Similar to the phrase ‘a guy goes into a bar,’ the concept of delivering profit across the entire product portfolio can seem like a punchline when it comes to rough-cut capacity planning (RCCP). Isn’t rough-cut capacity planning (RCCP) about meeting demand at the lowest cost?
What Is the Definition of Capacity Planning?
Planning definitions can contain slight nuances depending on the company or solutions provided, but when it comes to capacity planning, River Logic’s description stretches beyond most definitions that exist today. It is closer to what some might refer to as supply chain optimization, in that capacity planning is all about mid- and long-term planning in regards to the allocation of existing capacity and the amount of capacity needed now and down the line.
How Our Customers View Capacity Planning
At River Logic, our customers plan their capacity on a monthly basis, as opposed to pre-River Logic when they would plan only once per year. For them, it runs parallel with and provides key input into the sales and operations planning (S&OP) process. While S&OP focuses on balancing demand and supply (ideally to maximize profit), capacity planning ensures the supply plan is both feasible and optimal, informing strategy planning by aligning and prioritizing investments in capacity and resources. Our customers are making mid- to long-term planning decisions about the allocation of capacity to produce certain products while also understanding how much they might need in the future.
Rough Cut Capacity Planning: What People Do Today
The more traditional approach to capacity planning is typically Master Resource Planning II (MRP II). It’s a centralized, integrated system that enables effective decision-making in scheduling, design engineering, inventory management and cost control in manufacturing. Critical to plan, the following functions are available in MRP II:
- master production scheduling
- bill of materials
- inventory tracking
- machine capacity scheduling
- demand forecasting
- quality assurance
- general accounting
- and more...
Additionally, it can often be part of an Enterprise Resource Planning solution, but stand-alone solutions do exist. There are what-if capabilities and is considered not only a technology but a process. Detailed production costs are available to inform finance.
Sounds pretty good, right? So, where’s the problem?
RCCP focus is on the resource bill for a single product, in addition to bottleneck work centers and critical resources.
To be clear, the MRP II is not a bad approach for the product. However, for the business, it happens to be a far inferior approach, value wise.
A simple analogy is this: ABC Company uses the traditional capacity planning approach to produce 100 units of Product A, but in doing so, it misses opportunities to utilize those same raw materials to produce more of Product B, which would generate a higher profit.
In other words, a win for the product doesn’t equate to a win for the business.
A more modern approach to capacity planning is to consider the entire product portfolio mix, in addition to raw material costs at individual plants, differing labor costs, transportation costs and more.
Capacity planning needs to eventually be focused on overall profit versus
simply minimizing costs.
Manufacturing Capacity Utilization: Why You Need Prescriptive Analytics
When it comes to total capacity utilization (TCU) across all industries, the end of 2018 showed months of consecutive increases despite concern for decline in 2019. Reports indicate that manufacturing production is holding its own, but will it continue in the months ahead?
The indicators are mixed and skewed toward the naysayers. With markets reflecting a correction underway, some suggest that the 2019 overall demand for manufacturing will be lower. Other gloomy factors include another interest rate increase, a strong U.S. dollar slowing exports, and a weak report purchasing managers’ index (PMI) for global manufacturing.1
The more optimistic camp, however, believes stocks will rebound about 10 percent and oil prices will climb to $70 per barrel. This is due to the belief that lower prices will cause demand to increase.
So why the need for prescriptive analytics — more specifically, constraint-based optimization — for manufacturing capacity utilization? We'll explain more below but, in short, prescriptive analytics is the only way to quickly achieve an optimal, feasible capacity plan on a weekly or monthly basis.
Beyond Supply Chain Planning
In manufacturing, capacity utilization measures the actual production against what’s possible. Since the average unit cost is typically lowered as outputs increase, optimized plans are the goal. Then what’s the challenge?
As noted earlier, traditional capacity planning software is limited in its ability to see the “big picture.” A major difference with optimization-based prescriptive analytics is its ability to simultaneously optimize multiple production lines within a plant or among the company’s numerous plants. Other advantages include:
- The ability to view and understand constraints among all products/product families, thus improving margins and profits as a whole instead of one production line or business unit.
- The possibility to run hundreds, if not thousands or more, of what-if scenarios, highlighting insights on the best courses of actions.
- The ability to see new opportunities to improve throughputs, introduce new products, decrease inventories, modify transportation plans to minimize costs and more.
Traditional approaches to capacity planning cannot offer this cross-functional view.
Planning/Forecasting with Integrated Financials
Poor decisions can cause cash flow issues despite significant income. Look at GE. According to its former vice chairman, Bob Wright, cash flow management was its downfall.
Managing manufacturing capacity utilization requires an accurate balance of supply and demand, plus the integration of financials. Without the ability to know the financial outcomes, capacity planning is a half-exercised effort. Enhancing a rough-cut capacity planning process with prescriptive insights guarantees that companies are optimally utilizing capacity and finding new, profit-driving opportunities across the value chain.
1U.S. manufacturing production increases; headwinds growing, November 18, 2018, Reuters.