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Solving a Complex Problem Based Upon Capacity Planning and Forecasting

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

- Case
o Analyze a complex operations situation in a manufacturing company and develop a solution based upon capacity planning and forecasting.
- SLP
o Analyze and discuss the interactions of operations in a non-manufacturing company.
- Discussion
o Analyze the four areas of operations management from this course.

Module Overview

To begin this Module, watch the two videos on Capacity (Part 1 and Part 2).

Let's take a systems dynamic look at production. There are two basic concepts to the dynamics of system flow: the rate of production (or the flow of materials over time) and the level of the material that accumulates or dissipates as it flows through. We talked about the levels of material in Module 2, Inventory. Materials flow into inventory from outside vendors. These materials go through production processes at various rates of production, and accumulate in work in process inventories and then finally into finished goods inventories.

In this diagram, the flows are based on production rates. The level is the level of inventory as it accumulates and as it is used up. Sometimes the outflow occurs at the same time as in the inflow. Other times the inventory is accumulated by the inflows, moved to another process, and then it flows out, through the process and back into another inventory. Traditional manufacturing processes work this way and add cost (value) to the work-in-process inventory. Capacity can be determined in two ways: the rate of flows, based on number of machines (work-stations) in the process and the speed of the machine (or manual process), and the physical size of the facilities, as determined by floor space and cubic volume.

Review the video, Part 3, which discusses capacity briefly. (Just move the time slider to 12:45 and watch until 14:35.)

What is Capacity from a flow perspective? Capacity is usually determined on a process by process basis. It is calculated as the number of parts that can be produced in a given period of time. For weekly capacity, this calculation is (number of machines or workers) * speed (parts/hour) * number of shifts * hours/week/shift. Without using any factors, this gives you the raw maximum capacity per week. If there is an efficiency factor that accounts for downtime (non-production time), then is applied. For example, the efficiency factor may be 90%, which means that 10% of the available time, the process is down.

Capacity from a level (container) perspective. Capacity is also analyzed from a physical space view. The amount of inventory that can be held often depends on the size of storage facility that holds it. This creates inventory costs, the holding cost, based on owning and maintaining physical facilities. There is also another reason physical facilities and space is important, mostly in the long run. The amount of space available will determine how many machines and work stations can be used. One way to increase capacity is to add another machine or work station. But when you run out of space, you can't or you need to obtain more space.

There are different levels of capacity, e.g. maximum and normal. The maximum capacity is the just that, how much can be produced when the process is running at peak levels of production.
Most manufacturing companies do not run at maximum, since problems can occur. Most companies like to set a Normal level of capacity, say 80% or 85% of maximum. This allows for unplanned downtime, and also provides reserve capacity if and when the demand increases in the short term.

Capacity of a production line - bottlenecks. The problem with measuring capacity of individual processes is that processes are connected in order to generate the finished product. As an example, take the Plasti-Brack product line. Each of the processes in producing the finished product and bulk-packing it, have different capacities. But when you look at these altogether as one big process, one of the processes becomes the controlling process in terms of production capacity. That is the one with the lowest production capacity.

How can you increase capacity? The answer is simple: more machines (or more work stations), faster machines (or workstations), more up time, more time per day or week (shifts or overtime), or more space so you can add more machines or work stations. This article explains more about capacity planning:

How do you determine if the long-term demand will require more capacity? Forecasting is the process of determining what is going to happen in the future. But it is somewhat different that predicting. Predicting is usually considered an attempt at determining the outcome of a specific event, like who is going to win the Super Bowl. Forecasting, at least in business (and weather), is determining future patterns of behavior, e.g. what will the demand be in three to five years for our products. Forecasting has been developed over many years and is now done with the help of computers and complex algorithms. The most advanced forecasting techniques use facts about the trends and desires of consumers which are correlated to demand patterns.

How forecasting is important to capacity planning? Determining what the future demands will be for the various products and product lines can then be converted into requirements for capacity. When forecasted capacity exceeds actual capacity, something must be done or customers will become dissatisfied as it takes longer and longer for them to receive their orders. In other words, when demand levels outstrip capacity, customer orders begin to build into a backlog. Customers will eventually cancel orders and/or find other suppliers. In order to prevent this, the capacity issue must be addressed, in both the long term and the short.

Scenario COMPANY EMAIL

FROM: Gerald Garcia

SUBJECT: Backlog of orders in Plasti-Brack

I am meeting with Philip Lesh, the Director of Materials, to discuss what appears to be a growing backlog of customer orders in the Plasti-Brack product line. It seems that for the last two to three months apparently we have had a slow creep-up of order backlog in the MLD250 department, specifically the Plasti-Brack molding group. That means that even as we increase productivity we still need to consider how to deal with capacity as our demand increases.

I may want you to meet with us. But this seems like it will be your next project. Let me know if you have any questions

COMPLEX PROBLEMS IN OPERATIONS. As you have seen from the first three modules, operations consist of various aspects that are complex and important to the company. Making sure that quality products and services are provided to the customers on time and within budgets and cost constraints is a key factor in a company's profitability and long term survival.

But these various components of operations do not exist independently of each other - they interact, which makes operations management even more complex. For example, capacity and productivity affect inventory. Quality and process yields affect capacity.

WHY LEARN ABOUT CAPACITY? Recall from the course overview that not too long ago, Gulfstream, a business jet manufacturer, planned to increase its production capacity as its business volume increased. At the same time, CEOs of trucking and rail companies were forecasting a short supply of capacity in freight transport industry. Production Capacity is the ability to produce a specific amount of output over a specific amount of time. But there is also another definition and that is the capability to hold or contain a certain amount of things, such as inventory.

This module will show you how to understand capacity and tell you some of the issues with this operations function and how to plan for it including forecasting. You will use your knowledge from the first three modules and analyze a complex problem at the Excellent Manufacturing Company. In the SLP, you will analyze how the various aspects of operations at your company interact.

Scenario COMPANY EMAIL
FROM: Gerald Garcia

SUBJECT: Potential problem with backorders in Plasti-Brack

I received an email from Philip Lesh about what he thinks might be a growing backlog of orders for Plasti-Brack products. This could be an issue with our capacity and forecasting. I will keep you posted.