OPERATIONS MANAGEMENT
for MBAs Fourth Edition
Meredith and Shafer
John Wiley and Sons, Inc.
Topic 2: Capacity Planning & Forecasting
Chapters 8 & 8S : Capacity, Forecasting
1
Outline
•Capacity Planning Overview
•Utilization & Efficiency
•Effectively Utilizing Capacity / Resource Planning & Scheduling
Production Planning
Aggregate Plan
Master Production Schedule
•The Learning Curve
• Forecasting
• Homework
2
Capacity Planning Decisions
Demand Estimates
Forecast
Market
Corporate Strategy
Skills
Suppliers & Customers
3
Capacity
Maximum rate outputs can be produced or
services delivered.
Maximum amount of availability for a product or
service.
4
Capacity Timing
Forecast of capacity
required
Capacity
Planned unused
capacity
Capacity
increment
Time between
increments
Time
(a) Preceding Demand or Expansionist strategy
5
Capacity Timing
Forecast of capacity
required
Capacity
Planned use of
short-term options
Capacity
increment
Time between
increments
Time
(b) Following Demand or Wait-and-see strategy
6
Location Planning Strategies
Possible Factors affecting location decisions
7
Breakeven Location Model
Location
A
B
C
D
FC
150000
300000
500000
600000
VC
62
38
24
30
8
Annual cost (thousands of dollars)
Breakeven Location Model
1600
A
(20, 1390)
1400
(20, 1200)
1200
D
B
C
(20, 1060)
1000
(20, 980)
800
Break-even point
600
Break-even
point
400
200
0
A best
2
4
B best
6
8
6.25
C best
10 12 14 16 18 20 22
14.3
Q (thousands of units)
9
Weighted Score Location Method
Factor
Tax environment
Employee preference
Accessibility
Community
Costs
Wt
A
20
20
5
25
30
B
C
D
5
2
1
3
5
1
2
3
3
1
4
2
2
1
4
3
3
3
3
3
370
180
275
300
10
Utilization
Time Busy / Time Available
Actual output / capacity
Average output rate / capacity
Occupied (in use) / amount available
11
Efficiency
total task time / (N X cycle time)
Capacity or Output Rates:
15 units/hr
20 units/hr
6 units/hr
30 units/hr
Littlefield
Utilization:
100%
75%
100%
20%
Utilization:
40%
30%
100%
20%
Efficiency = 19 / (4 X 10) = .475 = average utilization based on cycles
cycle time  time at which every workstation can pass its completed part to the next station
12
Efficiency
total task time / (N X cycle time)
2nd Machine C
5
Capacity or Output Rates:
Utilization:
15 units/hr
80%
20 units/hr
12 units/hr
30 units/hr
60%
100%
100%
40%
Efficiency = 19 / (5 X 5) = .76 = average utilization based on cycles
cycle time  time at which every workstation can pass its completed part to the next station
13
Bottlenecks
5 per hour
15 per hour
7 per hour
14
Bottlenecks
Bottleneck
Operation 1
20/hr.
Operation 2
10/hr.
Operation 3
15/hr.
Maximum output rate
limited by bottleneck
15
The following diagram describes a process that consists of eight separate operations, with sequential
relationships and capacities (units per hour) as shown.
a. What is the current capacity of the entire process?
b. If you could increase the capacity of only two operations through process improvement efforts, which two operations
would you select, how much additional capacity would you strive for in each of those operations, and what would the
resulting capacity of the entire process be?
15/hr.
10/hr.
20/hr.
1
2
3
5/hr.
8/hr.
12/hr.
4
5
6
34/hr.
30/hr.
7
8
16
Cushion
High Cushion
Low Cushion
17
Resource Planning
Long-Range
Capacity
Planning
Chase Plan
Master
Production
Schedule
Aggregate
Planning
Level Plan
Master
Production
Schedule
Inventory
Information
Production
Planning
18
Resource Planning
19
Resource Planning
MPS gets further broken down in the MRP.
20
Resource Planning
At the heart of any organization
 Starts with sales and operations plans (or
aggregate plan) and plans the input
requirements
 A process relative to the firm’s competitive
priorities and an important part of managing
supply chains

21
Resource Planning
Aggregate Plan
22
Materials Requirements Planning
An information system that translates master
schedule requirements for end items into timephased requirements for subassemblies,
components, and raw materials.
Aids in managing dependent demand inventory.
Primary Inputs:
Master Production Schedule
Bill of Materials
Inventory Records
23
MRP Inputs
Authorized
master production
schedule
Inventory
transactions
Inventory
records
MRP
explosion
Other
sources
of demand
Bills of
materials
Engineering
and process
designs
Material
requirements
plan
24
Master Production Schedule
MPS for a single
end item
Aggregate Plan
25
Bill of Materials





A record of all components of an item
Shows the parent-component relationship
The usage quantities are derived from engineering and
process design
Five common terms

End items

Intermediate items

Subassemblies

Purchased items
Part commonality (sometimes called
standardization of parts or modularity)
26
Bill of Materials
Back
legs
Front
legs
Back slats
Seat cushion
Leg supports
Seat-frame
boards
A
Ladderback
chair
BOM for a Ladder-Back Chair
27
Bill of Materials
A
Ladder-back
chair
F (2)
Back legs
B (1)
Ladder-back
subassembly
C (1)
Seat
subassembly
G (4)
Back slats
H (1)
Seat frame
D (2)
Front
legs
E (4)
Leg
supports
I (1)
Seat cushion
J (4)
Seat-frame
boards
28
Bill of Materials
If 50 units of of end item A are to be assembled, how many
additional units of D are needed? Of E?
Item
A
B
C
D
E
F
G
LT (wks)
1
2
3
3
6
1
3
Amt. OH
0
10
15
10
100
5
5
A
B(3)
D(1)
C(1)
E(2)
F(1)
D(1)
G(1)
29
30
Inventory Record
Inventory transactions are the basic building blocks of
up-to-date records
 Transactions include releasing new orders, receiving
scheduled receipts, adjusting due dates for scheduled
receipts, withdrawing inventory, canceling orders,
correcting inventory errors, rejecting shipments, and
verifying losses and stock returns
 Inventory records divide the future into time periods
called time buckets
 Keep track of inventory levels and component
replenishment needs

31
Inventory Record

The time-phase information contained in the inventory
record consists of:
◦
◦
◦
◦
◦
Gross requirements
Scheduled receipts
Projected on-hand inventory
Planned receipts
Planned order releases
Projected on-hand
inventory balance
at end of week t
=
Inventory on
hand at end of
week t–1
+
Scheduled
or planned
receipts in
week t
–
Gross
requirements
in week t
32
Planning Factors
Lot-sizing rules
 Fixed order quantity (FOQ) rule maintains
the same order quantity each time an order
is issued
 Lot for lot (L4L), order what is necessary
 Periodic order quantity (POQ), order what
is necessary to handle P periods

33
MRP Example, Given MPS, Inv Records, BOM
MPS for End Item A, LT=1, Beg Inv=0
W
e
e
k
M
P
S
0 1
0
2
3
4 5
1
0
0
6 7
2
0
0
8 9 1
0
1
2
0 8
0 6
0
Inventory Records
Item
A
B
C
D
LT
1
1
2
3
200 wk 1, 100 wk 6
Sch Rec
Amt OH
0
Rule
BOM
B(1)
20
0
425
L4L, min 120
L4L
Lot Size, Q=500
A
C(2)
D(1)
34
MRP Example, Solution
A (LT=1)
Gross requirements
Schd. Receipts
Proj. OH
Net requirements
Planned-order receipts
Planned-order releases
Beg. Inv.
B (LT=1, L4L, min=120)
Gross requirements
Schd. Receipts
Proj. OH
Net requirements
Planned-order receipts
Planned-order releases
Beg. Inv.
C (LT=2, L4L)
Gross requirements
Schd. Receipts
Proj. OH
Net requirements
Planned-order receipts
Planned-order releases
Beg. Inv.
D (LT=3, Lot Size Q=500)
Gross requirements
Schd. Receipts
Proj. OH
Net requirements
Planned-order receipts
Planned-order releases
Beg. Inv.
1
2
3
4
5
2
3
20
20
1
2
100
100
200
200
120
120
180
180
180
60
60
60
5
40
40
160
160
200
2
4
5
0
4
425
425
500
425
6
25
8
360
6
9
10
120
180
60
0
120
120
180
0
180
180
120
0
60
120
7
100
0
0
400
400
140
5
400
425
0
400
200
0
3
7
120
400
1
6
200
200
200
200
120
160
3
10
60
4
120
9
180
200
20
80
120
8
120
100
20
7
200
100
1
6
100
8
9
10
240
360
120
100
140
140
120
0
360
360
0
120
120
7
8
140
360
120
25
115
500
385
25
95
500
9
405
60
10
405
405
500
35
The Learning Curve
•The ability to increase productive capacity through “learning.”
•Each time the output doubles, the labor hours decrease by a fixed percentage of their
previous value.
•Common LC values are 70 to 95 percent.
120
Units
1
2
4
8
16
32
Hours (.9)
Hours (.8)
100
100
90
80
81
64
72.9
51.2
65.61
40.96
59.049
32.768
Labor-hours
100
80
60
Hours (.9)
Hours (.8)
40
20
0
0
10
20
30
Number of Units Produced
40
36
LC Application
A customer support center has a 90 (or 0.90) percent learning curve rate for handling
customer issues. A new rep has just begun work. Her first support call required 2000
seconds.
a)Estimate the time needed to complete her first 5 calls.
b)Estimate the time needed to complete her 5th call.
c)Estimate the time needed to complete calls 21 through 25.
0.9
Tn  T1 (n
ln 0.8
ln 2
)
where, Tn  time for the nth unit

1
2
3
4
5
2000.00
1800.00
1692.41
1620.00
1565.97
21
22
23
24
25
1259.07
1250.19
1241.78
1233.77
1226.14
Using the Tables
Using the Tables
2000 X 4.339 = 8,678
2000 X 17.71 = 35,420 (length of first 25 calls)
2000 X 14.61 = 29,220 (length of first 20 calls)
6,200
2000 X 0.783 = 1,566
37
LC Application
Call Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Length
Cumulative
2000.00
2000.00
1800.00
3800.00
1692.41
5492.41
1620.00
7112.41
1565.97
8678.39
1523.17
10201.56
1487.90
11689.45
1458.00
13147.45
1432.13
14579.58
1409.38
15988.96
1389.11
17378.06
1370.85
18748.92
1354.28
20103.19
1339.11
21442.30
1325.14
22767.43
1312.20
24079.63
1300.16
25379.80
1288.92
26668.71
1278.37
27947.08
1268.44
29215.52
1259.07
30474.59
1250.19
31724.78
1241.78
32966.56
1233.77
34200.32
1226.14
35426.46
2000.00
1800.00
1692.41
1620.00
1565.97
1523.17
1487.90
1458.00
1432.13
1409.38
1389.11
1370.85
1354.28
1339.11
1325.14
1312.20
1300.16
1288.92
1278.37
1268.44
1259.07
1250.19
1241.78
1233.77
1226.14
2000.00
1800.00
1692.41
1620.00
1565.97
1523.17
1487.90
1458.00
1432.13
1409.38
1389.11
1370.85
1354.28
1339.11
1325.14
1312.20
1300.16
1288.92
1278.37
1268.44
1259.07
1250.19
1241.78
1233.77
1226.14
38
LC Application
A manager wants to estimate an appropriate LC rate for a new type of work his firm will
undertake. He has obtained the following completion times for the initial 8 repetitions of a
job of this type. What learning curve rate is appropriate? Estimate the duration to
complete job unit 45.
Unit
1
2
3
4
5
6
7
8
Time (hrs)
15.90
12.00
10.10
9.10
8.40
7.50
7.40
6.90
39
Factors that may affect the LC rate
•Complexity of the task
•Human component
40