Facilities and Aggregate Planning

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Chapter 12

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc. 2007, All Rights Reserved

Chapter 12 Outline
Facilities Decisions Facilities Strategy Aggregate Planning Definition Planning Options Basic Strategies Aggregate Planning Costs Example of Costing Sales and Operations Planning
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Hierarchy of Capacity Decisions

Facilities decisions

Facilities decisions Aggregate Planning

Aggregate planning

Scheduling

Scheduling

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18

24

Months Planning Horizon

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Definition of Capacity
Capacity is defined as the maximum output that can be produced over a given period of time. Primarily determined by
Physical assets Labor availability

Nominal capacity
Subtracts downtime, shift breaks, etc. Is the actual capacity that should be used in planning

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Facilities Decisions
How much total capacity is needed? How large should each unit of capacity be? When is the capacity needed? What type of facilities/capacity are needed?

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Factors Affecting Facilities Strategy

Predicted demand Cost of facilities Likely behavior of competitors Business strategy International considerations

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How Much?: Strategies for Capacity Cushion

Try not to run out (e.g. utilities) Build to average forecast Maximize utilization at bottlenecks
Reduce rejects and rework

Reduce throughput time

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How Large? What is Optimum Unit Size? Economies of scale

Diseconomies of scale

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When? Timing of Facility Additions Preempt the competition Wait-and-see strategy

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What Type? Types of Facilities

Product-focused (55%) - computers, chain saws, dishwashers Market-focused (30%) - electricity, bakeries Process-focused (10%) - computer chips General purpose (5%) several products and processes.

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Aggregate Planning Characteristics

A time horizon of about 12 months An aggregated level of demand for one or few categories of product The possibility of changing both supply and demand A variety of management objectives Facilities that are considered fixed (cannot be expanded or reduced)

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Planning Options
Options for managing demand.
influencing demand from customers delivering orders as promised

Options for managing supply

delivering what is promised managing capacity & other resources
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Options for Influencing (Managing) Demand

Pricing Advertising and promotion Backlog or reservations (shifting demand) Development of complementary products

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Options for Influencing (managing) Supply

Hiring and layoff of employees Using overtime and undertime Using part-time or temporary labor Carrying inventory Outsourcing or Subcontracting

Making cooperative arrangements

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Basic Production Strategies

Level strategy (constant work force, use inventory as buffer)

Chase strategy (produce to

demand, vary workforce)

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Level Load Strategy

Deliver products and services at a constant rate Avoid making changes to operations

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Chase Strategy
Produce only what you sell Produce products or services just-in-time If there are no salesdo not produce Typical for services

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Comparison of Chase versus Level Strategy

Chase Demand Level Capacity Level of labor skill required Job discretion Compensation rate Working conditions Training required per employee Labor turnover Hire-fire cost E rate rror Amount of supervision required Type of budgeting and forecasting required Low Low Low S weatshop Low High High High High S hort-run High High High Pleasant High Low Low Low Low Long-run

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Aggregate Planning Costs

Hiring and firing costs (chase) Overtime and undertime costs (chase) Subcontracting costs (chase) Part-time labor costs (chase) Inventory-carrying costs (level)

Cost of stockout or back order (level)

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Underlying Purpose of S&OP

The underlying purpose of Sales and Operations Planning is to balance demand and supply. Monthly time buckets over a rolling 12 month horizon. Based on families of products Input into detailed planning and scheduling
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Inputs to S&OP
Input Demand Forecast Market intelligence Actual sales Capacity information Management targets Financial requirements New product information New process information Workforce availability Responsibility Marketing Marketing Sales Manufacturing Management Finance R&D Process engineering Human resources
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S&OP Outputs
Output Sales plan Production plan Inventory plan (MTS) Backlog plan (MTO) Purchasing plan Financial plan Engineering plan Workforce plan Responsibility Marketing and sales Manufacturing Management Management Purchasing Finance Engineering Human resources
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Iterative Nature of S&OP

(made possible by concurrent planning)
1. Develop production plan.

2. Check implications for inventory/backlog plan.

3. If necessary, adjust production plan. 4. Check against resource plan and availability. 5. If necessary, adjust production plan. 6. Recheck against inventory/backlog and

resources.
7. Continue (go to 5) until you meet all constraints.
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Summary
Facilities Decisions Facilities Strategy Aggregate Planning Definition Planning Options Basic Strategies Aggregate Planning Costs Example of Costing Sales and Operations Planning
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End of Chapter Twelve

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