As part of Solutions Review’s Expert Insights Series—a collection of contributed articles written by industry experts in enterprise software categories—Stu Johnson, the Vice President of Product Marketing at Rootstock Software, explains how manufacturers can use capacity planning insights to improve their business.
Today, manufacturers face multiple challenges, from labor shortages, such as knowing whether employees will show up to staff production lines, to supply chain issues, like an order of critical materials may not arrive from suppliers on time. Most of these are due to a lack of timely digital signals. A labor signal may be received when a staffer calls in sick, but often, that signal is not promptly conveyed to the production floor manager to cover a shift.
Supply chain signals aren’t much better. Some of these signals may come as calls from suppliers informing a materials manager of shipping delays. Or it may be a more immediate signal from a morning news report that a freighter is blocking a critical channel or a hurricane is creating disruptions.
The critical signals directly influencing a manufacturer’s capacity are the demand signals. They indicate how much the company has sold, how much it must deliver, and when. Despite the disruptions in supply chains or even the global pandemic, manufacturers have constantly been challenged by demand peaks that can affect their capacity to fulfill orders. As such, successful manufacturing is now an even more delicate balance among three factors—demand, capacity, and supply.
If achieving this balance wasn’t difficult enough, the decisions manufacturers make regarding these factors also correspond to sensitive economics. For example, if a company stocks up on supplies, it may not have the capital for equipment. Or if a manufacturer builds a new plant for added capacity, it may not be able to sell enough to keep its production lines running. All of this can affect profitability and even future viability.
What is Capacity Planning?
Capacity planning is the “art” of balancing physical resources to support the run-rate business of predictable demand and growth. This may be easy for high-volume products in great demand, where you can simply add shifts and replicate production lines to scale proportionally for growth. More commonly, however, this type of planning occurs when a company produces multiple products with different volumes, especially if those volumes vary throughout the year.
The typical scenario is a collection of different production work centers—requiring other skills—that are scheduled together in a series of operations to complete a quantity of product in time to ship and get orders delivered to customers. Each product requires planning and choreography regarding the time needed to convert raw materials into finished goods. The complexity comes in when the planner needs to schedule multiple production runs of different products using the same labor resources and work centers. This might not be too difficult if sales demand was well established and supply chains were operating normally—but today, the only norm is volatility.
Since manufacturers don’t have a crystal ball, they should look to their enterprise resource planning (ERP) solution to help them achieve this demand-supply-capacity balance. A modern ERP will show how much materials must be delivered in time to produce X volume of widget A. With these insights, a manufacturer can schedule staff and work centers to complete orders and make the expected delivery date, as promised by the sales team.
If work centers break down unexpectedly (and never do “expectedly”), or too many workers are no-shows, manufacturers may need to respond by rescheduling the remaining production to another shift. However, the other shift is likely already scheduled to handle another order. This shows why capacity planning must become “dynamic,” so manufacturers remain agile to ongoing changes.
Strategic Planning: A Longer Game
The rudimentary make-to-order example above is how many of today’s small manufacturers operate while they grow. If their product is not prohibitively expensive to make to stock, then planning can occur annually using history and projections. This ensures appropriate stock to meet peak demand times. Of course, any stock in a warehouse costs money that could be spent elsewhere, but that likely offsets the risk of late or short shipments and the resulting customer frustrations.
But when other factors exist—for example, a product may be expensive, supply lead times may be extended, or a company’s growth plan may be aggressive—the manufacturer must take a broader view and account for possible risks. Remember, each factor has a cost implication, so financial planning is at the heart. Again, addressing the balance between demand, which is growing, and supply, which is unpredictable, will undoubtedly affect calculations for capacity that cost money. And the result is hopefully growth.
This is the sales and operations planning (S&OP) process for mature rapid-growth manufacturers. It lives at the executive level, so the sales team negotiates with finance to fund the capacity that operational departments need to fulfill orders and revenue for the year. This type of process has a longer time horizon and becomes more strategic.
For mid-sized growing manufacturers, proper planning can be accomplished by “listening to signals.” Manufacturers can monitor demand signals from sales channels, which ideally grow at a predictable rate and result in seasonality that can be forecasted. The longer the time window of a plan, the easier it is to source more significant quantities of raw materials. This gives an organization more leeway on consumption rates for different customer orders. When done correctly, this long-game view will help manufacturers better understand their capacity demands—and how all factors ebb and flow throughout the year.
Becoming a Signal-Chain Manufacturer
With long-range forecasting, manufacturers should have greater visibility and clarity to determine better utilization of work centers, which supports multiple scheduling scenarios. Manufacturers can better understand their staffing requirements, which may signal a need for temporary labor or justify seasonal hiring. And in turn, that visibility gives an organization longer lead times to procure equipment needed to increase capacity or even identify outsourced resources to be used during demand peaks.
This complex balancing act can be better managed by monitoring the various information signals in a manufacturer’s business. To stay responsive to such signals, companies need technology that can help them cope with demand-capacity-supply challenges.
A cloud ERP can help, especially one that’s purpose-built for manufacturers. A manufacturing cloud ERP should provide 360° visibility in both the inward direction to monitor demand, manage their capacity planning efforts, handle an outward view of the supply chain, and track where materials are at any given point. With a cloud ERP, a manufacturer can go beyond supply chain needs and become a comprehensive “signal chain” company.
- Why Manufacturers Should Listen to Capacity Planning Signals - April 4, 2023