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Capacity and Aggregate Planning. Aggregate Planning The process of planning the quantity and timing of output over the intermediate range (3-18 months)

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Presentation on theme: "Capacity and Aggregate Planning. Aggregate Planning The process of planning the quantity and timing of output over the intermediate range (3-18 months)"— Presentation transcript:

1 Capacity and Aggregate Planning

2 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

3 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

4 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

5 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

6 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

7 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

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

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

10 Capacity Expansion Strategies (a) Capacity lead strategy (b) Capacity lag strategy (c) Average capacity strategy (d) Incremental vs. one-step expansion Units Capacity Time Demand Units Capacity Time Demand Units Capacity Time Demand Units Incrementalexpansion Time Demand One-step expansion Figure 9.1

11 Lead Advantages anticipates demand first to market lure from competitors Disadvantages product problems product acceptability consumers unfamiliar with product R&D costs

12 Lag 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 strategy will return - Western Sizzlin

13 Average Capacity Advantages level production stable work force excess capacity potential Chasing half the time market timing excess product

14 Aggregate Production Planning (APP) Matches market demand to company resources Matches market demand to company resources Plans production 6 months to 12 months in advance Plans production 6 months to 12 months in advance Expresses demand, resources, and capacity in general terms Expresses demand, resources, and capacity in general terms Develops a strategy for economically meeting demand Develops a strategy for economically meeting demand Establishes a company-wide game plan for allocating resources Establishes a company-wide game plan for allocating resources also called Sales and Operations Planning also called Sales and Operations Planning

15 Sales and Operations Planning (S&OP) Brings together all plans for business performed at least once a month

16 Inputs and Outputs to APP Company Policies Company Policies Strategic Objectives Strategic Objectives Capacity Constraints Capacity Constraints Units or dollars subcontracted, backordered, or lost Units or dollars subcontracted, backordered, or lost Size of Workforce Size of Workforce Production per month (in units or $) Production per month (in units or $) Inventory Levels Inventory Levels Financial Constraints Financial Constraints Demand Forecasts Demand Forecasts Aggregate Production Planning Aggregate Production Planning Figure 9.3

17 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)

18 Strategy Details Level production - produce at constant rate & use inventory as needed to meet demand Level production - produce at constant rate & use inventory as needed to meet demand Chase demand - change workforce levels so that production matches demand Chase demand - change workforce levels so that production matches demand Maintaining resources for high demand levels - ensures high levels of customer service Maintaining resources for high demand levels - ensures high levels of customer service

19 Strategy Details Overtime & undertime - common when demand fluctuations are not extreme Overtime & undertime - common when demand fluctuations are not extreme Subcontracting - useful if supplier meets quality & time requirements Subcontracting - useful if supplier meets quality & time requirements Part-time workers - feasible for unskilled jobs or if labor pool exists Part-time workers - feasible for unskilled jobs or if labor pool exists Backordering - only works if customer is willing to wait for product/services Backordering - only works if customer is willing to wait for product/services

20 Level Production Production Demand Units Time Figure 9.4 (a)

21 Level Production Advantages stable work force no overtime or additional hiring costs Disadvantages inventory obsolescence carrying costs depends on real good forecasts

22 Chase Demand Figure 9.4 (b) ProductionDemandUnits Time

23 Chase Strategy Advantages less inventory less chance for obsolete merchandise Disadvantages Never a stable production level work force instability hiring/firing costs always a priority

24 Demand Management Shift demand into other periods Shift demand into other periods Incentives, sales promotions, advertising campaigns Incentives, sales promotions, advertising campaigns Offer product or services with countercyclical demand patterns Offer product or services with countercyclical demand patterns Partnering with suppliers to reduce information distortion along the supply chain Partnering with suppliers to reduce information distortion along the supply chain

25 Demand Distortion along the Supply Chain

26 Available to Promise -ATP Why is it important? What is its use? The uncommitted portion of a companys inventory and planned production maintained in the master schedule to support customer ordering promising. Portion of on hand inventory and planned production not already tied to a customer order

27 Available-to-PromisePERIOD ON-HAND = Forecast Customer orders Master production schedule Available to promise PERIOD ON-HAND = Forecast Customer orders Master production schedule Available to promise ATP in period 1 = ( ) - ( ) = 40 ATP in period 3 = ( ) = 0 ATP in period 5 = ( ) = 170 Example 9.5

28 Available-to-Promise Product 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 Yes No Yes No Yes No Yes No Yes No Figure 9.6

29 Aggregate Planning for Services 1.Most services cant be inventoried 2.Demand for services is difficult to predict 3.Capacity is also difficult to predict 4.Service capacity must be provided at the appropriate place and time 5.Labor is usually the most constraining resource for services

30 Chapter 12 Inventory Management To Accompany Russell and Taylor, Operations Management, 4th Edition, 2003 Prentice-Hall, Inc. All rights reserved.

31 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

32 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

33 Inventory Stock of items held to meet future demand Stock of items held to meet future demand Insurance against stock out Insurance against stock out Coverage for inefficiencies in systems Coverage for inefficiencies in systems Inventory management answers two questions Inventory management answers two questions How much to order How much to order When to order When to order

34 Types of Inventory Raw materials Raw materials Purchased parts and supplies Purchased parts and supplies Labor Labor In-process (partially completed) products In-process (partially completed) products Component parts Component parts Working capital Working capital Tools, machinery, and equipment Tools, machinery, and equipment Safety stock Safety stock Just-in-case Just-in-case

35 Reasons to Hold Inventory Meet unexpected demand Meet unexpected demand Smooth seasonal or cyclical demand Smooth seasonal or cyclical demand Meet variations in customer demand Meet variations in customer demand Take advantage of price discounts Take advantage of price discounts Hedge against price increases Hedge against price increases Quantity discounts Quantity discounts

36 Inventory Hides Problems

37 Two Forms of Demand Dependent Dependent Items used to produce final products Items used to produce final products Easier to forecast Easier to forecast Independent Independent Items demanded by external customers Items demanded by external customers Example – repair parts Example – repair parts

38 Aggregate Inventory Management 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.

39 Inventory Costs Carrying Cost Carrying Cost Cost of holding an item in inventory Cost of holding an item in inventory As high as 25-35% of value As high as 25-35% of value Insurance, maintenance, physical inventory, pilferage, obsolete, damaged, lost Insurance, maintenance, physical inventory, pilferage, obsolete, damaged, lost Ordering Cost Ordering Cost Cost of replenishing inventory Cost of replenishing inventory Shortage Cost Shortage Cost Temporary or permanent loss of sales when demand cannot be met Temporary or permanent loss of sales when demand cannot be met

40 Inventory Control Systems Continuous system Continuous system Constant amount ordered when inventory declines to predetermined level Constant amount ordered when inventory declines to predetermined level variable amount ordered when inventory reaches Reorder Point variable amount ordered when inventory reaches Reorder Point Periodic system (fixed-time-period) Periodic system (fixed-time-period) Order placed for variable amount after fixed passage of time Order placed for variable amount after fixed passage of time

41 ABC Classification System Demand volume and value of items vary Demand volume and value of items vary Classify inventory into 3 categories, typically on the basis of the dollar value to the firm Classify inventory into 3 categories, typically on the basis of the dollar value to the firm PERCENTAGEPERCENTAGE CLASSOF UNITSOF DOLLARS A B3015 C

42 ABC Classification 1$ PARTUNIT COSTANNUAL USAGE Example 10.1

43 ABC Classification Example $ PARTUNIT COSTANNUAL USAGE TOTAL% OF TOTAL% OF TOTAL PARTVALUEVALUEQUANTITY% CUMMULATIVE 9$30, , , , , , , , , , $85,400

44 ABC Classification Example $ PARTUNIT COSTANNUAL USAGE TOTAL% OF TOTAL% OF TOTAL PARTVALUEVALUEQUANTITY% CUMMULATIVE 9$30, , , , , , , , , , $85,400 A B C

45 ABC Classification Example $ PARTUNIT COSTANNUAL USAGE TOTAL% OF TOTAL% OF TOTAL PARTVALUEVALUEQUANTITY% CUMMULATIVE 9$30, , , , , , , , , , $85,400 A B C % OF TOTAL CLASSITEMSVALUEQUANTITY A9, 8, B1, 4, C6, 5, 10,

46 ABC Classification – – – – – 0 0 – |||||| % of Quantity % of Value A B C

47 Why ABC? Inventory controls Security controls Monetary constraints Storage locations

48 Another 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

49 Economic Order Quantity

50 Assumptions of Basic EOQ Model Demand is known with certainty and is constant over time Demand is known with certainty and is constant over time No shortages are allowed No shortages are allowed Lead time for the receipt of orders is constant Lead time for the receipt of orders is constant The order quantity is received all at once The order quantity is received all at once

51 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

52 The Inventory Order Cycle Time Inventory Level Reorder point, R Order quantity, Q 0

53 The Inventory Order Cycle Demand rate Time Lead time Order placed Order receipt Inventory Level Reorder point, R Order quantity, Q 0

54 EOQ Cost Model C o - cost of placing orderD - annual demand C c - annual per-unit carrying costQ - order quantity Annual ordering cost = CoDCoDQQCoDCoDQQQ Annual carrying cost = CcQCcQ22CcQCcQ222 Total cost = + CoDCoDQQCoDCoDQQQ CcQCcQ22CcQCcQ222

55 EOQ Cost Model Slope = 0 Total Cost Order Quantity, Q Annual cost ($) Minimum total cost Optimal order Q opt Q opt Carrying Cost = CcQCcQ22CcQCcQ222 Ordering Cost = cdQ

56 EOQ Formula EOQ = 2CoD2CoDCcCc2CoD2CoDCcCc C o = Ordering costs D = Annual Demand C c = Carrying Costs Cost per order can increase if size of orders decreases Most companies have no idea of actual carrying costs

57 EOQ Example C c = $0.75 per yardC o = $150D = 10,000 yards Q opt = 2CoD2CoDCcCc2CoD2CoDCcCc 2(150)(10,000)(0.75) Q opt = 2,000 yards Orders per year =D/Q opt =10,000/2,000 =5 orders/year Order cycle time =311 days/(D/Q opt ) =311/5 =62.2 store days

58 Quantity Discounts Price per unit decreases as order quantity increases Price per unit decreases as order quantity increases TC = + + PD CoDCoDQQCoDCoDQQQ CcQCcQ22CcQCcQ222 where P = per unit price of the item D = annual demand

59 Quantity Discounts Price per unit decreases as order quantity increases Price per unit decreases as order quantity increases TC = + + PD CoDCoDQQCoDCoDQQQ CcQCcQ22CcQCcQ222 where P = per unit price of the item D = annual demand ORDER SIZEPRICE $ ( d 1 ) ( d 2 )

60 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

61 Forms of Reorder Points Fixed Variable Two Bin Card Judgmental Projected shortfall

62 Reorder Point Example Demand = 10,000 yards/year Store open 311 days/year Daily demand = 10,000 / 311 = yards/day Lead time = L = 10 days R = dL = (32.154)(10) = yards

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

64 Safety Stocks Safety stock Safety stock buffer added to on hand inventory during lead time buffer added to on hand inventory during lead time Stockout Stockout an inventory shortage an inventory shortage Service level Service level probability that the inventory available during lead time will meet demand probability that the inventory available during lead time will meet demand

65 Variable Demand with a Reorder Point Reorder point, R Q LT Time LT Inventory level 0

66 Reorder Point with a Safety Stock Reorder point, R Q LT Time LT Inventory level 0 Safety Stock

67 Reorder Point With Variable Demand R = dL + (z d L) where d=average daily demand L=lead time d =the standard deviation of daily demand d =the standard deviation of daily demand z=number of standard deviations corresponding to the service level probability (page 805) z d L=safety stock

68 Reorder Point for a Service Level Probability of meeting demand during lead time = service level Probability of a stockout R Safety stock dL Demand z d L Figure 10.7

69 The standard normal distribution F(z) F(z) z 0 Transform X = N( ) to z = N(0,1) z = (X - ) /. F(z) = Prob( N(0,1) < z) Transform back, knowing z*: X* = + z*.

70 Reorder Point for Variable Demand The carpet store wants a reorder point with a 95% service level and a 5% stockout probability d= 30 yards per day L= 10 days d = 5 yards per day d = 5 yards per day For a 95% service level, z = 1.65 R= dL + z d L = 30(10) + (1.65)(5)( 10) = yards Safety stock= z d L = (1.65)(5)( 10) = 26.1 yards

71 Inventory Control Cyclic Inventory Annual Inventory Periodic Inventory Sensitive Item Inventory

72 Next Week Chapter 15 Reverse Logistics – The Forklifts Have Nothing to Do!


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