SCM Fundamentals: Resource Planning:
Now from recent articles you should have good understanding of the demand you need to fulfill we will now start looking at the other side of the equation. Supply. As we discussed previously the constant struggle in business is the demand to balance supply and demand. The first step when looking at supply is to develop a plan for the resources required to product that supply.
Resources are what Marx might have referred to as “the means of production”. Resources will vary from industry to industry and even with-in an industry there may be further limitations location by location. Some examples of resources that you need to consider include
- Space (This is for both manufacturing and storage. Anyone who has had to try and secure warehouse space in the UK or Ireland for the couple of years leading up to Brexit will understand how limited space can be)
- Plant and Machinery (The equipment in a factory used for manufacturing is increasingly complex and automated. This leads to greater efficiencies BUT also means the lead time and cost for this machinery can be prohibitive)
- Equipment (for maintenance, essential safety etc)
- Labour (This includes both direct and indirect labour)
- Supplier capability and capacity (very few companies produce everything themselves)
- Specialised skills (as equipment and processes become more complicated and technical the skill level required increases)
- Energy (we take it for granted that electricity is available at the flick of a switch but even in developed industrialised nations many networks are running close to full capacity).
- Infrastructure (transportation and communications)
- Waste disposal (there may be strict licence issues for what you are disposing of and even if there aren’t legal requirements Good Corporate Social Responsibility demands that we dispose of waste correctly).
- Raw materials and components is another form or resource but we will cover these in the inventory section.
A company that has clear visibility of it’s supply chain and of the capabilities of each element of the chain should have a resource plan. They will often have a Bill or Resources for each product (similar to the bill of materials) and that will allow them to aggregate the demand up to see the total requirement on each resource. Now each resource has to be checked to see if there is sufficient capacity.
So this while a very basic analysis is more or less how much of the resource planning is done at this first step. It is a rough guide as to could the demand be met in the existing capacity and let someone else (i.e. planning) work out the details later. Now that is not to dismiss it. It is not going to give you an actionable resource loading plan but it will allow you to “fail fast and fail cheap”. You will be able to spot any high level resource issues before they become critical issues. Here is a simple illustration of that.
We have a factory capable of producing 100 units a month. At the start of the year the senior management team sit down and review the known capacity of the plant against the demand.
From the graph they can see that there is no real problem between January and August. Yes the demand is a little up and down but the later processes of RCCP and MRP II will smooth that out and “level the demand”. They don’t have to worry about that. But there is a problem in September, October and December. Demand is more than double what the factory can produce. And very clearly they can see that there isn’t spare capacity in the surrounding months to pick up the slack. Now they have to understand what is the nature of the demand, is it real. If it is they need to plan how to meet that. But they have time to come up with solutions.
Another example based on a real factory. A company has one line that produces cheese. This line can produce 4t of cheese an hour and works a single 8 hour shift 5 days a week. That means in a typical week they can produce 160t of cheese a week. That is a lot of cheese but demand for cheese internationally is huge and growing so the company has set the capacity at this level thinking that it would meet all future demand. Now after going through the S&OP process it has been determined that in June, which for this exercise we will say has 4 weeks, they need to produce 1000t of cheese (now that really is a lot of cheese) for a big promotion that is coming up. Now we have a disconnect between supply and demand. Based on current capacity they can produce 640t in June (160t a week by 4 weeks). So now senior management have asked planning (because they always do) to come up with a way to meet that 1000t in June. How can they do it?
The answers to this dilemma will vary depending on the industry and the business but here are some things they could look at.
1. Cheese generally has a long shelf life. They could look to pull some of the production back into May or April.
2. They could work overtime on Saturdays and Sundays but that would only bring us to 896t and there may be HR issues with working 7 days a week.
3. They could look to work a second shift Monday-Friday. But where will they find the required staff? Even if they can recruit them will they be trained and have the necessary skills?
4. They could look to outsource some of the production to another cheese factory. But what happens if what is being made is a specialised cheese using special enzymes and ingredients that may contaminate the equipment of that second factory.
5. They could look to defer some of the demand to spread it over a longer period of time. But the customer may be running a limited time promotion.
6. They could look for an engineering solution that increases throughput to say 6t an hour. That may be possible but will the engineering skills and equipment be available to do it.
7. Go back to the customer and tell them that they can only have 640t rather than 1000t. This depends on the relationship with the customer. In some cases they may accept it but often failure to fulfill such a large order may damage the relationship in the long term.
And I’m sure there are other solutions. This is the key challenge for planning departments. Developing solutions to problems where the current situation doesn’t meet customer demand. Also the nature of the solution will vary depending on the nature of the demand increase. If it is a consistent uplift and the demand will now be 1000t a month every month ongoing then that will require a more permanent, and expensive solution such as buying new equipment or hiring new permanent staff or even building a new factory. If it is a one off “spike” in demand then the challenge will be to find short term solutions. The problem is a consistent uplift in demand is often seen as one off spikes until a clear trend develops. So this is why it is critical that there is good visibility of the demand and good communication with the customers.
However this visibility of resource requirements is often not clearly known. Frequently a product could be taken on without a clear understanding of the resources, materials or skills required to produce it. There could be a disconnect between what sales say the company can do in order to win the business and what the company can actually do. One company I worked with took on a new product for a Christmas promotion with a major supermarket chain. It involved the production of a “party food” range. However once it was started two things became apparent. In order to cut the meat into handy bite sized “party” portions 2cmx2cmx2cm cubes required a lot more precision by the staff on the line than they were used to. This meant processing time was far longer than had been estimated and extra costs were incurred on overtime etc. Secondly Christmas is the peak time for little skewers that often come with party food. Orders are often placed more than six months in advance to secure supply and the company was ordering these components late in the process. These problems were all overcome but required considerable effort by the management, operations and planning teams to resolve. Was this a success. Arguably it was. After this the factory had the capability and expertise to produce this sort of party food in the future. But at the time of writing they have yet to utilise that capability again.
So this is why resource planning is important. It is important to understand what can and cannot be done. And it is important to understand if what cannot be done is really impossible or just difficult. Growth is essential for all companies and most will tell you that what they are doing today would have been considered impossible five years ago. Visionary business leaders need the support of visionary support staff especially in planning. Over the next few articles in this series we will look at how to plan your capacity in more detail starting with Rough Cut Capacity Planning.