Strategic Capacity Planning

by Merlin Hernandez

Capacity is the volume of output a production system can achieve over a specific period, and is the relationship between input and output e.g. how many labor hours it takes to produce an amount of item units like cars or dolls within a system (labor capacity).  It is measured as the aggregate capacity of all areas of production necessary for meeting productivity needs.  This includes financial and human resources. The objective of capacity planning is to determine an optimum level that best supports the company’s competitive strategy.

Capacity planning is concerned with lean and value-creating manufacturing processes. This involves accurate forecasting, a continuous flow for reduced cycle times and costs, collaborative customer and supplier relationships, line balancing for efficient resource allocation, and stock control for JIT production and delivery. Inadequate capacity can lose customers through failed or late delivery which would allow competitor entry to capture some of the company’s market share. Excessive capacity can result in larger inventories, price reductions to stimulate demand that would erode profit margins, and the costs of an underutilized workforce.

Contemporary competitive challenges for smaller manufacturers dictate the need to develop operational strategies to transform manufacturing processes from one of building inventory to JIT production in ways that give greater capacity utilization at reduced costs with minimal need for safety stock. This may require a shift to mass customization techniques that would provide a stable process for cost efficiencies, but with built-in flexibility for value creation. Mass customization means that a basic product can later be customized with several optional features that would be developed in collaboration with the client base. This enhances the customer relationship, and is a value creating strategy that provides a desired customized product, for faster customer re-supply that is more responsive to market pull signals.

Planning would then integrate the various stakeholders into the value chain – consumer, retailer, supplier, and manufacturer. And Production will be a feature of a synchronous manufacturing process that emphasizes total system performance not on localized measures such as labor or machine utilization. In terms of capacity planning, the combination of JIT production and mass customization would allow for larger lot sizes of the basic product to create the continuous flow needed for lean manufacturing. This will also facilitate production at near capacity, with a narrow capacity cushion, for optimum utilization of facilities, labor, raw material, and operational expenses.

Service Industry

While capacity planning for both manufacturing and service facilities has many similarities, the service industry presents some important differences. In a manufacturing context, the measure is the amount of items produced over a given period. In a service setting, the capacity measure might be the number of customers processed by the system within a certain time-frame. Manufacturing may be more concerned with batch quantities, line balancing, and stock control. These areas are of reduced importance to service delivery which is more involved with availability time, location proximity and access, and volatility of demand – different needs and expectations.

Service thus demands wide variability to process times and capacity needs that might be based on time of day, seasonal demand, weather conditions etc.  There is a shift from more internally- focused, product-based efficiency to a strategic need to derive efficiencies from more external variables like customer needs and the direct and immediate influence of environmental and seasonal factors (weather, holidays, disasters). There is then a day-to-day balance between capacity utilization rate and service quality, and planning often becomes more a feature of contingency.

Even short term capacity planning in manufacturing offers at least weekly or monthly process adjustments and may produce at near capacity with a small capacity cushion. Service industries require a much wider capacity cushion to accommodate wide demand fluctuations and individual service needs. A service business needs to factor optimum operating points e.g. lunch hour at a restaurant, pay days at retail stores, or high pollen days at an urgent care facility.

A manufacturing process may seek to maintain system balance to influence value creation. The service industry works at optimizing quality delivery to maximize customer satisfaction. These are not mutually exclusive goals. But accurate demand forecasts and meticulous calculation of equipment and labor requirements are necessary for effective capacity planning.  It should be noted, however, that strategic capacity planning needs to be resource-based. This will plot the strengths and weaknesses of financial, human resource, knowledge base, information and communication systems, as well as other assets against strategic goals. The point is to ensure  alignment of goals and resources so that the business can support sustained competitive advantage.

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Supply Chain Management

 

 by Merlin Hernandez

 

With economic upheavals predicted to continue through the next five years, and erratic consumer spending patterns, businesses are facing major challenges – fast- changing environmental conditions, heightened competition, depressed revenues, and the struggle to stay in business. Manufacturers need to pay attention to lean supply chain efficiencies through lean manufacturing strategies for continuous process improvement, elimination of waste, reduced costs, better prices, and a focus on customer value. A well-designed supply chain also leads to higher productivity and greater capacities.

Strong supply chain planning will depend on the ability to have demand-driven sourcing and procurement relationships that are collaborative. Technology like Supplier Relationship Management (SRM) software and an RFID inventory management system would allow more accurate forecasting while supplier, customer, marketing and manufacturing data will be more accessible throughout the system. It connects the company’s B2B needs directly to suppliers for the kind of demand visibility that facilitates better planning and delivery throughout the system.

Providing sales forecasts to suppliers helps to ensure material availability. With suppliers in the loop, there is an opportunity to implement a Just in Time inventory control system.  The system sets up a process in which a pull from finished goods inventory will initiate similar actions upstream in the manufacturing and ordering processes.  Suppliers can also be asked to carry an established safety stock of inventory to avoid stock outs. 

An Enterprise Resource Planning (ERP) system like SAP will integrate forecast information with the bill of materials (BOM) for each product to generate a material requirements plan (MRP) for an effective business-to-business interface that can also send purchase orders directly to supplier electronically. Inventory receipts will be more readily integrated into the system in real-time, through application of RFID technology.  Customer orders can flow through the system consuming inventory on input. The SRM tools can also accommodate confirmation of product shipment for immediate revenue recognition for financial accounting purposes.

There is a strong correlation between supply chain efficiencies and financial performance. Performance is based on inventory turnover (time, sales), COGs and ROI. This makes lower inventory with JIT delivery and fast turnover as well as cost efficiencies and profitability the business of supply chain management. Effective Supply Chain Management is the tool that leverages the supply chain to competitive advantage through heightened responsiveness of the company’s supply networks to environmental and market changes. Along with on time deliveries, low costs, superior product, and strong customer service that ERP/ SRM technology brings, managing the customer relationship is considerably easier. The key is to apply an integrated, end-to-end total systems approach to managing the entire flow of information, materials, processes, and services.

Building profitability into an enterprise begins from good forecasting and partnership with customers and suppliers, through increased productivity, lower costs, and enhanced inventory management, to total customer service for value creation strategies throughout the entire supply chain.

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Controlling Manufacturing Processes

 

by Merlin Hernandez     

         As small businesses seek to become more effective, they might take a page from the playbook of larger organizations and use business statistics as a vital key to competitive manufacturing processes. Process controls can influence cost savings, product quality, and customer satisfaction by establishing upper and lower limits to defects so that production and delivery schedules work as anticipated.  A Statistical Process Control (SPC) system uses process data to describe optimal manufacturing process to execute a prototype within the context of its environment – the goal is to identify defect points and levels in order to intervene before tolerance violators occur.

The system uses random sampling to detect whether process output is within the pre-selected range for quality. It is meant to optimize the entire process and allow for better control and documentation of processes, and faster interventions. Identifying the relationship between control needs and process capability would invite process improvement to maintain small tolerances and mean variations. Using control charts to calculate the overall fraction defective will offer better cost and revenue projections. Process flow and resource allocation will be more efficient and also allow savings. Standards and specifications will drive better processes for improved quality to have greater process integration, reduce margins of error, and increase customer satisfaction. These can positively impact brand equity, market share objectives, market expansion, and overall profitability.

SPC has been gaining attention in the last few years because of the increasing popularity of more comprehensive quality systems like ISO, QS9000, MSA, and Six Sigma. Manufacturers and service providers in both small and large enterprises are under pressure to improve quality and customer satisfaction, reduce response times, increase productivity, and reduce costs in order to remain competitive. Two major impediments to bringing quality improvement to many companies are cost and time. In terms of cost effectiveness and implementation time, relatively simple techniques like SPC and EPC can achieve great quality improvement and system cost reduction at a fraction of the cost of more comprehensive systems like Six Sigma or ISO. Lower cost SPC systems have proven to be effective in process improvement and can bring adequate data analysis for managerial/technical corrective actions where financial resources are limited. 

While the Six Sigma system is expensive to implement, a cost-benefit analysis might reveal that these costs, when amortized across the long term benefits of the strategies, can be offset by the sustained level of savings. Six Sigma efficiencies will smooth process problems like bottlenecks, starving, and blocking to eliminate production delays and reduce throughput times thus saving on costs and improve quality. Statistical analysis will identify areas of system vulnerability to defects in order to minimize waste and facilitate savings. But while smaller companies need such a system, they may not have the resources to afford the initial investment and might consider the SPC route to inject better process control. 

The complexity of the Six Sigma system and the method for gathering and analyzing data makes the steps to DMAIC time consuming and tedious, and training is also time-consuming as the system requires an organizational culture that supports implementation which may translate into major structural change. Six Sigma, however, has proven beneficial to large manufacturers like Motorola and Lockheed Martin resulting in across the board savings, streamlined operations, and improved quality. But implementation tended to begin in smaller pockets around these large organizations before incorporation throughout the entire organization. It is a strategy that requires deep pockets and a long term vision where the time to implementation is an asset to the process of organizational change. Many smaller organizations have found it difficult to create employee buy-in as early implementation adjustments can be disorienting and dislocating and bring questions as to the system’s value.

This is compounded by the fact that Six Sigma is more specifically grounded in objective analysis, and application to the unique characteristics of smaller businesses may prove difficult as the knowledge base and experience of employees are not factored. Cost savings are also difficult to determine in the short term and there are questions about the high cost of implementation. The method can also inhibit the creative process as statistical systems and standardization favor quantitative approaches to problem-solving as opposed to the more qualitative requirements of the creative process or a new small business still trying to map its way.

Meanwhile, companies like Toyota, John Deere and Raytheon have been using the Japanese Shingo system which places emphasis on integrating only value-added activities into the production process as they pursue lean manufacturing.  SQC methods like Six Sigma are not structured to prevent defects or eliminate them, they tell us the probability of a defect occurring. The Shingo system seeks to prevent defects from emerging at the end of a process by embedding controls within the process through feedback and corrective action immediately following detection of an error. Feedback is provided through different levels of inspections that facilitate detection. Source Inspections identify errors that can cause defects before the defects occur while Successive and Self-Checks are done for defects themselves. The supporting practice of Poka Yoke requires the stopping of a process as soon as a defect occurs, identifying the source of the defect, and taking proactive measures to prevent recurrence. Smaller  operations may find it advantageous to adopt this method.

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