KEY ISSUES in Advanced Operations Management Timo Seppälä
Production as a value creation process Operations system forms the transformation process between the inputs and the outputs of a manufacturing company. Strategy Execution Value creation Operations system Performance Commodity Quality Precision Variety Novelty Efficiency Productivity Quality Speed Flexibility Variety Customization 2
Those were the days Digital Manufacturing seem to change everything?
Fit and the contingency view of operations There is no typical industrial firm Different companies have different strengths and weaknesses and may choose to compete in different ways also in the same industry Different ways of configuring, equipping and managing operations result in different operating characteristics Rather than adopting a one best way, the task is to seek congruence ( fit ) between the firm s approach to competition and the way operations is designed, organized and managed Source: Hayes et. al. 2005 4
Three tasks of Production Planning and Control (Design) Planning Scheduling Execution These tasks are generic to all production environments, but application is specific to the particular company conditions. 5
Product Life Cycle Management Capabilities Marketing Product Development Process Planning Concept Development System Level Design Detail Design Testing & Refinement Production Ramp-up Delivery Service
Bill of Everything (+Bill of Data) Product Mechanical BOM Formula Specification Production Process Production Line Part Syringe Ingredient NaOH Operation BULK Equipment Kärl 60L Part Needle Ingredient BODE Process Step NaOH Equipment Blender Part Cyclinder Ingredient HA Process Step Stabilize Equipment Mixer Operation Xxx Process Step yyy Mechanical BOM Formula BOM Production Process Production Line 7
Enterprise resource planning (ERP) Production Planning & Control System Resource planning Sales & Oper. planning Demand management Master production scheduling Front end : The planning task Detailed capacity planning Detailed material planning Material and capacity plans Engine : The scheduling task Shop-floor systems Supplier systems Back end : The execution task 8
Scope of Enterprise Resource Planning systems Production and logistics Production Planning and Control Front end Engine Back end Enterprise planning models Enterprise performance measures Data warehouses Report generation Human resource management Finance Sales and marketing Transaction processing
Demand management Determining, estimating and influencing demand from customers Starting point for balancing demand and supply Delivery time quotations and available-topromise (MTO, ATO) Demand forecasting for inventory levels of finished goods (MTS) Independent vs dependent demand Managing new product introductions and phasing out of old products 10
Independent and dependent demand When a customer decides to buy our product, that decision is independent of the actions of the company. Independent demand is defined as the demands of customers, while production decisions remain under company s control. If the company has plans to build e.g. valves at a forecasted rate during the year, then the demand for parts e.g. castings depends on that plan. Dependent demand can be derived from independent demand, Bill-Of-Materials (BOM) and plans 11
Categories of production environments Make-to-stock, MTS Serving customers from the finished goods inventories Assemble-to-order, ATO Assembling modules / options according to a customer order Make-to-order, MTO Making products from raw materials, parts and components to a customer order Engineer-to-order, ETO Working with the customer to design the product and then make it from purchased materials, parts and components
Customer Order Decoupling point or Order Penetration Point (OPP) Order penetration point is the point in the company material flow, where an item becomes earmarked to a specific, known customer. OPP is also the last point where unallocated inventory is held last point of forecasting. Upstream from OPP push control is used, downstream from OPP control is based on customer orders (pull control). Trade-off: upstream OPP means less risk (for the manufacturer), downstream OPP means shorter delivery times. 13
OPP and different production environments Production environment Engineerto-order (ETO) Make-toorder (MTO) Assembleto-order (ATO) Make-tostock (MTS) OPP location Suppliers IQI* Raw materials, suppliers Work-inprocess (WIP) parts, components and modules Finished goods Fixed *IQI = Internal Quotation Inquiry 14
Forecast and customer-order-driven parts of the production process Order-penetration point (OPP) Raw materials Forecast-driven Production time line Customer-driven End customer
Capacity Demand management and master production scheduling: orders consume the forecast Forecast orders MTS ATO MTO Current date Time into the future -> 16
Sales & operations planning top management s handle on the business 2500000 2000000 1500000 1000000 500000 0 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 SOP is needed to match manufacturing and distribution capacity to nonlinear demand across quarters and months Process of determining aggregate levels of production Managerial objective is to develop an overall business plan integrating various functional planning efforts: marketing, finance, operations, human resource planning 17
Sales and Operations Planning (S&OP) process in Unilever Nordic Sales: We might sell 200 units Finance: We have 300 units in the budget Marketing Finance Demand forecasting Purchasing One Plan Product management Production: We ll make 150 units Marketing: the campaign target is to sell 400 units Sales Production Customer service Source figure: Red Pepper. Modified E&Y 1999
Value of SOP The SOP process provides visibility of the interactions between sales, marketing, production, and finance Critical trade-off decisions are documented Manufacturing performance is controlled in a clear fashion This leads to better integration among functional areas and better response to the marketplace
SOP process key activities Update the sales forecast Review the impact of operations plan changes can current capacity and materials support the changes? Identify alternatives where problems exist Formulate recommendations for top management Communicate the information to top management
Master Production Schedule (MPS) Master Production Schedule answers, for an individual end item, e.g. on a weekly level, to the following questions: What product will be produced? How many should be completed? When these products are completed? 21
Master Production Schedule MPS is a planned production schedule MPS is stated in items (end item, sub-items and options) in order to figure out the materials and capacity needs Used as a vehicle for communication with sales sales can make accurate order promising against MPS MPS is updated as time goes on, this is called rolling through time 22
Time-Phased Record A means of gathering and displaying critical scheduling information (forecast, available stock, production schedule) Period On hand 1 2 3 4 5 Forecast 5 5 8 10 15 Projected available balance 20 25 30 32 32 27 Master production schedule 10 10 10 10 10
Detailed material planning approaches MPS approach MTO ATO MTS Detailed material planning approach Timephased Ratebased Shop-floor system approach MRP based JIT (flow) based 24
Detailed material planning options Time-phased material planning Production process usually based on batch production Typically using MRP approaches Rate-based material planning Establishing rates of production for each part in the production process Repetitive manufacturing, assembly lines, JIT, TOC 25
Shop-floor system options MRP based systems Activities triggered by processes authorizing production quantities, routings, due dates continually recalculated through MRP planning Tracking of shop orders is done throughout the production JIT-based systems Produce in response to downstream use of the item, be it work center to work center or for the overall demand of the end item Tracking of individual orders is not necessary in the process Relatively constant demands are required for the JIT-based approach 26
Material Requirements Planning (MRP) Material Requirements Planning (MRP) has the managerial objective of providing the right part at the right time to meet the schedules for completed products MRP provides a formal plan for each part number raw materials, components, and finished products
Basic MRP Record Requirements from all sources On hand Period 1 2 3 4 5 Gross requirements 10 40 10 Scheduled receipts 50 A previously released order due in period 1 Projected available balance 4 54 44 44 4 44 Planned order releases 50 Lead time = 1 period Lot size = 50 A unreleased order due in period 5
Theory of Constraints (TOC) Central tenant: An hour lost in a bottleneck resource is an hour lost of the entire factory s output, while an hour lost in a non-bottleneck resource is an illusion in other words, has no real cost So, you first need to establish your bottleneck resources (by using a rough-cut method), then make sure that they re never out of work 29
Theory of Constraints Production flow System capacity Bottleneck Drum-buffer-rope control Scheduling point = the Drum Buffer Bottleneck Pull = the Rope Excess capacity
The hidden factory Over time, the relative cost of the hidden factory has been growing compared to the first factory The hidden factory processes transactions Logistical transactions Balancing transactions Quality transactions Change transactions Beware the excess complexity created by letting the hidden factory grow too large
Two main managerial problems related to capacity planning and management 1. Matching capacity with the plans Either to provide sufficient capacity to execute the plans or to adjust plans to match capacity constraints 2. Trade-off between time and capacity utilization Fast throughput typically requires underutilization of some capacity in the system High priority scheduling results in fast throughput for the high priority jobs but with the expense of longer throughput times for lower priority jobs and underutilization of some capacity 32
Different capacity planning options 1 4 7 10 13 16 19 22 25 28 31 Week number 34 37 Capacity to match maximum demand 40 43 46 49 52 1 4 7 10 13 16 19 22 25 28 31 Week number 34 Capacity to match average demand 37 40 43 46 49 52 1 4 7 10 13 16 19 22 25 28 31 Week number Capacity is adjusted to demand 34 37 40 43 46 49 52 Outsource Capacity 1 4 7 10 13 16 19 22 25 28 31 Week number 34 37 40 43 46 49 52 1 4 7 10 13 16 19 22 25 28 31 Week number 34 37 40 43 46 49 52 Outsourcing of peaks OR Outsourcing the base load Complimentary products Capacity 22.9.2011 33
Infinite capacity planning Capacity e.g. hours 90 80 70 60 50 40 30 20 10 0 26-Feb 2-Mar 4-Mar 6-Mar Periodic No capacity constraints Does not consider any adjustment to plans because of planned capacity utilization 10-Mar 12-Mar Time (day or week) Other Order book Open orders Capacity 16-Mar 18-Mar 20-Mar 34
Finite scheduling/loading Schedules work through work centers only to the extent that there is capacity available to do so Capacity constraints will define order completion times 35
Capacity planning and management in the MPC System Long range Resource planning Rough-cut capacity planning Sales & Oper. planning Master production scheduling Demand management Medium range Capacity requirement planning Detailed material planning Short range Finite loading Input/output analysis Shop-floor and purchasing systems 36
Hierarchy of capacity planning decisions 1. Resource planning matching with the sales and operations planning (SOP) 2. Rough-cut capacity planning matching with the master production scheduling (MPS) 3. Capacity requirements planning (CRP) matching with the detailed material planning (MRP) 4. Finite loading matching with the detailed material planning and shop floor scheduling 5. Evaluation of particular capacity plans using input / output analysis Long range Medium range Short range Decision-making among these levels is hierarchical: long-range planning sets constraints on medium-range planning, which in turn constrains detailed scheduling and execution on the shop floor. 37
Production environments and capacity planning techniques Rate-based planning Time-phased planning Stable material flows Simple product structures Simple accounting systems Recognizes product mix changes Different capacity requirements for different products Recognizes product mix changes Different lead-times for different products Time-phased MRP records used for detailed materials planning Capacity planning using overall factors (CPOF) Capacity bills Resource profiles Capacity requirements planning (CRP) Increasing: requirements for input data volume and quality computational capability and capacity difficulties in making changes to the plans
Capacity monitoring with input/output control Planned inputs are determined by the capacity planning process Planned outputs depend upon the nature of the work center Capacity-constrained planned output is determined by the processing rate of the work center Non-capacity-constrained planned outputs match planned inputs Differences between plan and actual must be addressed (management by exception)
Summarizing principles Production systems need to be analysed from the perspective of the value that they create The logic of the production process design and the PPC system design need to match with the market and business requirements but it also needs to accept the restictions set by the existing systems Production process improvement is never ending therefor there will always be work available for those who are interested in complex analytical and practical problems