Operations Planning Horizons

1. OperationsPlanning Horizons • Long Range Planning - Annual planning, with a time horizon greater than one year • Aggregate Planning - Intermediate planning with a time horizon of 6 to 18 months with monthly or quarterly increments • Short Range Planning - Weekly planning with a time horizon of one day to six months

2. Aggregate Planning • Product group or broad category (Aggregation) • Medium-Range: 6-18 months • Goal: Specify the optimal combination of • production rate • workforce level • inventory on hand

3. Exhibit 13.1 Process planning Long range Strategic capacity planning Forecasting & demand management Intermediate range Sales and operations (aggregate) planning Sales plan Aggregate operations plan Manufacturing Services Master scheduling Material requirements planning Weekly workforce and customer scheduling Order scheduling Short range Daily workforce and customer scheduling

4. Balancing Aggregate Demand and Aggregate Production Capacity 10000 Suppose the figure to the right represents forecast demand in units 10000 8000 8000 7000 6000 5500 6000 4500 4000 Now suppose this lower figure represents the aggregate capacity of the company to meet demand 2000 0 Jan Feb Mar Apr May Jun 9000 10000 8000 8000 What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up 6000 6000 4000 4500 4000 4000 2000 0 Jan Feb Mar Apr May Jun

5. Key Strategies for Meeting Demand • Chase - Match production rate to order rate by hiring and laying off employees • Level - Maintain a stable work force working at a constant output rate; shortages and surpluses are absorbed by fluctuating inventory levels, backlogs and lost sales • Some combination of the two

6. Competitors’behavior Raw material availability Market demand External capacity Economic conditions Current physical capacity Current workforce Inventory levels Activities required for production Required Inputs to the Production Planning System External to firm Planning for production Internal to firm

7. Strategic Capacity Planning • Capacity can be defined as the ability to hold, receive, store, or accommodate; a measure of an organization’s ability to provide customers with the demanded services or goods in the amount requested and in a timely manner • Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size

8. EstimatingCapacity • Must differentiate between theoretical capacity (what can be achieved under ideal conditions in a short period of time), and achievable capacity (considering equipment problems, maintenance requirements, material problems, worker errors) • Must select a yardstick to measure it, such as tons per hour (tph) of steel or number of patient days in a hospital

9. Management Decisions That Affect Capacity in the Intermediate Term • Subcontracting or outsourcing production • Changing the mix of products produced • Adding people to the production process • Increasing the motivation of employees • Increasing the operating rate of a machine • Improving quality of raw materials, processes, etc. • Increasing product yield (quantity of output/quantity of input, or the % of useful output)

10. Capacity Utilization Where: • Capacity used = rate of output actually achieved, and • Best operating level = capacity for which the process was designed

11. Example of Capacity Utilization • During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate? • Answer: Capacity utilization rate = Capacity used . • Best operating level • = 83/120 • =0.69 or 69%

12. Economies of Scale and the Experience Curve working 100-unit plant Average unit cost of output 200-unit plant 400-unit plant 300-unit plant Diseconomies of Scale start working Volume Economies & Diseconomies of Scale

13. Yesterday Cost or price per unit Today Tomorrow Total accumulated production of units The Experience Curve As plants produce more products, they gain experience in the best production methods and reduce their costs per unit

14. Capacity Flexibility • Flexible plants • Flexible processes • Flexible workers

15. Stage 1 Stage 1 Stage 2 Stage 2 Stage 3 Stage 3 Capacity Planning: Balance Unbalanced stages of production Units per month Maintaining System Balance: Output of one stage is the exact input requirements for the next stage 6,000 7,000 5,000 Balanced stages of production Units per month 6,000 6,000 6,000

16. Determining Capacity Requirements • Forecast sales within each individual product line • Calculate equipment and labor requirements to meet the forecasts • Project equipment and labor availability over the planning horizon • Identify bottlenecks

17. Capacity Utilization & Service Quality • The best operating point is between 70% and 90% of capacity; over 90% is undesirable • Why do you think that this is so?

18. Utilization and Time in System 70

19. Capacity - Summary • Capacity decisions should be made carefully, as they can commit significant resources to assets that cannot be changed easily or economically. • Capacity is affected by management decisions regarding the number of hours worked, product mix, staffing levels, machine capabilities, level of quality, and product yield. • Watch out for the “Bermuda Triangle” of operational complexity, where management difficulty exceeds management ability (management bottleneck!).

20. Enterprise Resource Planning Systems

21. Enterprise Resource Planning (ERP) Systems • Enterprise Resource Planning Systems is a computer system that integrates application programs in accounting, sales, manufacturing, and other functions in the firm • This integration is accomplished through a database shared by all the application programs

22. SAP AG’S R/3 • SAP AG, A German firm, is a world leader in ERP software. • -Designed to operate in a three-tier client/server configuration • -Applications are fully integrated so that data are shared between all applications

23. Financial Accounting Sales & Distribution Human Resources Manufacturing & Logistics R/3 System Functional Components R/3 System Functional Components

24. Financial Accounting • Financials • Controlling • Asset management

25. Human Resources • Payroll • Benefits administration • Applicant data administration • Personnel development planning • Workforce planning • Schedule & shift planning • Time management • Travel expense accounting

26. Manufacturing & Logistics • Materials management • Plant maintenance • Quality management • Production planning & control • Project management system

27. Sales and Distribution • Prospect & customer management • Sales order management • Configuration management • Distribution • Export controls • Shipping and transportation management • Billing, invoicing, and rebate processing

28. Reasons for Implementing SAP R/3 • Desire to standardize and improve processes • To improve the level of systems integration • To improve information quality