Chapter 9
Planning for Successful Operations
In This Chapter
Putting together an operations plan
Creating an aggregate plan and master schedule
Conducting material requirements planning
Performing operations planning in service-based companies
Implementing an enterprise resource planning system
Ben Franklin said, “If you fail to plan, you are planning to fail.” This is particularly true of operations management because of the interdependencies of all the various components, including resources, materials, and processes. Trying to manage complex business operations with a seat-of-your-pants approach, hoping that the process will somehow evolve into something efficient without planning, is a losing proposition. To win at the game of operations, you need to plan.
In this chapter, we show you how to plan operations with a hierarchical approach. We describe tools you can use to plan operations at both the corporate and facility levels and point out how to apply your plans to process scheduling. Near the end of this chapter, we also cover software systems that are particular popular in the operations management set.
Planning from the Top Down
The planning and control of operations usually occurs in a hierarchical manner. Figure 9-1 illustrates the typical organization for operations planning. Strategies and goals are determined at the corporate level; detailed plans for meeting the firm’s objectives are developed at the facility level; and operations are executed at the plant-floor (or, for services, front-line) level. In this section, we examine these three levels of planning and look at the decisions made in each.
Illustration by Wiley, Composition Services Graphics
Figure 9-1: The hierarchy of operations planning.
Determining corporate strategy
At the top of the pyramid is the corporate strategy, which ideally establishes the organization’s direction and the basis upon which the business will compete. Michael Porter, a leading expert on corporate strategy and competitiveness, proposed basic strategies for competitive advantage. They include a focus on being the low-cost provider (Walmart), a focus on being the leader in innovation (Apple) or product quality (Toyota), or a focus on the differentiated needs of the customer (American Express). Each of these strategies requires a different approach to operations management. For more details on how strategy choice and product life cycles influence your operations, see Chapters 5 and 18.
The key to executing the corporate strategy is the business plan, which answers the core questions of running the business, such as what products or services the firm wants to provide and where and how it will produce, market, and distribute them. The business plan also describes market dynamics and competition.
The business plan has a long-term effect on the health of the company and its shareholders. It covers many aspects of running the business, including these:
Goals: What financial and performance goals will the company set?
Markets: What markets and which customers will the firm pursue?
Product portfolio: What products will the business offer, and how quickly will the company introduce and update the products?
The business plan also covers the key strategic operations management decisions within the scope of this chapter on operations, including these considerations and others:
Facility location: Will the company have multiple facilities, and if so, where will they be located?
Long-term capacity: What is the forecast for expected demand, and how much capacity will the firm need to meet the demand (see Chapters 6 and 7)?
Outsourcing strategy: What will the company produce or provide itself and what will it outsource (see Chapter 17)?
Production allocation: What facilities will make which products, and will a product be produced at multiple facilities or will a facility make multiple products? Chapter 4 covers flexibility in processes.
Production policy: How will the firm face the market? Will the company make its product to order or make it to stock (see Chapter 5)?
These high-level decisions have long-term implications and must be considered over a long time horizon. Given the long-term nature of corporate strategy decisions, company leaders must look into the future and create a shared vision of what the company will be before making those decisions.
Preparing for success
After a firm determines its corporate strategy and establishes its long-term capacity needs and production policies, focus shifts to intermediate planning, which is often referred to as aggregate planning. Aggregate planning usually presents a detailed plan for sales and operations that covers a period of 2 to 12 months. A company’s aggregate plan typically addresses the following three specific operational considerations:
Employment levels: How much manpower is needed to meet the set production rates?
Inventory levels: How much inventory (both raw material and finished goods) does the company need (see Chapter 8)?
Production or output rates: How much will the company produce in the designated time period? For a detailed discussion on long-term capacity planning and the effects of different production strategies, see Chapter 7.
Develop an aggregate plan by following these steps:
1. Determine demand for each time period covered in the plan.
You can use the forecasting methods described in Chapter 6 to predict demand.
2. Determine the available capacities for each time period.
Be sure to calculate capacities for all resources, including labor and machine capacities.
3. Identify corporate policies and external constraints such as regulation and market forces that may influence the plan.
These policies include limitations on workers over time, inventory targets, and outsourcing policies.
4. Determine product cost, based on direct labor and material costs as well as indirect or overhead (fixed) manufacturing expenses.
5. Develop contingency plans to account for surges and downturns in the market.
For example, each plan may utilize different levels of overtime, outsourcing, and inventory to meet the demand requirements, thus resulting in a different product cost and availability.
6. Select the plan that best meets the corporate objectives.
Compare your various plans and determine how well each one meets your business objectives. Some plans may present tradeoffs in different performance metrics such as utilization versus inventory levels.
7. Test the plan for robustness (its ability to perform well under varying conditions).
This may involve changing the demand requirements or the unit costs for things such as overtime to simulate different scenarios. If the outcome of the plan varies greatly from your ideal scenario, revisit one of the alternative plans available in Step 5.
Aggregate planning is an ongoing process. A plan usually provides details at the monthly level over the course of a year, and you should update it as conditions change. For example, you need to account for changes in expected demand as well as unexpected events such as material shortages and production disruptions.
Avoid the temptation to change your aggregate plan too often. The purpose of the plan is to provide an intermediate path into the future. Reacting too quickly to perceived changes in demand or variability in production output can create unnecessary disruptions in your overall plan, such as layoffs, unnecessary hiring, or changes in supply purchasing contracts. Until you recognize an undisputable, reoccurring change in demand or production output, allow your short-term planning to accommodate the blips in demand that are only temporary because of such things as weather events or short-term shifts in customer preference.
Executing the plan
Armed with the aggregate plan, plant personnel or those who schedule and control actual production develop the short-term detailed plans for implementation. This level of planning generally includes the weekly and daily schedules for specific tasks:
Inventory levels: How much raw material, work-in-process, and finished goods should be in the operation (see Chapter 8)?
Machine loading: What items will be processed by what resources and when?
Production lot sizes: How large should batch sizes be, and how should changeovers be scheduled (see Chapter 4)?
Work schedules: What are the staffing needs, including overtime?
A critical aspect of successful operations is managing bottleneck operations (covered in Chapter 3). Because the bottleneck is the resource that limits the processes output, start your detailed planning with a focus on the bottleneck. This increases the likelihood that the facility will use its resources in the best way possible.
The detailed plan needs to be responsive to sudden changes in conditions such as a rush order for a product, a disruption in material supply, or an unexpected equipment failure. The operations manager can schedule overtime or reassign workers to different tasks to adjust for many of these issues.
Exploring the Components of an Aggregate Plan
An aggregate plan provides the road map for business operations; it translates corporate strategy into a plan that can be implemented on the plant floor or on the front-line of service. For companies that sell physical products, this map details the production process. For service-based companies, the aggregate map identifies staffing levels and other resources needed to accommodate customer demand. In this section, find out how the aggregate plan evolves from the corporate strategy and how it becomes a detailed plan for production.
Putting together a plan
The operations planning process starts at the corporate level with a strategic plan for the company. The overarching corporate strategy guides the aggregate operations plan; this relationship is shown in Figure 9-2.
The purpose of the aggregate plan is to match the firm’s capacity with anticipated customer demand to ensure that the company is utilizing its available capacity to best meet anticipated demand. An aggregate plan requires two sets of information:
Strategic capacity plan: A capacity plan emerges from the corporate strategic plan and provides aggregate planners with details on current and future capacity levels.
Forecast of anticipated demand: The demand forecast provides an overview on how much product the facility needs to manufacture in the coming months to satisfy anticipated customer demand. (Find details on forecasting in Chapter 6.)
Illustration by Wiley, Composition Services Graphics
Figure 9-2: The planning process.
In their general form, aggregate plans deal with the total demand. They typically don’t focus on individual models or items. For example, when allocating space in a grocery store, the aggregate plan would indicate a certain amount of space to be used for breakfast cereals, but the plan wouldn’t address how much shelf space each type or brand of cereal gets. In some cases, the plan may allocate a specific amount of space to a particular manufacturer, such as Kellogg’s, but this is usually as specific as it gets.
The end product of aggregate planning is the production plan, which guides the development of a master schedule (MS), which informs detailed schedules for operations. These relationships are illustrated in Figure 9-2.
Creating the master schedule
Based on the production plan, facility personnel (such as a retail store manager) create a detailed schedule to give specific direction on what to do when to employees who are actually doing the work or providing the service. The master schedule shows the quantity and timing for a specific product to be delivered to customers over a specific period of time, but it doesn’t show how many products actually need to be produced because the demanded products can be provided using inventory in some cases.
The master schedule and inventory levels provide information for the master production schedule, which communicates how many units need to be produced at a given time. Chapter 8 covers how to calculate desired inventory levels, and Chapter 7 provides details on balancing production with inventory.
For example, a computer manufacturer’s production plan may show that the company forecasts sales of 1,200 portable computers in September, 1,500 in October, and 1,700 in November. But it doesn’t give any information about what quantity of each model is needed. The master schedule shows how many of each model is needed and when it needs to be produced.
Figure 9-3 shows the aggregate plan and the master schedule for a company that manufactures three different models of a product.
Getting to the specifics of the master schedule can be difficult. Breaking a production plan into the number of specific models to produce isn’t always easy. Because disaggregate forecasts are less accurate than aggregate forecasts, it’s often difficult to predict what actual models the customer will desire. You must take care when developing the forecast (flip to Chapter 6 for info on forecasting techniques). Because short-term forecasts are typically more accurate than long-term forecasts, the longer you can delay making the line item (model) forecast, the better off everyone will be. When creating a master schedule, follow a structured method (such as the one described earlier in this chapter in the Preparing for success section).
Illustration by Wiley, Composition Services Graphics
Figure 9-3: Disaggregating the plan.
Considering Materials
A company’s master schedule focuses on creating the product or delivering the service that a company is in business to sell. This commodity often requires materials and processes, and the collection of parts and activity can become complicated very quickly. In this section we present the basics of material requirements planning (or MRP).
Gathering information for the system
Material requirements planning (MRP) is a computerized information system designed to help manage the ordering and scheduling of the components, parts, and raw material that make up a company’s end product. Demand for these components is often referred to as dependent demand because the quantity demanded depends on the consumer demand for the end product.
An MRP system requires these major inputs:
Master production schedule: This input is described in the section Creating the master schedule earlier in this chapter.
Product structure: This diagram shows all inputs needed to produce the product. It may also show assembly order. Figure 9-4 shows an abbreviated product structure for an automobile. The automobile consists of two axle assemblies: one body and one engine assembly. Each axle assembly consists of two wheels and one axle subassembly.
Bill of materials (BOM): This input is a listing of all the items needed to produce an end product. It’s much like the list of ingredients in a recipe.
Inventory record: Tallies of all the raw material, parts, subassemblies (partial assemblies), and assemblies for each time period are included in this input. Here are the primary data points contained in this file:
• Gross requirements: The total demand for the item during the time period
• Scheduled receipts: The orders that have been placed but not yet received, often referred to as open orders
• Expected on-hand inventory: An estimate of the inventory that’s on hand
• Net requirements: Actual amount needed
• Planned receipts: Quantity expected to be received
• Planned releases: Quantity expected to be ordered
For MRP, you must also know the expected lead time, the time between the ordering of parts and their delivery.
Illustration by Wiley, Composition Services Graphics
Figure 9-4: Abbreviated automotive product structure.
Getting system results
The MRP system takes the master production schedule, product structure, BOM, inventory record, and lead time information and creates a material requirement plan for each item. The process starts with the number of end products desired in any given period. The software uses the product structure and the BOM to determine how many of each assembly and subassembly are needed — and when — to make the end product. Using current inventory levels, the system provides the manufacturing staff with a work release, which points out how many items they need to actually produce. This process repeats down to the raw material level.
To visualize this process, consider the BOM in Figure 9-4. If you need 100 automobiles in week 7 and 120 in week 8, then the MRP system breaks out the master schedule into separate plans for the automobile, the axle assemblies, the subassemblies, and the wheels. Figure 9-5 shows a traditional output from an MRP system.
Illustration by Wiley, Composition Services Graphics
Figure 9-5: MRP output.
Figure 9-5 shows that the company needs 100 automobiles in week 7. Because the company has a one-week lead time, it needs to release the required materials into the plant during week 6, which means that 200 axle assemblies must be ready at this time. (Each automobile needs two axle assemblies.) Given the one-week lead time to produce an axle assembly, the company must release the material needed to produce the assemblies at week 5. Notice that producing a subassembly takes 3 weeks, so the company must release materials for 200 axle subassemblies at week 2. For the same reasons, it needs to release materials for 400 wheels at week 1 (two wheels per axle assembly; four-week lead time). These calculations are repeated for the 120 automobiles needed at week 8, although, because of the 20 percent increase in demand, all the quantities grow by 20 percent.
MRP reporting makes it quick and easy for an operations manager to see the required timing for future operations. For example, if you’re managing the axle subassembly operations, you know that at week 2 you need to begin production for the 200 subassemblies required for a week-5 delivery to the axle assembly area.
Taking MRP data to the factory floor
MRP releases raw material onto the factory floor as needed but doesn’t schedule the individual resources (machines and people) needed to produce the product. Scheduling jobs can be problematic when specific resources are required for multiple products or jobs. Which jobs do you schedule first?
Several methods to prioritize jobs are available. Here are some of the most common options:
First-come, first-served (FCFS): Process jobs in the order that they arrive. Also known as first-in, first-out (FIFO).
Shortest operating time (SOT): Start with the job that has the shortest processing time.
Earliest due date first (EDD): Begin with the job that has the earliest required date.
Critical ratio method (CR): Calculate the time remaining until the due date and divide it by the total processing time remaining. Start with the job with the smallest ratio.
The metrics you use to evaluate the advantages of each scheduling method include the flow time and the job lateness. Flow time (covered in Chapter 2) is the length of time a job spends in the facility. It includes not only processing time but also the time the job waits to be processed. Measure lateness against the promised due date to the customer; that is, calculate job lateness as the difference between the actual completion date and the due date.
Unfortunately, no one method is better than the others in all circumstances. Evaluate all the methods for each series of jobs to find the best approach for a given situation.
Here are some general trends:
FCFS is the worst performer in most situations because long jobs often delay other jobs behind them in the process. However, FCFS is often used in service operations because it’s the simplest method to implement and perceived to be the fairest to customers.
SOT always results in the lowest flow time for a group of jobs. This typically results in lower work-in-progress inventory because jobs move through the process quickly. The major drawback is that long-processing-time jobs often spend much more time waiting than with FCFS or EDD.
EDD usually minimizes the number of jobs missing their delivery date, but it also can increase the flow time of jobs through the system because they aren’t processed until the last possible moment.
Planning for Services
Aggregate planning is rooted in the manufacturing sector, but many of its concepts apply to service industries, too. In this section, we point out how operations planning typically happens in service-based companies. We highlight the factors that make planning for service unique and describe how to develop a plan for serve operations.
Seeing the difference in services
All sorts of businesses sell services, and some service products — such as those provided by restaurants and retail stores — contain many of the same operational elements as manufacturing-based organizations. For starters, these particular service industries require a business to maintain inventory. In fact, much of the activity in the banking industry (think processing deposits and withdraws) can be automated in a way that’s quite similar to what you may see on a production line. However, other kinds of service-based businesses, including healthcare, are significantly different from a manufacturing operation because patients cannot be inventoried and their care cannot be automated.
Most service industries share a handful of characteristics that don’t apply to most manufacturing operations:
High level of customization: No two customers are alike in most service environments, and each requires at least some level of customization, if not complete customization.
No inventory: Customers cannot be inventoried for services, and the service process cannot be initiated until a customer expresses demand for the service. For example, a bank cannot approve a mortgage loan until an applicant finds a house he wants to purchase and submits the loan application. Similarly, a doctor cannot perform most medical procedures until a customer is present.
Variable arrival rates: In manufacturing, the operations manager has a fairly high level of control over the arrival rates of material. This isn’t the case for services, where the arrival of customers is often difficult to control. Even with the use of appointments and reservations, customer arrival rates are difficult to predict and control. If a manufacturing company produces using a make-to-order system (only producing when an order is received), its arrival rate variability will be more like that of a service operation.
Variable service times: In services, the cycle time (time to complete the task) can vary significantly, much more than in a typical manufacturing operation. Service time variability makes capacity planning more difficult in service industries (see Chapter 7).
Because inventory isn’t present in most service-based operations, capacity becomes the prime leverage point when managing “product” availability, and the variability in arrival rates and service times makes capacity management difficult, resulting in potentially significant waiting time for customers, which often impacts customer satisfaction.
Establishing the service plan
Service planning is usually completed in a hierarchical manner. At the corporate level, company leaders decide what types of services to provide and set goals and metrics. These parameters are communicated to the facility level where detailed plans are made. As in manufacturing, these plans are then carried out on the service floor, or front line.
In services the primary focus is on capacity, and service capacity is usually of the human variety, so the goal of planning is to determine how many people are needed for certain periods of time and when individual employees should work. See Chapter 7 for processes to determine capacity. In aggregate planning terms, customer demand is specified for each time period and employees are assigned to meet this demand. For example, when staffing a restaurant, additional kitchen and wait staff are scheduled during lunch and dinner hours to meet the increased demand.
Though an MRP system isn’t too useful in services, many services utilize a scheduling optimization software program that can help managers best utilize resources and provide better customer service.
Consider a popular retail chain. At the corporate level, the strategic plans for the company are established. Corporate leaders determine what customer market to target and what products to sell. Each facility takes these strategic plans and determines how to implement them at its local branch. In the clothing industry, for example, a store in southern Texas has limited need for winter parkas, so the store’s managers may decide to carry a larger stock of lightweight jackets instead.
Though general management employment levels are established at the strategic level, it is typically up to the facility management to determine how many employees are needed on the store floor to service customers. These employees are usually assigned to departments based on projected demand. For example, the days before Mother’s Day, more employees may be assigned to the women’s apparel and jewelry departments to service the anticipated increase in demand in these areas.
Applying Information to the Entire Organization
MRP led to the development of enterprise resource planning (ERP). As the name implies, ERP integrates an entire company into one information system that operates on real-time data it receives from throughout the organization. The shared database ensures that every location and department can access the most reliable and up-to-date information (see Figure 9-6).
An ERP system incorporates many of the topics covered in this book, including process design and management, aggregate planning, capacity and inventory management, scheduling, quality control, and project management.
An ERP system has many advantages, but beware of the silver bullet perception. ERP systems require significant investments, including purchasing the system and then implementing and maintaining it. Many companies underestimate the amount of time and money involved with implementing and maintaining an ERP system.
Illustration by Wiley, Composition Services Graphics
Figure 9-6: Spanning the organization.
We recommend the following steps for implementing a successful ERP system:
1. Assess your needs.
Do you really need such a sophisticated system? The system itself won’t fix all the problems of an organization. Often, some process re-engineering and communication across the organization can do the trick, and you can handle data management in a much simpler and inexpensive way. Many world-class manufacturing and service operations use relatively simple, unsophisticated systems to manage their ERP needs.
2. Fix your processes.
Implementing an ERP system won’t fix broken, inefficient processes. Before investing in an ERP system, evaluate and, if needed, redesign your processes using the methods described in Part I of this book.
3. Acquire and verify consistent data.
When you begin populating an ERP system with data, remember that the outputs are only as good as the data going in. If different departments are operating on different sets of data — say, sales data in one department is different from sales data in another — then the software system isn’t going to produce accurate data for the company.
4. Customize your software.
ERP vendors offer highly standardized software, typically with optimized modules for particular industries. One of the major concerns companies have about implementing an ERP system is that it locks the company into standardized processes. This inhibits process innovation within a company because deviating from the ERP’s process ends up requiring many software work-arounds. When setting up an ERP, make sure the system can accommodate process improvements from Step 2 and not force you into the standard processes that have been built into its software.
When customizing software to accommodate an improved process, be sure your competitors don’t get ahold of the same programs and eliminate any competitive advantage you’ve gained.
5. Train your employees.
Employees must understand the purpose of the system and how to input data and interpret the reports that the system generates.
6. Continuously improve your processes.
Continuous improvement is the heartbeat of all successful companies, and changing processes almost certainly involves modifications to ERP software. Many companies find themselves locked into their current processes to avoid the time and money needed to update their software. Avoid stagnation by developing a good relationship with your software provider.