Capacity and Aggregate Planning Chapter 9/12 Capacity and Aggregate Planning

Disney’s Forecasting vs distribution Excellent forecasting and planning models - results in multiple ticket plans for Florida residents Warehousing & Distribution - 3 days to process receipt; 3 days dock to stock; 3 days to pick order

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

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 Affects lead time responsiveness, cost & competitiveness Determines when and how much to increase capacity

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

Capacity Expansion Strategies (a) Capacity lead strategy (b) Capacity lag strategy (c) Average capacity strategy (d) Incremental vs. one-step expansion Units Capacity Time Demand Incremental expansion One-step expansion Figure 9.1

Lead Disadvantages product problems Advantages product acceptability consumers unfamiliar with product R&D costs Advantages anticipates demand first to market lure from competitors

Lag Advantages established demand for product less R&D growth market Follower strategy when to enter market - downside if too late in life cycle loss of customers to first to market Assumes customers lost to Lead strategy will return - Western Sizzlin’

Average Capacity Advantages level production stable work force excess capacity potential Chasing half the time market timing excess product

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

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

Inputs and Outputs to APP Company Policies Strategic Objectives Capacity Constraints Units or dollars subcontracted, backordered, or lost Size of Workforce Production per month (in units or $) Inventory Levels Financial Demand Forecasts Aggregate Planning Figure 9.3

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

Strategy Details Level production - produce at constant rate & use inventory as needed to meet demand Chase demand - change workforce levels so that production matches demand Maintaining resources for high demand levels - ensures high levels of customer service

Strategy Details Overtime & undertime - common when demand fluctuations are not extreme Subcontracting - useful if supplier meets quality & time requirements Part-time workers - feasible for unskilled jobs or if labor pool exists Backordering - only works if customer is willing to wait for product/services

Level Production Production Demand Units Time Figure 9.4 (a)

Level Production Advantages stable work force no overtime or additional hiring costs Disadvantages inventory obsolescence carrying costs depends on real good forecasts

Chase Demand Production Demand Units Time Figure 9.4 (b)

Chase Strategy Advantages less inventory less chance for obsolete merchandise Disadvantages Never a stable production level work force instability hiring/firing costs always a priority

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

Demand Distortion along the Supply Chain

Available to Promise -ATP Why is it important? What is its use? The uncommitted portion of a company’s inventory and planned production maintained in the master schedule to support customer ordering promising. Portion of on hand inventory and planned production not already tied to a customer order

Aggregate Planning for Services Most services can’t be inventoried Demand for services is difficult to predict Capacity is also difficult to predict Service capacity must be provided at the appropriate place and time Labor is usually the most constraining resource for services

Chapter 12 Inventory Management To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.

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 Insurance against stock out Coverage for inefficiencies in systems Inventory management answers two questions How much to order When to order

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

Reasons to Hold Inventory Meet unexpected demand Smooth seasonal or cyclical demand Meet variations in customer demand Take advantage of price discounts Hedge against price increases Quantity discounts

Inventory Hides Problems

Two Forms of Demand Dependent Independent Items used to produce final products Easier to forecast Independent Items demanded by external customers Example – repair parts

Aggregate Inventory Management How much do we have now? How much do we want? What will be the output? 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 Ordering Cost Shortage Cost Cost of holding an item in inventory As high as 25-35% of value Insurance, maintenance, physical inventory, pilferage, obsolete, damaged, lost Ordering Cost Cost of replenishing inventory Shortage Cost Temporary or permanent loss of sales when demand cannot be met

Inventory Control Systems Continuous system Constant amount ordered when inventory declines to predetermined level variable amount ordered when inventory reaches Reorder Point Periodic system (fixed-time-period) Order placed for variable amount after fixed passage of time

ABC Classification System Demand volume and value of items vary Classify inventory into 3 categories, typically on the basis of the dollar value to the firm PERCENTAGE PERCENTAGE CLASS OF UNITS OF DOLLARS A 5 - 15 70 - 80 B 30 15 C 50 - 60 5 - 10

ABC Classification PART UNIT COST ANNUAL USAGE 1 $ 60 90 2 350 40 1 $ 60 90 2 350 40 3 30 130 4 80 60 5 30 100 6 20 180 7 10 170 8 320 50 9 510 60 10 20 120 PART UNIT COST ANNUAL USAGE

ABC Classification 1 $ 60 90 2 350 40 3 30 130 4 80 60 5 30 100 6 20 180 7 10 170 8 320 50 9 510 60 10 20 120 PART UNIT COST ANNUAL USAGE TOTAL % OF TOTAL % OF TOTAL PART VALUE VALUE QUANTITY % CUMMULATIVE 9 $30,600 35.9 6.0 6.0 8 16,000 18.7 5.0 11.0 2 14,000 16.4 4.0 15.0 1 5,400 6.3 9.0 24.0 4 4,800 5.6 6.0 30.0 3 3,900 4.6 10.0 40.0 6 3,600 4.2 18.0 58.0 5 3,000 3.5 13.0 71.0 10 2,400 2.8 12.0 83.0 7 1,700 2.0 17.0 100.0 $85,400

ABC Classification A B C 9 $30,600 35.9 6.0 6.0 8 16,000 18.7 5.0 11.0 1 $ 60 90 2 350 40 3 30 130 4 80 60 5 30 100 6 20 180 7 10 170 8 320 50 9 510 60 10 20 120 PART UNIT COST ANNUAL USAGE TOTAL % OF TOTAL % OF TOTAL PART VALUE VALUE QUANTITY % CUMMULATIVE 9 $30,600 35.9 6.0 6.0 8 16,000 18.7 5.0 11.0 2 14,000 16.4 4.0 15.0 1 5,400 6.3 9.0 24.0 4 4,800 5.6 6.0 30.0 3 3,900 4.6 10.0 40.0 6 3,600 4.2 18.0 58.0 5 3,000 3.5 13.0 71.0 10 2,400 2.8 12.0 83.0 7 1,700 2.0 17.0 100.0 $85,400 A B C

ABC Classification C B A % of Value | | | | | | 0 20 40 60 80 100 100 – 80 – 60 – 40 – 20 – 0 – | | | | | | 0 20 40 60 80 100 % of Quantity % of Value C B A

Why ABC? Inventory controls Security controls Monetary constraints Storage locations

Another Form of ABC Not monetary based Use annual demand quantities Used to determine storage locations in warehouse/distribution center Establish golden zones in the warehouse for items that are fast moving, at ergonometric picking levels Cross Docking

Economic Order Quantity

Assumptions of Basic EOQ Model Demand is known with certainty and is constant over time No shortages are allowed Lead time for the receipt of orders is constant 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

The Inventory Order Cycle Order quantity, Q Demand rate Inventory Level Reorder point, R Time Lead time Lead time Order placed Order receipt Order placed Order receipt

EOQ Cost Model Co - cost of placing order D - annual demand Cc - annual per-unit carrying cost Q - order quantity Annual ordering cost = CoD Q Annual carrying cost = CcQ 2 Total cost = +

EOQ Cost Model Annual cost ($) Total Cost Slope = 0 CcQ 2 Carrying Cost = Minimum total cost cd Q Ordering Cost = Optimal order Qopt Order Quantity, Q

EOQ Formula Co = Ordering costs Cost per order can increase 2CoD Cc EOQ = Co = Ordering costs D= Annual Demand Cc = 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

Reorder Point Example Demand = 10,000 yards/year Store open 311 days/year Daily demand = 10,000 / 311 = 32.154 yards/day Lead time = L = 10 days R = dL = (32.154)(10) = 321.54 yards

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

Safety Stocks Safety stock buffer added to on hand inventory during lead time Stockout an inventory shortage Service level probability that the inventory available during lead time will meet demand

Inventory Control Cyclic Inventory Annual Inventory Periodic Inventory Sensitive Item Inventory

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