McGraw-Hill/Irwin  The McGraw-Hill Companies, Inc. 2007, All Rights Reserved Facilities and Aggregate Planning Chapter 12 Due Date!

12-2 Chapter 12 Outline Facilities Decisions Facilities Strategy Aggregate Planning Definition Planning Options Basic Strategies Aggregate Planning Costs Example of Costing Sales and Operations Planning

12-3 Hierarchy of Capacity Decisions Facilities decisions Aggregate planning Scheduling Months Planning Horizon Scheduling Facilities decisions Aggregate Planning

12-4 Definition of “Capacity” Capacity is defined as the maximum output that can be produced over a given period of time. Primarily determined by – –Physical assets – –Labor availability Nominal capacity – –Subtracts downtime, shift breaks, etc. – –Is the actual capacity that should be used in planning

12-5 Facilities Decisions How much total capacity is needed? How large should each unit of capacity be? When is the capacity needed? What type of facilities/capacity are needed?

12-6 Factors Affecting Facilities Strategy Predicted demand Cost of facilities Likely behavior of competitors Business strategy International considerations

12-7 How Much?: Strategies for “Capacity Cushion” Try not to run out (e.g. utilities) Build to average forecast Maximize utilization at bottlenecks –Reduce rejects and rework –Reduce throughput time

12-8 How Large? What is “Optimum” Unit Size? Economies of scale Diseconomies of scale

12-9 When? Timing of Facility Additions Preempt the competition Wait-and-see strategy

12-10 What Type? Types of Facilities Product-focused (55%) - computers, chain saws, dishwashers Market-focused (30%) - electricity, bakeries Process-focused (10%) - computer chips General purpose (5%) – several products and processes.

12-11 Aggregate Planning Characteristics A time horizon of about 12 months An aggregated level of demand for one or few categories of product The possibility of changing both supply and demand A variety of management objectives Facilities that are considered fixed (cannot be expanded or reduced)

12-12 Planning Options Options for managing demand. –influencing demand from customers –delivering orders as promised Options for managing supply –delivering what is promised –managing capacity & other resources

12-13 Options for Influencing (Managing) Demand Pricing Advertising and promotion Backlog or reservations (shifting demand) Development of complementary products

12-14 Options for Influencing (managing) Supply Hiring and layoff of employees Using overtime and undertime Using part-time or temporary labor Carrying inventory Outsourcing or Subcontracting Making cooperative arrangements

12-15 Basic Production Strategies “Level” strategy (constant work force, use inventory as buffer) “Chase” strategy (produce to demand, vary workforce)

Level Load Strategy Deliver products and services at a constant rate Avoid making changes to operations 5-27

Chase Strategy Produce only what you sell Produce products or services just-in-time If there are no sales—do not produce Typical for services 5-29

12-18 Comparison of Chase versus Level Strategy

12-19 Aggregate Planning Costs Hiring and firing costs (chase) Overtime and undertime costs (chase) Subcontracting costs (chase) Part-time labor costs (chase) Inventory-carrying costs (level) Cost of stockout or back order (level)

12-20 Underlying Purpose of S&OP The underlying purpose of Sales and Operations Planning is to balance demand and supply. Monthly ‘time buckets’ over a rolling 12 month horizon. Based on families of products Input into detailed planning and scheduling

12-21 Inputs to S & OP InputResponsibility Demand ForecastMarketing Market intelligenceMarketing Actual salesSales Capacity informationManufacturing Management targetsManagement Financial requirementsFinance New product informationR&D New process informationProcess engineering Workforce availabilityHuman resources

12-22 S & OP Outputs OutputResponsibility Sales plan Marketing and sales Production plan Manufacturing Inventory plan (MTS) Management Backlog plan (MTO) Management Purchasing plan Purchasing Financial plan Finance Engineering plan Engineering Workforce plan Human resources

12-23 Iterative Nature of S & OP (made possible by concurrent planning) 1. Develop production plan. 2. Check implications for inventory/backlog plan. 3. If necessary, adjust production plan. 4. Check against resource plan and availability. 5. If necessary, adjust production plan. 6. Recheck against inventory/backlog and resources. 7. Continue (go to 5) until you meet all constraints.

12-24 Summary Facilities Decisions Facilities Strategy Aggregate Planning Definition Planning Options Basic Strategies Aggregate Planning Costs Example of Costing Sales and Operations Planning

12-25 End of Chapter Twelve