CHAPTER 4: CAPACITY MANAGEMENT AND AGGREGATE PRODUCTION

PLANNING

TRUE/FALSE
1. Actual capacity is the greatest throughput rate that can be achieved with the existing configuration
of resources and the accepted product or service mix plans.
ANS: T
2. E is the efficiency with which utilization U can be employed to make different kinds of products.
ANS: F
3. E, the efficiency, is a proportional factor used to convert units of throughput to standard time.
ANS: T
4. Unexplained fluctuations in capacity are unpleasant but profitable.
ANS: F
5. Shutting down the production system for 2 hours of an 8-hour day does not affect the measure U,
which remains at 100 percent.
ANS: F
6. The ability to contain or store inventory is a well-received measure of capacity.
ANS: T
7. Operations capacity describes how many units can be supplied per unit of time.
ANS: T

8. The two kinds of capacity situations (extra- and under-) have a trade-off relationship.
ANS: T
9. When market demand falls below maximum supply capacity, an inventory buildup can be used to
help meet that demand if backordering is prohibited.
ANS: F
10. Backorders can be used to postpone satisfying demand when there is no inventory available.
ANS: T

11. Capacity as measured by maximum output volume per unit of time (or max throughput rate)
comes closest to capturing the P/OM concept.

ANS: T

12. Capacity management relates to how the equipment, people, and materials of the existing system
are used.
ANS: T

13. Aggregate planning is a method used to design a generalized production schedule.

ANS: T
14. The reason that the term “aggregation” is used is because the specific identities of only some of the
units are merged into a common pool of standard units or standard hours.
ANS: F
15. Aggregate planning is an external (strategic) production management function as compared to an
internal (tactical) function.
ANS: F
16. The driver of AP (aggregate planning) is forecasted customer demand in standard units.
ANS: T
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17. Workforce planning is readily accomplished by AP but it is strictly manufacturing and not
important to service industries.
ANS: F
18. Intermittent flow shops may be preferred because of lumpy demand levels (rather than constant
demand levels) over time.
ANS: T

19. Aggregate planning lumps various items together so that the sum reflects aggregate demand. The
items to be aggregated must share supply commonalities. There is no point in aggregating jobs
that cannot be made at the same facilities.
ANS: T

20. The second level of production scheduling consists of assigning jobs to departments that have
been equipped and staffed according to the aggregate plan.
ANS: T

21. Overstaffing seldom places burdens on the human resources managers who have to deal with
personnel needs and the long-term repercussions of asking people to leave without notice.
ANS: F

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22. By varying the size of the workforce, production output can be made to match demand if facilities
and equipment allow.
ANS: T
23. Buyers who refuse to accept backorders create the situation called fill or kill. In that case, the cost
of a backorder is a lost sale at the minimum and possibly the loss of a customer over a long
purchasing period.
ANS: T
24. Market research indicates that consumers of cosmetics and makeup will travel far and wide to find
the lipstick brand and color to which they are loyal. This is equivalent to a fill and kill situation.
ANS: T
25. Forecasts of demand are subject to statistical variability. Demand cannot be predicted perfectly
without a contract.
ANS: T
26. When calculating the costs of level production, it should be remembered that cumulative inventory
is the measure of actual stock on-hand. During a period of time when demand continuously
exceeds supply, this net stock on-hand cannot fall below zero.
ANS: F

27. Workforce planning is directly related to the control of inventories based on forecasts of supply.
ANS: F
28. Flexible workforce size is better fitted to the configuration of job shops and batch production than
it is to flow shop production.
ANS: T

29. Workforce size is a variable that is often a function of the volume of business, revenues, and
profits. These factors play a part in determining inputs to forecasts for AP modeling.
ANS: T

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MULTIPLE CHOICE

1. Lack of orders or breakdowns of productive systems will diminish

a. T. c. E.
b. U. d. T  E.
ANS: B
2. _____ is applied as a proportional correction to standard time when there are supply chain
disruptions.
a. T (real time available) c. U (utilization)
b. E (efficiency) d. C (actual capacity)
ANS: C

3. Many companies prefer to have capacity in reserve and expect to operate effectively _____ the
misleading ideal of _____ percent utilization.
a. below; 100 c. below; 75
b. above; 75 d. above; 100
ANS: A
4. The definition that best fits capacity is
a. the capacity to make goods and/or provide services.
b. the minimum sustained output of goods and/or services.
c. the capacity to contain or store inventory.
d. both a and c
e. both b and c
ANS: D

5. If the maximum capacity of the process is _____ the peak demand, knowing how to assign
priorities will influence real capacity levels achieved.
a. equal to c. less than
b. greater than d. much greater than
ANS: C

6. Capacity planning involves not only machinery and _____, but also _____.
a. labor; management c. training; vendor management
b. employees’ motivation; materials d. all of the above
ANS: D
7. As throughput volume gets larger, what factors operate to make the process more efficient?
a. workers learn to do their jobs better
b. it takes less time
c. more work gets turned out in a time period
d. costs decrease
e. all of the above
ANS: E

8. Capacity decisions must have three elements in place:

a. managerial support, market rationalization, and P/OM knowledge.
b. P/OM knowledge, market rationalization, and financial support.
c. market rationalization, HRM support, and P/OM knowledge.
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d. financial support, market rationalization, and managerial support.
ANS: B
9. Stockless materials management systems are basically _____ managed inventory systems where
a third party manages all or part of the supplies.
a. marketing c. customer
b. vendor d. accounting
ANS: B
10. _____ is determined by calculating the amount of time that is available when fully utilizing the
resources that are already in place to make and deliver product throughputs. Doubling the
number of machines doubles the amount of available time.
a. T c. E
b. U d. C
ANS: A
11. Machines and people that work _____ have lower efficiency than those that have a _____
productive output.
a. slower; higher c. faster; higher
b. slower; lower d. faster; lower
ANS: A
12. If a job is being done at 90 percent of the standard time because a supplier has delivered a
defective product, _____ action must be taken with supplies on hand and the problem must be
corrected with future deliveries.
a. no c. positive
b. remedial d. utilization forecasting
ANS: B

13. The overloaded system does not have to turn away orders if the customer agrees to wait until
other customers’ jobs are finished. When no current inventory is available, these _____ must
wait until supply catches up with demand.
a. work-in-process c. raw materials
b. finished goods d. back orders
ANS: D

14. If the _____ capacity of a process is less than the peak demand, knowing how to assign priorities
will influence real capacity levels achieved.
a. maximum c. rated
b. minimum d. observed
ANS: A

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15. A potential backup supplier who can make up an emergency shortfall in materials is needed.
Having this supplier in place before the shortage occurs is known as _____ planning.
a. strategic c. short-term
b. long-term d. contingency
ANS: D
16. The specific purpose of _____ is to schedule production for the job shop.
a. aggregate planning d. planning horizons
b. detailed schedules e. disaggregate planning
c. strategic business plans

ANS: A
17. The_____ is the producer’s general plan for getting work done.
a. company plan c. detailed schedule
b. aggregate plan d. strategic plan
ANS: B
18. Before trying to do detailed, tactical scheduling, _____ should be used to avoid costly mistakes
arising from not being prepared with the proper resources at the right time.
a. company planning d. strategic planning
b. production scheduling e. enterprise planning
c. aggregate planning

ANS: C
19. _____ is (are) generated by a variety of customers for the different kinds of products made by
the job shop or the different kinds of services offered by job shops.
a. Supply d. Production plans
b. Aggregate plans e. Information
c. Demand

ANS: C
20. _____ is achieved by collecting and lumping all items to be produced together.
a. Strategic planning c. Company planning
b. Detailed scheduling d. Aggregate planning
ANS: D
21. Aggregate-planning methods can derive better solutions when P/OM can develop
a. ways to expand the number of different products that can be made by a specific set of
resources.
b. ways to convert strategies into tactics.
c. ways to expand the number of resources that can make a class of products.
d. both a and c
e. both a and b
ANS: D

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22. Because many job shops provide services and not goods, it pays to emphasize the fact that AP is
useful to _____ kinds of job shops.
a. most c. specific
b. both d. many
ANS: B

23. Which level of production planning requires a forecast?

a. first level (aggregate planning) c. third level (sequencing)
b. second level (loading) d. fourth level (LP planning)
ANS: A

24. Which variables are relevant production factors of aggregate planning?

a. demand aggregated over time d. workforce level
b. supply aggregated over time e. all of the above
c. overtime production

ANS: E
25. To justify the _____, the sum of costs associated with a constant workforce must be less than the
sum of costs associated with a variable workforce.
a. chasing policy c. hybrid policy
b. constant production strategy d. combination strategy
ANS: B

26. Backordered work is shown as

a. positive inventory. c. cumulative inventory.
b. negative inventory. d. rework.

ANS: B
27. What business product lines have customers with ordering behaviors called fill or kill?
a. video and music tapes d. none of the above
b. lipstick and cosmetics e. all of the above
c. caviar and champagne

ANS: E

28. For the slightly chasing policy model (C1) backorders cost $100 per occurrence, costs for carrying
inventory are $25 per unit, hires cost $200 per instance, and reductions cost $300 per event - all
occurring within the time period. Then, total variable cost TVC (C1) is
a. $12,800 c. $22,800
b. $5,800 d. $12,925
ANS: A
29. Workforce adjustment costs and _____ costs trade off between each other.
a. minimum total c. lean production
b. inventory/backorder d. smoothing demand
ANS: B

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30. The specific purpose of AP is to decide
a. when to schedule work.
b. under what conditions to schedule work.
c. what to forecast for demand.
d. both a and b
ANS: D
31. Aggregate planning starts a chain reaction in the supply chain, which is best described by
a. producers to customers to suppliers.
b. customers to producers to suppliers.
c. suppliers to producers to customers.
d. producers to suppliers to customers.
ANS: C
32. Material flows inside the company can be scheduled in detail for specific items, or in
a. random allocation. c. both a and b
b. categories of specific items. d. neither a nor b
ANS: B
33. Aggregation methods for scheduling farming (harvesting) activities have useful _____ to service
and manufacturing applications. The _____ can be accounted for at a later time.
a. similarities; differences
b. differences; similarities
c. transformation analogies; outputs
d. forecast similarities; product schedules
ANS: A

34. Aggregate planning is achieved by _____ all items to be produced together.

a. collecting c. both a and b
b. lumping d. averaging
ANS: C
35. Because many job shops provide services and not goods, it pays to emphasize the fact that:
a. AP is useful to all kinds of job shops.
b. AP is only useful to service providers.
c. AP is only useful to goods providers.
d. AP is not useful to all brands of jobs shops.
ANS: A

36. It is not possible to do aggregate planning without a _____.

a. Moving average c. Forecast
b. Weighted MA d. Exponential Smoothing
ANS: C

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37. _____ are treated in aggregation across a variety of different work facilities and output jobs.
a. Demands and production outputs c. Production inputs and outputs
b. Demands and forecasts d. none of the above
ANS: A
38. Demands for different outputs are _____ by considering them all to be a unified demand for the
output capacity of the facility.
a. calculated c. averaged
b. aggregated d. modified
ANS: B
39. The aggregate planning problem requires _____ that will optimize the total system’s
performance.
a. period-by-period solutions c. aggregate solutions
b. one period solutions d. single period solutions
ANS: A
40. _____ occurs when production is constant and demand varies.
a. overproduction c. both a and b
b. underproduction d. none of the above
ANS: C

41. When there is a large amount of demand fluctuation, a variable workforce capability is appealing
but there are offsetting costs, which include the costs of
a. the required information systems. c. both a and b
b. human resource management. d. none of the above
ANS: C

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SHORT ANSWER

1. What is actual capacity? How is it defined and altered?

ANS:
Actual capacity of the supply chain is the greatest throughput rate that can be achieved with the
existing configuration of resources and the accepted product or service mix plans. Altering the product
or service mix can change actual realizable capacity. Modifying the existing configuration of
resources, equipment, and people in the supply chain workforce alters real capacity.
2. What is capacity? How is it defined? Is 100 percent capacity realistic?
ANS:
Capacity as measured by maximum output volume per unit time, or throughput rate, comes closest to
capturing the P/OM concept. That does not make it easy to measure. It is possible to produce at more
than 100 percent of capacity for a period of time. Maximum capacity depends on who is doing the
work and what is being made or serviced. Although 100 percent and maximum capacity are illusive
concepts, they are useful standards to go by as long as the users are aware of their arbitrary nature.
3. Capacity planning is one of the most important business activities. But, why is capacity planning
so difficult?
ANS:
Capacity planning is filled with opportunity to manage to advantage and fraught with difficulties. This
is especially true if demand is capricious and tough to forecast correctly. Capacity planning is done to
reach optimal supply decisions that, it is hoped, will match future demand patterns. This means that
capacity planning does not have to be a single frozen value but can be a dynamic trajectory with
fluctuations and oscillations.
4. What are the implications of bottlenecks on capacity?
ANS:
A major issues in determining maximum capacity is the effect of bottlenecks, which limit throughput
rates of parts of the supply chain. Real capacity can be much lower than the apparent capacity of
individual components of the supply chain. The systems point of view requires that the subject of
bottlenecks be thoroughly addressed when dealing with the design and measurement of supply chain
capacity.
5. How does backordering augment service capacity?
ANS:
If the customer is willing to wait, backorders can be used to satisfy demand on the books. There is no
real inventory available until later when supply catches up with demand. This applies to services that
cannot be stored. It applies as well to the manufacturer who is out of stock. The overloaded system
does not have to turn away orders if the customer agrees to wait until other customers’ jobs are
finished.

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6. Why is the term aggregation used in the concept of Aggregate Demand?
ANS:
The term aggregation is used because the specific identities of all units are merged into a common
pool of standard units or standard hours.
7. What is the driver of AP?

ANS:
The driver of AP is forecasted customer demand. This can take the form of customer orders and/or
inventory plans. The AP must be updated at regular intervals as forecasts are prepared for the next
planning horizon.
8. Define Standard Units.
ANS:
Standard units are used as the common denominator for aggregated units in the production-scheduling
problem. For example, demand for paints of different colors and can sizes are aggregated as gallons of
generic paint.
9. What are some of the key factors of Aggregate Planning?
ANS:
1. Demands over time
2. Supplies over time
3. Overtime production occurs when the normal time production capacity level cannot satisfy demands
(with or without backorders allowed).
4. Workforce levels are the amounts of human resources required to meet demands.
5. Inventory levels including starting levels and final inventory levels.
6. All factors are measured against normal capacity plans, stated in standard units.

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PROBLEMS
1. Six jobs will be completed next week. The demand in units for each job (called dj) and the
production rates of the standard operator in pieces per standard operator hour for each type of job
(called PRj) are given as follows:

Job A B C D E F
dj 700 1,200 600 500 2,100 200
PRj 44 26 28 12 45 20

What production capacity (in standard hours) is required to complete all of these jobs?
ANS:
Job A B C D E F
dj 700 1,200 600 500 2,100 200
PRj 44 26 28 12 45 20

dj/PRj 15.909 46.153 21.429 41.667 46.667 10.000

Sum = 181.825 = 181.83 standard hours

Note: How demand for item j, which is dj, when divided by the production rate of the standard
operator, PRj, is equal to demand in standard hours.
2. Four service calls are on hand for next week. The number of steps required for each has been
determined and is listed as dj. The supervisor is designated as the standard operator. Her output
rates are labeled as PRj. They are measured in steps per standard operator hour for each type of
job.

Job A B C D
dj 400 150 2000 48
PRj 20 30 400 12

What production capacity (in standard hours) is required to complete the four service calls?
ANS:
Job A B C D
dj 400 150 2000 48
PRj 20 30 400 12

dj/PRj 20 5 5 4

Sum = 34 standard hours

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3. It has been estimated that annual demand for three types of cat food made by Bruce’s Seafood
Delight Company are:

A B C
dj 900 630 240

There are three plants located in the United States. The most productive plant has been chosen as the
standard plant. Its output is listed in standard plant output per day.

dj/PRj 6 7 2

The other two plants have indexes of 0.9 and 0.7. There are 250 working days in the year, and all
numbers are given in thousands of cases.

Can Bruce’s three plants satisfy the annual demand?

ANS:
A B C
dj 900 630 240
PRj 6 7 2

dj/PRj 150 90 120

Total = 360 standard days to meet demand

Standard days at standard plant = 250 days (given)

Plant 2 at 90 percent = 225 days
Plant 3 at 70 percent = 175 days
Total days = 250 + 225 + 175 = 650

Yes, Bruce’s three plants can satisfy the annual demand since 360 standard days are needed to meet
demand and 650 standard days are available. The demand can easily be met. However, because 290
days of plant time will not be utilized, an effort should be made to increase sales, close the 0.7 rated
plant, or do both.

4. Complete the table below. What kind of aggregate planning policy is this?
T: Time Period
St: Demand (Sales)
Pt: Production = 10 Wt
It: Inventory
Wt: Number of Workers (initial period = 38)

T St Pt It Sum It Wt Wt – Wt–1
1 340 380 38
2 420 390 39
3 350 360 36
4 390 370 37
5 360 360 36
6 420 400 40
ANS:

T St Pt It Sum It Wt Wt – Wt–1
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 1 340 380 +40 +40 38 +0
2 420 390 -30 +10 39 +1
3 350 360 +10 +20 36 -3
4 390 370 -20 0 37 +1
5 360 360 0 0 36 -1
6 420 400 -20 -20 40 +4
Total 2280 2260

This is a combination aggregate planning policy (hybrid) that mixes the inventory costs associated
with a level strategy and the work force adjustment costs associated with a chasing strategy.

5. Complete the table below.

T: Time Period
St: Demand (Sales)
Pt: Production = 10Wt
It: Intentory
Wt: Number of Workers (initial period = 39)

T St Pt It SIt Wt Wt – Wt–1
1 420 390 39
2 360 390 39
3 390 390 39
4 350 390 30
5 420 390 39
6 340 390 39
ANS:
T St Pt It SIt Wt Wt – Wt–1
1 420 390 -30 -30 39 0
2 360 390 +30 0 39 0
3 390 390 0 0 39 0
4 350 390 +40 +40 30 0
5 420 390 -30 +10 39 0
6 340 390 +50 +60 39 0

This is a level production aggregate planning policy that experiences inventory costs only. There are
no work force adjustment costs that are associated with a chasing strategy.

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6. The new manager of the electric utility notes that recent summers have been warmer than average.
Consequently, for next year she revises upward the probability that actual demand will exceed
average demand; this is estimated to occur 8 percent of the year or 29.2 summer days. She
estimates that each power incident can cost far less than her predecessor had spent. Using different
management techniques to deal with brownouts, she hopes to reduce the cost per incident to
$10,000. Because the previous manager had not invested in additional capacity to cover maximum
peak-load requirements, that option is still available. She faces the prospect that it will cost an
extra $3,000,000 to increase capacity from average to peak. This amount is spread out over 10
years, or $300,000 per year. Should peak-load capacity be installed?
ANS:
Cp is the investment for peak capacity, depreciated over the life of the system. Cnp is the cost of not
having capacity to meet demands that are greater than the average demand. These costs are $10,000
per incident and are composed of the costs of brownouts and power failures, as well as the loss of
community goodwill.

Thus, Cnp is 365  0.08  $10,000 = $292,000. This is less than the $300,000 investment to prevent the
brownouts, so they should delay buying the equipment to generate sufficient power to meet peak
demands. Note that if the cost per incident had not been reduced so effectively and was more than
$10,274, then the $300,000 investment could be justified. Projections for future year’s peak
requirements and cost of peak-load capacity might change the decision.

15
7. The aggregate demand for a product line for the next six months is given below. The firm plans to
have regular capacity of 120 units per month, overtime capacity for 40 more units per month and
subcontracting can supply up to 100 units per month.

Month 1 2 3 4 5 6
Demand 230 150 200 220 200 190

Additional Data
Previous output level 150 units
Beginning inventory 50 units
Shortage cost $200 per unit per month
Inventory holding cost $80 per unit per month
Regular time cost $1,000 per unit
Subcontracting cost $1,800 per unit
Overtime cost $1,200 per unit
Hiring workers to increase production level $300 per unit
Firing workers to decrease production level $400 per unit

Use the Chase Strategy and answer the following four questions
a. What is the total cost of shortages?
ANS: There are no shortages in a Chase Plan.

b. What is the cost of overtime production?

ANS: $276,000

c. What is the cost of subcontracting?

ANS: $342,000

d. What is the cost of changing production level?

ANS: $12,000

NOTE: Please see detailed calculation in the Excel File “APP for Test Bank”.
Many new problems can be generated by changing the data.

16
 8. Consider the demand data given below. A level plan that produces 180 units per period in the
regular time is being used. The inventory carrying cost per unit per period is $ 20; and the
shortage cost per unit per period is $ 35.00. The beginning inventory is 70 units. There is no
overtime production or subcontracting.

Month 1 2 3 4 5 6
Demand 230 150 200 220 200 190

a. What is the total cost of holding inventories?

ANS: $2,000.00

b. What is the cost of shortages?

ANS: $2,800.00

NOTE: Please see detailed calculation in the Excel File “APP for Test Bank”.
Many new problems can be generated by changing the data.

17
 9. A company has the following demand forecast for the next six months. Assume that an
employee contributes 8 regular working hours per day. Overtime capacity is limited to a
maximum of 25% of regular time capacity. The time to produce one unit is 4 hours.

Working
Month Forecast
Days

January 550 21
February 660 20
March 570 22
April 510 19
May 540 20
June 580 18
Total 3410 120

a. What is the average demand level per day during the 6-month period?
ANS: 28.42 (=3410/120).

b. If the demand for April (510 units) are produced during regular time in April (19 days), how
many workers will you need?
ANS: 13.42 = (510*4)/(8*19)

c. Suppose the number of workers is 14 in each month. Each worker produces to the maximum
capacity during regular time. How many units can be produced in March during regular time?
ANS: 616 = (14*8*22)/4

d. The management specifies the following policy: Use a level production – that is the same
number of workers is used in each month. No inventories or shortages are allowed. Over time and/or
subcontracting may be used in any month if needed. What level production per day will you use?

ANS: The minimum number of workers required in any month is 12.95 (March). This number
is used in doing the calculations.

NOTE: Please see detailed calculation in the Excel File “APP for Test Bank”.
Many new problems can be generated by changing the data.

18
 10. The aggregate demand for a product line for the next six months is given below. The firm has
regular capacity of 140 units per month, overtime capacity for 30 more units per month and
subcontracting can supply up to 80 units per month. The chase policy is being used. Find the
numbers of units produced during regular time, over time and through subcontracting in each
month.

Month 1 2 3 4 5 6
Demand 210 130 190 220 200 180

Answer:

Regular
Overtime Sub- Idle
Month Demand Time
Production contracting Capacity
Production
1 210 140 30 40 0
2 130 130 0 0 10
3 190 140 30 20 0
4 220 140 30 50 0
5 200 140 30 30 0
6 180 140 30 10 0

Hint: In month 1, 140 units are produced during regular time, 30 units in overtime and 40 units
through subcontracting. In month 2 the demand is 130 units. Therefore, only 130 (and not 140) units
are produced during regular time. In this way the calculations continue.

NOTE: Please see detailed calculation in the Excel File “APP for Test Bank”.
Many new problems can be generated by changing the data.

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