When you are done with your demand plan you will have something that looks like the charts below.
Below I have a monthly control limit, a 6-month moving average control limit, and also a cumulative plan with control limits. The monthly will let us know when something drastic happens. The moving average is better at finding subtle longer term trends but takes longer to identify.
Trending Up and Seasonal Monthly Demand
With the demand plan in place, we can now begin capacity planning. The first step is understanding existing inventory because:
Production Plan-Demand = Δ inventory
Are there already excess finished goods that should be sold? Is there excess WIP because of a late supplier? Factor the existing inventory and the target end of year inventory. Next, start planning labor and/or equipment (if needed)
Here is an example labor plan against the demand.
The variation month to month is from the number of working days in each month. Also remember that the actual demand WILL NOT be flat. Here is a chart of a simulation below.
This is more like real life.
I simulated this 100 times with the assumption that we hit the labor plan, but do not have any ability to change it, or change inventory. The average on time delivery is 89.6%. So even with hitting your production plan every single month, just the variation in demand causes you to be less than 90% on time!
The key to improving on time delivery is to build in flexibility.
The 4 potential ways to achieve flexibility to match demand variation are:
1. Labor Flexibility- this includes overtime and potentially temporary workers, especially in seasonal demand profiles.
2. Lead Time Flexibility- compare the actual lead time (from issuing Supplier POs to the end item goods receipt) to the quoted lead time or customer lead time. If you have slack you can flex the job in on the schedule.
3. Resource flexibility- Identify bottlenecks. There should be redundant equipment as needed and identify training opportunities to drive flexibility.
4. Inventory- When demand is low it may make sense to build finished goods of parts that have steady demand, low quality/revision change risk, do not take up a lot of physical space, and preferably low material content. I call these types of parts accordion parts.
The output of capacity planning is your production labor plan. This is “the plan” to budget from and do any other integrated business planning.
Also, this production labor plan is your empty “container” for the next step, Master Production Scheduling. The picture I keep in my head is like sand art. If you have ever done this with your kids, you know you start with an empty container and layer in different sand colors to make a design. The production plan is the empty containers and as you fill the schedule with work orders it creates the sand art.
I also prefer visual master schedules with different colors that denote different things just like the sand art as well.
If you would like to discuss Capacity Planning or S&OP further just send me a message.