Fundamentals of Operations Management BUS 3 – 140 Capacity & Operations Planning Week of Feb 25, 2008

Definitions Design capacity Maximum output rate or service capacity for which an operation, process, or facility is designed Effective capacity Design capacity minus allowances such as personal time, maintenance, and scrap Actual output Rate of output actually achieved--cannot exceed effective capacity. * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

Measures of Capacity (Table 5.1) * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

Factors that Influence Effective Capacity (Table 5.2) FACILITIES POLICY Design Location OPERATIONAL Layout Scheduling Environment Materials Management Quality assurance PRODUCT / SERVICES Maintenance policies Design Equipment breakdowns Product or service MIX SUPPLY CHAINS PROCESS Quantity capabilities EXTERNAL FACTORS Quality capabilities Product standards Safety regulations HUMAN FACTORS Unions Job Content Pollution control standards Job Design Training and Experience Motivation Compensation Learning Curve Absenteeism & labor turnover

Strategic Considerations in Capacity Planning Revenue Cost Technologies Volumes Markets Acquisitions Sourcing decisions Expansion decisions Capital equipment Long time to Implement and then in place for a Long time

Tactical Considerations in Capacity Planning

Anything that LIMITS a system in reaching its Goal Constraints Anything that LIMITS a system in reaching its Goal Types of Constraints: Resource Material Supplier/Vendor Financial Knowledge/Competence Policy

Potential Bottleneck Operations (2 Examples) Operation 1 20/hr. Operation 2 10/hr. Operation 3 15/hr. 10/hr. Maximum output rate limited by bottleneck 40 Units coming in every hour, but only 30 going out Machine #1 10/hr Machine #2 10/hr Bottleneck Operation 30/hr Machine #3 10/hr Machine #4 10/hr

Constraint True Definition IMBALANCE IMBALANCE IMBALANCE A Constraint that causes REVENUE to be Lost IMBALANCE IMBALANCE IMBALANCE Operation 1 20/hr. Operation 2 10/hr. Operation 3 15/hr. 10/hr. Unless more than 10 units per hour can be SOLD, the Operations are IMBALANCED but not a true Constraint

Unique Elements of Service Capacity The need to be near Customers Cannot store “inventory” of services in advance of the requirement Variability of Inputs and Outputs

Developing Capacity Alternatives Design flexibility into systems Add power and water lines for easier expansion Simplify facilities Three bedroom house when you have no kids Take stage of life cycle into account Take a “big picture” approach to capacity changes Correlation of different events (e.g. Increasing number of Hotel Rooms offered will increase need for Parking, Food, Housekeeping, etc..) Attempt to smooth out capacity requirements Influence demand so that load during peak times may be transferred of too-peak times Use same equipment for complementary products (e.g. Bicycles and “Body by Jake”)

Capacity Planning & Cost

Fixed and variable Costs Fixed Costs Remain CONSTANT regards of level of Volume Rent Manager salaries Insurance Overhead Variable Costs Vary directly with Volume of Output Total Material Cost Total Beware of ABSORBING OVERHEAD (amortizing Fixed Costs) as a justification for producing more than can be Sold

Total variable cost (VC) Breakeven Point The volume of output at which total cost and total revenue are equal Fixed Cost divided by Contribution Margin per unit Amount ($) Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) Profit Profit Total revenue Total revenue Total cost Total cost Break Even Point units Q (volume in units) Q (volume in units) Once the Breakeven Point is passed, Economies Of Scale result in accelerated Profits

Breakeven Exercise Page 194 of Book

Aggregate Planning

Intermediate Planning (Table 13.1) Intermediate Plans Long-Range Plans General levels of: Employment Output Finished Goods Inventory Subcontracting Backorders Short-Range Plans Long-term capacity Location Layout Product Design Work System design Detailed Plans: Machine loading Job assignments Job sequencing Production Orders Work schedules * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

Intermediate Planning (Figure 13.1) Business Plan Establishes operations and capacity strategies Aggregate plan Establishes operations capacity Master schedule Establishes schedules for specific products Corporate strategies and policies Economic, competitive, and political conditions Aggregate demand forecasts * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

Aggregate Planning Focus on Quantity and Timing of expected Demand (forecast) Start with Multiple plans and choose the most appropriate one Factor in Revenue, Market Share, and Inventory targets Estimate the impact of Product Transitions

Aggregate Planning Inputs and Outputs (Table 13.2) * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

Demand Options When Demand does not match Capacity then alter (i.e. Influence) demand Pricing Promotion New demand to smooth peaks and valleys (e.g. Bus taking kids on field trips during the school day) Points out a useful application of the economic concept of Elasticity of Demand

Capacity Options Hire workers and / or layoff workers Attraction and Retention risk Skill set replacement Union issues Hiring and layoff costs Part time workers and contractors Work schedule adjustments Overtime Second (and third) shifts Sending workers home Four day weeks Inventories Subcontracting, offloading, outsourcing

Managing Uneven Load Level Load Chase Develop Business Rules No more than x% of forecasted demand Never short an order No more than 110% of capacity No more than 50% in last month of Quarter Other

Managing Uneven Load (Table 13.3) CHASE Approach Capacities are adjusted to match demand requirements over the planning horizon LEVEL Approach Capacities are kept constant over the planning horizon * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

Techniques for Aggregate Planning Know your Demand Know your CAPACITIES (including Flex up or down) Account for company policies on Layoffs, costs, overtime, etc.. Agree on The Plan Draw the Capacity Line and the Load bars against it

Summary of Techniques for Aggregate Planning (Table 13.7) True Optimization is rare, but the analysis is useful to drive Business Rules and formal decision criteria * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

Aggregate Planning in Services Cannot stock Finished Goods Inventory Demand is Perishable Input is highly variable Cross train people to increase effective capacity Yield Management (Airlines)

Master Scheduling

The Master Schedule “disaggregates ” the Aggregate Plan Figure 13.4 Figure 13.5 Aggregate Planning Aggregate Plan Jan Feb Mar Lawn Mowers 200 300 400 Disaggregation Master Schedule Jan Feb Mar Push Mowers 100 100 100 Power Mowers 75 150 200 Riding Mowers 25 50 100 Total 200 300 400 Master Schedule * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

The Master Scheduling Process (Figure 13.6) Inputs Outputs Beginning Inventory Forecast Orders Projected Inventory Master Production Schedule Uncommitted Inventory PROCESS * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

Additional Key Points in Master Scheduling Rough Cut Capacity Planning Time Horizons Time Fences “Available to Promise” The most valuable part of the job is knowing when to say, “Yes” and when to say, “No”

Time Fences “frozen” (firm or fixed) “liquid” (open) “slushy” somewhat firm “liquid” (open) Only Executive Exception would authorize a Change Only Executive Exception would NOT authorize a Change Changes are likely to be accepted, but require Research and / or Business Case

Time Fences can be Dynamic Typical Technology Manufacturer Dell Computer Cargo Airplanes for the US Dept. of Defense Restaurant Burger King Generally varies by Lead Time to obtain Materials and Capital equipment Goal is to minimize the Red and Yellow and keep FLEXIBILITY and RESPONSIVENESS to a maximum

Sales & Operations Planning A bridge between Aggregate Planning & Master Scheduling

Sales & Operations Planning (S&OP) Purpose Senior Management Alignment on Revenue and Supply plans Greater accountability of individual plans Consensus on managing gaps Output Judged Revenue Plan Master Build Schedule Contingency plans Documented agreements and planned outcomes

Key S&OP Inputs, by Function Unconstrained Forecast Execution to Plan Capacity Materials Plan Time to Volume Buffer Targets Sales Operations BU’s Finance Prelim. Revenue Plan GM Revenue objectives Profitability scenarios Prelim. Budgets Prelim. FGI Targets Return on Invested Capital Market Trends & TAM Share expectations Customer TAM expectations Roadmaps and Transitions

S&OP Output is a Consensus Plan Constrained Revenue plan Accountability for Forecast Accuracy Standard, system-generated, accuracy metrics Defined ownership by Sales and Marketing Joint ownership of FGI between Sales and Operations MPS tied to single plan of record and business rules Published Lead Times Integrated Revenue plan Credible EPS guidance Exception Loops between meetings

Introduction to Inventory Management

Reasons for Carrying Inventory Revenue Have what Customers want, when they want it Compensate for non-linear demand that doesn’t match your capacity Buffer for upside demand Buffer for when competitors cannot deliver Buffer against unexpected internal supply problems Carrying Buffer inventory is necessary, but continuous, relentless efforts to minimize variability, and thus eliminate the need for the Buffers is greatly preferred

Reasons for Carrying Inventory Cost Minimize shortages, to avoid delays and idle time Optimize plant, people, and equipment utilization Obtain volume discounts for favorable unit pricing Hedge against future price increases Optimizing utilization and unit pricing are valuable only when the goods made or purchased will SOLD to a paying Customer in a reasonable time The cost of a STOCKOUT is hard to quantify, but is to be AVOIDED at all times

Types of Inventory Manufacturing All Finished Goods Subassembly (WIP) Raw Materials Work In Process (WIP) Finished Goods (FGI) Maintenance, Repair, & Operating Supplies (MRO) Resale Items Manufacturing All Chocolate Cake Finished Goods Cake Icing Subassembly (WIP) Raw Material Egg Mix Water MRO Raw