Let’s talk Capacity Planning.
Definition- Determining the production capacity needed to meet changing demands for products. You’ve got stuff to make. How do you figure out how much of it to make, and when? Capacity Planning. It can take many forms. There is lot-for-lot, fixed order quantity, fixed order period, and a less well known option of part-period balancing.
For fun, we’ll keep our focus on Part-Period Balancing (PPB). For more info on the other methods, check out my post on them here. First, some assumptions:
Wagner-Whitin Property is to be upheld. “Under an optimal lot-sizing policy either the inventory carried to period t +1 from a previous period will be zero or the production quantity in period t + 1 will be zero.”
Basically, you cannot make items for a given period in more than one period.
Demand and production are deterministic.
Uncertainties such as canceled orders, breakdowns, sickness, etc. are not baked in.Let’s start with a fictional demand schedule:
For simplicity, we can think of each time period as a week, and the net requirements as generic “units.” Could be shoes, monitors, desks, or anything.
Part-Period Balancing (PPB). This method combines the Wagner-Whitin property with the assumption that inventory carrying cost is
to the setup cost. The motivation for using PPB approach is to balance the two costs so neither one blows up. A Part-period is the length of time a part is carried. E.g. 1 part carried for 10 periods, 5 parts carried for 2 periods, and 10 parts carried for 1 period all are 10 part-periods and have the same inventory carrying cost.
For this example, let’s assume the setup cost is $200 (constant) and the carrying cost is $2 per item per period.
Since an inventory cost of $270 is closest to a set up cost of $200, you would choose to build 87 items in period 1. That would cover the needs for periods 1, 2 and 3. Doing it again-
Now we see that $180 is closest to $200, so we’ll build 93 items. This will cover periods 4,5 and 6. Depending on how many periods of demand you have, you would keep going. In this example, we only have two more periods to go, and we know the demand is 90. Since the previous production run totaled 93 units produced, we can skip the table and just produce 90 units in period 7 to cover the final two periods. The actual production schedule would look like
Where is this used?
Long term planning
Budgeting (note, the PPB method can be great for keeping a hold on budgets)
|The Big Question on Everyone’s Mind|
True or false- Former rapper and R&B singer Akon is planning on launching a digital currency known as “Akoin?”
Throw back Thursday, Tuesday Edition
Tony Hawk is recreating his 1999 video game, “Tony Hawks Pro Skater” in real life. Check out a behind the scenes look at the video shoot.
Podcast highlight of the week
Pomp Podcast #376, feature Ryan Begelman. Begelman operates in what he calls “micro private equity.” He looks to buy business with $50k-$3MM dollars in profits. Businesses that are too small for large PE firms to care about. There is a huge opportunity in the space as Boomers start to retire and need to sell their businesses.
Some of Begelman’s ideas on growth opportunities for existing brands;
Wholefoods should launch a food-based theme park.
Joe Rogan should buy small Shopify stores and promote their products to his massive audience.
Tony Robins should launch micro communities for conference attendees to stay connected and support one another after the fact.
Vayner media should launch its own software tools.
SEO agencies should buy their client companies and earn revenue as they scale up.
Article of the Week
Should NBA referees call fouls objectively in playoff games?
Tyler Cowen lays out the argument for “letting them play” when it comes to basketball.
Trick or Tweet Not exactly what you want to find when you call for you dog.
Answer to today’s big questionTrue. Akon is planning to build a city in Senegal based on Wakanda, the fictional city portrayed in the Marvel Cinematic Universe. CNN breaks it down here.
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