. Capacity Cushion The size of the capacity cushion that a company wishes to have varies greatly based on a number of factors: Organizations that compete based on low cost will generally choose to have fairly small capacity cushions. Organizations that compete based on quality or flexibility will employ larger cushions. WHY?

10. Capacity Planning Overview • Long-range planning (Strategic) • Greater than one year planning horizon • Intermediate-range planning (Tactical) • Months out (roughly 2-18 months) “Big Picture” approach to planning • Families or groups (aggregation) of: • Products • Resources • Technologies or skills • Provide “rough” estimates • Short-range planning (Detailed Planning) • Days & weeks out

11. Decision Level Decision Process Forecasts needed Sum up all items & allocates production among plants Annual demand by item and by region “Clutch Covers in US” Corporate Determines seasonal plan by product type Monthly demand for 15 months by product type “Ducati Parts” Plant manager Aggregate Planner Determines monthly item production schedules Monthly demand for 5 months by Item “Clutch Covers” Shop superintendent Capacity Production Planning

12. Top-Down Similar products OR stable mix Standards available for planning time, cost requirements from history and/or planning documentation Can “Average” product Bottom-Up Different products AND unstable mix Requires forecasts and production data for individual products Can be extremely data-intensive Capacity Planning Approaches

13. Top-Down Planning • Develop the aggregate sales forecast and planning values. • Translate the sales forecast into resource requirements. • Personnel, equipment, materials • Generate alternative production plans. • Chase, level, mixed • Select the best of the plans. • Lowest cost, best fit to capability

14. Top-Down Example II(“Average” Products) Weighted Planning Value for labor/unit?

15. Top-Down Example Ill(Demand Forecast for 6 months) “Average” unit requires 20 worker hours Each worker works 160 hours per month Convert to workers needed

16. Primary Objectives of Capacity Planning • Match Supply and Demand • Minimize Costs 13-5

17. Alternatives for Changing Demand • Pricing • Advertising and Promotion • Backlogs and Reservations • Develop Alternative Products 13-6

18. Alternatives for Changing Supply • Overtime/Undertime • Hiring/Firing of Personnel • Temporary/Part-time Personnel • Subcontracting • Adjusting Inventories • Adjusting Lead Times 13-7

19. Capacity or Aggregate Planning • Inputs: Strategic objectives, demand forecasts, company policy, financial constraints, capacity constraints. • Outputs: Size of workforce, production per month (units or $), Inventory levels, and Units or dollars subcontracted, back ordered, or lost. • APP= What is the company wide game plan for allocation of resources?

20. Objectives • Minimize Costs/Maximize Profits • Maximize Customer Service • Minimize Inventory Investment • Minimize Changes in Production Rates • Minimize Changes in Work-force Levels • Maximize Utilization of Plant and Equipment

21. What are the alternatives to meeting seasonal demand? • Pure Strategies • Level: • Constant Production or output rate (workforce can fluctuate) • Constant Workforce (output can fluctuate) • What else vary if there is still seasonal demand? Costs? • Reactive or Chase • Vary Production rates or output • Vary Workforce • What will stay constant? Costs? • Mixed Strategies

22. Demand -I Units +I Production Time Pure Level Strategy 13-10

23. Demand Units Production Time Pure Chase Strategy 13-9

24. Goal: Specify the optimal combination of • production rate • workforce level • inventory on hand

25. Good and Rich Candy Company

26. Costs and starting information • Hiring cost =$100 per worker • Firing cost =$500 per worker • Inventory carrying cost=$0.50 per pound/quarter • Production per employee=1000 pounds per quarter (constant) • Beginning work force=100 workers

27. Cost of Level versus Chase Strategy?