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Planning in Operations Management
Business Essentials · Chapter 8: Operations Management and Information SystemsSection 8.3 · lesson 44 of 10514 min · free with a free account
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In this lesson
Deciding what to produce, with what, and when, before the work begins.
- Describe the 3 levels of operations planning
- Explain capacity, location, and layout decisions
- Compare chase and level aggregate plans on cost
- Plan for services, where capacity can't be stored
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Operations Management and Information Systems
Planning in Operations Management
Every operation has to decide, before the work begins, what it will produce, with what, and when. This section is about how that planning is organized. We'll start with three planning horizons, and the cascade that links them. Then capacity. Which figure to trust, how much spare to hold, and when to add more. We'll look at location, layout, and aggregate planning, where chase and level strategies compete. Then forecasting, scheduling, and materials planning. And we'll finish with services, which can't store capacity at all. Watch for one theme. A plan is only as good as the assumptions underneath it.
Table 8.3.1
3 Planning Horizons
Operations planning is deciding in advance what the operation will produce, with what resources, and when. Section five point three covered planning in general. Here, that framework is arranged by planning horizon. A planning horizon is how far into the future a decision looks, and commits the organization. Long-range planning looks years ahead, at capacity and facilities. How large a plant to build, and where. Those decisions commit large sums that are hard to recover if they prove wrong. Medium-range planning, also called aggregate planning, covers the next several months to a year. It sets overall output, workforce size, and inventory for groups of products. Its costs reverse over months. Short-range planning covers days and weeks. Which jobs are done, in what order, and by whom. Plans here can be adjusted daily. But errors show up immediately, as late work. Notice the pattern. As the horizon lengthens, the levers become fewer and larger, and harder to reverse. Plan at the wrong horizon, and you commit too early, or find no lever left when trouble comes.
The Cascade
Each Level Constrains the Next
The three horizons aren't independent. They form a cascade, in which each level constrains the next. The capacity built by the long-range decision sets the ceiling for aggregate planning. The aggregate plan, in turn, sets the volumes that scheduling must distribute. That structure is also how failures travel. A failure occurs when a short-range plan rests on a long-range assumption that nobody has rechecked. Picture a schedule built around a machine assumed available all year. In fact, it was retired. Or a staffing plan based on a demand level that ended six months earlier. Each lower level inherits the assumptions of the levels above it. So an error at the top doesn't stay there. It spreads downward through every plan that follows.
Capacity Planning
Which Capacity Figure?
Section eight point one defined capacity as the maximum output an operation can produce in a period. Measuring it takes care, because there's more than one meaningful figure. Design capacity is the theoretical maximum, under ideal conditions, with no stops at all. Effective capacity is what can realistically be sustained. It allows for maintenance, changeovers between products, breaks, and scheduling constraints. Actual output is normally lower again, because of breakdowns, shortages, and absenteeism. Here's an illustration, with figures constructed for the exercise. A plant has a design capacity of one thousand units a week, and an effective capacity of eight hundred fifty. Its typical actual output is seven hundred eighty. Plan on the first figure, and every promise is two hundred twenty units a week too optimistic. So the first planning question is which capacity figure you're actually using.
Cushion and Timing
How Much Spare, and When to Add It
The capacity cushion is the amount of capacity held above the level expected to be needed. It protects the operation against demand that comes in higher than forecast, and against disruptions. A large cushion improves reliability and cuts lost sales, but you pay for capacity that's often idle. A small cushion lowers cost, but raises the risk of delay, as section eight point one showed. The right cushion depends on how uncertain demand is, and how costly a missed order is. Then there's timing. When should capacity be added, relative to demand? Leading demand means adding capacity before it's needed. It secures growth, and can win customers. The risk is paying for capacity that demand never fills. Lagging demand means adding capacity only after demand appears. Utilization stays high, and risk stays limited. The risk there is turning customers away, and losing them to competitors. Tracking demand adds capacity in small steps, balancing both risks. It needs capacity that comes in small increments. No option removes the risk. Each one chooses which risk to bear.
Location
Same Factors, Opposite Conclusions
Location is the choice of where to place a facility. Four groups of factors drive it. Proximity, to customers, to suppliers, and to labor with the needed skills. Cost, including land, labor, energy, and taxes. Infrastructure, such as roads, ports, power, and communications. And regulation, such as zoning and permits. Those are largely state and local, so they vary by place. What's striking is how differently the factors are weighted. A manufacturer of heavy, low-value materials is pulled toward its suppliers or its customers by transport cost. It's also pulled toward low-cost land and labor. A restaurant, a clinic, or a dry cleaner is different. Its customers must travel to it. So proximity and visibility usually outweigh the cost of land. The same list of factors produces opposite conclusions, depending on which ones carry the most weight.
Layout Types
4 Layouts, Matched to Process Types
Layout, from section eight point one, comes in four common forms, each matched to a process type. A process layout groups similar equipment or activities together. That suits a job shop, where each order takes a different route. A product layout arranges resources in the sequence the product follows. That suits line processes, with high volume and a standard route. A cellular layout groups the different machines needed for a family of similar parts into one cell. It's a compromise for batch production, and it shortens routes. A fixed-position layout keeps the product in one place, and brings the resources to it. That suits projects, such as building construction. As section seven point two stressed, each arrangement changes the number of handoffs. So a poor match between layout and process type is a persistent source of delay.
Aggregate Planning
5 Levers for Matching Supply to Demand
Aggregate planning matches supply to forecast demand over the medium term, with the resources already in place. The word aggregate matters. The plan covers groups of products, and the whole operation, not single items. Five levers exist. Hiring or laying off is effective, but costly in recruiting, training, and morale. Overtime raises output quickly without hiring. It costs a wage premium, and fatigue and law limit it. Building inventory in slow periods works for goods, not services, and carries holding costs. Subcontracting moves some work to outside firms. You gain flexibility, and lose some control. Demand management changes demand itself, through pricing, promotion, reservations, and appointments, shifting it from peak to slack periods. Every lever has a cost and a limit. The plan is the cheapest combination that stays within them. Two pure strategies frame the choice. A chase strategy matches output to demand, period by period. Inventory stays roughly constant, but capacity changes repeatedly. A level strategy holds output near average demand. Inventory builds in slack periods, and drains in busy ones. It keeps the workforce stable, but the product must be storable. Real plans often mix the two.
Chase Versus Level
Same Demand, Very Different Costs
Here's a worked illustration, with figures constructed for the exercise. Demand over six months runs eighty, one hundred, one hundred twenty, one hundred forty, one hundred, and sixty. That's six hundred in total, or one hundred a month on average. Forty units start in stock. Adding a unit of monthly capacity costs ten, and removing one costs five. Holding costs two per unit per month, on the ending balance. Under the chase plan, production equals demand each month. From one hundred, capacity falls by twenty, rises by twenty for three months, then falls by forty, twice. Additions total sixty units, costing six hundred. Reductions total one hundred, costing five hundred. Inventory stays at forty, costing four hundred eighty to hold. The total is one thousand five hundred eighty. Under the level plan, production is one hundred every month. Ending inventory runs sixty, sixty, forty, zero, zero, and forty, so holding costs four hundred. There are no changing costs. On these figures, the level plan is far cheaper. But that depends on the assumptions. A perishable product, or a high holding cost, could make chase win. So could workers who are cheap to add and remove. So know the relative cost of changing capacity and of holding stock, before you choose.
Forecasting
Every Plan Rests on a Forecast
Every plan rests on a forecast of demand. Qualitative forecasting uses judgment. Experienced managers and salespeople, a market survey, or a panel of experts. It's useful when there's no history to go on, as with a new product. Quantitative forecasting uses data. It projects past demand forward, or links demand to price or the economy. The statistical methods lie beyond this section. For planning, two conceptual points matter. First, accuracy falls as the horizon lengthens, because more can change. Second, forecasts for groups beat forecasts for single items, because errors across items tend to offset. That's one reason aggregate plans are built for groups. Now, a discipline that catches the cascade failures we met earlier. It's called an assumption register. It lists the assumptions a plan depends on. Demand growth, a machine's availability, a supplier's lead time. Each comes with the date it was last checked, and the person responsible for checking it. It makes hidden assumptions visible, so a changed one is noticed before the plans built on it fail.
Scheduling and Materials
Order Matters, and Inputs Follow Output
Scheduling assigns work to resources and times. Sequencing sets the order of jobs at one resource. Order affects both completion time and waiting. Here's a small illustration, with figures constructed for the exercise. Three jobs, A, B, and C, need five, two, and eight hours on one machine. In order of arrival, they finish at hours five, seven, and fifteen. An average of nine. Shortest first, B, A, then C, they finish at hours two, seven, and fifteen. An average of eight. Same total work, same final finish. But the average wait is lower. Other rules exist. Doing the job with the earliest due date first favors keeping promises. The best rule depends on what the operation most needs to protect. Average speed, due dates, or fairness. Materials planning applies the same logic to inputs, working backward from the production schedule. It works out the components each item needs, and subtracts what's already in stock. Then it orders the rest early enough to arrive in time, allowing for the supplier's lead time. Demand for components is derived from the schedule for finished goods. Chapter fourteen has the detail.
Services: A Case Vignette
The February Rush
Services face a harder version. As section eight point one explained, service capacity can't be inventoried. With no stock to smooth demand, a service can change capacity, through staff scheduling or part-time workers. Or it can change demand, and that becomes the central planning tool. Reservations and appointments smooth arrivals. Differential pricing moves price-sensitive customers into slack periods. And complementary services give waiting customers something useful to do. Here's a composite case, with a fictional organization and person. Tamsin runs operations at Wren Tax Services, a tax-preparation office. Most clients arrive within a few spring weeks. In those weeks, waits stretch to hours, walk-in clients leave, and long days cause staff errors. She could hire seasonal staff, but training takes several weeks, and the office has only a few desks. Or she could shift demand. Cheaper early-filing appointments, drop-off for simple returns, and limited daily reservations. The trade-off is the discount and the lost late walk-ins, against the cost of idle seasonal capacity. The demand levers come first. Shifting even part of the peak shrinks the problem, with no added fixed cost. Reservations turn unpredictable walk-ins into a schedule that can be staffed. Then seasonal hiring fits the smaller peak.
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