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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
$85,400
AA
BB
CC
Why ABC?Why ABC?
• Inventory controls
• Security controls
• Monetary constraints
• Storage locations
Another Form of ABCAnother Form of ABC• Not monetary based• Use annual demand quantities• Used to determine storage locations in
warehouse/distribution center• Establish golden zones in the
warehouse for items that are fast moving, at ergonometric picking levels
• Cross Docking
Economic OrderEconomic OrderQuantityQuantity
Assumptions of Basic Assumptions of Basic EOQ ModelEOQ Model
Demand is known with certainty Demand is known with certainty and is constant over timeand is constant over time
No shortages are allowedNo shortages are allowedLead time for the receipt of orders Lead time for the receipt of orders
is constantis constantThe order quantity is received all The order quantity is received all
at onceat once
No reason to use EOQ if:No reason to use EOQ if:
• Customer specifies quantity
• Production run is not limited by equipment constraints
• Product shelf life is short
• Tool/die life limits production runs
• Raw material batches limit order quantity
The Inventory Order CycleThe Inventory Order Cycle
Demand Demand raterate
TimeTimeLead Lead timetime
Lead Lead timetime
Order Order placedplaced
Order Order placedplaced
Order Order receiptreceipt
Order Order receiptreceipt
Inve
nto
ry L
evel
Inve
nto
ry L
evel
Reorder point, Reorder point, RR
Order quantity, Order quantity, QQ
00
EOQ Cost ModelEOQ Cost ModelCCoo - cost of placing order - cost of placing order DD - annual demand - annual demand
CCcc - annual per-unit carrying cost - annual per-unit carrying cost QQ - order quantity - order quantity
Annual ordering cost =Annual ordering cost =CCooDD
Annual carrying cost =Annual carrying cost =CCccQQ
22
Total cost = +Total cost = +CCooDD
CCccQQ
22
EOQ Cost ModelEOQ Cost Model
Slope = 0Slope = 0
Total CostTotal Cost
Order Quantity, Order Quantity, QQ
Annual Annual cost ($)cost ($)
Minimum Minimum total costtotal cost
Optimal orderOptimal order QQoptopt
Carrying Cost =Carrying Cost =CCccQQ
22
Ordering Cost =Ordering Cost =cdcd
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!”