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Capacity and Aggregate Planning

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Title: Capacity and Aggregate Planning


1
  • Capacity and Aggregate Planning

2
Capacity Outputs Examples
3
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

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 lt1(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
  • inertia of change can create new bottle necks

14
Capacity Planning
  • Establishes overall level of productive resources
  • Affects lead time responsiveness, cost
    competitiveness
  • Determines when and how much to increase capacity

15
The Importance of Planning(how good is the
plan?)
  • Poor planning can mean a company's inability to
    handle unexpected occurrences.
  • Good planning can place a company in an extremely
    strong competitive position.
  • Probably the most important planning activity is
    concerned with developing a competitive strategy.
  • Planning in an organization must begin at the
    top with strategic planning.

16
Capacity Expansion
  • Volume certainty of anticipated demand
  • Strategic objectives for growth
  • Costs of expansion operation
  • Incremental or one-step expansion

17
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

18
Sales and Operations Planning (SOP)
  • Brings together all plans for business
  • performed at least once a month

19
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)

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
Capacity Terms
  • Load profile
  • Compares released and planned orders with work
    center capacity
  • Capacity
  • Productive capability includes utilization and
    efficiency
  • Utilization
  • of available working time spent working

22
More Capacity Terms
  • Efficiency how well the machine or worker
    performs compared to a standard output
  • Load
  • The standard hours of work assigned to a facility
  • Load percent
  • The ratio of load to capacityLoad
    (load/capacity)x100

23
Remedies for Underloads
  1. Acquire more work
  2. Pull work ahead that is scheduled for later time
    periods
  3. Reduce normal capacity

24
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

25
Scheduling as part of the Planning Process
26
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

27
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

28
Scheduling
  • Specifies when labor, equipment, facilities are
    needed to produce a product or provide a service
  • Last stage of planning before production occurs
    really?

29
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

30
Critical Ratio Rule
Ties scheduling to Gantt Chart or PERT/CPM
31
Chapter 12
  • Inventory Management

32
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33
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34
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

35
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

36
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

37
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

38
Inventory Hides Problems
Policies
Inventory Accuracy
Transportation Problems
Poor Quality
Training
39
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.

40
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

41
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

42
Why ABC?
  • Inventory controls
  • Security controls
  • Monetary constraints
  • Storage locations

43
Economic OrderQuantity
44
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

45
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

46
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
47
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
48
Forms of Reorder Points
  • Fixed
  • Variable
  • Two Bin
  • Card
  • Judgmental
  • Projected shortfall

49
Why Safety Stock
  • Accurate Demand Forecast
  • Length of Lead Time
  • Size of order quantities
  • Service level

50
Inventory Control
  • Cyclic Inventory
  • Annual Inventory
  • Periodic Inventory
  • Sensitive Item Inventory

51
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
  • ProctorGamble - Wal-Mart
  • DLA moving from a manager of supplies to a
    manager of suppliers
  • Direct Vendor Deliveries loss of visibility

52
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

53
Next 2 Weeks
  • No Class Work on Exam and Case Study Analysis
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