1. Operations Planning Horizons
Long Range Planning - Annual planning, with a time horizon greater than one year
Aggregate Planning - Intermediate planning with a time horizon of 6 to 18 months with monthly or quarterly increments
Short Range Planning - Weekly planning with a time horizon of one day to six months
Supply Chain Management - SCM, JIT, Strategic Capacity Planning 2 2

2. Aggregate Planning Product group or broad category (Aggregation)
Medium-Range: 6-18 months
Goal: Specify the optimal combination of
production rate
workforce level
inventory on hand
Product category - 21 cubic ft refrigerators
Production rate - amount of capacity need to set.
Workforce level - # of workers; stable, overtime, hire and fire
Inventory - carry over or backlogs
Supply Chain Management - SCM, JIT, Strategic Capacity Planning

3. Long range Intermediate Manufacturing Services Short Master scheduling
Material requirements planning
Order scheduling
Weekly workforce and
customer scheduling
Daily workforce and customer scheduling
Process planning
Strategic capacity planning
Sales and operations (aggregate) planning
Long
range
Intermediate
Short
Manufacturing
Services
Exhibit 13.1
Sales plan
Aggregate operations plan
Forecasting & demand management

4. Balancing Aggregate Demand and Aggregate Production Capacity
10000
Suppose the figure to the right represents forecast demand in units
10000
8000
8000
7000
6000
5500
6000
4500
4000
Now suppose this lower figure represents the aggregate capacity of the company to meet demand
2000
Jan
Feb
Mar
Apr
May
Jun
10000
9000
8000
8000
What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up
6000
6000
4500
4000
4000
4000
2000
Jan
Feb
Mar
Apr
May
Jun
Supply Chain Management - SCM, JIT, Strategic Capacity Planning 9 9

5. Key Strategies for Meeting Demand
Chase - Match production rate to order rate by hiring and laying off employees
Level - Maintain a stable work force working at a constant output rate; shortages and surpluses are absorbed by fluctuating inventory levels, backlogs and lost sales
Some combination of the two
Chase - Overtime, Reduced Hours, Hire Temps, Hire/Fire
Costs - overtime and hiring and firing
Level - Hold Inventories, Allow Backlogs
Costs - holding inventory and backlogs
Choice is based on costs
Supply Chain Management - SCM, JIT, Strategic Capacity Planning

6. Required Inputs to the Production Planning System
Competitors’behavior
Raw material availability
Market
demand
External to firm
External capacity
Economic conditions
Planning for production
Current
physical
capacity
Activities required for production
Current workforce
Inventory levels
Internal to firm
Supply Chain Management - SCM, JIT, Strategic Capacity Planning 11 11

7. Strategic Capacity Planning
Capacity can be defined as the ability to hold, receive, store, or accommodate; a measure of an organization’s ability to provide customers with the demanded services or goods in the amount requested and in a timely manner
Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size
Supply Chain Management - SCM, JIT, Strategic Capacity Planning 3

8. Estimating Capacity
Must differentiate between theoretical capacity (what can be achieved under ideal conditions in a short period of time), and achievable capacity (considering equipment problems, maintenance requirements, material problems, worker errors)
Must select a yardstick to measure it, such as tons per hour (tph) of steel or number of patient days in a hospital

9. Management Decisions That Affect Capacity in the Intermediate Term
Subcontracting or outsourcing production
Changing the mix of products produced
Adding people to the production process
Increasing the motivation of employees
Increasing the operating rate of a machine
Improving quality of raw materials, processes, etc.
Increasing product yield (quantity of output/quantity of input, or the % of useful output)

10. Capacity Utilization Where:
Capacity used = rate of output actually achieved, and
Best operating level = capacity for which the process was designed
Supply Chain Management - SCM, JIT, Strategic Capacity Planning 5

11. Example of Capacity Utilization
During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?
Answer:
Capacity utilization rate = Capacity used .
Best operating level
= 83/120
=0.69 or 69%
Supply Chain Management - SCM, JIT, Strategic Capacity Planning 6

12. Economies & Diseconomies of Scale
100-unit
plant
200-unit
300-unit
400-unit
Volume
Average
unit cost
of output
Economies of Scale and the Experience Curve working
Diseconomies of Scale start working

13. The Experience Curve Cost or price per unit
As plants produce more products, they gain experience in the best production methods and reduce their costs per unit
The Experience Curve
Total accumulated production of units
Cost or
price
per unit
Yesterday
Today
Tomorrow

14. Capacity Flexibility Flexible plants Flexible processes
Flexible workers
Supply Chain Management - SCM, JIT, Strategic Capacity Planning 11

15. Capacity Planning: Balance
Unbalanced stages of production
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
7,000
5,000
Maintaining System Balance: Output of one stage is the exact input requirements for the next stage
Balanced stages of production
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
6,000
6,000
Supply Chain Management - SCM, JIT, Strategic Capacity Planning 12

16. Determining Capacity Requirements
Forecast sales within each individual product line
Calculate equipment and labor requirements to meet the forecasts
Project equipment and labor availability over the planning horizon
Identify bottlenecks
Supply Chain Management - SCM, JIT, Strategic Capacity Planning

17. Capacity Utilization & Service Quality
The best operating point is between 70% and 90% of capacity; over 90% is undesirable
Why do you think that this is so?
Supply Chain Management - SCM, JIT, Strategic Capacity Planning 27

18. Utilization and Time in System70
Supply Chain Management - SCM, JIT, Strategic Capacity Planning 70

19. Capacity - Summary
Capacity decisions should be made carefully, as they can commit significant resources to assets that cannot be changed easily or economically.
Capacity is affected by management decisions regarding the number of hours worked, product mix, staffing levels, machine capabilities, level of quality, and product yield.
Watch out for the “Bermuda Triangle” of operational complexity, where management difficulty exceeds management ability (management bottleneck!).
Supply Chain Management - SCM, JIT, Strategic Capacity Planning

20. Enterprise Resource Planning Systems

21. Enterprise Resource Planning (ERP) Systems
Enterprise Resource Planning Systems is a computer system that integrates application programs in accounting, sales, manufacturing, and other functions in the firm
This integration is accomplished through a database shared by all the application programs
Supply Chain Management - SCM, JIT, Strategic Capacity Planning

22. SAP AG’S R/3 SAP AG, A German firm, is a world leader in ERP software.
-Designed to operate in a three-tier client/server configuration
-Applications are fully integrated so that data are shared between all applications

23. R/3 System Functional Components
Financial
Accounting
R/3 System
Sales & Distribution
Human Resources
Functional
Components
Manufacturing
& Logistics

24. Financial Accounting Financials Controlling Asset management
Supply Chain Management - SCM, JIT, Strategic Capacity Planning

25. Human Resources Payroll Benefits administration
Applicant data administration
Personnel development planning
Workforce planning
Schedule & shift planning
Time management
Travel expense accounting
Supply Chain Management - SCM, JIT, Strategic Capacity Planning

26. Manufacturing & Logistics
Materials management
Plant maintenance
Quality management
Production planning & control
Project management system
Supply Chain Management - SCM, JIT, Strategic Capacity Planning

27. Sales and Distribution
Prospect & customer management
Sales order management
Configuration management
Distribution
Export controls
Shipping and transportation management
Billing, invoicing, and rebate processing
Supply Chain Management - SCM, JIT, Strategic Capacity Planning

28. Reasons for Implementing SAP R/3
Desire to standardize and improve processes
To improve the level of systems integration
To improve information quality
Supply Chain Management - SCM, JIT, Strategic Capacity Planning