Capacity Planning in High-Mix, Low-Volume, Make-To-Order Production

Capacity planning (CP) is a necessary managerial task particularly when spikes in demand create bottlenecks in production. According to Wikipedia, capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products. Specifically, proactive capacity planning is a planning exercise for correctly determining in advance how much extra capacity is needed to meet each surge in demand. Many high-mix, low-volume (HMLV) production units and custom production units usually have unpredictable demand with high fluctuations and very limited resources.

Improvements by Capacity Planning

The unpredictable demand for distinct products brings rapid changes in product mix and causes shifting bottlenecks on shop floor. Such units needs to perform proactive capacity planning to mitigate those bottlenecks and improve flow, WIP, order-to-delivery times and throughput. Proactive capacity enhancement is more effective than real-time capacity enhancement.

The nature of make-to-order production

A make-to-order (MTO) production unit makes a product only after it receives a customer order for the product. Such type of production is necessary when products are to be made to specifications given by customers. Custom manufacturing also involves MTO production. A high-mix, low-volume (HMLV) production unit has the capability to make a large variety of products for meeting diverse needs of customers. For most products in such high-variety systems, usually order quantities are small and the system makes a product only after receiving a customer order for the product. This is because maintenance of final goods inventory (FGI) for every product is prohibitive physically and economically. For this reason, most high-mix, low-volume production units usually operate like MTO units. Nevertheless, they maintain FGI for a few products which customers frequently need.

The complexity of make-to-order production

Most MTO production units are job shops which are small in size and revenue. They keep receiving a stream of diverse orders to make a variety of products using very limited resources. But, they receive orders without any predictability. Process and resource requirements for fulfilling an order are also unknown until the manufacturer receives the order and therefore, advance preparation for the order is not possible. Customers want deliveries of their products within stipulated lead times. The production system is often more complex than a simple production line that makes products one after another. Many job shops simultaneously make several diverse products using common resources.

Impact on production lead times, throughput and customer satisfaction

In MTO production units, product mix keeps changing rapidly and consequently, the workload levels for resources will keep changing and bottlenecks also keep shifting over time. If we cannot enhance resource capacities at right times even temporarily, the changing and heterogeneous workload in the system will have major impact on production lead times of orders and factory throughput. Also bottlenecks will increase those lead times and adversely affect customer satisfaction. Enhancement of resource capacities at right times will be helpful to control production lead times, increase customer satisfaction and increase throughput.

Optimal determination of resource capacity enhancements

In HMLV and MTO production, CP is the determination of resource capacity enhancements at right times for this purpose. The enhancements include overtime for workers, running machines for more hours, outsourcing bottleneck operations, etc. But, managers usually decide resource capacity enhancement in real time for quick inventory reduction at bottlenecks. This is a real-time, reactive approach to controlling inventory and job lead times. Some instantaneous decisions may quickly reduce inventories in real time but their impact on the overall on-time delivery performance may not be significant in MTO systems. There is relatively less flexibility with instantaneous decisions for enhancing resource capacities based on the existing situation in production. Such decisions may even amount to firefighting. Advance planning for resource capacity enhancements at right times as required will be very effective. This is known as proactive capacity planning.

Short-term CP involves running machines for a few extra hours, providing overtime for workers or running production for extra shifts on some days. CP may also involve outsourcing some operations or even entire production of some selected products. On the other hand, long-term CP is done by hiring workers, training workers for additional skills, adding more machines or running extra shifts on long term basis.

The purpose of capacity planning

Proactive capacity planning is very useful to:

  • Expedite some jobs without any significant adverse impact on completion times of other jobs
  • Reduce the risk of delays for orders
  • Shorten production lead times for some orders
  • Overcome the adverse impact of major interruptions on job completion times
  • Mitigate the adverse effect of shifting bottlenecks
  • Accept more orders
  • Accept a new order with shorter lead time stipulated by customer
  • Accept and manage a rush order without adverse impact on other orders.

In job shops engaged in MTO production, optimal proactive capacity planning is to plan in advance for minimal increase in resource capacities for meeting the above mentioned objectives. This is a real challenge regularly faced by many job shops engaged in MTO production. Those shops cannot easily do it for high-variety production without rigorous calculations.


Finite Capacity Scheduling for Prediction of Work Flow and Bottleneck Formations

In make-to-order production, there is neither a simple formula nor an easy method for such capacity planning. Moreover, there is no unambiguous definition of capacity in such production. In many industries, CP is done in Excel using experience, commonsense and crude calculations. However, the result is unsatisfactory in some cases, particularly in MTO environment. Rough-cut CP which converts a master production schedule into requirements for key resources is not effective for MTO production with limited resources because it may not be possible to increase capacity of some resources temporarily as much as required.

For MTO production, CP will be effective and dependable when it is based on (1) reliable prediction of work flow and bottleneck formations and (2) fast, accurate and extensive what-if analysis of production with the help of work flow prediction. But, the prediction and what-if analysis are quite difficult due to rapidly changing product mix and rapidly changing loads of limited resources. This is where production scheduling methodology can provide a lot of help in CP. Even discrete event Monte Carlo simulation of production helps with CP.

The effectiveness of CP in high-variety production increases with the efficiency of production scheduling. Truly powerful scheduling software based on finite capacity scheduling (FCS) logic help predict (1) bottleneck formations in HMLV environment and (2) progress and completion time of each order.

What-If Analysis for Proactive Capacity Planning

With their predictive capability, finite capacity scheduling software support fast, accurate and extensive what-if analysis for optimal, proactive capacity planning. FCS-based capacity planning is done by what-if analysis of finite capacity production schedules with respect to changes in resource capacities. What-if analysis is usually done by FCS for changes like:

  • Addition of a new machine with specific functionality
  • Hiring a new worker with certain skills
  • A worker acquiring an additional skill
  • Running an extra shift for some period
  • Overtime for some workers
  • Removal of a machine from production
  • A machine in non-operating condition while waiting for repair
  • A worker of certain skills leaving the system
  • A worker becoming absent for one or more days.

In summary, managers can easily perform proactive capacity planning in make-to-order production by performing what-if analysis of finite capacity schedules with the help of FCS. Powerful, low-cost FCS software are now easily available for this purpose.

Advantages of Capacity Planning:

  • Reduction in rejection of orders due to capacity concerns
  • Reduction of anxiety to meet due dates
  • Increased revenue due to acceptance of more demand and efficient management of demand spikes
  • Improved customer satisfaction with increase in on-time delivery and acceptance of rush orders without affecting other orders
  • Judicious and cost-effective investments on new resources for increasing production, revenue and profit.

Software Tools for Capacity Planning in MTO Environment

There are some powerful, low-priced software tools for scheduling MTO production. These tools are also very useful for efficient CP also. Unlike production scheduling, capacity planning does not demand job status updates from shop floor very regular because CP is not required to be done as frequently as production scheduling. Some difficulties faced in using software for production scheduling disappear while doing the same for capacity planning. Production managers in some industries are using powerful scheduling tools exclusively for capacity planning and getting a lot of benefit from this exercise alone. Optisol software tools,Schedlyzer and Schedlyzer Lite are very appropriate for efficient, proactive capacity planning in a wide range of job shops engaged in MTO production. Both of them all support fast, accurate and extensive what-if analysis as part of proactive capacity planning in make-to-order production.