Lecture 4 Aggregate Planning

LGT 2106
Principles of Operations Management

Lecture 4
Capacity Management & Aggregate Planning

Capacity Management
• Capacity is the ability to hold, receive, store or accommodate.
• Commonly viewed as the amount of output a system is capable of achieving over a specified period of time.
– In a service setting, it can be the number of customers that can be handled from noon to 1pm.
– In a manufacturing setting, it can be the number of automobiles that can be produced in a single shift.

Capacity Decisions
• System capacity affects:
– Response rate to market changes
• How quickly the system can produce or serve customers

– Overall product cost structure
• Fixed and variable production cost, regular/overtime pay, subcontracting fess

– Composition of workforce
• Regular vs temporary, shifts, overtime, etc

– Level of production technology utilized
• Long-term installation vs short-term adjustment

– Extent of management and staff support
• Resource allocation and coordination

– General inventory strategy
• To absorb the variance between output and demand

Factors Affecting Capacity Decisions
• External Factors
– Government regulations
– Union agreements
– Supplier capabilities

• Internal
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Product and service design
Personnel and jobs
Plant layout and process flow
Equipment capabilities and maintenance
Materials management
Quality control systems
Management capabilities

Important Capacity Concepts
• Best operating level
– The capacity (production volume) for which the average unit cost of output is at a minimum.

• Economy of scale
– The output range in which average unit cost decreases as unit production volumes increase.

• Diseconomy of scale
– The output range in which average unit cost rises due to added costs incurred at the operating level exceeding the best operating level.

Economies & Diseconomies of Scale

Managing Demand
 Demand
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Short term: curtail demand by raising prices, scheduling longer lead time
Long term: increase