Capacity and Aggregate Planning

1. Capacity and Aggregate Planning

2. Capacity Outputs: Examples

3. The goal of capacity planning decisions • The capacity of the firm to produce the service or good • The processes for providing the service or making the good • The layout or arrangement of the work space • The design of work processes to enhance productivity

4. Capacity • The max output that an organization be capable of producing • Measure a single facility: • Design vs. Effective capacity • Capacity Utilization: design vs. efficient utilization • For systems have more than one facility and flows of product • System capacity and bottleneck • Improve system capacity

5. Determinants of Effective Capacity • Facilities • Human considerations • Adding people • Increasing employee motivation • Operations • Improving operating rate of a machine • Improving quality of raw materials and components • External forces • Safety regulations

6. Capacity Utilization Measures how much of the available capacity is actually being used: • Always <=1(percentage of usage) • Higher the better • Denominator: • If effective capacity used: efficient utilization • If design capacity used: design utilization

7. 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

8. 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

9. 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

10. the capacity decisions: • When to add capacity • How much capacity to add • Where to add capacity • What type of capacity to add • When to reduce capacity

11. 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

12. 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

13. 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

14. Theory of Constraints • What needs to be changed • What to change to • How to make the change happen

15. Theory of Constraints • Identify the constraint • Subordinate • Inertia • Walk the process again • inertia of change can create new bottle necks

16. Capacity Planning • Establishes overall level of productive resources • Affects lead time responsiveness, cost & competitiveness • Determines when and how much to increase capacity

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

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

19. 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)

20. 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

21. Remedies for Underloads Acquire more work Pull work ahead that is scheduled for later time periods Reduce normal capacity

22. Remedies for Overloads Eliminate unnecessary requirements Reroute jobs to alternative machines or work centers Split lots between two or more machines Increase normal capacity Subcontract Increase the efficiency of the operation Push work back to later time periods Revise master schedule

23. Scheduling as part of the Planning Process

24. Scheduling • Scheduling is the last step in the planning process? • It is one of the most challenging areas of operations management. • Scheduling presents many day-to-day problems for operations managers because of • Changes in customer orders • Equipment breakdowns • Late deliveries from suppliers • A myriad of other disruptions

25. Objectives in Scheduling • Meet customer due dates • Minimize job lateness • Minimize response time • Minimize completion time • Minimize time in the system • Minimize overtime • Maximize machine or labor utilization • Minimize idle time • Minimize work-in-process inventory • Efficiency

26. Sequencing Rules • FCFS - first-come, first-served • LCFS - last come, first served • DDATE - earliest due date • CUSTPR - highest customer priority • SETUP - similar required setups • SLACK - smallest slack • CR - critical ratio • SPT - shortest processing time • LPT - longest processing time

27. CR considers both time and work remaining If CR > 1, job ahead of schedule If CR < 1, job behind schedule If CR = 1, job on schedule time remaining due date - today’s date work remaining remaining processing time Critical Ratio Rule Ties scheduling to Gantt Chart or PERT/CPM

28. Inventory Management

31. 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

32. 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

33. 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

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

35. Inventory Hides Problems Policies Inventory Accuracy Transportation Problems Training Poor Quality

36. 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.

37. Inventory Costs • Carrying 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

38. PERCENTAGE PERCENTAGE CLASS OF UNITS OF DOLLARS A 5 - 15 70 - 80 B 30 15 C 50 - 60 5 - 10 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

39. Why ABC? • Inventory controls • Security controls • Monetary constraints • Storage locations

40. Economic OrderQuantity

41. 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

42. 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

43. 2CoD Cc EOQ Formula 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

44. 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

45. Forms of Reorder Points • Fixed • Variable • Two Bin • Card • Judgmental • Projected shortfall

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

47. Inventory Control • Cyclic Inventory • Annual Inventory • Periodic Inventory • Sensitive Item Inventory

48. Vendor-Managed Inventory • Not a new concept – same process used by bread deliveries to stores for decades • Reduces need for warehousing • Increased speed, reduced errors, and improved service • Onus is on the supplier to keep the shelves full or assembly lines running • variation of JIT • Proctor&Gamble - Wal-Mart • DLA – moving from a manager of supplies to a manager of suppliers • Direct Vendor Deliveries – loss of visibility

49. Inventory Management: Special Concerns • Defining stock-keeping units (SKUs) • Increase in number of SKUs – 15% over past 3 years • Dead inventory • Deals • Substitute items • Complementary items • Informal arrangements outside the distribution channel • Repair/replacement parts • Reverse logistics

50. Project Managementand Operations