Capacity and Aggregate Planning

Capacity Outputs: Examples

The goal of capacity planning decisions (1)The capacity of the firm to produce the service or good (2)The processes for providing the service or making the good (3)The layout or arrangement of the work space (4)The design of work processes to enhance productivity

Capacity The max output that an organization be capable of producing Measure a single facility: –Design vs. Effective capacity –Capacity Utilization: design vs. efficient utilization For systems have more than one facility and flows of product –System capacity and bottleneck –Improve system capacity

Determinants of Effective Capacity Facilities Human considerations –Adding people –Increasing employee motivation Operations –Improving operating rate of a machine –Improving quality of raw materials and components External forces –Safety regulations

Capacity Utilization Measures how much of the available capacity is actually being used: –Always <=1(percentage of usage) –Higher the better –Denominator: If effective capacity used: efficient utilization If design capacity used: design utilization

Aggregate Planning The process of planning the quantity and timing of output over the intermediate range (3-18 months) by adjusting production rate, employment, inventory Master Production Schedule: formalizes the production plan and translates it into specific end item requirements over the short to intermediate horizon

Capacity Planning The process of determining the amount of capacity required to produce in the future. May be at the aggregate or product line level Master Production Schedule - anticipated build schedule Time horizon must exceed lead times for materials

Capacity Planning Look at lead times, queue times, set up times, run times, wait times, move times Resource availability Material and capacity - should be in synch driven by dispatch list - listing of manufacturing orders in priority sequence - ties to layout planning load profiles - capacity of each section

the capacity decisions: When to add capacity How much capacity to add Where to add capacity What type of capacity to add When to reduce capacity

Capacity Planning Rough Cut Capacity Planning - process of converting the master production schedule into requirements for key resources capacity requirements plan - time- phased display of present and future capacity required on all resources based on planned and released orders

Capacity Planning Capacity Requirements Planning (CRP) - process of determining in detail the amount of labor and machine resources required to meet production plan RCCP may indicate sufficient capacity but the CRP may indicate insufficient capacity during specific time periods

Theory of Constraints Every system has a bottle neck capacity of the system is constrained by the capacity of the bottle neck increasing capacity at other than bottle neck operations does not increase the overall capacity of the system inertia of change can create new bottle necks

Capacity Planning Establishes overall level of productive resources Establishes overall level of productive resources Affects lead time responsiveness, cost & competitiveness Affects lead time responsiveness, cost & competitiveness Determines when and how much to increase capacity Determines when and how much to increase capacity

The Importance of Planning (how good is the plan?) Poor planning can mean a company's inability to handle unexpected occurrences. Good planning can place a company in an extremely strong competitive position. Probably the most important planning activity is concerned with developing a competitive strategy. Planning in an organization must begin at the top with strategic planning.

Capacity Expansion Volume & certainty of anticipated demand Volume & certainty of anticipated demand Strategic objectives for growth Strategic objectives for growth Costs of expansion & operation Costs of expansion & operation Incremental or one-step expansion Incremental or one-step expansion

Aggregate Production Planning (APP) Matches market demand to company resources Matches market demand to company resources Plans production 6 months to 12 months in advance Plans production 6 months to 12 months in advance Expresses demand, resources, and capacity in general terms Expresses demand, resources, and capacity in general terms Develops a strategy for economically meeting demand Develops a strategy for economically meeting demand Establishes a company-wide game plan for allocating resources Establishes a company-wide game plan for allocating resources also called Sales and Operations Planning also called Sales and Operations Planning

Sales and Operations Planning (S&OP) Brings together all plans for business performed at least once a month

Adjusting Capacity to Meet Demand 1.Producing at a constant rate and using inventory to absorb fluctuations in demand (level production) 2.Hiring and firing workers to match demand (chase demand) 3.Maintaining resources for high demand levels 4.Increase or decrease working hours (overtime and undertime) 5.Subcontracting work to other firms 6.Using part-time workers 7.Providing the service or product at a later time period (backordering)

Demand Management Shift demand into other periods Shift demand into other periods Incentives, sales promotions, advertising campaigns Incentives, sales promotions, advertising campaigns Offer product or services with countercyclical demand patterns Offer product or services with countercyclical demand patterns Partnering with suppliers to reduce information distortion along the supply chain Partnering with suppliers to reduce information distortion along the supply chain

Capacity Terms Load profile Compares released and planned orders with work center capacity Capacity Productive capability; includes utilization and efficiency Utilization % of available working time spent working

More Capacity Terms Efficiency – how well the machine or worker performs compared to a standard output Load The standard hours of work assigned to a facility Load percent The ratio of load to capacity Load % = (load/capacity)x100%

Remedies for Underloads 1.Acquire more work 2.Pull work ahead that is scheduled for later time periods 3.Reduce normal capacity

Remedies for Overloads 1.Eliminate unnecessary requirements 2.Reroute jobs to alternative machines or work centers 3.Split lots between two or more machines 4.Increase normal capacity 5.Subcontract 6.Increase the efficiency of the operation 7.Push work back to later time periods 8.Revise master schedule

Scheduling as part of the Planning Process

Scheduling is the last step in the planning process? It is one of the most challenging areas of operations management. Scheduling presents many day-to-day problems for operations managers because of –Changes in customer orders –Equipment breakdowns –Late deliveries from suppliers –A myriad of other disruptions Scheduling

Objectives in Scheduling  Meet customer due dates  Minimize job lateness  Minimize response time  Minimize completion time  Minimize time in the system  Minimize overtime  Maximize machine or labor utilization  Minimize idle time  Minimize work-in-process inventory  Efficiency

Scheduling  Specifies when labor, equipment, facilities are needed to produce a product or provide a service  Last stage of planning before production occurs – really?

Sequencing Rules  FCFS - first-come, first-served  LCFS - last come, first served  DDATE - earliest due date  CUSTPR - highest customer priority  SETUP - similar required setups  SLACK - smallest slack  CR - critical ratio  SPT - shortest processing time  LPT - longest processing time

Critical Ratio Rule CR considers both time and work remaining If CR > 1, job ahead of schedule If CR < 1, job behind schedule If CR = 1, job on schedule time remainingdue date - today’s date work remaining remaining processing time Ties scheduling to Gantt Chart or PERT/CPM

Chapter 12 Inventory Management

Why is Inventory Important to Operations Management? The average manufacturing organization spends 53.2% of every sales dollar on raw materials, components, and maintenance repair parts Inventory Control – how many parts, pieces, components, raw materials and finished goods

Inventory Conflict Accounting – zero inventory Production – surplus inventory or “just in case” safety stocks Marketing – full warehouses of finished product Purchasing – caught in the middle trying to please 3 masters

Inventory Stock of items held to meet future demand Stock of items held to meet future demand Insurance against stock out Insurance against stock out Coverage for inefficiencies in systems Coverage for inefficiencies in systems Inventory management answers two questions Inventory management answers two questions How much to order How much to order When to order When to order

Types of Inventory Raw materials Raw materials Purchased parts and supplies Purchased parts and supplies In-process (partially completed) products In-process (partially completed) products In-process (partially completed) products In-process (partially completed) products Component parts Component parts Working capital Working capital Tools, machinery, and equipment Tools, machinery, and equipment Safety stock Safety stock Just-in-case Just-in-case Just-in-case

Transportation Problems Poor Quality Inventory Accuracy Policies Training Inventory Hides Problems

Aggregate Inventory Management 1.How much do we have now? 2.How much do we want? 3.What will be the output? 4.What input must we get? Correctly answering the question about when to order is far more important than determining how much to order.

Inventory Costs Carrying Cost Carrying Cost Cost of holding an item in inventory Cost of holding an item in inventory As high as 25-35% of value As high as 25-35% of value Insurance, maintenance, physical inventory, pilferage, obsolete, damaged, lost Insurance, maintenance, physical inventory, pilferage, obsolete, damaged, lost Ordering Cost Ordering Cost Cost of replenishing inventory Cost of replenishing inventory Shortage Cost Shortage Cost Temporary or permanent loss of sales when demand cannot be met Temporary or permanent loss of sales when demand cannot be met

ABC Classification System Demand volume and value of items vary Demand volume and value of items vary Classify inventory into 3 categories, typically on the basis of the dollar value to the firm Classify inventory into 3 categories, typically on the basis of the dollar value to the firm PERCENTAGEPERCENTAGE CLASSOF UNITSOF DOLLARS A B3015 C

Why ABC? Inventory controls Security controls Monetary constraints Storage locations

Economic Order Quantity

Assumptions of Basic EOQ Model Demand is known with certainty and is constant over time Demand is known with certainty and is constant over time No shortages are allowed No shortages are allowed Lead time for the receipt of orders is constant Lead time for the receipt of orders is constant The order quantity is received all at once The order quantity is received all at once

No reason to use EOQ if: Customer specifies quantity Production run is not limited by equipment constraints Product shelf life is short Tool/die life limits production runs Raw material batches limit order quantity

EOQ Formula EOQ = 2CoD2CoDCcCc2CoD2CoDCcCc C o = Ordering costs D = Annual Demand C c = Carrying Costs Cost per order can increase if size of orders decreases Most companies have no idea of actual carrying costs

When to Order Reorder Point is the level of inventory at which a new order is placed R = dL where d = demand rate per period L = lead time

Forms of Reorder Points Fixed Variable Two Bin Card Judgmental Projected shortfall

Why Safety Stock Accurate Demand Forecast Length of Lead Time Size of order quantities Service level

Inventory Control Cyclic Inventory Annual Inventory Periodic Inventory Sensitive Item Inventory

Vendor-Managed Inventory Not a new concept – same process used by bread deliveries to stores for decades Reduces need for warehousing Increased speed, reduced errors, and improved service Onus is on the supplier to keep the shelves full or assembly lines running variation of JIT Proctor&Gamble - Wal-Mart DLA – moving from a manager of supplies to a manager of suppliers Direct Vendor Deliveries – loss of visibility

Inventory Management: Special Concerns Defining stock-keeping units (SKUs) Increase in number of SKUs – 15% over past 3 years Dead inventory Deals Substitute items Complementary items Informal arrangements outside the distribution channel Repair/replacement parts Reverse logistics

Next 2 Weeks No Class – Work on Exam and “Case Study Analysis”