Facilities and Aggregate Planning INTRODUCTION to Operation Management 4e, Schroeder Facilities and Aggregate Planning Chapter 12 Due Date! McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc., All Rights Reserved.

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

Hierarchy of Capacity Decisions Facilities decisions Facilities decisions Aggregate planning Aggregate Planning Scheduling Scheduling 6 12 18 24 Months Planning Horizon 12-3

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

Utilization = output/nominal capacity Capacity Utilization Capacity utilization is defined relative to output and nominal capacity: Utilization = output/nominal capacity Capacity is seldom at 100 percent utilization. 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

Facilities Strategy Facilities strategy typically considers: Amount of capacity Size of the units Timing of capacity changes Types of facilities needed for the long run 12-7

Factors Affecting Facilities Strategy Predicted demand Cost of facilities Likely behavior of competitors Business strategy International considerations 12-8

How Much?: Strategies for “Capacity Cushion” Capacity cushion = capacity – average demand Try not to run out (e.g. utilities) Build to average forecast Maximize utilization at bottlenecks Reduce rejects and rework Reduce throughput time 12-9

How Large? What is “Optimum” Unit Size? Economies of scale Production costs are not linear Overhead spread over more units Diseconomies of scale Increased transportation costs Cost of more bureaucracy Increased organizational complexity 12-10

When? Timing of Facility Additions Preempt the competition Build capacity ahead of need Positive capacity cushion Wait-and-see strategy Small or negative capacity cushion Lower risk strategy 12-11

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. Whirlpool factory in Findlay, Ohio, is example of product focus. They make all Whirlpool’s dishwashers for the U.S. market. 12-12

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) 12-13

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 12-14

Options for Influencing (Managing) Demand Pricing Advertising and promotion Backlog or reservations (shifting demand) Development of complementary products 12-15

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 Cooperative arrangement: Nissan assembles its Quest minivan in Ford’s plant in Avon Lake, Ohio. 12-16

Basic Production Strategies “Level” strategy (constant work force, use inventory as buffer) “Chase” strategy (produce to demand, vary workforce) 12-17

Level Load Strategy Deliver products and services at a constant rate Avoid making changes to operations 12-18

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 12-19

Table 12.1: Comparison of Chase versus Level Strategy 12-20

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) 12-21

Sales & Operations Planning The underlying purpose of Sales and Operations Planning (S&OP) is to balance demand and supply. Uses cross-functional teams Monthly ‘time buckets’ over a rolling 12 month horizon. Based on families of products Input into detailed planning and scheduling and ERP 12-22

Inputs to S&OP Input Responsibility Demand Forecast Marketing Market intelligence Marketing Actual sales Sales Capacity information Manufacturing Management targets Management Financial requirements Finance New product information R&D New process information Process engineering Workforce availability Human resources 12-23

S&OP Outputs Output Responsibility 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 12-24

Iterative Nature of S&OP (made possible by concurrent planning) Develop production plan. Check implications for inventory/backlog plan. If necessary, adjust production plan. Check against resource plan and availability. Recheck against inventory/backlog and resources. Continue (go to 5) until you meet all constraints. 12-25

Summary Facilities Decisions Facilities Strategy Aggregate Planning Definition Planning Options Basic Strategies Aggregate Planning Costs Example of Costing Sales and Operations Planning 12-26

End of Chapter Twelve 12-27