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Operations Planning Horizons• Long Range Planning - Annual planning, with a time horizon greater than one year

• Aggregate Planning - Intermediate planning with a time horizon of 6 to 18 months with monthly or quarterly increments

• Short Range Planning - Weekly planning with a time horizon of one day to six months

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Aggregate Planning

Product group or broad category (Aggregation)

Medium-Range: 6-18 months Goal: Specify the optimal combination of

production rate

workforce level

inventory on hand

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Master scheduling

Material requirements planning

Order schedulingWeekly workforce andcustomer scheduling

Daily workforce and customer scheduling

Process planning

Strategic capacity planning

Sales and operations (aggregate) planning

Longrange

Intermediaterange

Shortrange

ManufacturingServices

Exhibit 13.1Exhibit 13.1

Sales plan Aggregate operations plan

Forecasting & demand management

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Balancing Aggregate Demand and Aggregate Production Capacity

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

45005500

7000

10000

8000

6000

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

4500 4000

90008000

4000

6000

Suppose the figure to the right represents forecast demand in units

Suppose the figure to the right represents forecast demand in units

Now suppose this lower figure represents the aggregate capacity of the company to meet demand

Now suppose this lower figure represents the aggregate capacity of the company to meet demand

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

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Key Strategies for Meeting Demand

Chase - Match production rate to order rate by hiring and laying off employees

Level - Maintain a stable work force working at a constant output rate; shortages and surpluses are absorbed by fluctuating inventory levels, backlogs and lost sales

Some combination of the two

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Required Inputs to the Production Planning System

Planning for

production

External capacity

Competitors’behavior

Raw material availability

Market demand

Economic conditions

Currentphysical capacity

Current workforce

Inventory levels

Activities required for production

External to firm

Internal to firm

Strategic Capacity Planning

Capacity can be defined as the ability to hold, receive, store, or accommodate; a measure of an organization’s ability to provide customers with the demanded services or goods in the amount requested and in a timely manner

Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size

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Estimating Capacity

Must differentiate between theoretical capacity (what can be achieved under ideal conditions in a short period of time), and achievable capacity (considering equipment problems, maintenance requirements, material problems, worker errors)

Must select a yardstick to measure it, such as tons per hour (tph) of steel or number of patient days in a hospital

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Management Decisions That Affect Capacity in the Intermediate Term

Subcontracting or outsourcing production Changing the mix of products produced Adding people to the production process Increasing the motivation of employees Increasing the operating rate of a machine Improving quality of raw materials,

processes, etc. Increasing product yield (quantity of

output/quantity of input, or the % of useful output)

Capacity Utilization

Where:Capacity used = rate of output actually achieved, and Best operating level = capacity for which the process was designed

level operating Best

usedCapacity rate nutilizatioCapacity

Example of Capacity Utilization

During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?

During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?

Answer: Capacity utilization rate = Capacity used .

Best operating level = 83/120 =0.69 or 69%

Answer: Capacity utilization rate = Capacity used .

Best operating level = 83/120 =0.69 or 69%

Economies & Diseconomies of Scale

100-unitplant

200-unitplant 300-unit

plant

400-unitplant

Volume

Averageunit costof output

Economies of Scale and the Experience Curve workingEconomies of Scale and the Experience Curve working

Diseconomies of Scale start workingDiseconomies of Scale start working

The Experience Curve

As plants produce more products, they gain experience in the best production methods and reduce their costs per unit

As plants produce more products, they gain experience in the best production methods and reduce their costs per unit

Total accumulated production of units

Cost orpriceper unit

Yesterday

Today

Tomorrow

Capacity Flexibility

Flexible plants

Flexible processes

Flexible workers

Capacity Planning: Balance

Stage 1 Stage 2 Stage 3Unitsper

month6,000 7,000 5,000

Unbalanced stages of productionUnbalanced stages of production

Stage 1 Stage 2 Stage 3Unitsper

month6,000 6,000 6,000

Balanced stages of productionBalanced stages of production

Maintaining System Balance: Output of one stage is the exact input requirements for the next stage

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Determining Capacity Requirements

Forecast sales within each individual product line

Calculate equipment and labor requirements to meet the forecasts

Project equipment and labor availability over the planning horizon

Identify bottlenecks

Capacity Utilization & Service Quality

The best operating point is between 70% and 90% of capacity; over 90% is undesirable

Why do you think that this is so?

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Utilization and Time in System

0

30

60

90

120

150

50% 60% 70% 80% 90% 100%Utilization

Tim

e in

Sys

tem

70

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Capacity - Summary Capacity decisions should be made carefully, as

they can commit significant resources to assets that cannot be changed easily or economically.

Capacity is affected by management decisions regarding the number of hours worked, product mix, staffing levels, machine capabilities, level of quality, and product yield.

Watch out for the “Bermuda Triangle” of operational complexity, where management difficulty exceeds management ability (management bottleneck!).

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Enterprise Resource Planning Systems

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Enterprise Resource Planning (ERP) Systems

Enterprise Resource Planning Systems is a computer system that integrates application programs in accounting, sales, manufacturing, and other functions in the firm

This integration is accomplished through a database shared by all the application programs

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SAP AG’S R/3 SAP AG, A German firm, is a

world leader in ERP software.-Designed to operate in a three-tier client/server configuration-Applications are fully integrated so that data are shared between all applications

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R/3 System Functional Components

R/3 SystemFunctional

ComponentsSales & Distribution Human Resources

Manufacturing & Logistics

Financial Accounting

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Financial Accounting

Financials

Controlling

Asset management

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Human Resources

Payroll Benefits administration Applicant data administration Personnel development planning Workforce planning Schedule & shift planning Time management Travel expense accounting

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Manufacturing & Logistics

Materials management

Plant maintenance

Quality management

Production planning & control

Project management system

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Sales and Distribution

Prospect & customer management Sales order management Configuration management Distribution Export controls Shipping and transportation

management Billing, invoicing, and rebate

processing

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Reasons for Implementing SAP R/3

Desire to standardize and improve processes

To improve the level of systems integration

To improve information quality