Operation and supply management

MEASURING DD AND CAPACITY

FORECASTING DD FLUCTUATIONS

Without an estimate of future dd is not possible to plan effectively for future events, only to react them. So

even if forecasts are uncertain they are as well important.

Three requirements from a dd forecast:

- It is expressed in terms which are useful for the capacity planning and control: not money but

machine hours per year, operatives required, space,…

- It is accurate as possible

- It gives an indication of relative uncertainty: an estimate of how much actual dd could differ from

the average is important

Seasonality of dd

Capacity planning and control is concerned with seasonal dd fluctuations. Almost all products/services have

some seasonality and some also have supply seasonality.

These fluctuations may be reasonable forecastable but some are usually also affected by unexpected

variations in the weather and by changing economic conditions. The woolen factory and the hotel

have seasonal dd but for different

reasons: the factory bc of climatic

patterns; the hotel b cod dd of

business people who take

vacations at Xmas and summer.

The retail supermarket is less

seasonal but it has peaks in pre-

vacations and decreasing sales

during holidays. The aluminum

producer has no seasonality.

Weekly and daily dd fluctuations

Example of supermarket: lower dd in the morning, higher in the afternoon, peaks at lunchtime and evening.

DD low on Monday, peak on Friday and Saturday.

Banks, public offices and telephone sales organizations have this type of fluctuation.

MEASURING CAPACITY

The main problem in measuring is the complexity of most operations. Only when the operation is highly

standardized and repetitive is capacity is easy to define.

Example: a factory produces one model of TV, 2000 model A per week.

I have also to define which units/measure I use to define my capacity.

I can choose

- output capacity measure: how many cars, how many computers – It measures the actual nb of

units of outputs. I am planning to have the capacity for the next month.

I used this when I have one output stable over time. If I produce one model of washer machines,

and I produce only this next year, I use output capacity measure.

- Input capacity measure: how many working hours I need to produce those cars? - it measures the

inputs of the process. More appropriate when a much wider range of outputs is produced.

If I produce different products (washing machines, refrigerators, …) I use this method.

I can use also a mix of too but the majority of firms choose one.

Design capacity and effective capacity

Then the other thing that I have to consider is that there are different types of capacity:

 Design capacity: what the plant/process is designed to produced, the theoretical capcity of an

operation. The plant is designed to produce 20 cars each day. It has been designed to produce that

amount of cars.

It cannot always be achieved in practice.

 Effective capacity: I have to stop the machines because there are problem of maintenance or

because I have to change my production. There are predictable time losses.

The actual capacity which remains after such losses are accounted for is the effective capacity

 Actual output: I have to consider also the unpredictable loss of time (inputs stock-out, absenteeism,

poor quality,…). The actual output will be even lower than the effective capacity.

Ratio of the output actually achieved by an operation to its design capacity:

Ratio of output to effective capacity:

First of all I should reduce the avoidable loss bc this loss is not supposed to exist when I plan my capacity.

Example written

In order to reduce the first losses I have to change my organization:

- Product changeover : I work on the machines to do some transformations in order to reduce the

change over

…

While the other losses I can reduce immediately

Overall equipment effectiveness

OEE ratio = overall equipment effectives, measures the effectiveness of operations equipment.

It can be applied at the plant level or at the single machine level : I can measure on a single press, work

station, robot…

The logic of the ratio is to calculate the efficiency of something. It is useful to identify how efficient I am and

why or where my inefficiencies come from.

They can come from the fact that

- I am loosing some time (time ratio)

- Low quality (quality losses – why I am not efficient)

- Slow (speed loss)

SO, three aspects of performance: time, quality and speed.

OEE = a * p * q

Availability losses:

time in which my machines does not work. Not available production.

A breakdown of a machine is always unexpected. Moreover a machine can be not available because for ex I

am changing the painting in the machine. Or for example I don’t have the operator which is not able to

work on the machine.

Speed losses :

Related to the fact that the machine works/is available but it works at a lower rate than the potential rate.

So I have a slow running equipment. Or the machine is idling ( = waiting) for materials for example

Quality losses:

Produce something that is defective. I waste in time because I have to re-produce/re-work/re-control.

The valuable operating time is the time that I actually use my plant at 100 % with good products.

For equipment to operate effectively, it needs to achieve high levels of performance against all these 3

dimensions. Viewed in isolation, the metrics are important indicators of plant’s performance BUT they do

not give a complete picture of the machine’s overall effectiveness. So we have to multiplying the 3 metrics

together.

All these losses to the OEE performance can be expressed in terms of units of time loss. In effect, this

means that an OEE represents the valuable operating time as a percentage of the design capacity.

Exemple written

The problem with OEE is that is does tell nothing about the demand. The performance is measured by

these rates and if the demand drop, you continue to produce and you produce inventory! The machine

idling bc there is not dd.

THE ALTERNATIVE CAPACITY PLAN

With an understating of both dd and capacity, the next step is to consider the alternative methods of

responding to dd fluctuations.

Three different approaches for coping with such variation:

1. Level capacity plan:

It ignores the fluctuations and keep activity levels constant.

The processing capacity is set at a uniform level throughout the planning period, regardless fluctuations of

dd. My workforce is stable over time because my capacity is constant.

With non perishable goods, when they are processed but not immediately sold, I should be able to stock

my production and I sell after. Example: aluminum producer.

There is high risk of underutilization of equipments and high costs.

If I am a farmer, I cannot stock the tomatoes for two months. I have a problem: I cannot change my

capacity but I have a dd that fluctuates over time. In those cases you adopt the third capacity plan: you do

not manage your capacity but you change the dd. You reduce the price when the dd is low or you increase

it when the dd is high.

Advantages Disadvantages

Stable workforce Inventories build up (inventory to financed and

stored)

High productivity, high utilization rates, operations Risk of unsold product (not appropriate for

stability, low unitary cost perishable products)

Most firms operating this plan, give priority to only creating inventory where future sales are relatively

certain and unlikely to be affected by changes in fashion or design.

It can be also used by hotel or supermarket but it is not the best planning because it defines a big waste of

staff resources: a service cannot be stored, so a level capacity plan would involve running the operation at a

uniformly high level of capacity availability. The hotel would employ sufficient staff to service all the rooms

even in months when dd was expected to be well below capacity.

2. Chase demand plan:

It adjusts capacity to reflect the fluctuations in dd.

Match capacity closely to the varying levels of forecast dd. Much more difficult than a level capacity plan bc

staff/equipments/working hours may differ in the periods. For this reason chase dd plan are not used in

non perishable productions (so unlikely to be used for the aluminum producer).

A pure chase dd is used by operations which

cannot store the output (services or perishable

productions).

It avoids the excess provision of

staff/equipment….

Where output can be stored, the chase plan is

used to reduce inventory.

But sometimes is too difficult to obtain large

variation of capacity if there is too much fluctuation: for ex a hotel will have permanent staff who works

more!! Advantages Disadvantages

Less inventories and lower risks of low utilization Poor stability of operations, cost of adjustment

rates

Guarantees that capacity is enough to meet dd Less productivity

Follow the dd, so I should not have inventory (I Costs associated with turnover

produce exactly what is needed)

Methods of adjusting capacity:

The chase dd approach requires that capacity is adjusted by some means.

 Overtime and idle time

The quickest and convenient method of adjusting capacity is by varying the nb of productive hours worked

by the staff in the operation. When dd > capacity, overtime is worked; when dd < capacity, work time is

reduced.

This method is only useful if the timing of the extra productive capacity matches that of the dd. For

example is not useful to increase staff hours in the evening if all the extra dd is in the afternoon.

Costs: extra payment for work overtime or cost of paying staff who are not engaged in direct productive

work (idle time).

 Varying the size of workforce (using also temporary labor or lay off – cassa integrazione)

Hiring extra staff during period of high dd and fire when it falls. But this is related to ethical implications.

Costs: recruitment, salary, cost of learning, (loss of moral when fire)

One method to manage the peaks of dd is to create flexible workers who can pass from a job to another.

 Using part time staff

Used in supermarkets, fast foods but also in manufacture operations to shift after the normal working day.

Costs: recruitment, salary, learning

 Subcontracting

Buy capacity from other organizations: this enables the operation to meet the dd without extra expense of

investing in capacity which will not be needed after the peak in dd has passed.

Costs: the subcontractor makes margin for his business, subcontractor not motivated to deliver on time or

with quality; risk that the subcontractor enters in the same market.

Here I don’t change my workforce.

The less expensive one is hire. Subcontractors is the most expensive bc I have to pay for the subcontractors

market. 3. Demand management:

The most obvious mechanism of dd management is to change dd through price. The objective is to

stimulate off-peak dd and to constrain peak dd, in order to smooth de