Fundamentals of Operations Management BUS 3

1
Fundamentals ofOperations ManagementBUS 3
140Capacity Operations PlanningWeek of Feb
25, 2008
2
Definitions

• Design capacity
• Maximum output rate or service capacity for
  which an operation, process, or facility is
  designed
• Effective capacity
• Design capacity minus allowances such as
  personal time, maintenance, and scrap
• Actual output
• Rate of output actually achieved--cannot exceed
  effective capacity.

From Stevenson, Operations Management, Ninth
Edition, McGraw Hill Irwin
3
Measures of Capacity (Table 5.1)
From Stevenson, Operations Management, Ninth
Edition, McGraw Hill Irwin
4
Factors that Influence Effective Capacity (Table
5.2)
FACILITIES
POLICY
Design
Location
OPERATIONAL
Layout
Scheduling
Environment
Materials Management
Quality assurance
PRODUCT / SERVICES
Maintenance policies
Design
Equipment breakdowns
Product or service MIX
SUPPLY CHAINS
PROCESS
Quantity capabilities
EXTERNAL FACTORS
Quality capabilities
Product standards
Safety regulations
HUMAN FACTORS
Unions
Job Content
Pollution control standards
Job Design
Training and Experience
Motivation
Compensation
Learning Curve
Absenteeism labor turnover
5
Strategic Considerations in Capacity Planning

• Revenue
• Cost
• Technologies
• Volumes
• Markets
• Acquisitions
• Sourcing decisions
• Expansion decisions
• Capital equipment
• Long time to Implement and then in place for a
  Long time

6
Tactical Considerations in Capacity Planning
7
Constraints
Anything that LIMITS a system in reaching its Goal

• Types of Constraints
• Resource
• Material
• Supplier/Vendor
• Financial
• Knowledge/Competence
• Policy

8
Potential Bottleneck Operations (2 Examples)
Bottleneck
Operation 120/hr.
Operation 210/hr.
Operation 315/hr.
10/hr.
Maximum output ratelimited by bottleneck
40 Units coming in every hour, but only 30 going
out
Machine 1
10/hr
Machine 2
Bottleneck Operation
10/hr
30/hr
Machine 3
10/hr
Machine 4
10/hr
9
Constraint
True Definition
A Constraint that causes REVENUE to be Lost
IMBALANCE
IMBALANCE
IMBALANCE
Operation 120/hr.
Operation 210/hr.
Operation 315/hr.
10/hr.
Unless more than 10 units per hour can be
SOLD, the Operations are IMBALANCED but not a
true Constraint
10
Unique Elements of Service Capacity

• The need to be near Customers
• Cannot store inventory of services in advance
  of the requirement
• Variability of Inputs and Outputs

11
Developing Capacity Alternatives
Design flexibility into systems Add power and
water lines for easier expansion Simplify
facilities Three bedroom house when you have no
kids Take stage of life cycle into account Take
a big picture approach to capacity
changes Correlation of different events (e.g.
Increasing number of Hotel Rooms offered will
increase need for Parking, Food, Housekeeping,
etc..) Attempt to smooth out capacity
requirements Influence demand so that load
during peak times may be transferred of too-peak
times Use same equipment for complementary
products (e.g. Bicycles and Body by Jake)
12
Capacity Planning Cost
13
Fixed and variable Costs

• Fixed Costs
• Remain CONSTANT regards of level of Volume
• Rent
• Manager salaries
• Insurance
• Overhead
• Variable Costs
• Vary directly with Volume of Output
• Total Material Cost
• Total

Beware of ABSORBING OVERHEAD (amortizing Fixed
Costs) as a justification for producing more than
can be Sold
14
Breakeven Point

• The volume of output at which total cost and
  total revenue are equal
• Fixed Cost divided by Contribution Margin per unit

Profit
Profit
Total revenue
Total revenue
Total cost
Total cost
Break Even Point units
0
0
Q (volume in units)
Q (volume in units)
Once the Breakeven Point is passed, Economies Of
Scale result in accelerated Profits
15
Breakeven Exercise
Page 194 of Book
16
Aggregate Planning
17
Intermediate Planning (Table 13.1)
Intermediate Plans
Short-Range Plans
Long-Range Plans

• General levels of
• Employment
• Output
• Finished Goods Inventory
• Subcontracting
• Backorders

• Long-term capacity
• Location
• Layout
• Product Design
• Work System design

• Detailed Plans
• Machine loading
• Job assignments
• Job sequencing
• Production Orders
• Work schedules

From Stevenson, Operations Management, Ninth
Edition, McGraw Hill Irwin
18
Intermediate Planning (Figure 13.1)
From Stevenson, Operations Management, Ninth
Edition, McGraw Hill Irwin
19
Aggregate Planning

• Focus on Quantity and Timing of expected Demand
  (forecast)
• Start with Multiple plans and choose the most
  appropriate one
• Factor in Revenue, Market Share, and Inventory
  targets
• Estimate the impact of Product Transitions

20
Aggregate Planning Inputs and Outputs (Table 13.2)
From Stevenson, Operations Management, Ninth
Edition, McGraw Hill Irwin
21
Demand Options

• When Demand does not match Capacity then alter
  (i.e. Influence) demand
• Pricing
• Promotion
• New demand to smooth peaks and valleys (e.g. Bus
  taking kids on field trips during the school day)
  
• Points out a useful application of the economic
  concept of Elasticity of Demand

22
Capacity Options

• Hire workers and / or layoff workers
• Attraction and Retention risk
• Skill set replacement
• Union issues
• Hiring and layoff costs
• Part time workers and contractors
• Work schedule adjustments
• Overtime
• Second (and third) shifts
• Sending workers home
• Four day weeks
• Inventories
• Subcontracting, offloading, outsourcing

23
Managing Uneven Load

• Level Load
• Chase
• Develop Business Rules
• No more than x of forecasted demand
• Never short an order
• No more than 110 of capacity
• No more than 50 in last month of Quarter
• Other

24
Managing Uneven Load (Table 13.3)
CHASE Approach
Capacities are adjusted to match demand
requirements over the planning horizon
LEVEL Approach
Capacities are kept constant over the planning
horizon
From Stevenson, Operations Management, Ninth
Edition, McGraw Hill Irwin
25
Techniques for Aggregate Planning

• Know your Demand
• Know your CAPACITIES (including Flex up or down)
• Account for company policies on Layoffs, costs,
  overtime, etc..
• Agree on The Plan
• Draw the Capacity Line and the Load bars against
  it

26
Summary of Techniques for Aggregate Planning
(Table 13.7)
True Optimization is rare, but the analysis is
useful to drive Business Rules and formal
decision criteria
From Stevenson, Operations Management, Ninth
Edition, McGraw Hill Irwin
27
Aggregate Planning in Services

• Cannot stock Finished Goods Inventory
• Demand is Perishable
• Input is highly variable
• Cross train people to increase effective capacity
• Yield Management (Airlines)

28
Master Scheduling
29
The Master Schedule disaggregates the
Aggregate Plan
Figure 13.4
Figure 13.5
Aggregate Planning
Aggregate Plan
Jan
Feb
Mar
Lawn Mowers
200
300
400
Disaggregation
Master Schedule
Jan
Feb
Mar
Push Mowers
100
100
100
Power Mowers
75
150
200
Riding Mowers
25
50
100
Total
200
300
400
Master Schedule
From Stevenson, Operations Management, Ninth
Edition, McGraw Hill Irwin
30
The Master Scheduling Process (Figure 13.6)
Outputs
Inputs

• Beginning Inventory
• Forecast
• Orders

• Projected Inventory
• Master Production Schedule
• Uncommitted Inventory

PROCESS
From Stevenson, Operations Management, Ninth
Edition, McGraw Hill Irwin
31
Additional Key Points in Master Scheduling

• Rough Cut Capacity Planning
• Time Horizons
• Time Fences
• Available to Promise

The most valuable part of the job is knowing
when to say, Yes and when to say, No
32
Time Fences
frozen(firm orfixed)
liquid(open)
slushysomewhatfirm
Only Executive Exception would authorize a Change
Only Executive Exception would NOT authorize a
Change
Changes are likely to be accepted, but require
Research and / or Business Case
33
Time Fences can be Dynamic
Typical Technology Manufacturer
Dell Computer
Cargo Airplanes for the US Dept. of Defense
Restaurant
Burger King

• Generally varies by Lead Time to obtain Materials
  and Capital equipment
• Goal is to minimize the Red and Yellow and keep
  FLEXIBILITY and RESPONSIVENESS to a maximum

34
Sales Operations PlanningA bridge between
Aggregate Planning Master Scheduling
35
Sales Operations Planning (SOP)
Purpose

• Senior Management Alignment on Revenue and Supply
  plans
• Greater accountability of individual plans
• Consensus on managing gaps

Output

• Judged Revenue Plan
• Master Build Schedule
• Contingency plans
• Documented agreements and planned outcomes

36
Key SOP Inputs, by Function

• Unconstrained Forecast
• Execution to Plan

• Capacity
• Materials Plan
• Time to Volume
• Buffer Targets

Sales
Operations
BUs
Finance

• Prelim. Revenue Plan
• GM Revenue objectives
• Profitability scenarios
• Prelim. Budgets
• Prelim. FGI Targets
• Return on Invested Capital

• Market Trends TAM
• Share expectations
• Customer TAM expectations
• Roadmaps and Transitions

37
SOP Output is a Consensus Plan

• Constrained Revenue plan
• Accountability for Forecast Accuracy
• Standard, system-generated, accuracy metrics
• Defined ownership by Sales and Marketing
• Joint ownership of FGI between Sales and
  Operations
• MPS tied to single plan of record and business
  rules
• Published Lead Times
• Integrated Revenue plan
• Credible EPS guidance
• Exception Loops between meetings

38
Introduction to Inventory Management
39
Reasons for Carrying Inventory

• Revenue
• Have what Customers want, when they want it
• Compensate for non-linear demand that doesnt
  match your capacity
• Buffer for upside demand
• Buffer for when competitors cannot deliver
• Buffer against unexpected internal supply
  problems

Carrying Buffer inventory is necessary, but
continuous, relentless efforts to minimize
variability, and thus eliminate the need for the
Buffers is greatly preferred
40
Reasons for Carrying Inventory

• Cost
• Minimize shortages, to avoid delays and idle time
• Optimize plant, people, and equipment utilization
• Obtain volume discounts for favorable unit
  pricing
• Hedge against future price increases

Optimizing utilization and unit pricing are
valuable only when the goods made or purchased
will SOLD to a paying Customer in a reasonable
time
The cost of a STOCKOUT is hard to quantify, but
is to be AVOIDED at all times
41
Types of Inventory
Raw Materials
Work In Process (WIP)
Finished Goods (FGI)
Maintenance, Repair, Operating Supplies (MRO)
Resale Items
Manufacturing
All
Chocolate Cake
Finished Goods
Cake
Icing
Subassembly (WIP)
Raw Material
Water
Egg
Mix
MRO
Raw