Fundamentals of Operations Management BUS 3 140 Aggregate Planning

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Fundamentals ofOperations ManagementBUS 3
140Aggregate Planning Master SchedulingOct
9, 2007
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Capacity Planning Review
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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
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Measures of Capacity (Table 5.1)
From Stevenson, Operations Management, Ninth
Edition, McGraw Hill Irwin
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Constraints
Anything that LIMITS a system in reaching its Goal

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

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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
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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
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Bottleneck
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 bottleneck
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Breakeven Exercise
Page 194 of Book
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Aggregate Planning
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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
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Intermediate Planning (Figure 13.1)
From Stevenson, Operations Management, Ninth
Edition, McGraw Hill Irwin
13
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

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

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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

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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

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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
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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

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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
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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)

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Master Scheduling
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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
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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
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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
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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
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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

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Sales Operations PlanningA bridge between
Aggregate Planning Master Scheduling
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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

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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

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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

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Introduction to Inventory Management
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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
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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
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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