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Week 2 resource and capacity planning

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Supply chain building blocks …

Supply chain building blocks

Liam Fassam.

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  • 1. Resource & Capacity Management International Business Liam Fassam
  • 2. Resource & Capacity planningIn this lesson we will review the following componentsand how they intercede with resource and capacitymanagement:• Capacity forecasting and planning• Materials and manufacturing requirement planning• Production scheduling• Enterprise resource planning (ERP)• Capacity adjustment to meet demand• Demand manipulation• Operations scheduling International Business - Resource & 2 Capacity Management - Liam Fassam
  • 3. The Supply Chain Mantra• Supply chain management is distinguished by its role to provide a strategic and integrating function at all levels of logistics including the suppliers.• Ideally, the supplier becomes part of the team and is involved in the planning process, not only for scheduling of deliveries when required, but also in the design stage for new products.• The business objective to convert customer demand by optimising the utilisation of resources to deliver effective customer service applies to all organisations regardless of whether they are in manufacturing or service sectors. International Business - Resource & 3 Capacity Management - Liam Fassam
  • 4. Theoretical capacityIn supply chain management capacity refers to theamount of inventory that can be held in the supplychain. The aggregate capacity is the sum of the totalinventory that could be held simultaneously at eachstage.In theory this total is the capacity of the entirechain. However, a supply chain does not standstill, material is constantly moving into the factoriesand food processing plants, through road, rail, seaand air transportation (multi modal) and throughsuccessive stages out to the end user. International Business - Resource & 4 Capacity Management - Liam Fassam
  • 5. Effective capacity• The effective capacity can be defined as the amount of material or product available at each upstream stage of the supply chain.• Some SCM academia purport effective capacity being the holding capacity of individual warehouses along the various supply chain nodes.• However, movement through the warehouse will be limited by the speed and reliability of inward supply and by the availability of outward transport. The objective of good warehouse management is not to have huge amounts of material, but to have a high rate of throughput. International Business - Resource & 5 Capacity Management - Liam Fassam
  • 6. Effective capacityBeginning with the end user, how much could the upstream supplierprovide at any given time to customers and so on up through thevarious tiers of the chain and what are our risks?Lets take a short while to compare our Kellogg’s business case witheffective capacity and risks.• Cost of premises• Cost of capital (interest on cash tied up in stock holding)• Handling costs• Insurance• Damage and deterioration of materials• Stock shrinkage due to miscoding and theft• Loss due to obsolescence, fashion changes and passed used by dates International Business - Resource & 6 Capacity Management - Liam Fassam
  • 7. Capacity forecast and planningWild (2002) says ‘Capacity management is concerned with thematching of the capacity of the operating system and the demandplaced on that system’. Planning to match demand and capacity beginswith the forecasting of what the demand is likely to be.Capacity decisions are based on forecasts of demand at severaldifferent levels. Long-range capacity planning needs forecasts to bemade several years ahead and includes facility planning. Short- andmedium-term forecasts span 2–3 years, and generally are used todetermine people requirements, leasing of premises, machines andequipment, and product details.In the more immediate short-term forecasts are used to plan, orderand schedule resources on a monthly, weekly and daily basis. Theshorter the time frame, the more precise the forecast must be. Castminds back to lesson 1 – Sales and operations planning! International Business - Resource & 7 Capacity Management - Liam Fassam
  • 8. Qualitative forecastingLast quarter (spring) the demand was twice that of the previous (winter)quarter. Further examination might show that the trend for the last few yearsthat demand in the spring quarter has always been double that of theprevious quarter (winter).However, the circumstances existing each previous spring might haveinfluenced the results. For one year demand might have been high due to anew product launch, another year the high demand was due to a successfulTV promotion, and on another occasion a major competitor might have failedand we got the business by default.The figures cannot stand alone but need to be supported by informationas to the circumstances at the time, in this case promotions are skewing thefigures. International Business - Resource & 8 Capacity Management - Liam Fassam
  • 9. Life cycle analysisThe product life cycle curve of develop, launch, growth, maturity and declineis shown below: Rise in demand Real risk of obsolescence if the Supply chain has not Demand recognised this low at launch International Business - Resource & 9 Capacity Management - Liam Fassam
  • 10. Life cycle analysisAt the launch stage demand is low, the growth stage shows a rapiddemand increase and relatively stable demand at the maturity stage.Most product life cycles are predictable and for a product such aspetrol the life cycle has extended over many decades but for somefast-moving consumer goods and fashion items the rate ofgrowth/decline can be dramatic.Some consumables only reach the decline stage if there is a dramaticchange in technology. An example is the replacement of cannedvegetables such as peas by frozen vegetables, however, once thedecline has steadied there is still a demand.Where there is an obvious life cycle capacity decisions can bemade, such as ordering and holding materials during the growth stagein anticipation of a high demand in the growth stage, i.e. Apple withthe iPhone. International Business - Resource & 10 Capacity Management - Liam Fassam
  • 11. Time series forecastingForecasting by time series employs analysis ofpast demand and trends of demand toanticipate future demand.Any forecast or method of forecast can be testedfor past accuracy.Accuracy is usually monitored by the deviationof the actual result from the forecast result. International Business - Resource & 11 Capacity Management - Liam Fassam
  • 12. Time series forecastingShort-term forecasting considers historical data patterns (of demand) frompast periods and projects these patterns into a forecast. Thus, if last perioddemand was 50,000 the forecast for the next period would be 50,000. If foreach period the trend is upwards then the forecast will follow the trend butalways lag behind: What would be the consequence if Demand rose to period 2 figures In period 4 and 5? International Business - Resource & 12 Capacity Management - Liam Fassam
  • 13. Time series forecastingThe method gives a quick response to trends, dependingon the length of time of each period. If trend go upwardsthen forecasts will follow but lag behind by a period.The total absolute deviation in the example, indicates thathaving a higher forecast than actual is as serious as havinga lower than actual forecast. In the calculation of totalabsolute deviation the symbols for plus or minus areignored.The mean absolute deviation is the average deviation offorecast from actual and in this case the forecast onaverage is 6000 wrong on each occasion. International Business - Resource & 13 Capacity Management - Liam Fassam
  • 14. Time series forecastingIf the forecast is too high it is likely that too much resource willbe provided, and if too low there will not be sufficient resourceto satisfy demand – cast minds back remember how we discussresource is not infinite!If the periods shown above are daily forecasts and the resourceis not perishable the damage in poor forecasting might not begreat – where/when would this not be acceptable? Lean or TPS manufacturing – poor resource management is waste and this is adding cost and no value.If however each period represents a year the damage donecould be serious. International Business - Resource & 14 Capacity Management - Liam Fassam
  • 15. Materials requirements & planning• In most manufacturing companies the focus is on a reliable flow of inwards materials.• This is achieved through a materials requirements plan (MRP) for inbound logistics so as to achieve an appropriate balance of stock and to satisfy demand.• MRP is the set of techniques which uses bills of material, inventory on hand and on order data, and the production schedule or plan to calculate quantities and timing of materials.• Such a plan is incomplete if it does not take into account whether manufacturing resources (e.g. plant, people, energy and space) will be available at the desired time. International Business - Resource & 15 Capacity Management - Liam Fassam
  • 16. Materials requirements & planningFrom the business plan, an operations plan is formulated whichcovers the materials and other resources needed to translate thebusiness plan into reality. It follows that to keep the operationsplan in line with updates to the business plan, regularcommunication is required between the various functionsinvolved.This updating process is best achieved by face-to-face meetingswhich we recommend should take place at least once a monthand always with all parties present at the one time. There is avery real danger of misunderstandings and ambiguities ifmeetings are not face-to-face and if all concerned are notpresent at the same time. International Business - Resource & 16 Capacity Management - Liam Fassam
  • 17. Materials requirements & planning International Business - Resource & 17 Capacity Management - Liam Fassam
  • 18. Materials requirements & planning• The issues that will be agreed will include time and availability of resources, and conflicting requirements and priorities will be resolved.• Above all demand is the crucial issue, and as future demand can never be certain there should be a formal mechanism of forecasting using the best combination of historical models, past results from promotions, data from customers and market intelligence.• Likewise, the inventory data system has to be up to date and accurate with details of raw materials (RM) on hand, goods on order, lead times and finished goods on hand. International Business - Resource & 18 Capacity Management - Liam Fassam
  • 19. Materials requirements & planning• The next stage is to follow a rough-cut capacity planning process to assess to what extent the capacity of manufacturing facilities could meet the master schedule. The feedback loop at this level tests the master plan against problem areas such as known bottlenecks and other critical resource areas.• Often, as this is a short- to medium-term approach, action has to be taken to make the best use of existing resources rather than to add extra long-term resources.• The company should decide which alternative to follow if the existing resources are not adequate, for example review the schedule, increase resources, work extra shifts, delay maintenance, outsource to third parties and so on. International Business - Resource & 19 Capacity Management - Liam Fassam
  • 20. Materials requirements & planning• Having established that the resources are sufficient or adjusting the plan to fit the resources, the next step is detailed MRP and capacity requirements planning for day-to-day operations (detailed bills of materials for each product or batch of products).• The revised master schedule for each product and for each stock keeping unit (SKU) and bills of material for each SKU, the materials required for each item of raw materials (RM) and packaging materials (PM) are matched with current inventory levels to derive the additional procurement requirements.• The requirements are modified, if required, after comparing with the detailed capacity planning process and the planning process then commences with the final production scheduling and purchasing (supply planning) processes. International Business - Resource & 20 Capacity Management - Liam Fassam
  • 21. Materials requirements & planning• With the ‘push’ system stocks of materials and of finished goods are used to ensure maximum plant capacity utilization by having level production.• The ‘pull’ system is driven by customer orders and just-in-time principles which can result in some under utilization of capacity. It is said that just-in-time requires greater flexibility and reliability of plant plus a multi-skilled workforce.• In its simplistic form just-in-time is reactive (demand pull), whereas MRPII can be described as proactive. International Business - Resource & 21 Capacity Management - Liam Fassam
  • 22. Enterprise resource & ops planningERP replaces the old standalone computer systems forfinance, manufacturing, HR, and distribution and replaces themwith a single integrated software system divided into softwaremodules that approximately represent the old standalonesystems.There are five major factors why companies undertake ERPsystems: 1. Integrate financial information 2. Integrate customer order information & demand plan 3. Standardise and speed up supply processes One collective view 4. Reduce inventory 5. Standardise HR information International Business - Resource & 22 Capacity Management - Liam Fassam
  • 23. Operations resource planning International Business - Resource & 23 Capacity Management - Liam Fassam
  • 24. Operations resource planningA partnership with suppliers and a partnership with customersare the beginnings of a radical change in supply chainmanagement.As a result, the service provider, the supplier and the customerachieve benefits in: • lower operating cost, • improved service level, • a greater certainty of a continued relationship.The boundaries between companies will blur as they viewthemselves as part of an ecosystem, supply chain, or value chain. (Hasso Platner, Co-founder and Vice Chairman, SAP) International Business - Resource & 24 Capacity Management - Liam Fassam
  • 25. Capacity managementThere are two approaches to managing capacity: one is to adjustcapacity and the other is to manipulate demand.Generally, organisations will seek to match capacity and demandusing both approaches.The constraint could seemingly be • lack of space • lack of handling equipment • lack of people • lack of reliable supply. Once the constraint that limits your capacity to serve yourcustomers is identified then corrective action can be taken. International Business - Resource & 25 Capacity Management - Liam Fassam
  • 26. Variation or capacity adjustmentThis strategy has short and longer term implications.In the short-term capacity can to some extent be adjusted.• Overtime/double shifts can be worked• Unskilled workers can be employed to make better use of trained people• Workforce can be re-deployed• Jobs or deliveries can be prioritised• Supply and production expedited• Subassemblies subcontracted• Non-essential maintenance delayed Lets discuss some of the risks associated with the above International Business - Resource & 26 Capacity Management - Liam Fassam
  • 27. Variation or capacity adjustmentLonger-term• Facilities, machines/equipment and people can be added. Production can be made in advance and stockpiled.• Adding extra people will not immediately add to effective capacity. All organisations rely heavily on people, and a strong corporate culture with the goodwill of people will in the short- term ease the burden of increases in demand.• However when demand falls it is often difficult to sell or dispose of capital assets such as buildings, machines, equipment, and vehicles. Generally, disposal of assets will not realise book value. International Business - Resource & 27 Capacity Management - Liam Fassam
  • 28. Reducing the need to adjust• It is never the strategy to keep the customer waiting• However to reduce excess capacity there always lies a danger that customers will have to wait for order fulfilment and in doing so a reputation for poor service will ensue.• Organisations can avoid over commitment with resource deployment utilising a manipulated demand strategy.• This works by lowering prices when demand drops enticing customers to buy and furthermore increase prices when capacity is low, which can assist in carrying an extra costs associated with ramping up production and put off some customers from the purchase until the price drops again. Lets discuss some of the risks associated with the above International Business - Resource & 28 Capacity Management - Liam Fassam
  • 29. In summary• Resource and capacity management is all about planning. Planning is not possible without information. Resource and capacity planning begins with knowing what our effective capacity is.• Effective capacity is the amount of material or product that can be delivered in a given period of time to customers. Having the capacity to meet customer demand requires advanced knowledge of what the demand will be. International Business - Resource & 29 Capacity Management - Liam Fassam

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