Sales Growth: Can Operations & Supply Chain Keep Up?
Almost every client has the opportunity to grow substantially. The question is whether their operations and supply chain can keep up. Unfortunately, across the board, planners are wringing their hands to expedite orders, prioritize customers, schedule additional production, understand the impact on inventory across their facilities, and increase capacity.
If that wasn’t enough, customer orders are changing on a daily basis (due to shortages from other suppliers, changing market conditions, etc.), forecasts are in a constant state of flux, manufacturing capabilities are constrained (due to lack of people, flexibility, trials and/or difficulties in running with substitute materials, etc.), and the extended supply chain (material purchases, warehousing/ distribution, transportation) is in chaos. Thus, how should we answer the question on whether operations and the supply chain can keep up?
Rough Cut Capacity Planning
From a best practice point-of-view, in order to answer the question on whether you are prepared to grow, you need to focus on rough cut capacity planning. Ideally, you have a SIOP/ S&OP process (sales, inventory & operations planning) process with a clear picture of demand. However, in 80% of the situations, this is not the case. Thus, start with demand although don’t get too wrapped up in creating the perfect demand plan that you lose sight of your capacity plans.
At a minimum, review last year’s sales and current customer orders, incorporate key trends and mix changes, and start there. For more details on developing a demand plan, read about creating predictable revenue with demand planning best practices. The bottom line is that you’ll need a place to start with what to produce, purchase, replenish, and/or store.
Start your capacity planning process with whatever data you have. Ideally, you have a long-term production plan, purchase plan, and/or replenishment/ distribution plan. From a systems perspective, these can be referred to as a master production schedule (MPS), material requirements plan (MRP), and distribution requirements plan (DRP) although they also can be all rolled into an ERP/MRP system. Don’t worry about the debate of MRP vs. Lean as both are valuable for different purposes. For capacity planning, you’ll need a longer-term view of requirements, and it doesn’t matter if you use MRP or Kanbans.
From a technology perspective, you might not have an ERP system that supports these functions. Don’t despair as you can start by converting your sales forecast into a directionally correct production, materials, and/or replenishment plan.
Let’s start with a long-range view of a production plan in units or hours. Break your production into product groupings ideally by work center groups or production cells if possible. If not, break into whatever groups make sense from a manufacturing point-of-view that you can do quickly. You can always evolve over time. From a rough-cut perspective, there is no need to worry about days and weeks. Think in terms of months or quarters, depending on the needs of your business. There is also no reason to worry about items. Stick to larger product groupings when dealing with rough cut capacity. This is a pitfall several clients fall into. They get bogged down in item details and never get a directional view of required capacity.
The tricky part is that you’ll need to put your requirements into a base unit of measure. For example, you cannot add boxes, pieces and ounces together and make sense of capacity figures. This is a constant challenge even with sophisticated clients. For example, we worked with a life sciences manufacturer, and we thought it would be an easy exercise to convert milligrams and grams, into milligrams. Although that issue was solved with a simple calculation, there were also custom products with different units of measure. Unfortunately, 1 unit could be 1 microgram or 1 unit could be 1 milligram, but they both said 1 unit. Thus, we had to design a directionally correct way to convert custom products into the base unit of measure so that the data would make sense for capacity analysis.
You’ll then convert production requirements into a base unit of measure that makes sense across all products. Compare these requirements by product grouping to your available capacity for that product grouping. It will give you a place to start. Advanced clients review requirements as compared with various staffing configurations, overtime, full capacity, transferring capacity among sites, and additional scenarios to find the optimal approach to meet customer needs while maximizing operational performance and meeting inventory targets. They also review improvement opportunities to increase output and capacity. In addition to staffing, review machinery, equipment, tooling, and other support functions vs. requirements. The key decision becomes how to adjust capacity in alignment with requirements in the optimal manner. It is rarely ever a straight line in manufacturing. For example, if you need 1 crew, 5 days a week on average, you are likely to need 1.5 crews during peak season and .75 crews during low season or you need 6 days a day on average throughout the year, making it difficult to run overtime continuously yet not requiring a 7 day schedule.
Similarly, to manufacturing, once they have a long-range view of requirements in a base unit of measure by commodity groupings, they convert the base unit of measure into purchase plans. The most successful clients provide material and commodity level forecasts to suppliers so that they can plan for capacity. They also incorporate into contracts and pricing within ranges or they partner with suppliers to build Kanban systems with stockpiles of strategic materials. Frequently, there is significant opportunity for improvement in service, reduction in lead times and shared cost savings with collaborative planning so that suppliers can proactively plan capacity as well.
Similarly, to manufacturing, once they have a long-term view of requirements in a base unit of measure, they convert the base unit of measure into space requirements to evaluate storage and material handling equipment needs. There are various storage strategies and associated equipment needs with tradeoffs depending on volumes, frequency, storage size, and several other factors. For example, you might evaluate storage needs in pallets, bins, cubic feet, and other alternatives. Order frequency, handling requirements, and picking needs are also relevant factors. After collecting your requirements by groups of products or customers (as there can be different requirements by customer), you’ll compare with available capacity. Similarly, to manufacturing, you can choose to increase capacity in several ways and you can build flexible options into your strategy.
Transportation capacity is also a key topic so that you can plan for the appropriate number of trucks, container loads, or packages and can optimize the mode of transportation, service levels and rates. For example, if you will need an average of 3 trucks per week to go across the country, you might plan ahead and send intermodal to save money. Or you might decide to put together a milk run with a consistent route that your transportation partner builds into a consistent plan. You might decide to build a multiple-stop truckload for certain routes if you don’t have enough product for one customer to fit on a truck. There are several options to evaluate; however, in order to ensure you have sufficient capacity to deliver your customer orders on time and to support your transportation needs, forecasting your transportation requirements ahead of time will not only ensure higher service levels, but it will also provide opportunities for cost savings.
Incorporate Capacity Planning into a Monthly Review Cadence
Review your capacity plans as a part of your monthly SIOP/ S&OP process. Gather inputs from appropriate parties, compile and synthesize data, and design a monthly review of required capacity vs. available capacity for your critical areas. Start with your key machines, overloaded people/ positions, and your most bottlenecked resources. This will quickly highlight strategic decisions and/or bottlenecks that require attention to meet your customer needs.
Refer to our blog for many articles on planning, capacity and related systems. Also, read more about these types of strategies in our eBooks such as The Road Ahead: Business, Supply Chain & the World Order. If you are interested in talking about what it would take to purse the capacity planning and SIOP journey in your business, contact us.
Did you like this article? Continue reading on this topic:
Recovering Capacity with Production Planning Best Practices