Capacity Planning
• Capacity planning – changing capacity to match anticipated workloads
• Production scheduling – arranging workload to fit planned capacity
• Workload variability o The extent the workload is variable
• Capacity of variable resources increase and decrease to match the workload
• Capacity of fixed resources must cover peak workload requirements…and will be underutilized during non-peak periods
• Workload leveling o The extent we can level the workload
• Reduce the need for flexible resource capacity
• Reduce peak workload
• Reduced fixed capacity requirement
• Reduce under-utilization during non-peak periods
• Backlogging demand – pushing workload to a later period (i.e. period 1 workload pushed to periods 2 and 3)
• Forward production – producing ahead of time (i.e. period 3 workload done in periods 1, 2, and 3)
• Long range o Capacity planning o Fixed resources o Planning changes in capacity of less flexible resources o Significant uncertainty o Aggregated planning units
• Short range o Production scheduling o Planning use of existing capacity of less flexible resources o Capacity planning for more flexible resources o Less uncertainty, greater planning detail
• What decisions must be made long range (while critical info is still unknown)?
• What decisions could be made later, in the short term (after critical info becomes known)?
• Issues for long range capacity planning o Fixed vs. variable costs, breakeven point o Capacity “chunks” – sizing and timing o Capacity “cushion” – utilization vs. responsiveness o Peak capacity requirements, coverage
• Workload smoothing techniques
• Capacity planning tools o Breakeven point – fixed vs. variable costs, total cost vs. revenue o NPV analysis – size and timing of capacity increments o Payoff tables – single-stage decision making under uncertainty (newsboy problem) o Decision trees – multi-stage decision making under uncertainty o Queuing models and simulation – system capacity, resource utilization vs. responsiveness
• Required volume to generate a specified profit o Q = (Specified profit + FC) / (Rev per unit – VC per unit)
• Breakeven point o BEP = FC / (Rev per unit – VC per unit)

Aggregate Demand
• Chase demand vs. level production
• Anticipation inventory
• Planning capacity changes in anticipation of projected aggregate workload
• May involve long range workload leveling though seasonal (anticipation) inventory buildup
• Used to plan changes in capacity of more flexible resources, like the number of shifts run, use of temporary workforce, outside contracting, etc.
• Based off of total workload from all products
• Production quantities are balances against an aggregate demand forecast for each product group, resulting in a projections of anticipation inventory levels
• Anticipation inventory allows a smooth production schedules even though demand varies
• Fixed resources form constraints on the range of feasible solutions
• Level production – constant month-by-month aggregate product level, despite variability in projected demand o Maintains constant workload o Avoids capacity change costs o Uses anticipation inventory to smooth out month-by-month variation in workloads
• Chase demand – productions levels vary month-by-month to match demand o No inventory buildup o Either change capacity up and down as workload goes up and down, OR maintain capacity at a level sufficient to cover the peak monthly workload
• A decision to increase or decrease machine capacity would require a longer planning horizon, and is essentially a different problem cuz it’s more of a permanent decision
• Workload leveling – planning production quantities to maintain a constant workload while building inventory for later periods of high demand
• Capacity adjustment – changing the number of shifts in order to provide sufficient capacity for varying production levels

MRP
• Capacity planning to production scheduling (long