Capacity and Aggregate Planning

 

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 planand - time-  phased display of present future  capacity required on all resources  r esources  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 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

Capacity Demand Units

Units Demand

Capacity

Time

Time

(c) Av Average erage capacity strategy

(d) Incremental vs. one-step expansion One-step expansion

Capacity

Units

Units Demand

Incremental expansion Demand

Figure 9.1

Time

Time

 

Lead  •

Advantages 

•

•

•

•

•

anticipates  demand  first to market  lure from  competitors 

•

•

•

Disadvantages  product problems  product  acceptability  consumers  unfamiliar with  product  R&D costs 

 

•

•

•

•

Advantages  established  demand for  product  less R&D  growth market 

Lag  •

•

•

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  Capacity Constraints

Aggregate  Aggregate  Production   Production Planning

Demand Forecasts

Size of Workforce

Strategic Objectives

Production per month (in units or $)

Figure 9.3

Inventory Levels

Company Policies

Financial Constraints

Units or dollars subcontracted, backordered, or lost

 

Adjusting Capacity to  1.

2. 3. 4. 5. 6. 7.

Meet Demand  Produci Prod ucing ng at at a cons constan tantt rate rate and and usin using g inve invento ntory  ry  to absorb fluctuations in demand (level  ( level  production)  Hiring Hir ing and firi firing ng wor worker kers s to mat match ch dema demand nd (cha (chase  se  demand)  Maint Ma intain aining ing res resour ources ces for hig high h dema demand nd lev levels  els  Increa Inc rease se or dec decrea rease se work working ing hou hours rs (ov (overt ertime  ime  and undertime)  Subc Su bcon ontra tract ctin ing g wor work k to to oth other er fi firms  rms  Usin Us ing g pa part rt-t -tim ime e wo work rker ers  s  Providi Prov iding ng the ser servic vice e or pro produc ductt at at a lat later er time  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  Demand Production   s    t    i   n    U

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  Demand Production   s    t    i   n    U

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  countercyclicall demand patterns  countercyclica  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 planned order production not already tied toand a customer

 

Available-to-Promise  Product Request

Yes

Is the product available at this location?

Is an alternative product available at an alternate

Yes

Availableto-promise

location? No

Availableto-promise

Yes

No

Allocate inventory Yes

Figure 9.6

Is an alternative product available at this location?

Is this product available at a different location? No

No

Allocate inventory

Capable-topromise date

Is the customer willing to wait for the product?

No Lose sale

Yes

Revise master schedule

Trigger production

 

Aggregate Planning  for Services  1. Most services can’t be inventoried   2. Demand Demand for servi services ces is is diff difficul icultt to pred predict  ict  3. Cap Capacit acity y is also dif difficu ficult lt to pre predict  dict  4. Se Servi rvice ce capa capacit city y must must be prov provid ided ed at the  the  appropriate place and time  5. Labo Laborr is is usual usually ly the mos mostt const constrain raining  ing  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 Manageme Management?  nt?  •

•

The average manufacturing  organization spends 53.2% of every  sales dollar on raw materials, components, and maintenance repair  parts   – how many parts, Inventory Control  – pieces, components, raw materials  and finished goods 

 

Inventory Conflict  •

•

•

•

Accounting  –  – zero inventory   – surplus inventory or  Production  – “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  Quantity discounts 

increases 

 

Inventory Hides Problems 

 

Two Forms of Demand   Dependent  

Items used to produce final products   Easier to forecast   Independent  

Items demanded by external customers   Example  –  – repair parts 

 

Aggregate Inventory  Management  1. How much do we have now?  2. How much do we want?  3. What wi will be th the ou output?  4. 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 

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 

 

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-pe (fixed-time-period)  riod) 

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  CLASS A B C

PERCENTAGE OF UNITS 5 - 15 30 50 - 60

PERCENTAGE OF DOLLARS 70 - 80 15 5 - 10

 

ABCUNIT Classification  COST ANNUAL USAGE 

PART 1

$ 60

90

2 3 4 5 6 7 8 9 10

350 30 80 30 20 10 320 510 20

40 130 60 100 180 170 50 60 120 Example 10.1

 

PART

ABC Classification  PART UNIT COST ANNUAL USAGE  TOTAL VALUE

% OF TOTAL VALUE

% OF TOTA TOTAL L QUANTITY

9 8

$30,600 1 16,000 2

35.9 $ 60 18.7 350

6.0 5.0

2 1 4 3 6

14,000 3 5,400 4 4,800 5 3,900 3,600 6

16.430 6.3 5.680 4.630 4.220

4.0 9.0 6.0 10.0 18.0

5 10 7

3,000 7 2,400 8 1,700

3.510 2.8 320 2.0

13.0 12.0 17.0

9 $85,400 10

510 20

% CUMMULA CUMMULATIVE TIVE

90 40 130 60 100 180 170 50 60 120

6.0 11.0 15.0 24.0 30.0 40.0 58.0 71.0 83.0 100.0

Example 10.1

 

PART

ABC Classification  PART UNIT COST ANNUAL USAGE  TOTAL VALUE

% OF TOTAL VALUE

% OF TOTA TOTAL L QUANTITY

9 8

$30,600 1 16,000 2

35.9 $ 60 18.7 350

6.0 5.0

2 1 4 3 6

14,000 3 5,400 4 4,800 5 3,900 3,600 6

16.430 6.3 5.680 4.630 4.220

4.0 9.0 6.0 10.0 18.0

5 10 7

3,000 7 2,400 8 1,700

3.510 2.8 320 2.0

13.0 12.0 17.0

9 $85,400 10

510 20

% CUMMULA CUMMULATIVE TIVE

90 A 40 130 60 B  100 180 170 C  50 60 120

6.0 11.0 15.0 24.0 30.0 40.0 58.0 71.0 83.0 100.0

Example 10.1

 

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

   l   e   v   e    L   y   r   o    t   n   e   v   n    I

Reorder point, R  

0

Lead time

Lead time

Order Order placed receipt

Order Order placed receipt

Time

 

EOQ Cost Model  C  - cost of placing order C  - annual per-unit carrying cost  o

 c

D - annual demand  Q - order quantity

Annual ordering cost = 

C  D  Q    o

C Q   Annual carrying cost = 2   c

C  D  C Q   Total cost = + Q   2   o

 c

 

Annual cost ($)

EOQ Cost Model  Total Cost Slope = 0 C Q  Carrying Cost = 2   c

Minimum total cost

cd   Ordering Cost = Q  

Optimal order Q opt 

Order Quantity, Q 

 

EOQ Formula  2C  D  C   o

EOQ = Co = Ordering costs D= Annual Demand Cc = Carrying Costs

 c

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  •

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•

•

•

•

Fixed  Variable  Two Bin  Card  Judgmental  Projected shortfall 

 

Why Safety Stock  •

•

•

•

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

 

Safety Stocks  

Safety stock  



Stockout  



buffer added to on hand inventory during  lead time  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 

 

Next Week  •

•

Chapter 15   – “The Forklifts Reverse Logistics  – Have Nothing to Do!”