Capacity and Aggregate Planning Capacity Outputs Examples The

Capacity and Aggregate Planning

Capacity Outputs: Examples

The goal of capacity planning decisions (1) The capacity of the firm to produce the service or good (2) The processes for providing the service or making the good (3) The layout or arrangement of the work space (4) The design of work processes to enhance productivity

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

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

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

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

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

Capacity Planning • Rough Cut Capacity Planning process of converting the master production schedule into requirements for key resources • capacity requirements plan - timephased 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

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

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

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

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

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

Adjusting Capacity to Meet Demand 1. Producing at a constant rate and using inventory to absorb fluctuations in demand (level production) 2. Hiring and firing workers to match demand (chase demand) 3. Maintaining resources for high demand levels 4. Increase or decrease working hours (overtime and undertime) 5. Subcontracting work to other firms 6. Using part-time workers 7. Providing the service or product at a later time period (backordering)

Demand Management ü Shift demand into other periods ü Incentives, sales promotions, advertising campaigns ü Offer product or services with countercyclical demand patterns ü Partnering with suppliers to reduce information distortion along the supply chain

Remedies for Underloads 1. Acquire more work 2. Pull work ahead that is scheduled for later time periods 3. Reduce normal capacity

Remedies for Overloads 1. Eliminate unnecessary requirements 2. Reroute jobs to alternative machines or work centers 3. Split lots between two or more machines 4. Increase normal capacity 5. Subcontract 6. Increase the efficiency of the operation 7. Push work back to later time periods 8. Revise master schedule

Scheduling as part of the Planning Process

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

Objectives in Scheduling Ø Ø Ø Ø Ø 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

Sequencing Rules Ø Ø Ø Ø Ø 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

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

Inventory Management

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 ü Stock of items held to meet future demand ü Insurance against stock out ü Coverage for inefficiencies in systems ü Inventory management answers two questions ü How much to order ü When to order

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

Inventory Hides Problems Policies Inventory Accuracy Training Poor Quality Transportation Problems

Aggregate Inventory Management 1. 2. 3. 4. 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 ü Carrying Cost ü Cost of holding an item in inventory ü As high as 25 -35% of value ü Insurance, maintenance, physical inventory, pilferage, obsolete, damaged, lost ü Ordering Cost ü Cost of replenishing inventory ü Shortage Cost ü Temporary or permanent loss of sales when demand cannot be met

ABC Classification System ü Demand volume and value of items vary ü 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

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

Economic Order Quantity

Assumptions of Basic EOQ Model ü Demand is known with certainty and is constant over time ü No shortages are allowed ü Lead time for the receipt of orders is constant ü 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 2 Co. D EOQ = Cc 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 = d. L where d = demand rate 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

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

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

Project Management and Operations

Project Management First Essay on Project Management: 1697 – “An Essay Upon Projects” 1959 HBR Article – “The Project Manager” Air Force Manual 1964

Project Management A project is a temporary and one-time endeavor undertaken to create a unique product or service, that brings about beneficial change or added value. . (wikipedia)

Problem Areas of Project Management ü Project team - Individuals from different departments within company ü Matrix organization - Team structure with members from different functional areas depending on skills needed ü Project manager - Leader of project team ü Project Charter – high level description of what is to be accomplished in a project and delegates authority to project manager to implement actions to complete project

Project Planning ü Statement of work ü Written description of goals, work & time frame of project ü Activities require labor, resources & time ü Precedence relationship shows sequential relationship of project activities

Project Control ü All activities identified and included ü Completed in proper sequence ü Resource needs identified ü Schedule adjusted ü Maintain schedule and budget ü Complete on time

Elements of Project Planning ü Define project objective(s) ü Identify activities ü Establish precedence relationships ü Make time estimates ü Determine project completion time ü Compare project schedule objectives ü Determine resource requirements to meet objective

Phases of a Project • • • Initiating Planning Execution Monitoring and Control Closing

A Gantt Chart Around since 1914 ü Popular tool for project scheduling ü Graph with bar for representing the time for each task ü Provides visual display of project schedule

A Gantt Chart 0 | 2 Month | 4 | 6 | 8 | 10 5 7 9 Activity Design house and obtain financing Lay foundation Order and receive materials Build house Select paint Select carpet Finish work 1 3 Month

CPM/PERT ü Critical Path Method (CPM) ü Du. Pont & Remington-Rand (1956) ü Deterministic task times ü Project Eval. & Review Technique (PERT) ü US Navy, Lockheed ü Multiple task time estimates

Project Network for a House 3 Lay foundation 2 1 3 Design house and obtain financing 2 Dummy Build house 0 1 4 Order 1 and Select receive paint materials 6 3 1 5 Finish work Select carpet 1 7

Critical Path ü A path is a sequence of connected activities running from start to end node in network ü The critical path is the path with the longest duration in the network ü Project cannot be completed in less than the time of the critical path

Project Crashing ü Crashing is reducing project time by expending additional resources ü Crash time is an amount of time an activity is reduced ü Crash cost is the cost of reducing the activity time ü Goal is to reduce project duration at minimum cost

Life Cycle Management • Long term view of projects to guide decision making – solutions that provide life time success vice short term • Acquisition; development; production; introduction; sustainment; disposal • Links system costs to big picture; better use of resources; minimize total cost of ownership