Capacity and Aggregate Planning

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

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

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)

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

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

Inventory Hides Problems

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

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

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 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

EOQ Formula 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

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

Next Week Chapter 5, 7, 15 Reverse Logistics – “The Forklifts Have Nothing to Do!”