From the Diary of a Supply Chain consultant
by Ian Pilkington
One of the challenges some organisations face is not being able to fully understand how capacity planning works and the ability to know if they will be able to meet demand. This puts companies in a severe disadvantage as this lack of awareness also prevents them to improve their processes efficiency.
Companies often create plans based on infinite capacity or target capacity models instead of actual or demonstrated capacity of their processes which invariably will make any production plan fail.
The results of poor capacity planning can be very costly as you end up with overloading your key processes, creating bottle necks, a conflict on scheduling priorities and extra or no resources.
The most common question I get with clients during the implementation of S&OP is how do I determine my capacity based on the demand plan? In this blog I am going to give 4 tips on how to demystify capacity planning.
1) It’s all about the hours
Usually when the demand plan is agreed at the S&OP Demand Review, information provided will be in units / volume and value (£’s) by part number. Unfortunately your processes are not broken up in value but in time, so for that reason in order to “constrain” your demand, data needs to be translated in to demand hours.
There are several ways to achieve this, and the first time you do it will take time and effort, however the objective is to take the units you know from each part number and your known cycle times to come up with a measure of time. For example, demand for product A1 is 300 units and your total cycle time for each process step that make that specific part number is 30 minutes, therefore your total demand hours for product A1 is 150 hours on that specific time-frame.
By doing this you will be able to get a better month to month view of how your demand translate in to operational hours. To achieve this the data must be right, e.g. process routings for each production part number with cycle times, and changeover times thereby creating an accurate view of standard hours. For new products or future forecasted parts, the standard hours should be accurately estimated. If we don’t have this information accurately, we cannot say what we can or cannot do.
2) Know the difference between Target vs. Actual Capacity
Stating theoretical or planned capacity, has a place, as it gives organisations a target to work towards. However S&OP asks you to define if you can meet the agreed demand plan. You can only answer this question with demonstrated or actual capacity.
There are two elements of capacity you need to account for, labour capacity, number of people, working time (shift patterns, overtime levels, times for breaks/meetings etc), and the actual efficiency of your labour. For machine capacity, information required to calculate what capacity is available, number of machines, planned running time, machine efficiency or OEE (Overall equipment effectiveness), and number of shifts.
When you put this together by month by process, you have the foundational level of labour and machine capacity. Adding demand load in hours, by process, enables you to have the load v capacity model for your operation.
Projecting this out into the future, as part of the S&OP principles, you can see if you don’t have enough capacity, or you may have too much and are therefore carrying too much cost. All of my clients really appreciate the ability to see into the future and what they can or can’t do. The model enables decisions to be made at the right time, in advance, and enable good preparation and planning.
3) Take a holistic view of your demand vs. capacity
When creating a demand v capacity model, it tells you many things as a business. I have found with my clients that it opens the eyes of the Sales & Commercials teams to the impact they have on their supply chain.
S&OP is a collaborative process, when people understand the information that is shared then discovery and ideas happen. One of my clients was discussing with a prospective customer how his business has incredible capacity and very short lead times. By participating in the supply review He was shocked to learn that the machines were overloaded and lead-times are actually 3x times as long.
For Operational Leaders, it should be the foundation of your improvement strategy, to improve supply chain performance, at the right production area at the right times. For Purchasing Leaders, it allows them to see (if you pass down the demand plan to the supply base) where suppliers have capacity or not. Giving suppliers a long-term demand forecast allows them to significantly reduce purchase price.
For Financial Leaders & the Executive Team it allows them to see where costs are too high, inventory is not optimised and where future investments in people and equipment need to be made and when. S&OP takes away the urgency of the CAPEX ( Capital expenditure) process as you will have a longer term view of what is needed and this will allow the business to make planned decisions.
4) Continuously improve your process
When you start developing your capacity models, you may not have data on actual capacity to start with. This will be related to your actual process efficiencies and what they actually deliver vs. what you target them to be. Start with what you know, use target capacity to calculate your available capacity and make this an assumption, flag it as a concern and create an action plan to drive getting the information you need. As the process matures and so your sources of information, you will be able to make better decisions for your business.
One suggestion I give my clients to include continuous improvement as an agenda item for every review. It is important that every step is challenged by the team and to find ways to do things better. For example, are there better ways of getting information and using it for decision making, consider who attends each review to enable better collaboration, and are decisions being made at the Executive Review. When the process reaches a good maturity level, continuous improvement becomes natural and the momentum really kicks on from that point.
Contact me if you want to learn more.
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