Before going into the daily details of capacity management, it is also important to assess midterm capacity. If major investments need to be planned for more prolonged periods, some strategic moves can be made on shorter periods, still without looking into the details of each product’s details on each day. We can’t emphasize enough on this: once we get into details for each product, it’s easy to lose the overview. On a shop floor where different products are manufactured with the same equipment, we must keep this overview in mind and establish upper limits under which we will then operate in the daily details.
What can happen midterm? A competitor could file for bankruptcy, or a critical customer could be trying to develop deeper relationships with a selected few vendors to integrate them better in their supply chain through new purchasing agreements with increased volumes. In both cases, we have an opportunity to grow. When such opportunities present themselves, we need to assess our current capacity before committing to more volumes and possibly shut down less profitable activities to focus on growing market shares.
The reverse is also possible: a new competitor with an alternative product jumps in aggressively in our market, causing our sales to drop. Or new legislation forces us to rearrange our shop floor in a less productive manner (hello social distancing!).
The goal with midterm capacity planning is to identify our key resources and our current bottleneck(s) so that we can then establish production volumes and then product mixes that are sustainable with our existing shop floor. The calculations done when determining midterm capacity may give some insight into future needs for significant pieces of equipment (they can be used in long-term planning as well). Still, the goal here is to work within the current capacity.
The current capacity might be elastic, depending on the context. For example, a plant where there is only a day-shift and an evening-shift could face an increase in demand by adding a night-shift or, if it’s only temporary, ask employees if anyone volunteers for overtime. Maybe there aren’t any equipment restrictions when the work is mostly manual – in this case, it’s essentially a matter of hiring more labor, as long as there is room to work for everyone. Another example would be for seasonal variations in demand: an organization may not have the capacity for the peak demand period, but maybe they can plan for it. Start piling inventory a few weeks or months before, provided they have access to affordable storage facilities.
Let’s emphasize again how aggregated data is key for midterm capacity planning with this last example on seasonal demand: if we look at a single week of the peak demand period, we likely lack capacity, but when looking at the whole year, then we probably have more than enough. However, if the seasonal demand is for a product like a snowmobile, and the organization manufactures both snowmobiles and marine motorcycles on the same production lines, it shouldn’t consider storing inventory the same way. It would likely look at motorcycles as a whole.
At this stage, we do what is called ‘rough-cut capacity planning’ by examining the bills of resources for the product families. The bill of resources for a product family is a high-level table of the key resources needed to manufacture products in this family and their required capacity per unit. The key resources can be a work center operating a full capacity most of the time, labor time for specific skilled or certified resources, or a part that has an unusually long lead time to procure or for which the supply is limited. Key resources can be anywhere in the supply chain, including the distribution network!
Then we can make a resource plan based on our production volumes, where we can compare the required capacity of each key resource to its available capacity. If there is any excess in required capacity that cannot be resolved by production planners, upper management may have to make some decisions about long-term investments, or the sales team will have to calm down and/or manage customer expectations.
Finally, regardless of whether we are looking at an increase or a decrease in production, we must be careful to see beyond our organization’s capacity. Most businesses today are just one piece in a more global supply chain. Just because we increase our capacity for more volumes doesn’t mean our current suppliers and distributors can do the same. And decreasing volumes could disqualify us from some of our current partnerships.
Make-to-order (MTO) – Example
I’m no expert on toilet paper manufacturing, so please be indulgent when I start throwing random numbers in this example to illustrate the manufacturing concepts discussed.
Our fictitious organization wanted to have new performant and reliable production lines for its flagship products. However, the old line A was still in relatively good shape. Since uninstalling and reselling the different pieces of equipment wasn’t very profitable, the organization decided to keep it as a back-up line and for R&D purposes, and now tries to make it profitable by using it for developing new markets with a new fancy brand of toilet paper displaying various printings. Since the toilet paper with prints is a new product and is not very similar to the other ones nor meant to replace them (the prints clearly are an extra!), the historical sales data is of little use. The production line is already taking a significant space. The organization doesn’t want to incur more costs with fancy toilet paper storage, so it decides to manufacture these new products only once they get orders. They promoted the new services across their customer base, and good news – there was interest (!), and orders are coming in. However, orders in January 2020 were only reaching 30,000 kg/day on average. R&D usage is not significant in terms of toilet paper weight since they do small batches testing, but they do use up the hours for an equivalent of 10,000 kg/day on average. Still quite below the theoretical maximum of 100,000 kg/day of line D!
That was before the toilet paper frenzy. In February 2020, many grocery chains, customers of our toilet paper manufacturer, reported empty shelves since many end users started to panic because of the whole COVID-19 situation, and packed unusually large quantities of toilet paper at home to feel safer. Or better. Or both, who knows. Since toilet paper is not a product any business likes to store in large quantities, each store is temporarily running out of toilet paper. Customers call to get additional volumes, of any type of toilet paper, they are pretty sure any kind will sell. The sales team is all excited and re-do the forecasts upward. They expect higher demand for the next 6-8 weeks until bathroom cabinets of sudden toilet paper enthusiasts are full. Then, demands should slow down for a couple of weeks until most of this toilet paper gets used. Toilet paper that won’t be sold during this demand peak won’t really get sold after. They know the new production lines aren’t used at 100%, and that they can probably rely on the old production line for the temporary emergency. It’s an edge the organization has against most of its competitors. So they want to know how many new deals they can actually close AND get fulfilled on time? The main product inventory was relatively low and was all gone within a few days! We are suddenly no more in an MTS environment, even for the main products!
This is where production planners start assessing how close they can come to their maximum capacity and how the product mix could possibly be rearranged to optimize the production of very straight 2-ply toilet paper. Given that a 2-ply roll is 85g and 3-ply is 125g, it means we can produce way more rolls of 2-ply with the same raw materials. So maybe 3-ply could be temporarily ditched? Even if we consider that people use the same weight of toilet paper on average, toilet paper enthusiasts just want to accumulate as many rolls as they can, and the rest of the world just wishes to have something to wipe with. The sales team gets on the phone to validate with customers if they are willing to renounce their current orders of fancy prints and 3-ply in order to get more rolls overall, but plain 2-ply. Many agree, but there will still be a need for 30,000 kg/day of 3-ply, equally split in packages of 8, 16, and 24 rolls.
Work Centers on the Shop Floor
In each production line, the manufacturing of toilet paper goes through the eight following operations, among 7 work centers:
|Steps||Work Centers||Operations||Run-time per batch|
|1||Wood Chipper||Wood is received and chipped, with appropriate proportions of hardwood vs softwood||2h|
|2||Pool 1||Water and chemicals are added to turn wood chips into slurry||0.5h|
|3||Pressure Cooker||Slurry is cooked to remove moisture and retrieve the pulp||1h|
|4||Pool 1||Pulp is washed and bleached||0.5h|
|Water is added to make paper stock||0.5h|
|5||Sprayer||Paper stock is sprayed on mesh screens where most water drains||1.5h|
|6||Yankee Dryer||Paper stock is then sent to a large heated cylinder where it is pressed and dried to final moisture level||3h|
|Paper is creped and scraped off the cylinder in large sheets||3h|
|7||Roller||Sheets are slit, possibly quilted and printed, and rolled on long thin cardboard tubes||0.5h|
|8||Slicer||Long rolls are cut into smaller rolls and wrapped in packages of 8, 16 or 24 units||0.5h|
Table 1: Work Centers
When establishing the maximum production rate of each line, it’s the capacity of work center on step #6 (let’s call it WC#6) that limits the whole production. It can take a maximum batch size of 15,000 kg for each of lines B and C (25,000 kg for line D), and even if we can start a new batch every 2 hours with the wood chipper, work in progress inventory would build up on the sprayer since it takes 6h to get the current batch out of the Yankee dryer. So WC#6 is the constraint on this shop floor and is the reason why we established earlier that a total of 30,000 kg could be manufactured every 6h by lines B and C together. Even if the whole process takes 13h, to complete, we can ensure to get the maximum batch size out every 6h if we make sure to maximize the usage of WC#6.
While changing the quilted pattern on line C takes 30 mins to perform and validate (roller work center on step #7), modifying the number of ply on line B takes 1h on average (WC#6). Rolls of any type can then be packaged in 8, 16, or 24 rolls packs. Reconfiguring the end of the production lines (slicer work center on step #8) to change the package size takes only 5 minutes. Changeovers on the roller and slicer can be minimized if done between batches.
|Line||3-ply capacity||2-ply capacity||Total Capacity (kg)|
|B||12h → 30,000 kg||11h → 27,500 kg |
|C||0||24h → 60,000 kg||60,000 kg|
|D||0||24h → 100,000 kg||100,000 kg|
Table 2: Maximum Capacity Per Line in MTO environment
Production planners can now confidently tell that the production lines can grow the production from 88,000 kg/day to 217,500 kg/day if we include line D. Minus whatever safety factor they want to keep (remember line D is old and a bit less reliable). However, before giving this number to the sales team, the organization must ensure there aren’t any bottlenecks elsewhere in the supply chain.
When the organization inquires to their current suppliers about their ability to procure enough raw materials to sustain such an increase in the production rate, it turns out that currently, the procurement will be an important constraint as well in the very short term. The raw materials suppliers can only increase their deliveries of wood and other stuff of 75% for the next four weeks. Then they can commit to triple it. So for the next four weeks, the shop floor can only manufacture 88,000 kg/day * (1+75%)=154,000 kg/day. Then for the following weeks, raw materials are no longer an issue (88,000 kg/day * 3 = 264,000 kg/day, which is over the maximum production rate established of 217,500 kg/day).
Finally, before making more promises to customers, the organization must also ensure its distribution network can support it. Good news on this side, the distributors are just too happy to have more work.
It is decided to manufacture a maximum of 153,250 kg/day of toilet paper for the next four weeks, then to increase the maximum to 200,000 kg/day for the four following weeks before returning to normal production or even a bit lower.
That concludes the overview of midterm capacity planning in the series. Up next and final will be short-term capacity planning. If you missed out on the others: