Capacity and Aggregate Planning

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• Capacity and Aggregate Planning

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Capacity Outputs Examples
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The goal of capacity planning decisions

1. The capacity of the firm to produce the service
   or good
2. The processes for providing the service or making
   the good
3. The layout or arrangement of the work space
4. The design of work processes to enhance
   productivity

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Capacity

• The max output that an organization be capable of
  producing
• Measure a single facility
• Design vs. Effective capacity
• Capacity Utilization design vs. efficient
  utilization
• For systems have more than one facility and flows
  of product
• System capacity and bottleneck
• Improve system capacity

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Determinants of Effective Capacity

• Facilities
• Human considerations
• Adding people
• Increasing employee motivation
• Operations
• Improving operating rate of a machine
• Improving quality of raw materials and components
• External forces
• Safety regulations

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Capacity Utilization

• Measures how much of the available capacity is
  actually being used
• Always lt1(percentage of usage)
• Higher the better
• Denominator
• If effective capacity used efficient utilization
• If design capacity used design utilization

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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

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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

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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

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the capacity decisions

• When to add capacity
• How much capacity to add
• Where to add capacity
• What type of capacity to add
• When to reduce capacity

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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

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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

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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

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Theory of Constraints

• What needs to be changed
• What to change to
• How to make the change happen

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Theory of Constraints

• Identify the constraint
• Subordinate
• Inertia
• Walk the process again
• inertia of change can create new bottle necks

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Capacity Planning

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

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Capacity Expansion

• Volume certainty of anticipated demand
• Strategic objectives for growth
• Costs of expansion operation
• Incremental or one-step expansion

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Sales and Operations Planning (SOP)

• Brings together all plans for business
• performed at least once a month
• Internal and external

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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)

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Demand Management

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

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Remedies for Underloads

1. Acquire more work
2. Pull work ahead that is scheduled for later time
   periods
3. Reduce normal capacity

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Remedies for Overloads

1. Eliminate unnecessary requirements
2. Reroute jobs to alternative machines or work
   centers
3. Split lots between two or more machines
4. Increase normal capacity
5. Subcontract
6. Increase the efficiency of the operation
7. Push work back to later time periods
8. Revise master schedule

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Scheduling as part of the Planning Process
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Scheduling

• Scheduling is the last step in the planning
  process?
• It is one of the most challenging areas of
  operations management.
• Scheduling presents many day-to-day problems for
  operations managers because of
• Changes in customer orders
• Equipment breakdowns
• Late deliveries from suppliers
• A myriad of other disruptions

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Objectives in Scheduling

• Meet customer due dates
• Minimize job lateness
• Minimize response time
• Minimize completion time
• Minimize time in the system
• Minimize overtime
• Maximize machine or labor utilization
• Minimize idle time
• Minimize work-in-process inventory
• Efficiency

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Sequencing Rules

• FCFS - first-come, first-served
• LCFS - last come, first served
• DDATE - earliest due date
• CUSTPR - highest customer priority
• SETUP - similar required setups
• SLACK - smallest slack
• CR - critical ratio
• SPT - shortest processing time
• LPT - longest processing time

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Critical Ratio Rule
Ties scheduling to Gantt Chart or PERT/CPM
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• Inventory Management

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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

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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

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Inventory

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

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Types of Inventory

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

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Inventory Hides Problems
Policies
Inventory Accuracy
Transportation Problems
Poor Quality
Training
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Aggregate Inventory Management

• How much do we have now?
• How much do we want?
• What will be the output?
• What input must we get?
• Correctly answering the question about when to
  order is far more important than determining how
  much to order.

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Inventory Costs

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

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ABC Classification System

• Demand volume and value of items vary
• Classify inventory into 3 categories, typically
  on the basis of the dollar value to the firm

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Why ABC?

• Inventory controls
• Security controls
• Monetary constraints
• Storage locations

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Economic OrderQuantity
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Assumptions of Basic EOQ Model

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

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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

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EOQ Formula
EOQ
Co Ordering costs D Annual Demand Cc
Carrying Costs
Cost per order can increase if size of orders
decreases Most companies have no idea of actual
carrying costs
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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
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Forms of Reorder Points

• Fixed
• Variable
• Two Bin
• Card
• Judgmental
• Projected shortfall

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Why Safety Stock

• Accurate Demand Forecast
• Length of Lead Time
• Size of order quantities
• Service level

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Inventory Control

• Cyclic Inventory
• Annual Inventory
• Periodic Inventory
• Sensitive Item Inventory

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Vendor-Managed Inventory

• Not a new concept same process used by bread
  deliveries to stores for decades
• Reduces need for warehousing
• Increased speed, reduced errors, and improved
  service
• Onus is on the supplier to keep the shelves full
  or assembly lines running
• variation of JIT
• ProctorGamble - Wal-Mart
• DLA moving from a manager of supplies to a
  manager of suppliers
• Direct Vendor Deliveries loss of visibility

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Inventory Management Special Concerns

• Defining stock-keeping units (SKUs)
• Increase in number of SKUs 15 over past 3
  years
• Dead inventory
• Deals
• Substitute items
• Complementary items
• Informal arrangements outside the distribution
  channel
• Repair/replacement parts
• Reverse logistics

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Project Managementand Operations
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• Project Management

First Essay on Project Management 1697 An
Essay Upon Projects 1959 HBR Article The
Project Manager Air Force Manual 1964
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Project Management
A project is a temporary and one-time endeavor
undertaken to create a unique product or service,
that brings about beneficial change or added
value.. (wikipedia)
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Problem Areas of Project Management

• Project team - Individuals from different
  departments within company
• Matrix organization - Team structure with members
  from different functional areas depending on
  skills needed
• Project manager - Leader of project team
• Project Charter high level description of what
  is to be accomplished in a project and delegates
  authority to project manager to implement actions
  to complete project

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Project Planning

• Statement of work
• Written description of goals, work time frame
  of project
• Activities require labor, resources time
• Precedence relationship shows sequential
  relationship of project activities

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Project Control

• All activities identified and included
• Completed in proper sequence
• Resource needs identified
• Schedule adjusted
• Maintain schedule and budget
• Complete on time

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Elements of Project Planning

• Define project objective(s)
• Identify activities
• Establish precedence relationships
• Make time estimates
• Determine project completion time
• Compare project schedule objectives
• Determine resource requirements to meet objective

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Phases of a Project

• Initiating
• Planning
• Execution
• Monitoring and Control
• Closing

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A Gantt Chart
Around since 1914

• Popular tool for project scheduling
• Graph with bar for representing the time for each
  task
• Provides visual display of project schedule

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A Gantt Chart
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CPM/PERT

• Critical Path Method (CPM)
• DuPont Remington-Rand (1956)
• Deterministic task times
• Project Eval. Review Technique (PERT)
• US Navy, Lockheed
• Multiple task time estimates

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Project Network for a House
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Critical Path

• A path is a sequence of connected activities
  running from start to end node in network
• The critical path is the path with the longest
  duration in the network
• Project cannot be completed in less than the
  time of the critical path

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Project Crashing

• Crashing is reducing project time by expending
  additional resources
• Crash time is an amount of time an activity is
  reduced
• Crash cost is the cost of reducing the activity
  time
• Goal is to reduce project duration at minimum cost

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Time-Cost Relationship

• Crashing costs increase as project duration
  decreases
• Indirect costs increase as project duration
  increases
• Reduce project length as long as crashing costs
  are less than indirect costs

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Life Cycle Management

• Long term view of projects to guide decision
  making solutions that provide life time success
  vice short term
• Acquisition development production
  introduction sustainment disposal
• Links system costs to big picture better use of
  resources minimize total cost of ownership