Sales and Operations Planning Across the Supply Chain

Jack Gips, President
Jack Gips Inc.


For many years, sales and operations planning has proven to be one of the processes most critical to the success of manufacturing systems. It is management's means of driving the sales and manufacturing organizations toward their goals for customer service, financial results, resource utilization, human resources, and inventories. It is a monthly forum for discussing the state of the business and for comparing the operating plans with the annual business plans. It is a mechanism for bringing together the right people and the right information to make good business decisions on a timely basis.

In recent years more and more companies have begun to view their businesses in a different way. The supply chain view considers not only manufacturing, but the distribution and sales organizations it feeds and the purchasing and other internal manufacturing organizations that deliver materials and goods to it. A complete supply chain view would also extend out to the external customers and to the suppliers of the suppliers. For purposes of our discussion here, we will limit ourselves to a discussion of the internal supply chain starting with the primary suppliers and ending with our sales organization's performance for our customers.

Prior to adopting the supply chain view, many management teams made independent decisions and applied independent measurements to sales organizations and manufacturing plants. The annual planning exercise and informal management decision processes were the means of bringing all the sites into alignment. The importance of the supply chain view rests in its ability to give management a way to blend all these internal goals and decisions into the best set of drivers for the whole enterprise. It surfaces conflicting objectives and allows management to trade off performance in one node of the supply chain for the benefit of the entire chain. It brings to light redundant inventories and activities to more efficiently position inventories and resources. It leads to shorter cycle times and increased flexibility for the customers.

Sales and operations planning across the supply chain requires great coordination. All sales organizations must deliver their demand plans at the same time for the distribution centers and/or manufacturing plants to start their planning activities. Manufacturing feedback to the sales groups must arrive quickly to ensure they make valid promises and allocation decisions to satisfy the customers. Executive management's role is to provide strategy and direction at the start and approve the plans at the end of the sales and operations planning flow. The entire flow must take place within the period of a month and mesh with the master scheduling processes at each of the supply sites.


Supply Chain Example
For purposes of our discussion we will assume a global supply chain consisting of fifteen sales groups fed by three distribution centers which are in turn supplied by ten manufacturing plants. Assume that the sales groups have local warehouses and maintain inventories of the finished goods that are sold in their locations. The distribution centers carry the main supplies of these inventories and are the consolidation point for all of the demands that are sent to the manufacturing plants. Some goods can be sold into multiple markets while some are made specifically for individual markets.

Supply Chain Questions
In order to determine the sales and operations planning flow and responsibilities, the day-to-day planning responsibilities must be defined. The following questions must be answered:

  • Who creates the sales plans that drive replenishments?
  • Who maintains the on hand inventory balances at each level?
  • Who is responsible for the levels of inventory at each site?
  • Who plans the replenishments for each level?
  • Are finished goods shipped to the sales groups from distribution centers, manufacturing plants, or both?
  • Do the distribution centers sell any products directly to external customers or always ship to a sales affiliate?
  • Who determines the shipping schedules to the sales affiliates and distribution centers?
  • Are products made only at one plant or can they be sourced from several plants?
  • How are safety stocks determined and are they maintained at each level?
  • How is customer service measured at each level and who is responsible for it?

The answers to these questions will vary from company to company. In our example we will assume that the sales organizations are responsible for the forecasts and sales plans. The distribution center planners receive all the demand statements and plan the replenishments to both the sales groups and to the distribution centers from manufacturing.

Supply Chain Issues
Consider some of the issues these questions raise.

At the top of the S&OP structure there must be a sales plan to drive the process. This may start out as a pure sales forecast, but it should also take into account management's goals and budgets for the sales organizations and actions like promotions, price changes, and discounts to make them happen. Should manufacturing or distribution people set these plans or second guess and change them?

Where in the supply chain should sales and operations plans be created? Should S&OP meetings be held at each manufacturing site monthly, or should there be S&OP meetings at the distribution sites as well? Should there also be S&OP meetings at the sales affiliates? If so, what would they discuss?

What about the timing of the meetings? If one feeds information to another should their timing be coordinated in a single global sales and operations plan calendar?

Should critical resource issues at one site be considered in the initial planning of a site that is their customer in the supply chain before demands are passed down the chain? Or, should all demands be sent down and feedback returned once the supplier site reviews its resources against the total set of demands?

Should the executive sales and operations planning meetings occur at the start of the supply chain process to drive it, or at the end to accumulate the results and review them?

Some companies initially want to keep sales and operations planning as a completely independent activity. They want the S&OP output at one level of the supply chain to become direct input to the S&OP the next level down. This ignores the detailed decisions, policies, and inventory adjustments that are made between the levels. It also ignores the exaggerating affects of lot sizing, lead-times, and safety stocks at each level. It may not seem like a big assumption, but by the time you get from the top of the supply chain to the bottom, requirements and supply plans can be very different in both quantity and timing. It has been demonstrated in many cases that driving the sites at the bottom of the supply chain directly with the forecasts at the top does not lead to good supply chain performance. For that reason, planning should follow the pattern of S&OP to MPS to MRP (if required) at one node of the supply chain to S&OP to MPS to MRP (if required) at the next node. Figure 1 shows a Supply Chain S&OP Flow.


FIGURE 1

Guidelines for Supply Chain S&OP
Here are some guidelines for the supply chain process:

  • The sales and marketing organizations should bear the ultimate responsibility for providing an accurate and timely demand statement. They are closest to the customers and the competition, and have the best knowledge to ensure the accuracy. They know their own local market issues and decide on actions to satisfy their own goals and measurements.
  • All challenges to the demand statement they provide should be made before it is "officialized" in the affiliate demand meetings. Some companies have created demand management organizations, or forecasting councils, to challenge and validate the demand statements within the sales organizations before they are passed to the suppliers.
  • Once the official demand statements are generated, no one else should adjust them at any point in the supply chain. Only executive management and the sales/marketing people should change these plans.
  • The sales and marketing organizations should be measured on and held accountable for the accuracy of the demand plans.
  • The demand statements must be completed and consolidated early in the month (first or second week) to support the needs of the rest of the supply chain.
  • If the planners who plan the replenishments to the sales affiliates' inventories are part of the sales organizations and located at the affiliate sites, then a full S&OP process including supply planning meetings is warranted. These meetings should set the supply plans that drive the affiliate master schedules. These master schedules are, in turn, sent to the distribution centers as demands on their inventories. Other things that might be considered in these meetings are the local financial plans, inventory levels and warehouse labor and space requirements to support these plans.
  • If these planners reside at the distribution centers, then the affiliate processes may be limited to demand planning activities only and not require a full S&OP process. If this is the case, a distribution requirements planning activity or (affiliate master schedule) should be created to plan material shipments from distribution and arrivals at the affiliates. If there is a standard shipping arrangement (like one delivery by ship per month), this should be accounted for in the planning of this master schedule. This schedule should be visible at all times to the affiliates even though it is planned for them by planners at a central distribution point.
  • Central distribution centers are excellent points in the supply chain to consolidate demands and schedules, apply controls to manage capacities and inventories, and stabilize the orders that drive the manufacturing sites. Customer service and manufacturing performance can be greatly affected by the planning that is done at this level. If the planners use good judgments in reacting to exception messages calling for schedule change, respect time fences and capacity constraints, and manage their inventories well, the entire supply chain will perform better.
  • A distribution center S&OP should consolidate the requirements from the affiliate master schedules and treat these as the demands on the DCs. This will account for lot sizing, safety stocks, and container loads that determine the shipments to the affiliates and make them different from the forecasts. This demand is the input to the S&OP meetings and a supply plan is the output.
  • If a single distribution center is the single source of demand for a product family that is produced in a dedicated work center, that resource can be considered in the DC's resource requirements planning and S&OP. If demands come from more than one distribution center, or the product family is produced in multiple plants or in a work center that is shared by multiple families, it is better to do the resource planning at the plants and feed back problems to the DCs.
  • The supply plan should drive the DC master schedules that call for replenishments from the plants. These master schedules may be delivered to the DCs, or the shipments may go directly to the sales affiliates if the products are unique to a particular market. These master schedules become the demands that are consolidated for sales and operations planning at the plants. They are also the demands that consume the production forecasts in the plants' master schedules.
  • S&OP at the plants should not be focused on challenging the demands. It should be heavily concentrated on creating production plans to satisfy the demands and resolving resource constraints. If these constraints cannot be resolved, immediate feedback should be provided to the DC planners to adjust the demands.
  • The production plans resulting from the plant S&OP meetings should be disaggregated from the family level to the end item or SKU level to drive the plant master schedules.
  • If the plants are customers of other plants, or if there is another level of plants in the supply chain that supply them with components or raw materials, another level of S&OP and master scheduling may follow.

Management's Role
Executive management plays a critical role in this supply chain process. They obviously have to review the aggregate results of all these plans and agree that they satisfy the goals of the business. If not, they should drive adjustments to the plans through the supply chain in the next round of planning. This is a variation of a role with which most executive management teams are comfortable. It is common for them to review last month's actual results against their objectives and business plans, and react to unacceptable situations. The difference in the supply chain S&OP approach is that they can now look at projections and take actions in advance to avoid these unacceptable results. It is the difference between being proactive and reactive managers.

The best management teams take this proactive stance a step farther. Instead of reviewing the projections of the supply chain planning at the end of the process, they become the drivers and influence it at the beginning. They begin to do their planning earlier. They will inform the organization that they will be asking for increased year-end or end of the quarter sales volumes sooner than the month before they are required. They set policies for adjusting inventory levels before they become too high rather than after. They relax measurements on one part of the supply chain to get better performance from the rest of the chain. They sort out measurements that cause behaviors that are detrimental to the overall performance of the chain.

For example, there are businesses in which every plant is held to the same standards of plant utilization and efficiency. This may cause a raw material site to produce large quantities infrequently to maximize their efficiencies and lower their costs per unit. The impact on the rest of the supply chain may be slow turning inventories, larger than necessary lot sizes, and inflexibilities for their customers. The next tier of plants may have difficulty achieving their own efficiencies because of the way their supplies are delivered. The net result is that, instead of the customers determining what the plants should produce, the raw material suppliers determine it.

The most important management issue is whether they see their role as one of making decisions, driving the business, and measuring performance to plan, or one of reviewing results and reacting to them after the fact?

Synchronizing Supply Chain S&OP
This type of communications flow causes the need for highly synchronized planning and a supply chain planning calendar to time the S&OP activities. A typical supply chain calendar may look as follows:


FIGURE 2

It is important to separate sales and operations planning decisions from master scheduling decisions. Most of the time S&OP decisions are family level decisions and relate to longer term resource constraints. Master scheduling decisions are more likely to be item level decisions or decisions on individual orders. They may be tied to the availability of specific materials or shorter term capacity constraints in individual work centers. Inside the time fences, it is a good idea to keep changes to S&OP's production plans and supply plans to a minimum. It should take a conscious decision in an S&OP meeting to change these plans. Master schedule changes inside the time fences can be based on individual customer demands or manufacturing problems. Master schedulers make these decisions whenever it is possible to satisfy the customers. Sometimes this causes a trade-off of one schedule for another, so one change can actually result in several master schedule changes.

There are two key measurements on this planning that affect the supply chain. One is the master schedule summary which tests whether the sum of the master schedules for a family equals the production plan or supply plan for that family over a specific period of time. This tells you whether all the daily master scheduling decisions are causing a violation of the S&OP plans. The second measurement is master schedule stability. This tests the amount of schedule change that is being passed down the supply chain.

S&OP Meeting Topics
There are a number of sales and operations planning issues that cross the levels of the supply chain and should be communicated through this information flow. Some examples are:

  • New product launches and product changes
  • Major process changes and start-ups
  • Products with seasonal demands
  • Price changes
  • Promotions, one time deals, discounts
  • Supplier capabilities and limitations
  • Allocations of limited production items to customers
  • Inventory reduction programs
  • Plant sourcing and outsourcing decisions

In some of these cases, executive management should provide directions to the supply chain. In other cases the decisions should be worked out within the supply chain S&OP processes. Whenever decisions are made that affect multiple nodes of the supply chain, they should not be made unilaterally at one node without consideration for the others and the supply chain as a whole.

The ultimate measures of supply chain performance such as customer service and financial results to plan are dependent on the quality of the plans that are created from the top down in this S&OP flow. They also depend on everyone's execution of the plans from the bottom up. Measurements such as production plan achievement and master schedule conformance are critical to ensuring delivery to the plans at all levels. If the goals are well coordinated and everyone treats them seriously, the teamwork in the supply chain will bring excellent results to these very complex businesses.

The supply chain view adds new perspective to the way management views and manages a business. Sales and operations planning is management's tool to manage the business. The combination of these makes the decisions, information, measurements, and systems work together to achieve better performance than ever before.

BIOGRAPHY

Jack Gips is President of Jack Gips, Inc., a firm that provides high quality consulting and education to manufacturing companies.

Jack has spent 33 years in Manufacturing, as both a practitioner and a consultant. He has helped companies in many diverse industries improve their performance in manufacturing.

Jack has a B.S. and an M.B.A. degree from Case Western Reserve University. He served as Chairman of the 1977 APICS International Conference. He has served as a member of the APICS Curricula & Certification Council, Subcommittee for Production Activity Control, and the JIT Subcommittee. He is certified at the fellow level and speaks at numerous professional society meetings.

He has authored numerous articles and was Editor of the "Capacity Planning" chapter in The Production and Inventory Control Handbook.

How to Resurrect a Failing System

(Manuscript for upcoming presentation at the APICS Congress for Progress Conference in Baltimore)

Jack Gips, President
Jack Gips Inc.

There are thousands of manufacturing systems running on the world’s computers today. Since the 1970’s, a large percentage of the systems have been built on standard software purchased from a wide variety of vendors. Over these years, the technology has changed and improved dramatically and the software has become increasingly sophisticated. So, it would be logical to assume that most of these systems in place would be successful in operation. In fact, there are many more successful systems operating today than there have been at any time in the past. This is a tribute to both the quality of the software and the knowledge of what it takes to be successful that has developed through time. Unfortunately, there are also a great number of systems that run on our computers, but whose output is ignored in actual practice. This paper is dedicated to the companies trying to deal with these ineffective systems.

What determines success and failure?

There are many symptoms that can make success or failure evident.

  1. The bottom line for any system is whether the people in the organization trust it enough to make daily decisions directly from the system’s information and tools.
Are they processing a lot of data in, but using only a little of the information coming out?
Are there many non-system tools and reports in place that substitute for the formal system’s tools and reports?
Do key people have their own unique sources of information to make decisions?
Is the data accurate enough for the system to make valid recommendations?
  1. Are many of the modules that were originally purchased actually not in use?
  2. Is the system used to "track and transact" but not to "plan and execute"?
  3. Does Management use the sales and operations planning tools to make their business decisions?
  4. Are the scheduling and capacity planning tools used in daily practice?
  5. Do the users like working with the system and believe that it really helps them, or do they feel like "slaves to the system"?

How did it get this way?

A system can be a rousing success or a dismal failure right from the start.

  1. If its beginnings were a "software only" implementation, with little attention paid to the data, policies, practices, measurements, and preparation of the users, it was headed in the wrong direction from day one.
  2. If it was installed in six months under the pressures of a Y2K or similar deadline, chances are that the implementation was incomplete.
  3. If the initial focus was on software modifications to support the current way of operating, the users may have automated non-working processes. This is often the result when "software selection" is the first step taken in implementation.

Other systems start off successfully, but fade over time because the structure to maintain and sustain them was not established.

  1. If a strong training and education program is not in practice, people moving in and out of key positions may not receive the knowledge to keep the concepts intact.
  2. If there is no organization in place to protect the integrity of the concept, the users may ask for changes that violate its original intentions.
  3. If they ask for improvements and the IT organization does not respond, they may build a new set of informal systems using spreadsheets to get what they want.

If these are the symptoms, how can we determine the problems?

The best way to determine the real problems is to assess and measure the system’s performance. The standards for measurement have been well established over the years. There are many checklists available to evaluate the performance of manufacturing systems. Most of these focus on many of the same practices, measures, and goals. The best of these checklists evaluate processes like sales and operations planning, master scheduling, and purchasing through interviews, reviews of reports and on-line screens, and watching the actual practices. They also apply the results of basic measurements against their goals. These measurements should address data accuracy (like inventory accuracy), quality of planning (like master schedule stability), and quality of execution (like on-time delivery of supply orders). The measurements must be at the diagnostic level and not the bottom line measures (like inventory turnover) if you wish to identify the real problems.

The existence of these measurements is, in itself, one measure of the status of the current system. If the measurements are already collected, even if they show poor results, it is an indication that many things were done well in the initial implementation. If they do not exist, it raises a big question about the start.

The measurements lead to the improvement project.

Once you review the processes and take the measurements, the major tasks to improve the system’s performance can be defined. If inventory, bill of materials, or routing accuracy is below par, there will be a task to attain the required levels. If plans are past due, overloaded, unstable, or inconsistent at different levels of the planning structure, there will be task teams assigned to do root cause analysis, design the solutions, and implement them with the users. Schedules that are valid but not followed, output hours that do not meet capacity plans, and schedules and orders that are not delivered on time also lead to major tasks. The checklists and measurements determine the targets of these task teams and later become proof that the problems are getting resolved and the system is becoming successful.

Why does it have to be "a project"?

Why not take the measurements and just make it the users’ jobs to reach the goals as part of their daily activities? In most cases when a system goes bad, even the good parts are dragged down by the rest. It is not unusual for people to give up on a failing system. It typically takes a concerted effort to create an atmosphere of change and make it happen. Sometimes these projects turn out to be as comprehensive as the initial implementation minus the selection and implementation of the software. So we make it a project to give it the structure, importance, and emphasis that it needs to get everyone involved and accomplish the goals in a reasonable timeframe.

How is the project organized?

This is a big project that is worthy of a full project organization. A Management steering committee is needed because the project requires their attention. The steering committee’s role is to:

Set priorities
Provide the core team with clear direction
Provide resources to ensure the program is a success
Hold the core team accountable for accomplishing the implementation on time and within budget
Review core team proposals on a regular basis and judge the feasibility of the plans in relation to all other operational activities , as well as to the vision of the results
Ensure all levels of management maintain a high level of commitment and enthusiasm throughout the lifetime of the project
Gain sponsorship from all other functional groups , divisions , vendors and customers
Mentor specific teams

There is a core team or project team that is responsible for the overall activities of the project. Their role is to:

Develop and implement the project plan
Track key implementation issues through each phase of the change
Use a set of ongoing measurements to determine the effectiveness of the implementation
Identify implementation problems
Report progress to Steering Committee
Define education and training requirements
Review and present policies, procedures and performance measures for approval
Coordinate task team activities and assure consistency between teams
Participate as team members/facilitators
Assure user participation and cultural change

The task teams are managed by the project leader and the core team. Their job is to do the data gathering, root cause analysis, solution design, implementation of the solution with the users, handoff to the users, and follow-up to assure success. A typical set of task teams may include teams for:

Inventory Accuracy
Bills of Material Structure and Accuracy
Demand Management
Sales and Operations Planning
Master Scheduling/Materials Planning
Purchasing Data Accuracy
Routings/Time Standards/Lead-time Accuracy
Shop Floor Control/Capacity Planning
Product Changes/New Product Introductions
MRP II Performance Measurements
MRP II Education/Training

The initial measurements discussed above usually determine which teams are necessary for a given company.

The task teams follow a basic task structure to fulfill their roles:

  1. They are given team education that covers
ERP concepts related to the project
Their specific team charter
The current status of their part of the system based on the measurements
  1. They are given the high level project plan and are asked to develop a detailed implementation plan for their task including sub-tasks for Logic-Data-Policy-Process-Performance-People issues
  2. They design and develop the systems and process solutions for their task
  3. They gain design approval from
Core team
Steering committee
  1. They develop the supporting policies and procedures
  2. They provide education and training for the users
  3. They implement the systems, policies and procedures
  4. They implement missing performance measures and automate manual ones
  5. They handoff their task and results to the users
  6. They work with the users to validate that the new design is working and to achieve Class A results

The core team and task team are also responsible for creating an infrastructure to sustain and improve the system for the long term. This may involve:

  1. On-going performance measures and a measurement management process
Regular performance measurement meetings
Annual audits
  1. Setting up a system integrity group to review...
System changes and additions
Growth of informal systems
  1. An on-going education and training process that assures a high level of knowledge among the users into the future including...
Education and training policy
Matrix of positions and training topics that relate to them
Training documentation and measurements
Development of training materials
Qualification of instructors
Exposure to new ideas

What are the critical success factors?

The greatest obstacle to bringing a system back from the brink is the attitudes of the people in the organization. If they dislike the system because of its past performance, or if they believe it can never be made to work, it will be a great struggle to convert their thinking. The idea of resurrecting it must be sold rather than delivered by edict. If they like the informal systems they have authored to supplant the system, they must be convinced to give them up. If they take a passive "wait and see" stance, they must be convinced to join the effort as active participants. Without the support of the users there is no chance to succeed.

Another obstacle is the temptation to make this another "software" project. The whole idea of this project is to make an existing system succeed, not to buy a new system. Certainly, there may be software tasks to fill the gaps or modify some features of the system. This will be especially true if the original system has been modified drastically because of its past performance or the lack of understanding of the organization. However, the focus must not be primarily on the software. It must be on the data, policies, practices, performance measurements, and people because these are the areas of opportunity.

A final obstacle is the approach to the performance measurements themselves. Some organizations feel threatened by these measurements. This happens because measurements may have been misused in the past. If they were used to cast blame on individuals rather than to constructively improve performance of the business, there may be a fear of the same happening again. If so, Management has to convince the organization by word and deed that this is not the case.

The measurements are also the true test of commitment in the improvement process. When the new practices are in place, the scores will not necessarily be at their goals. Then it is time for the users to dig in and raise the scores through hard work and additional changes to practices. If they are not committed, they will challenge the measurements and the goals. It will be important for the steering committee, the core team, and the task teams to hold their ground and help them move to the next level. The measures are relatively standard and there are many other companies that achieve these goals. There is no reason to lower the goals, loosen the tolerances, or change the measurements. After all, the objective is not to get a certification. It is to become a better business by developing a successful system.

Successful results lead to more successful results

Once the project is over, the view of the system is quite different from the original view. The organization has learned to trust and use the information from the system. The informal replacement reports and data are gone. The users are committed to maintaining timely and accurate information in the system because they understand the importance of doing so. There is a structure in place to continue the measurements and assure that performance does not deteriorate in the future. There is usually a new attitude toward formal systems and greater ownership among the users.

In addition to the improved performance on the diagnostic measurements, the bottom line measures will have improved dramatically as well. If customer service was poor, it will have improved. If it was already good, it will still be so, but operating costs and inventory turns will have improved. If there was chaos in the organization and an inability to predict results, there will now be order and predictability.

The best indicator of the results is the large number of companies in which these improvements were accomplished by one plant or division with such remarkable results that the others have decided that it is worth their efforts to do the same. Good results that spread up and down the supply chain can have compounded benefits for any business.

The Truth about Capacity Planning and Scheduling Systems

Jack Gips
President, Jack Gips, Inc.


INTRODUCTION

The emotional debates wage on. Optimal (finite) scheduling zealots demonstrate the amazing calculation capabilities of their software and how it automatically does things that traditional scheduling modules can not. Members of the traditional sect ridicule the optimizers for their high cost, over use of precision, and constant need for recalculation to arrive at the "perfect" plan. Unfortunately, these debates are focused on the negatives and do little to help practitioners gain positive ground on this area of historical weakness.

The strengths of the traditional scheduling systems are their top down approach and their ties to management's philosophies on the relationships between customer service, revenue driving, and internal capacity utilization. Their weaknesses are tied to their lack of good visibility into the capacity relationships between work centers, their inability to simulate changes before they are made, and their lack of tools to realign schedules.

The strengths and weaknesses of many of the finite scheduling systems are in many ways the exact opposites of those of the traditional systems. Their calculation and 'drill down' capabilities are superb. Their simulation and schedules provide outstanding visibility. However, their ties to management's thinking are tenuous and their focus on detail at the lowest levels limits the value that they add to our decision processes.

Instead of bickering over the negatives and arguing over which is the best, why not combine the best of both and take a step forward in scheduling and capacity planning?
We finally have the software capabilities to create schedules and capacity plans that users can trust. Why not apply those capabilities to support the users in their decision making?

CAPACITY PLANNING FUNDAMENTALS

Our history of capacity planning is filled with examples of companies that installed software with the right intentions, but whose mind sets and informal policies were so different from the rules that guided the software that they were never free to properly utilize the tools. Agreements on the limits of capacity have usually taken a back seat to the need to service the customers, and rightfully so. Simply loading customer orders into a schedule, however, provides no guarantee of delivery. This guarantee can only come from assuring the availability of material and capacity and then producing the products on schedule. Disregarding capacity limits leads to poor customer service, higher manufacturing costs, higher inventories, and less flexibility. The assumption that capacity is so elastic that it can be stretched to satisfy almost any level of demand has gotten numerous companies into trouble. The perceived solution to these problems often is overly simplistic . . . If we just had a better set of tools; everyone would be willing to use them. So, instead of addressing the policy and rules conflicts, the endless search for the perfect logic becomes the direction. Some people even believe that the right software will force management and others to change their thinking and conform to the system's rules.

When discussing capacity planning, it is usually better to begin with fundamentals and leave the software solutions to the end. Here are some basic issues that determine the effective use of the capacity planning tools. How well the software helps us deal with these issues determines its success.

Is there a plan? Do we make every effort to validate the plan? Is it based on a complete and accurate statement of customer demand? Does it consider the availability of materials and capacities? Is it doable? Do we make every effort to achieve the plan? Do we measure performance in meeting the capacity plans, material plans, and customer promises? Is our actual performance against the plan taken into consideration when we create tomorrow's plan, thereby validating its integrity?

When planning capacity, is the objective to meet the plans or change the plans quickly and conveniently? There has been a great deal of attention paid to creating systems that automatically and instantaneously change plans. If the same efforts were made to measure and manage excellence in meeting the plans, the results would undoubtedly be more beneficial.

When it is necessary to change plans, is capacity considered before the changes are approved and promised to the customers? Is there an implicit assumption that if material is available, capacity will be made available somehow? Is each decision made on it own merits or is the overall impact on capacity reviewed?

Do people make the decisions to change or is it done automatically by the computer? In most companies, compromises must be made between maintaining perfectly precise schedules and maintaining schedule stability by avoiding unnecessary changes.

What is the value of maintaining precise schedules when they are based on imprecise data and assumptions? Lead-times, time standards, queues, demonstrated and finite capacity numbers, loss factors, productivity ratios, and routing/work center relationships are all based on estimates, averages, and historical trends. They are all used to plan future schedules and capacity plans. They are all subject to variations, changes in performance levels, and choices made by manufacturing people. Should the schedules be changed every time there is a variation? Or, should these schedules be targets for manufacturing and changed only when the tolerances set around them are exceeded? What is the value of a plan that continuously changes when it is missed? Should it result in a new plan or actions to meet the original one?

If the original plans are set based on one set of guidelines (i.e., demand statements and customer service goals), but intentionally violated based on a second set of guidelines (manufacturing objectives to optimize productivity), have you set yourself up to fail? Why not determine the real guidelines and priorities before planning and then stick closely to them during execution?

Does your business try to accommodate last minute customer orders? If so, do you reserve capacity and material for these so that you will not have to violate capacity plans or displace other customers? Is the compromise between reserving capacity, safety stocking inventories, and providing quick response to the customers well understood and backed by sound policies?

Is there agreement that schedules and capacity plans that are overloaded, front loaded, and scheduled past due are not valid? Will actions be taken to avoid these conditions and to fix them if they occur? Is there a structured approach to these actions? Are there rules that define what actions to take to adjust capacity levels and who makes them? Is it clear when to change the capacity and when to change the plans?

Is the system's data accurate and trustworthy? Is there a good definition of the capacity available in each work center? Are the time standards complete and set consistently? Is shop reporting timely and accurate?

Are manufacturing's issues factored into the plan? If you overlap operations, perform simultaneous operations, campaign batches, sequence orders a certain way, run items with similar setups together, etc., does the scheduling account for these and create initial plans that do not have to be violated and realigned once they reach manufacturing?

Are there good performance measurements on the delivery of hours of work into the work centers and output of hours from the work centers compared to the plans? Performance in capacity can only be improved if there are measurements in place to identify problems and fix them. If actions are taken to adjust capacities, are there measurements that review whether those actions provided the predicted results? If hours are delivered on time, then component orders can be delivered on time, and products can be delivered on time.

Is there a structured process for planning capacities and reviewing the performance measurements? Are there regular meetings to discuss work center capacities and loads? Is there a formal way to evaluate schedule changes and the actions necessary to meet them?

It is important to recognize that our systems built with sound logic have never been able to override management's decisions even when they seemed irrational. It is therefore critical to deal with the philosophy issues above before determining the approach to capacity planning and the tools that should be implemented. Many companies have proven that buying the tools to force the philosophy on management results in unused tools and wasted time and dollars.

TRADITIONAL SYSTEMS

The capacity planning tools that have been offered as part of MRP II systems over the past thirty years are Resource Requirements Planning, Capacity Requirements Planning, and Input/ Output Reporting. Resource Requirements Planning is linked with Sales and Operations Planning. It is Management's tool to assure there is enough capacity available to support their proposed production plans. It ties capacity to product families for critical work centers. Its purpose is to identify the actions necessary to get load and capacity reasonably in balance with each other and prevent "infinite" loading. Once capacity is in the "ballpark", the production plans drive the master schedules and material requirement plans.

Capacity Requirements Planning is a more detailed planning tool. It is used to validate the manufacturing schedules. It considers specific items' schedules, nets out existing inventories and work in process already completed, and accounts for lead-time offsets. It employs assumptions based on history and current measurements for lead-times, time standards, productivity factors, queues, etc. It matches capacity requirements with planned capacity availability, usually in graphical form, to highlight time periods of over or underloading that require smoothing or actions to raise or lower capacity. It provides information about the detailed orders that create the capacity requirements in specific periods for realignment.

Input/Output Reporting measures the flow of capacity requirements into a work center and the flow of output from the work center. These are compared to the plans for input and output to separate capacity problems from other problems that cause missed schedules. Proper use of Input/Output Reporting leads to quick reactions to capacity problems to avoid late deliveries. It also measures whether actions taken achieve their expected results.

Basic Concepts

Any approach to capacity planning has to be based on a general philosophy supported by consistent concepts. Some of the basic concepts behind the traditional approach to capacity planning are:

  • The planning has to be driven from the top. Management's high level sales and operations plans must assure the availability of resources to give manufacturing a chance to succeed. Resource Requirements Planning tools give management the information they need to assure resources are in the "ballpark".
  • The company's objective is to satisfy its customers' demands as often as possible. If customer demands exceed available capacity, the first course of action is to find ways to expand capacity. If these demands cannot fit within the limits of the available capacity, or if adding capacity is impractical, the customer demands will be prioritized and realigned to fit.
  • Plan the master schedules to support the forecasts and customer demands. Then make the component schedules support the master schedules.
  • Schedule to customer needs first, and then adjust the schedules to optimize manufacturing.
  • Schedules are targets that must be met within a tolerance. It is not necessary to react every time a schedule is not precisely met. It is desirable to stabilize the schedules and react only when tolerances around the targets are exceeded.
  • Create schedules using standards. Measure actual performance compared to these standards. React to variances that exceed the tolerances. The key performance measurements to monitor are:
    • Input/Output vs. plan
    • Actual queues vs. planned queues
    • Actual delivery vs. scheduled dates
  • Allow the computer to schedule orders outside the time fences and lead-times. Planners must manage the schedules inside these lead-times to assure validity and stability. It is not necessary to smooth the capacity plans outside these lead-times. It is only necessary to be in the "ballpark".

Weaknesses

The major weaknesses of the traditional approach are:

  • Realignment of individual schedules to maintain schedule validity and smooth short-term capacity plans is usually a manual operation. In companies with complex scheduling relationships or many orders, this can become overwhelming.
  • When the plan is to meet the due dates by expediting and re-prioritizing individual operations, there is a need to compress queues to maintain schedule validity. Only a few of the traditional systems provide automated help in queue compression.
  • The logic to optimize manufacturing efficiency and combine similar setups is missing from most traditional systems. They require complicated modifications to enable sequencing.
  • Although most have developed logic to plan overlapping and parallel operations, the logic to plan campaigns is another modification that is generally not available.
  • There is little automated assistance to do capacity smoothing even for short-term schedules.
  • There are limitations in planning for multiple constraints such as equipment, labor, and tooling simultaneously.
  • When manual changes are proposed to deal with capacity problems in one work center, there is little capability to see the impact of these changes on other related work centers until after the changes are made.
  • Traditional systems do not prevent overloading in individual time periods. Resource planning prevents overloading in total over extended periods. Although this approach does not allow "infinite" scheduling, it does create "lumpy" schedules that must be smoothed.

OPTIMAL (FINITE) SCHEDULERS

These are, in many ways, the exact opposites to the traditional methods of scheduling and planning capacity. Their logic is designed to eliminate schedule delinquency and prevent overloading. The earliest versions were strictly finite schedulers and were automatically calculated with little human intervention once their rules were set. They often failed because they had to be shut off to override their decisions.

Today's new technologies have paved the way for the development of "optimal" schedulers. These systems can use finite scheduling logic, capacity requirements planning logic, or both applied in different time frames.

They allow human intervention in the form of manual overrides to individual orders, the ability to freeze schedules in specified parts of the horizon, or changes to the scheme of priorities.

They are very flexible in their rules and constraints. They can simulate results before changes are made. They provide graphical views of the schedules and capacity plans, display the relationships between orders and loads and between work centers. "Drag and drop" graphical capabilities make their schedules easy to manipulate.

Many of these have also been designed to handle the sequencing, overlapping operations, parallel operations, campaigning, etc., that have been missing from many of the earlier systems.

Basic Concepts

Despite all the desirable features described above, optimal schedulers will fail to satisfy their users if they are applied without a philosophy supported by consistent concepts. Some of these are listed below:

  • "Finite" scheduling loads manufacturing orders into the work centers in a pre-determined priority sequence until the load hours in any time period reach a "finite" level of capacity. Once this level is reached, additional orders must be loaded into the next time period with available capacity. It "forward schedules" from the current date until all orders are scheduled. This approach eliminates past due schedules and prevents overloading work centers in any time periods.
  • "Optimal" scheduling may start with a finite method, but allows a planner to override the decisions of the finite scheduler when necessary. It allows adjustments to the "finite" capacities, the priority scheme for loading orders, and even the time periods and work centers in which the finite logic is applied.
  • The focus is on capacity and the optimization of manufacturing. Deliveries are promised only when there are enough materials, lead-times and capacities available to do so.
  • Many of the assumptions and averages used in the traditional methods are replaced by calculated numbers based on current schedules. Lead-times and queues, for example, are calculated based on the predicted loads and priorities each order will face as it moves through the plant.
  • More emphasis is placed on manufacturing's considerations like sequencing. The objective is to create a set of schedules that manufacturing really will follow.
  • If the capacity available in a work center changes, it is important to realign the orders to maintain the validity of their dates and to utilize capacity well.
  • Schedule stability is secondary in importance to schedule accuracy. Frequent realignment is key to maintaining this accuracy.
  • The computer should do as much of the scheduling as possible. A great amount of manual intervention significantly reduces the value of the tools.

Weaknesses

The major weaknesses of the optimal schedulers are:

  • In many situations, capacity is not "finite". It is extremely flexible. Management is often more inclined to stretch capacity than to risk disappointing a customer with a promise date later than the requested date. Under these conditions, it is difficult to treat precisely calculated schedules as real objectives.
  • It is difficult to determine the real priority schemes to apply to the orders. In many companies, there are a number of people who set and override these priorities on a case-by-case basis.
  • Like the traditional methods, these systems rely on assumptions such as time standards, productivity factors, available capacities, etc. Even the calculations that replace the lead-time and queue assumptions are based on these factors.
  • These systems calculate their plans very precisely. If their data is not accurate or if the plans are not followed, they re-calculate another set of precise plans that are different. Plans that change every day are not really plans at all. This approach may be useful for realigning very short-term schedules, but it is questionable when applied longer term.
  • These systems schedule using calculated queue times based on orders predicted to be in the queues. Unreliabilities in manufacturing, such as equipment downtime or absenteeism, cannot be absorbed when queues are planned this way with no tolerances. The system reacts by rescheduling, making schedules unstable and changing delivery dates.
  • The ability to manually intervene is both an advantage and a weakness. If there is too much intervention, these tools cannot serve their purpose. This makes users carry the burden of scheduling at a very detailed level. It violates the basic concepts. Some companies have even converted their "finite" schedulers into "infinite" schedulers by overriding their finite capacities with larger numbers to accommodate more customers.
  • The rules and data that must be maintained in the "optimal" schedulers can easily become too complex and confusing to the users. Once this happens, they are likely to set aside these "sophisticated" tools for ones they can understand that require less effort.

CONCLUSION

The dilemma facing most users is how to take advantage of the capabilities of the tools and technologies available to us. Installing capacity planning systems is not the goal. Using them to make better decisions is. We believe it has to start with an internal discussion about the company's philosophy related to capacities and customer service. There must be agreement on the rules and policies from Management down through the manufacturing people who assign orders and people to work centers. Management, instead of being the primary violators of the capacity plans, must become the leaders and enforcers of the new philosophy.

There must also be agreement on the data to be used and responsibilities for keeping them timely and accurate. Responsibilities for setting plans, overriding them, and executing them must be clarified. Performance measurements must be generated to assure conformance to these agreements.

Once all of these agreements are made, then it is time to determine the best tools to fit the company's needs. Between the traditional and optimal methods, there are certainly enough good tools to support these needs today. A combination of the two applied to different products or different periods in the planning horizon may certainly be appropriate. The key is to first understand and adopt the philosophy, and then apply only those tools that best support the philosophy.