Capacity and Capacity and Aggregate Aggregate Planning Planning

Capacity Outputs: Capacity Outputs: ExamplesExamples

Type of BusinessInput Measures of

CapacityOutput Measures

of Capacity

Car manufacturer Labor hours Cars per shift

Hospital Available beds Patients per month

Pizza parlor Labor hours Pizzas per day

Retail storeFloor space in square feet

Revenue per foot

The goal of capacity planning The goal of capacity planning decisionsdecisions

The goal of capacity planning The goal of capacity planning decisionsdecisions

(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

CapacityCapacity• 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 CapacityDeterminants 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 UtilizationCapacity 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

actual output rateUtilization 100%

available capacity

Aggregate PlanningAggregate 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 PlanningCapacity 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 PlanningCapacity 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: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 PlanningCapacity 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

Capacity PlanningCapacity 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 ConstraintsTheory 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 ConstraintsTheory of Constraints

• What needs to be changed

• What to change to

• How to make the change happen

Theory of ConstraintsTheory of Constraints

• Identify the constraint

• Subordinate

• Inertia

• Walk the process again

• inertia of change can create new bottle necks

Capacity PlanningCapacity Planning

Establishes overall level of Establishes overall level of productive resourcesproductive resources

Affects lead time Affects lead time responsiveness, cost & responsiveness, cost & competitivenesscompetitiveness

Determines when and how Determines when and how much to increase capacitymuch to increase capacity

Capacity ExpansionCapacity Expansion

Volume & certainty of anticipated Volume & certainty of anticipated demanddemand

Strategic objectives for growthStrategic objectives for growthCosts of expansion & operationCosts of expansion & operation Incremental or one-step Incremental or one-step

expansionexpansion

Sales and Operations Sales and Operations Planning (S&OP)Planning (S&OP)

• Brings together all plans for business

• performed at least once a month

• Internal and external

Adjusting Capacity to Adjusting Capacity to Meet DemandMeet Demand

1.1. Producing at a constant rate and using inventory Producing at a constant rate and using inventory to absorb fluctuations in demand (level to absorb fluctuations in demand (level production)production)

2.2. Hiring and firing workers to match demand (chase Hiring and firing workers to match demand (chase demand)demand)

3.3. Maintaining resources for high demand levelsMaintaining resources for high demand levels4.4. Increase or decrease working hours (overtime Increase or decrease working hours (overtime

and undertime)and undertime)5.5. Subcontracting work to other firmsSubcontracting work to other firms6.6. Using part-time workersUsing part-time workers7.7. Providing the service or product at a later time Providing the service or product at a later time

period (backordering)period (backordering)

Demand ManagementDemand ManagementShift demand into other periodsShift demand into other periods

Incentives, sales promotions, Incentives, sales promotions, advertising campaignsadvertising campaigns

Offer product or services with Offer product or services with countercyclical demand patternscountercyclical demand patterns

Partnering with suppliers to reduce Partnering with suppliers to reduce information distortion along the information distortion along the supply chainsupply chain

Remedies for UnderloadsRemedies for Underloads

1. Acquire more work

2. Pull work ahead that is scheduled for later time periods

3. Reduce normal capacity

Remedies for OverloadsRemedies 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 Scheduling as part of the Planning ProcessPlanning Process

• 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

SchedulingScheduling

Objectives in SchedulingObjectives 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

Sequencing RulesSequencing 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

Critical Ratio RuleCritical Ratio Rule

CR considers both time and work remaining

If CR > 1, job ahead of scheduleIf CR < 1, job behind schedule

If CR = 1, job on schedule

time remaining due date - today’s date

work remaining remaining processing time

Ties scheduling to Gantt Chart or PERT/CPM

Inventory Inventory ManagementManagement

Why is Inventory Important to Why is Inventory Important to Operations Management?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 ConflictInventory 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

InventoryInventoryStock of items held to meet Stock of items held to meet

future demandfuture demand Insurance against stock outInsurance against stock outCoverage for inefficiencies in Coverage for inefficiencies in

systemssystems Inventory management answers Inventory management answers

two questionstwo questions How much to orderHow much to order When to orderWhen to order

Types of InventoryTypes of Inventory Raw materialsRaw materials Purchased parts and suppliesPurchased parts and supplies In-process (partially completed) products Component partsComponent parts Working capitalWorking capital Tools, machinery, and equipmentTools, machinery, and equipment Safety stockSafety stock Just-in-case

Transportation Problems

Poor Quality

InventoryAccuracy

Policies

Training

Inventory Hides ProblemsInventory Hides Problems

Aggregate Inventory Aggregate Inventory ManagementManagement

1. How much do we have now?

2. How much do we want?

3. What will be the 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 CostsInventory Costs

Carrying CostCarrying Cost Cost of holding an item in inventoryCost of holding an item in inventory As high as 25-35% of valueAs high as 25-35% of value Insurance, maintenance, physical Insurance, maintenance, physical

inventory, pilferage, obsolete, damaged, inventory, pilferage, obsolete, damaged, lostlost

Ordering CostOrdering Cost Cost of replenishing inventoryCost of replenishing inventory

Shortage CostShortage Cost Temporary or permanent loss of sales Temporary or permanent loss of sales

when demand cannot be metwhen demand cannot be met

ABC Classification ABC Classification SystemSystem

Demand volume and value of items varyDemand volume and value of items vary Classify inventory into 3 categories, Classify inventory into 3 categories,

typically on the basis of the dollar value typically on the basis of the dollar value to the firmto the firm

PERCENTAGEPERCENTAGE PERCENTAGEPERCENTAGECLASSCLASS OF UNITSOF UNITS OF DOLLARSOF DOLLARS

AA 5 - 155 - 15 70 - 8070 - 80BB 3030 1515CC 50 - 6050 - 60 5 - 105 - 10

Why ABC?Why ABC?

• Inventory controls

• Security controls

• Monetary constraints

• Storage locations

Economic OrderEconomic OrderQuantityQuantity

Assumptions of Basic Assumptions of Basic EOQ ModelEOQ Model

Demand is known with certainty Demand is known with certainty and is constant over timeand is constant over time

No shortages are allowedNo shortages are allowedLead time for the receipt of orders Lead time for the receipt of orders

is constantis constantThe order quantity is received all The order quantity is received all

at onceat once

No reason to use EOQ if: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 FormulaEOQ Formula

EOQEOQ = =22CCooDD

CCcc

Co = Ordering costs

D= Annual Demand

Cc = Carrying Costs

Cost per order can increase if size of orders decreases

Most companies have no ideaof actual carrying costs

When to OrderWhen to OrderReorder Point is the level of inventory Reorder Point is the level of inventory at which a new order is placed at which a new order is placed

RR = = dLdL

wherewhere

dd = demand rate per period = demand rate per periodLL = lead time = lead time

Forms of Reorder PointsForms of Reorder Points

• Fixed

• Variable

• Two Bin

• Card

• Judgmental

• Projected shortfall

Why Safety StockWhy Safety Stock

• Accurate Demand Forecast

• Length of Lead Time

• Size of order quantities

• Service level

Inventory ControlInventory Control

• Cyclic Inventory

• Annual Inventory

• Periodic Inventory

• Sensitive Item Inventory

Vendor-Managed InventoryVendor-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

Inventory Management: Special ConcernsInventory 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 ManagementProject Managementand Operationsand Operations

Project Project ManagementManagement

First Essay on Project Management:1697 – “An Essay Upon Projects”

1959 HBR Article – “The Project Manager”

Air Force Manual 1964

Project ManagementProject ManagementA 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 Problem Areas of Project ManagementProject Management

Project team - Individuals from different departments within company

Matrix organization - Team structure with members from different functional areas depending on skills needed

Project manager - Leader of project team 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 PlanningProject PlanningStatement of work

Written description of goals, work & time frame of project

Activities require labor, resources & time

Precedence relationship shows sequential relationship of project activities

Project ControlProject ControlAll activities identified and includedCompleted in proper sequenceResource needs identifiedSchedule adjustedMaintain schedule and budgetComplete on time

Elements of Elements of Project PlanningProject Planning

Define project objective(s) Identify activitiesEstablish precedence relationshipsMake time estimatesDetermine project completion timeCompare project schedule objectivesDetermine resource requirements to

meet objective

Phases of a ProjectPhases of a Project

• Initiating

• Planning

• Execution

• Monitoring and Control

• Closing

A Gantt ChartA Gantt Chart

Popular tool for project schedulingGraph with bar for representing the

time for each taskProvides visual display of project

schedule

Around since 1914

A Gantt ChartA Gantt Chart| | | | |

Activity

Design house and obtain financing

Lay foundation

Order and receive materials

Build house

Select paint

Select carpet

Finish work

00 22 44 66 88 1010MonthMonth

MonthMonth11 33 55 77 99

CPM/PERTCPM/PERTCritical Path Method (CPM)

DuPont & Remington-Rand (1956) Deterministic task times

Project Eval. & Review Technique (PERT)

US Navy, Lockheed Multiple task time estimates

Project Network for a HouseProject Network for a House

Critical PathCritical Path

A path is a sequence of connected activities running from start to end node in network

The critical path is the path with the longest duration in the network

Project cannot be completed in less than the time of the critical path

Project CrashingProject Crashing Crashing is reducing project time by

expending additional resources Crash time is an amount of time an activity is

reduced Crash cost is the cost of reducing the activity

time Goal is to reduce project duration at minimum

cost

Life Cycle ManagementLife 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