Capacity and Capacity and Aggregate Aggregate Planning Planning

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

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

• 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

Capacity Expansion StrategiesCapacity Expansion Strategies(a) Capacity lead strategy(a) Capacity lead strategy (b) Capacity lag strategy(b) Capacity lag strategy

(c) Average capacity strategy(c) Average capacity strategy (d) Incremental vs. one-step expansion(d) Incremental vs. one-step expansion

UnitsUnits

CapacityCapacity

TimeTime

DemandDemand

UnitsUnits

CapacityCapacity

TimeTime

DemandDemand

UnitsUnits

CapacityCapacity

TimeTime

DemandDemand

UnitsUnitsIncrementalIncrementalexpansionexpansion

TimeTime

DemandDemand

One-step expansionOne-step expansion

Figure 9.1Figure 9.1

Lead Lead

• Advantages• anticipates

demand• first to market• lure from

competitors

• Disadvantages• product problems • product

acceptability• consumers

unfamiliar with product

• R&D costs

LagLag• Advantages• established

demand for product

• less R&D• growth market

• 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 strategywill return - Western Sizzlin’

Average CapacityAverage Capacity• Advantages• level production• stable work force• excess capacity

potential

• Chasing half the time

• market timing• excess product

Aggregate Production Aggregate Production Planning (APP)Planning (APP)

Matches market demand to company Matches market demand to company resourcesresources

Plans production 6 months to 12 months in Plans production 6 months to 12 months in advanceadvance

Expresses demand, resources, and capacity Expresses demand, resources, and capacity in general termsin general terms

Develops a strategy for economically Develops a strategy for economically meeting demandmeeting demand

Establishes a company-wide game plan for Establishes a company-wide game plan for allocating resourcesallocating resources

also called Sales and Operations Planningalso called Sales and Operations Planning

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

• Brings together all plans for business

• performed at least once a month

Inputs and Outputs to APPInputs and Outputs to APP

CompanyPolicies

CompanyPolicies

StrategicObjectivesStrategic

ObjectivesCapacity

ConstraintsCapacity

Constraints

Units or dollarssubcontracted,

backordered, or lost

Units or dollarssubcontracted,

backordered, or lost

Size ofWorkforce

Size ofWorkforce

Productionper month

(in units or $)

Productionper month

(in units or $)

InventoryLevels

InventoryLevels

FinancialConstraintsFinancial

ConstraintsDemand

ForecastsDemand

Forecasts

AggregateProductionPlanning

AggregateProductionPlanning

Figure 9.3Figure 9.3

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)

Strategy DetailsStrategy Details Level production - produce at constant rate Level production - produce at constant rate

& use inventory as needed to meet demand& use inventory as needed to meet demand Chase demand - change workforce levels Chase demand - change workforce levels

so that production matches demandso that production matches demand Maintaining resources for high demand Maintaining resources for high demand

levels - ensures high levels of customer levels - ensures high levels of customer serviceservice

Strategy DetailsStrategy Details Overtime & undertime - common when Overtime & undertime - common when

demand fluctuations are not extremedemand fluctuations are not extreme Subcontracting - useful if supplier meets Subcontracting - useful if supplier meets

quality & time requirementsquality & time requirements Part-time workers - feasible for unskilled Part-time workers - feasible for unskilled

jobs or if labor pool existsjobs or if labor pool exists Backordering - only works if customer is Backordering - only works if customer is

willing to wait for product/serviceswilling to wait for product/services

Level ProductionLevel Production

ProductionProduction

DemandDemand

Un

its

Un

its

TimeTime

Figure 9.4 (a)Figure 9.4 (a)

Level ProductionLevel Production• Advantages• stable work force• no overtime or

additional hiring costs

• Disadvantages• inventory• obsolescence• carrying costs• depends on real

good forecasts

Chase DemandChase Demand

Figure 9.4 (b)Figure 9.4 (b)

ProductionProduction

DemandDemand

Un

its

Un

its

TimeTime

Chase StrategyChase 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 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

Demand Distortion along Demand Distortion along the Supply Chainthe Supply Chain

Available to Promise -ATPAvailable to Promise -ATP

• Why is it important?

• What is its use?

The uncommitted portion of a company’sinventory and planned production maintainedin the master schedule to support customerordering promising.

Portion of on hand inventory and planned production not already tied to a customer order

Available-to-PromiseAvailable-to-PromiseProduct Request

Is the product available at

this location?

Is an alternative product available

at an alternate location?

Is an alternative product available at this location?

Is this product available at a

different location?

Available-to-promise

Allocate inventory

Capable-to-promise date

Is the customer willing to wait for

the product?

Available-to-promise

Allocate inventory

Revise master schedule

Trigger production

Lose sale

YesYes

NoNo

YesYes

NoNo

YesYes

NoNo

YesYes

NoNo

YesYes

NoNo

Figure 9.6Figure 9.6

Aggregate Planning Aggregate Planning for Servicesfor Services

1.1. Most services can’t be inventoriedMost services can’t be inventoried

2.2. Demand for services is difficult to predictDemand for services is difficult to predict

3.3. Capacity is also difficult to predictCapacity is also difficult to predict

4.4. Service capacity must be provided at the Service capacity must be provided at the appropriate place and timeappropriate place and time

5.5. Labor is usually the most constraining Labor is usually the most constraining resource for servicesresource for services

Chapter 12Chapter 12

Inventory Inventory ManagementManagement

To Accompany Russell and Taylor, Operations Management, 4th Edition, 2003 Prentice-Hall, Inc. All rights reserved.

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 LaborLabor In-process (partially completed) productsIn-process (partially completed) products Component partsComponent parts Working capitalWorking capital Tools, machinery, and equipmentTools, machinery, and equipment Safety stockSafety stock Just-in-caseJust-in-case

Reasons to Hold Reasons to Hold InventoryInventory

Meet unexpected demandMeet unexpected demandSmooth seasonal or cyclical demandSmooth seasonal or cyclical demandMeet variations in customer demandMeet variations in customer demandTake advantage of price discountsTake advantage of price discountsHedge against price increasesHedge against price increasesQuantity discountsQuantity discounts

Inventory Hides ProblemsInventory Hides Problems

Two Forms of DemandTwo Forms of Demand

DependentDependent Items used to produce final productsItems used to produce final products Easier to forecastEasier to forecast

IndependentIndependent Items demanded by external customersItems demanded by external customers Example – repair partsExample – repair parts

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, inventory, pilferage, obsolete, damaged, lostdamaged, lost

Ordering CostOrdering Cost Cost of replenishing inventoryCost of replenishing inventory

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

sales when demand cannot be metsales when demand cannot be met

Inventory Control Inventory Control SystemsSystems

Continuous system Continuous system Constant amount ordered when Constant amount ordered when

inventory declines to predetermined inventory declines to predetermined levellevel

variable amount ordered when variable amount ordered when inventory reaches Reorder Pointinventory reaches Reorder Point

Periodic system (fixed-time-period)Periodic system (fixed-time-period) Order placed for variable amount Order placed for variable amount

after fixed passage of timeafter fixed passage of time

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

ABC ClassificationABC Classification

11 $ 60$ 60 909022 350350 404033 3030 13013044 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060

1010 2020 120120

PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGE

Example 10.1Example 10.1

ABC ClassificationABC Classification

Example 10.1Example 10.1

11 $ 60$ 60 909022 350350 404033 3030 13013044 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060

1010 2020 120120

PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGETOTAL % OF TOTAL % OF TOTALPART VALUE VALUE QUANTITY % CUMMULATIVE

9 $30,600 35.9 6.0 6.08 16,000 18.7 5.0 11.02 14,000 16.4 4.0 15.01 5,400 6.3 9.0 24.04 4,800 5.6 6.0 30.03 3,900 4.6 10.0 40.06 3,600 4.2 18.0 58.05 3,000 3.5 13.0 71.0

10 2,400 2.8 12.0 83.07 1,700 2.0 17.0 100.0

$85,400

ABC ClassificationABC Classification

Example 10.1Example 10.1

11 $ 60$ 60 909022 350350 404033 3030 13013044 8080 606055 3030 10010066 2020 18018077 1010 17017088 320320 505099 510510 6060

1010 2020 120120

PARTPART UNIT COSTUNIT COST ANNUAL USAGEANNUAL USAGETOTAL % OF TOTAL % OF TOTALPART VALUE VALUE QUANTITY % CUMMULATIVE

9 $30,600 35.9 6.0 6.08 16,000 18.7 5.0 11.02 14,000 16.4 4.0 15.01 5,400 6.3 9.0 24.04 4,800 5.6 6.0 30.03 3,900 4.6 10.0 40.06 3,600 4.2 18.0 58.05 3,000 3.5 13.0 71.0

10 2,400 2.8 12.0 83.07 1,700 2.0 17.0 100.0

$85,400

AA

BB

CC

Why ABC?Why ABC?

• Inventory controls

• Security controls

• Monetary constraints

• Storage locations

Another Form of ABCAnother 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 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

The Inventory Order CycleThe Inventory Order Cycle

Demand Demand raterate

TimeTimeLead Lead timetime

Lead Lead timetime

Order Order placedplaced

Order Order placedplaced

Order Order receiptreceipt

Order Order receiptreceipt

Inve

nto

ry L

evel

Inve

nto

ry L

evel

Reorder point, Reorder point, RR

Order quantity, Order quantity, QQ

00

EOQ Cost ModelEOQ Cost ModelCCoo - cost of placing order - cost of placing order DD - annual demand - annual demand

CCcc - annual per-unit carrying cost - annual per-unit carrying cost QQ - order quantity - order quantity

Annual ordering cost =Annual ordering cost =CCooDD

QQ

Annual carrying cost =Annual carrying cost =CCccQQ

22

Total cost = +Total cost = +CCooDD

QQ

CCccQQ

22

EOQ Cost ModelEOQ Cost Model

Slope = 0Slope = 0

Total CostTotal Cost

Order Quantity, Order Quantity, QQ

Annual Annual cost ($)cost ($)

Minimum Minimum total costtotal cost

Optimal orderOptimal order QQoptopt

Carrying Cost =Carrying Cost =CCccQQ

22

Ordering Cost =Ordering Cost =cdcd

QQ

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

Safety Stocks Safety Stocks

Safety stockSafety stock buffer added to on hand inventory during buffer added to on hand inventory during

lead timelead time

Stockout Stockout an inventory shortagean inventory shortage

Service level Service level probability that the inventory available probability that the inventory available

during lead time will meet demandduring lead time will meet demand

Inventory ControlInventory Control

• Cyclic Inventory

• Annual Inventory

• Periodic Inventory

• Sensitive Item Inventory

Next WeekNext Week

• Chapter 15

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