Capacity Planning & Scheduling

• Capacity is crucial as it defines the upper threshold for production, influencing efficiency, resource allocation, and the ability to meet customer demand effectively while also impacting overall operational performance.
• Effective capacity management is critical as it allows firms to anticipate fluctuations in market demand, thereby maintaining a competitive edge. Managers must adeptly align resources to meet both immediate and long-term customer needs.
• Acquiring new capacity demands extensive planning, resource expenditure, and time.
• Capacity decisions consider economies/diseconomies of scale, capacity cushions, timing, sizing, customer service, and capacity utilization.
• Operations planning and scheduling balances demand and supply, from aggregate to short-term levels.
• Supply chain integration relies on operations planning and scheduling for supplier deliveries, due dates, and services.
• This module focuses on revising capacity levels and determining when to adjust capacity for the long term.
• Capacity decisions vary based on the time horizon.
• The module covers sales and operations planning and scheduling.
• The module is allotted for 6 hours in total

Learner Description

• The target learners are 3rd year BSA students.

Module Contents

• Capacity decisions are pivotal as they have a ripple effect across all functional areas of an organization. For instance, the accounting department must track costs associated with capacity changes, while finance considers the implications on cash flow. Marketing needs to understand capacity constraints for feasible promotional strategies, operations must adjust their processes, purchasing manages material procurement, and HR aligns workforce requirements to ensure optimal performance.
• Capacity decisions affects the ability to meet future demands, operating costs, initial costs, competitiveness, ease of management, and involves long-term commitment.
• Capacity is the upper limit of load an operating unit can handle, referring to manufacturing or service resource capabilities.
• Key questions in capacity handling: type, amount, and timing.
• Operations planning and scheduling is vital for all organizations across the supply chain.
• Scheduling matters for both service and manufacturing processes across various businesses.
• Schedules are a part of everyday operations, affecting every process.
• Long-term capacity plans cover investments in facilities and equipment at the organizational level.
• Top management approval is needed and cannot easily be reversed.
• These plans cover at least two years into the future.

Measures of Capacity and Utilization

• Capacity should be expressed in terms of output or input measures.
• Output measures work best when processes are within the firm, or when relatively small number of standardized services and products are used.
• Processes with customization and variety increases, output based capacity measures are less useful.
• Input measures are generally used for low-volume, flexible processes (e.g., custom furniture).
• Challenges exist though because demand is invariably expressed as an output rate.
• Output measures are likely insufficient when:
  • Product variety and process divergence is high.
  • The product or service mix is changing.
  • Productivity rates are expected to change.
  • Significant learning effects are expected.
• Utilization measures the degree to which resources are being used, expressed as a percentage of average output rate to maximum capacity.
• Design capacity is the maximum obtainable output.
• Effective capacity is the maximum capacity with expected variations (maintenance, breaks, scheduling conflicts).
• Actual output is the achieved output rate with unexpected variations and demand.
• Utilization Formula: Actual Output / Design Capacity
• Efficiency Formula: Actual Output / Effective Capacity

Economies of Scale

• Deciding on the best average unit cost of a service lowers while increasing its output rate.
• Economies of scale drives costs down when output increases with these reasons:
  • Spreading Fixed Costs: fixed costs do not vary with changes in output rate in the short term.
  • When the average output rate increases, the average unit cost drops because fixed costs are spread over more units.
  • Reducing Construction Costs: certain activities and expenses are required to build small and large facilities.
  • Doubling the size of the facility usually does not double construction costs.
  • Cutting Costs of Purchased Materials: higher volumes may reduce costs of purchased materials and services, giving better bargaining and quantity discounts.
  • Finding Process Advantages: High-volume production provides opportunities for cost reduction.
  • Focused Factory: It achieves economies of scale without extensive investments by focusing on a narrow range of goods/services to maximize efficiency and effectiveness.

Diseconomies of Scale

• Facilities can become so large that diseconomies of scale set in and the average cost per unit increases as the facility's size increases.
• Excessive size can bring complexity, loss of focus, and inefficiencies that raise the average unit cost of a service or product.

A Systematic Approach to Long-Term Capacity Decisions

• Long-term decisions include new plant/warehouse additions or reductions, workstations per department, and staffing levels.
• Such decisions require a systematic approach since they can take years to be fully implemented.
• A process's capacity requirement is what its capacity should be for some future time period to meet the demand of the firm's customers.
• Long-term capacity plans need to consider more of the future, a whole decade
• Unfortunately, the further ahead you look, the more chance you have of making an inaccurate forecast.
• Safety capacity (or capacity cushion) reserves capacity for unanticipated events (demand surges, material shortages, breakdowns).
• Safety capacity (%) = 100% – Average resource utilization %
• A capacity gap is the difference between projected capacity requirements and current capacity.
• Complications arise with multiple operations and multiple resource inputs.
• Expanding capacity of some operations may increase overall capacity.
• The next step is to develop alternative plans to cope with projected gaps.
• The base case is to do nothing and simply lose orders from demands that exceed the current capacity.
• Design flexibility into systems (modular expansion)
• Take a "big picture” approach to capacity changes
• Differentiate new and mature products (pay attention to the life cycle, demand variability vs. discontinuation)
• Prepare to deal with capacity "chunks" (no machine comes in continuous capacities)
• Attempt to smooth out capacity requirements (complementary products, subcontracting)
• Identify the optimal operating level (facility size)

Long Term Capacity Strategies

• Complementary goods and services can be produced using the same resources available to the firm whose seasonal demand patterns are out of phase with each other.

Short Term Capacity Adjustment

• Add or share equipment by leasing equipment or set up a partnership arrangement with capacity sharing. Examples: mainframe computers, CAT scanner, farm equipment.
• Sell unused capacity to outside buyers and even competitors. Examples: computing capacity, perishable hotel rooms.
• Change labor capacity and schedules through short term changes in work force levels (overtime, extra shifts, temporary employees, outsourcing).
• Change labor skill mix by hiring the right people.
• Shift work to slack periods
• Vary the price of goods or services as the most powerful way to influence demand
• Provide customers information for customers to call and visit.
• Advertising and promotion: a vital role on influencing demand; promotions are strategically distributed to increase demand during periods of low sales or excess capacity.
• Add peripheral goods and/or services to change demand during slack periods.
• Provide reservations to promise a good or service at some future time and place.

Evaluate the Alternatives

• Two alternatives are qualitatively and quantitatively
  • Qualitative Concerns: The manager looks at how each alternative fits the overall capacity strategy and other aspects of the business not covered by financial analysis.
  • Uncertain demand, competitive reaction, technological changes and cost estimates are more concerning to the manager.
  • Qualitative factors tend to dominate when a business is trying to enter new markets or change the focus of its business strategy.
  • Quantitative Concerns:
• The manager estimates the change in cash flows for each alternative over the forecast time horizon compared to the base case.
• Cash flow is the difference between the flows of funds into and out of the organization over a period of time, including revenues, costs, and changes in assets and liabilities.
• Demand forecasts for an extended time are required for Capacity planning
• Forecast accuracy declines as the forecasting horizon lengthens.
• The uncertainty of demand forecasts increases when you anticipate what competitors will do.
• Demand may not be evenly distributed when peaks and valleys of demand may occur within the time period.

Tools for Capacity Planning

• Waiting-Line Models: Useful in capacity planning, such as selecting an appropriate capacity cushion for a high customer-contact process.
  • Waiting lines develop in front of an airport ticket counter, machine center or a central computer.
  • Arrival time and processing time fluctuates among customers for this reason.
  • Waiting-line models are models that use probability distributions to provide estimates of average customer wait time, average length of waiting lines, and utilization of the work center.
  • With this information, managers can choose the most cost-effective capacity, balancing customer service and the cost of adding capacity.
• Simulation: Able to identify process bottlenecks and appropriate capacity cushions, even for complex processes.
• It is more complex waiting-line problems with random demand patterns and predictable surges in demand during a typical day.
• Decision Trees
  • Has a particular value when evaluating different capacity expansion alternatives when demand is uncertain and sequential decisions are involved.
• Aggregation

Stages in Operations Planning and Scheduling

• Product Families are a group of customers, services, or products that have similar demand requirements and common process, workforce, and materials requirements.
• Product families relate to market groupings or to specific processes.
• Common and relevant measurements should be used.
• Workforce can be aggregated in various ways depending on its flexibility.
• Time is usually a one year planning horizon that the sales and operations plan covers.
• Time is viewed in the aggregate months, quarters, or seasons rather than in weeks, days, or hours
• Demand Options includes complementary products, promotional pricing, prescheduled appointments, reservations, revenue management, backlogs, backorders, and stockouts.

Managing Demand

• Complementary Products balances the load on resources to produce or provide services even with different demand cycles.
• The key is to find services and products that can level off the need for resources over the year.
• Promotional Pricing provides promotional campaigns to increase sales with creative pricing.
• The lower prices can increase demand or shift demand to the current period.
• Prescheduled Appointments schedule customers for definite periods of order fulfillment, where demand is leveled to not exceed supply capacity.
• An appointment system assigns specific times for service to customers.
• Reservations are usually used when the customer occupies or uses facilities associated with the service, and the system is similar to appointment systems.
• Overbooking, deposits, and cancellation penalties can deal with no-shows.
• Bonuses are offered for compensation in the instance of overbooking.
• Revenue Management varies price at the right time for different customer segments to maximize revenues generated from existing supply capacity.
• Benefits customers, prices and fixed costs.
• Backlogs are an accumulation of customer orders that a manufacturer has promised for delivery at some future date.
• Used by firms or to make customized products with make-to-order strategy and can reduce uncertainty of future production requirements and can also be used to level demand
• Backorders and Stockouts last resort in demand management is to set lower standards for customer service (backorders or stockouts).
• A backorder in contrast, is much the same, except that the order is lost and the customer goes elsewhere.
• A backorder adds to the next period's demand requirement, whereas a stockout does not.
• Information inputs are sought to create a plan that works for all.

Supply Options

• Anticipation inventory is used to absorb uneven rates of demand or supply, and is generally not an option for service providers.
• Workforce Adjustment adjusts workforce levels by hiring or laying off employees.
• Attractive if the workforce is largely unskilled or semiskilled and the labor pool is large.
• Workforce Utilization is a change in workforce utilization involving overtime and undertime as an alternative to workforce utilization.
• Part-Time Workers only work during the peak times of the day or peak days of the week.

Planning Strategies

• Subcontractors can be used to overcome short-term capacity shortages.

Workforce Strategies

• Vacation Schedules helps manufacturers shut down during an annual lull in sales, leaving a skeleton crew to cover operations and perform maintenance.
• Two basic strategies can be a useful starting point to finding the best supply plans for output rates and workforce level.
  • Chase Strategy - hiring and laying off employees to match the demand forecast over the planning horizon.
  • Level Strategy - keeping a constant workforce, and varying its utilization to match the forecast (overtime, undertime and vacation.)
  • Mixed Strategy - best strategy which considers the full range of options (chase and level strategies)

Constraints and Costs

• Constraints can be either physical limitations or related to managerial policies.
  • Physical limitations - such as the number of backorders or the use of subcontractors or overtime.
  • Policy constraints - include minimum inventory levels needed to achieve desired safety stocks.
• Costs to be considered are:
  • Regular time - time wages paid to employees plus contributions to benefits
  • Overtime - Wages paid for work beyond the normal workweek.
  • Hiring and layoff - costs of advertsing jobs
  • Inventory holding - capital, warehousing, and insurance costs
  • Backorder and stockouts - additional costs to expedite past due orders.

Scheduling

• Gathering data such as demand forecasts, resource availability, and specific constraints.
• Then it involves generating work schedules for employees or sequences of jobs.
• The schedule must be coordinated with employees and suppliers
• Gantt Charts take two basic forms:
  • Job or activity progress chart - displays the current status of each job relative to its scheduled completion date.
  • Workstation chart - used to monitor progress of work.

Other Concepts

• Scheduling Employees help manage capacity, which determines when employees workers
• It specifies on-duty and off-duty periods, translating it to scheduling jobs
• Sequencing Jobs at a Workstation determine the order in which jobs are processed at a workstation combined with the expected processing time.
• Priority Sequencing Rules helps determine what job or customer to process:
  • First-Come, First-Served the job or customer arriving at the workstation first has the highest priority under a first-come, first-served (FCFS) rule.
  • Earliest Due Date is the job or customer to process with the earliest due date.
• Performance Measures judge the schedule
  • Commonly used performance measures include:
    • Flow Time: the amount of time a job spends in the system.
    • Past Due: the measure can be expressed as the amount of time by which a job missed its due date.