CHAPTER FIVE

CAPACITY PLANNING, AGGREGATE

PLANNING, AND OPERATIONS
SCHEDULING
 5.1. Capacity Planning
 Capacity is the maximum capability to produce.

Capacity is the upper limit or ceiling on the load that an

operating unit can handle.

 The operating unit might be a plant, department,

machine/equipment, store/space, employee skills, and others.

 The throughput, or the number of units a facility can hold,

receive, store, or produce in a period of time.

 Capacity planning takes place at several levels of detail.

 Capacity Planning....Cont’d
Capacity planning is described as matching the
capabilities of an organization with the predicted
level of future demand.

Many organizations become involved with

capacity planning due to changes in demand,
technology, the environment, etc.

Organizations have capacities or limits that their

system can handle
 Capacity Planning....Cont’d
The basic questions in capacity handling are:

 What kind of capacity is needed?

 How much is needed?
 When is it needed?

 The question of what kind of capacity is needed

depends on the products and services that
management intends to produce or provide.
 The question of how much is needed depend on
the level of demand exist in the market.
 When needed specify the time in which we have
to produce
 Importance of Capacity Decisions
For a number of reasons, capacity decisions are among
the most fundamental of all the design decisions that
managers must make.

1. Capacity decisions have a real impact on the ability

of the organisation to meet future demands for
products and services; capacity essentially limits the
rate of output possible.

Having capacity to satisfy demand can allow a company

to take advantage of tremendous opportunities.
 Importance of Capacity Decision..Cont’d
2. Capacity decisions affect operating cost. Ideally,
capacity and demand requirements will be matched,
which will tend to minimize operating costs. In
practice, this is not always achieved because actual
demand either differs from expected demand or tends
to vary (e.g., cyclically).

3. Capacity is usually a major determinant of initial

cost. Typically, the greater the capacity of a productive
unit, the greater its cost. This does not necessarily
imply a one-for-one relationship; larger units tend to
cost proportionately less than smaller units.
Importance of Capacity Decision..Cont’d
4. Capacity decisions often involve long-term
commitment of resources and the fact that, once
they are implemented, it may be difficult or
impossible to modify those decisions without
incurring major costs.

5. Capacity decisions can affect competitiveness. If a

firm has excess capacity, or can quickly add capacity,
that fact may serve as a barrier to entry by other
firms. Then too, capacity can affect delivery speed,
which can be a competitive advantage.
Importance of Capacity Decision..Cont’d
6. Capacity affects the ease of management;
having appropriate capacity makes management
easier than when capacity is mismatched.
7. Capacity decisions can ease existence in
globalized world. Globalization adds complexity but
with capacity planning you can survive.

8. Capacity decisions has impacts long range

planning
 Defining and Measuring Capacity
 No single measure of capacity will be appropriate in every situation.
 The measure of capacity must be tailored/customized to the
situation.
1) Designed Capacity
 Designed capacity of a facility is the planned or engineered rate of
output of goods or services under normal or full scale operating
conditions.

 For example, the designed capacity of the cement plant is 100 TPD
(Tonnes per day). Capacity of the sugar factory is 150 tonnes of
sugarcane crushing per day.

 The uncertainty of future demand is one of the most perplexing

problems faced by new facility planners.
 2) System/effective capacity
 System/effective capacity: System capacity is the
maximum output of the specific product or
product mix the system of workers and machines
is capable of producing as an integrated whole.

 System capacity is less than design capacity or at

the most equal to it because of the limitation of
product mix, quality specification, and
breakdowns.
 Continued….
 The maximum possible output given a product
mix, scheduling difficulties, machine
maintenance, quality factors, and so on

 System/effective capacity is design capacity minus

allowances such as personal time, maintenance,
and scrap
 3) Actual Output
 Actual out put is rate of output actually
achieved--cannot exceed effective capacity.

 The actual output is even less because of many

factors affecting the output such as actual
demand, downtime due to machine/equipment
failure, unauthorized absenteeism.
 Efficiency and Utilization
Actual output
Efficiency = Effective capacity

Actual output
Utilization = Design capacity

 Utilization is the percent of design capacity

achieved
Efficiency is the percent of effective capacity
achieved
 Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Given the information above, compute the efficiency

and utilization of the vehicle repair department:
 Solution

Efficiency=Actual Output X100= 36trucks per day = 90%

Effective capacity 40 trucks per day

Utilization=Actual output X100 =36 trucks per day = 72%

Design capacity 50 trucks per day
 Problem
The design capacity for engine repair in our
company is 80 trucks per day. The effective capacity
is 40 engines per day and the actual output is 36
engines per day.

Calculate the utilization and efficiency of the

operation. If the efficiency for next month is
expected to be 82%, what is the expected output?
 Your Reflections

What are the Determinants of Effective

Capacity?
 Determinants of Effective Capacity
There are many factors that determine effective capacity.
These are:

1. Facilities 2. Product/service
a. design a. design
b. Location b. Product/service mix
c. Layout
d. Environment
 Determinants of Effective Capacity…..Cont’d
3. Process
a. Quantity capabilities
b. Quality capabilities

4. Human factors 5. Operational

c. Job content a. Scheduling
d. Job design b. Materials management
e. Training and experience c. Quality assurance
f. Motivation d. Maintenance policies
g. Learning rate e. Equipment break downs
h. Absenteeism & Labour turnover
 Determinants of Effective Capacity...Cont’d
6. External factors 7. Inadequate planning
a. Product standards
b. Safety regulations
c. Unions
d. Pollution control standards

The most important parts of effective capacity are process

and human factors.
Process factors must be efficient and must operate
smoothly, if not the rate of output will dramatically decrease.
Human factors must be trained well and have experience,
they must be motivated and have a low absenteeism and
labour turnover.
 5.2. Aggregate planning
Aggregate plan is a statement of a company’s production
rates, workforce levels, and inventory holdings based on
estimates of customer requirements and capacity
limitations.
Aggregate planning is the process of planning the
quantity and timing of output over the intermediate range
(often 3 to 18 months) by adjusting the production rate,
employment, inventory, and other controllable variables.
 Aggregate planning decisions are strategic decisions that
define the frame work within which operating decisions will
be made.
 They are starting point for scheduling and production
control system.
 Aggregate Planning....Cont’d
Aggregate planning links long-range and short-range planning
activities.
It is “aggregate” in the sense that the planning activities at this
early stage are concerned with homogeneous categories (families)
such as gross volumes of products or number of customers
served.

 A service firm’s aggregate plan, called a staffing plan, centres on

staffing and other labour related factors; whereas, a manufacturing
firm’s aggregate plan, called a production plan, generally focuses
on production rates and inventory holding.

 For both types of companies, the plan must balance conflicting

objectives involving customer service, work force stability, cost,
and profit.
 Objectives of Aggregate Planning
• The main objectives of Aggregate Planning are:

 Maximum customer services

 Minimize inventory investment
 Minimize changes in workforce level
 Minimize changes in production rates
 Maximize utilization of plants and equipment
 Aggregate Planning....Cont’d
Organization need aggregate planning due to:

1. It takes time to implement the plan

2. Aggregation is important because it is not possible to
predict with degree of accuracy the timing and volume
of demand for individual items.
3. It can help synchronize/coordinate flow through out the
supply chain; it affects costs, equipment utilization,
employment level, and customer satisfaction.
 Purpose of Aggregate Planning
Why companies need aggregate plans and how they use
them to take a macro, or big picture, view of their
business.
1. Aggregation
The aggregate plan is useful because it focuses on a
general course of action, consistent with the company’s
strategic goals and objectives, without getting bogged
down in details.
Companies perform aggregation along three dimensions;
services or products, labor, and time.
For example: a manufacturer of bicycles that produces 12
different models of bikes might divided them in to two
groups, mountain bikes and road bikes.
Purpose of Aggregate Planning...Cont’d
a. Product Families
A group of customers, services, or products that have similar
demand requirements and common process, labor, and
materials requirements is called a product family.
For example: Insurer classify Automobile Insurance as Personal
Auto policy and Business Auto Policy.
b. Labor
A company can aggregate the workforce in various ways,
depending on workforce flexibility.
For example: If workers at the bicycle manufacturer are trained
to work on either mountain bikes or road bikes, for planning
purposes management can consider its workforce to be a single
aggregate group, even though the skills of individual workers
may differ.
Purpose of Aggregate Planning...Cont’d
 In service operations such as banking workers are
aggregated by the type of services they provide: Teller,
Customer services officer, Counter, Loan Officer, Foreign
exchange officer, etc
c. Time
The planning horizon covered by an aggregate plan typically
is one year, although it can differ in various situations.
Adjustments can be taken monthly or quarterly when need
arises.
In practice, planning periods reflect a balance between the
needs for:
i) A limited number of decision points to reduce planning
complexity
 Purpose of Aggregate Planning....Cont’d
ii) Flexibility to adjust output rates and work force levels
when demand forecasts exhibit seasonal variation.

2. Demand and Capacity

Aggregate planners are concerned with the quantity and
timing of expected demand.
The task of aggregate planners is to achieve rough equality
of demand and capacity over the entire planning horizon.
 Planners are usually concerned with minimizing the cost
of the production plan, although cost is not the only
consideration.
Purpose of Aggregate Planning....Cont’d
3. Inputs to Aggregate Planning
Effective aggregate planning requires good information.
1. The available resources over the planning period must
be known
2. Forecast of expected plan must be available
3. Planners must take in to account any policies regarding
changes in employment levels
 Aggregate planning inputs and outputs
INPUTS OUTPUTS
Resources Total cost of a plan
• Workforce/production rates Projected Level of Inventory
•Facilities and equipment • Inventory
Demand forecast • Output
Policy statement on work force changes • Employment
Subcontracting • Subcontracting
Overtime • Backordering
Inventory levels/changes
Back orders
Cost
• Inventory carrying cost
• Back orders
• Hiring/firing
• Over time
• Inventory changes
• Subcontracting
 Purpose of Aggregate Planning....Cont’d
4. Demand and Capacity Options
Management has a wide range of decision options
at its disposal for the purpose of aggregate
planning.
Demand Options Capacity Options
1. Pricing 1. Hire and lay off workers

2. Promotion 2. Over time/slack time

3. Back orders 3. Part-time workers

4. New demand 4. Inventories
5. Subcontracting
 Basic Strategies for Meeting Uneven Demand
Mangers have a wide range of options they can
consider for achieving a balance of demand and
capacity in aggregate planning.

 Aggregate planners might adopt a number of

strategies. Some of the more prominent ones are:
1. Maintain a level of workforce
2. Maintain a steady output rate
3. Match demand period by period
4. Use a combination of decision variables
 Techniques for Aggregate planning
Numerous techniques help decision makers with the task
of aggregate planning.

Further read on this issue

 5.3. Scheduling
Having determined the sequence that work is to
be tackled in, some operations require a detailed
timetable showing at what time or date jobs
should start and when they should end– this is
scheduling.
 Scheduling is the allocation of resources over
time to accomplish specific tasks.

 Scheduling decision allocate available capacity

or resources (equipment, labour, and space) to
jobs, activities, tasks, or all customers over time.
 Scheduling....Cont’d
 Since scheduling is allocation decision it uses the
resources made available by facilities decision and
aggregate planning.

 Aggregate planning seeks to determine the

resources needed while scheduling allocate
resources made available through aggregate
planning in the best manner to meet operations
objectives.
 Scheduling occurs in every organization,
regardless of the nature of activities.
 Scheduling....Cont’d
For example, Manufacturers must schedule production, which
means developing schedules for workers, equipment,
purchases, maintenance, and so on.

Hospital must schedule admissions, surgery, nursing

assignments, and support services such as meal preparation,
security, maintenance, and cleaning.
Educational institutions must schedule class rooms,
instructors, and students.

Lawyers, doctors, dentists, hair dressers, and auto repair shops

must schedule appointments.
 Scheduling....Cont’d
 Objectives of scheduling are to achieve trade-offs
among conflicting goals, which include efficient utilization
of staff, equipment, and facilities, and minimization of
customer waiting time, inventories, and process times.
Characteristics of Scheduling

1. Companies differentiate based on product volume and

product variety
2. Differentiation affects how the company organizes its
operations
3. Each kind of company operation needs different scheduling
techniques
 Characteristics of High Volume Operations
High-volume aka flow operations, like automobiles,
bread, gasoline can be repetitive or continuous
High-volume standard items; discrete or
continuous with smaller profit margins
Designed for high efficiency and high utilization
High volume flow operations with fixed
routings
Bottlenecks are easily identified
Commonly use line-balancing to design the
process around the required tasks
 Low-Volume Operations
Low-volume, job shop operations, are designed for
flexibility.

Use more general purpose equipment

Customized products with higher margins
Each product or service may have its own
routing (scheduling is much more difficult)
Bottlenecks move around depending upon
the products being produced at any given time
 Gantt Charts - Low-Volume Tool
It is visual aids called Gantt charts used for a variety of
purposes related to loading and scheduling.
 They derived their name from Henry Gantt, who
pioneered the use of charts for industrial scheduling in
the early 1900s.
Load charts illustrate the workload relative to the
capacity of a resource. Shows today’s job schedule by
employee.
 Gantt Charts….Cont’d
Progress Charts: Illustrate the planned schedule
compared to actual performance.
Brackets show when activity is scheduled to be
finished. Note: design & pilot run both finish late;
feedback has not started yet.
 Scheduling Work - Work Loading
Infinite loading: Jobs are assigned to work centers without
regard to the capacity of the work center.
It result in to formation of queues in some or all work
centers.
Ignores capacity constraints, but helps identify
bottlenecks in a proposed schedule to enable
proactive management
 Scheduling Work - Work Loading…Cont’d
Finite loading: are jobs assigned to work centers taking in
to account the work center capacity and job processing
times.
Allows only as much work to be assigned as can
be done with available capacity but doesn’t prepare
for inevitable slippage.
 Other Scheduling Techniques
Forward Scheduling –means scheduling ahead from a point in
time. It involves starting work as soon as it arrives.
 It starts processing when a job is received.
 It is used when the issue is “how long it takes to complete
the job?”
Backward Scheduling – means scheduling backward from due
date. It Involves starting jobs at the last possible moment to
prevent them from being late.
Begin scheduling the job’s last activity so that the job is
finished on due date.
 It is used when the issue is “when is the latest the job can
be started and still be completed by the due date?”
 Other Scheduling Techniques…Cont’d
For example, assume that it takes six hours for a contract
laundry to wash, dry and press a batch of overalls. If the
work is collected at 8.00 am and is due to be picked up at
4.00 pm, there are more than six hours available to do it.
Table below shows the different start times of each job,
depending on whether they are forward- or backward-
scheduled.
Task Duration Start time Start time
(forwards) (backwards)

Press 1hour 1:00pm 3:00pm

Dry 2 hours 11:00am 1:00pm
Wash 3 hours 8:00am 10:00am