Module 5 Capacity Planning

MODULE 5 CAPACITY PLANNING

Definition : Strategic planning involves a long term capacity plan that establishes some expectation of capacity which will be available to meet future demand. Aggregate Planning: 1.Planning to produce best quality in the intermediate range horizon 2.Lowest cost method 3.Involves work force size, Inventory level and production rate.

Objectives of Aggregate planning: To develop plants that are feasible and optimal Feasible- a portion of demand should be met. Optimal- resources should be used wisely at lower cost.

Operation planning and scheduling system: Volume and timing of output, utilization of operation capacity

Aggregate Production (output planning) 1.Overall level of output supporting the business. 2. 3.Determine output level (unit) produced over next 6 to 18 months period on weekly or monthly bases.

Need for Aggregate Capacity Planning 1.It facilitates fully loaded facilities and minimizes overloading and under-loading and keeps production costs low. 2.Adequate production capacity is provided to meet expected aggregate demand. 3.Orderly and systematic transition of production capacity to meet the peaks and valleys of expected customer demand is facilitated. 4.In times of scarce production resources, getting the maximum output for the amount of resources is enhanced. 5.To manage change in production/operations management by planning for production resources that adapt to the changes in customer demands.

Steps in Aggregate capacity Planning 1.Prepare the sales forecast for each product that indicates the quantities to be sold in each time period (usually weeks, months or quarters) over the planning horizon (6 to 18 months) 2.Sum up the individual product or service forecast into one aggregate demand for the factory. 3.Transform the aggregate demand for each time period into labour, materials, machines and other elements of production capacity required to satisfy aggregate demand. 4.Develop alternative resource schemes for supplying the necessary production capacity to support the cumulative aggregate demand. 5.Select the capacity plan from among the alternatives considered that satisfy aggregate demand and best meets the objectives of the organization

Cost Associated with Aggregate Planning (a)Pay roll costs (b) (b) Costs of overtime, second shifts and sub-contracting, (c) Costs of hiring and laying off workers (d) Costs of excess inventory and backlog (e) Costs of production rate changes

Approaches to Aggregate Planning Two types of approaches a.Top- down approach b.Bottom –up approach. c. Top down approach: 1.Working at highest level of consolidation of product 2.Plan – disaggregated to the product families. 3.Relay on proper amount of total capacity is available

Bottom – Up Approach: Also called as Resource Requirement Planning(RRP) or Rough cut capacity planning. 1.They are done with Master Production Schedule 2.Ensures no over load occurs for any department. 3.Quick and in-expensive way to find and correct the raw materials available and required for MPS.

Capacity (Production capacity) 1.Maximum production rate of a firm 2.Indicates the ability of the firm to meet the market demand. 3. Types: a)Fixed capacity b)Adjustable capacity c)Design capacity d)System capacity e)Potential capacity f)Intermediate capacity g)Effective capacity h)Normal /Rated capacity i)Actual or utilized capacity

Measurement of Capacity: By terms of input or output of firm. Example: Organisation Automobile factory Steel Mill Power Plant Job shop Airline Hospitals University Banks

Measure of Capacity Number of vehicles Tones of Steel Mega watt of electricity generated Labour hours worked. Number of seats Number of beds Number of students Number of Accounts

Capacity Decision Major considerations in capacity decisions are: a)What size of plant? How much capacity to install? b)When capacity is needed ? When to phase-in capacity or phase-out capacity? c)At what cost? How to budget for the cost? Determination of capacity Capacity decisions are important because: a)They have a long-term impact b)Capacity determines the selection of appropriate technology, type of labour and equipments, etc. c)Right capacity ensures commercial viability of the business venture. d)Capacity influences the competitiveness of a firm.

Factors affecting Capacity decision 1.Market demand for a product/service 2.The amount of capital that can be invested 3.Degree of automation desired 4.Level of integration (i.e., vertical integration) 5.Type of technology selected 6.Dynamic nature of all factors affecting determination of plant capacity, viz., changes in the product design, process technology, market conditions' and product life cycle, etc.

7.Difficulty in forecasting future demand and future technology. 8.Obsolescence of product and technology over a period of time. 9.Present demand and future demand both over short-range, intermediate-range and long-range time horizons. 10.Flexibility for capacity additions. 11.

Inter relationship between Capacity and other issue: 1.Relationship between capacity and location decision 2.Relationship between capacity and plant 3.Relationship between capacity and process design 4.Relationship between capacity and equipment selection 5. Capacity Planning ØDefine long term and short term capacity needs of a firm and how it is me

Capacity Planning Decision (a) Assessing existing capacity (b) Forecasting future capacity needs (c) Identifying alternative ways to modify capacity (d) Evaluating financial, economical and technological capacity alternatives (e) Selecting a capacity alternative most suited to achieve the strategic mission of the firm. Capacity planning involves capacity decisions that must merge consumer demands with human, material and financial resources of the organization.

Classification of capacity planning a.Long term b.Short tem c.Finite d.Infinite e. Factors affecting capacity planning Controlled factors – Labour Employed, Machines, tooling's, overtime work, sub contracting Less controlled factors – Absenteeism, Labour performance, Machine breakdown, lockouts, accidents etc..

Ways of changing capacity: 2 types 1.Expansion 2.Reduction Ways of Changing Long-range Capacity Types of capacity Ways of accommodating long range Sub-contracting with other companies to Expansion change capacity changes become suppliers of the expanding firm's components or entire products. Acquiring other companies facilities or resources Developing new sites, building new buildings, buying new equipments Reactivating facilities on standby status

Ways of Changing Long-range Capacity Types of capacity Ways of accommodating long range Selling off existing facilities, selling Reduction change capacity changes inventories and laying off or transferring employees to other units. Developing and phasing in new products as demand for other products decline.

Capacity requirement planning Process of determining what labour personnel and equipment capacities are needed to meet the production objectives in MPS and MRP

CRP Process

1.Orders are converted in to workload sheets 2.When work center capacity is verified, MRP verification is done 3.How it can be improved if deficiency occur 4. CRP Inputs a)Planned orders and released orders from MRP system. b)Loading information from the work centre status file. c)Routing information from the shop routing file. d)Changes which modify capacity, give alternative routings or altered planned orders.

CRP Outputs 1.Rescheduling information which call for capacity modifications or revision of MPS. 2.Verification of planned orders for MRP system and 3.Load reports. 4. Aggregate capacity planning strategies Planning best quality to produce during time period in the intermediate – range horizon and planning the lowest cost method of providing the adjustable capacity to accommodate production requirement

There are two types of Aggregate capacity Planning 1.Level capacity plan 2.Matching capacity with aggregate demand plan Level capacity plan §Uniform capacities from start to end §Underlying principle is to produce to stock Advantages

a)the cost of hiring and laying off workers and using overtime is practically eliminated b)the cost of locating and developing new sources of material supplies is minimized. c)labour and material costs per unit of output are low d)simplified supervision and low scrap rates since workers are experienced in their jobs e)low absenteeism. f)low operating costs, high and consistent quality of output. g)dependable production rates.

Disadvantage Higher finished goods, inventory levels, tying up cash & increasing inventory carrying cost Matching capacity with aggregate plan Advantage 1.Production capacity is matched with aggregate demand 2.Material flow and machinery capacity are allowed to change for each quarters 3.Main advantage is lower level of finished goods (ie) less carry cost compared to level capacity plan 4. Disadvantage §Labours and material cost is high because frequent change in work flow

Strategies for aggregate capacity plan 1.Active strategies 2.Passive strategies 1.Pure Strategy 2.Mixed strategy Types of pure strategies– Changing any 1 variable Strategy 1 – Vary in size and work force Limitation : Labour morale, trade union opposing lay off Strategy 2 – To vary output rate Limitation : cost of overtime and idle time Strategy 3 - Level production and use of inventory buildup, in periods of high demand Strategy 4 – Sub contracting to meet the excess demand which is more than normal capacity available in in-house Strategy 5 – Capacity utilization, according to demand

Mixed strategies to meet the non-uniform demand Changing more then 1 of the following variables is called mixed strategy a)Workforce b)Production rate c)Inventory levels Three strategy types Strategy 1 – Absorbing demand fluctuation by varying inventory level, back ordering or shifting demand

Methods Costs Remarks (a) Produce in earlier Inventory carrying Not applicable for periods and hold in cost service operations, inventory until the Delay in receipt of as service product is demanded revenue, at inventory cannot (b) Offer to deliver minimum, may be held Not feasible for the product or result in lost service later, when customers manufacturing capacity is available Costs of companies with (c) Exert special advertising and cost perishable products marketing effort to of discounts. shift the demand to slack periods

Strategy 2 Changing only the production in accordance with the nonuniform demand pattern Methods

Costs

Remarks

(a)Work additional Overtime premium pay Reduces the time hours without changing Excessive labour available (b) Staff for high Some timeforworkforce the workforce sizeso that wages during periods may maintenance work production levels be used for no over-time is required. of slack demand (Idle without deferredinterrupting maintenance production time cost) during slack periods

Methods (c) Sub-contracting (d) Revise make-orwork to outside buy to buy firmsdecisions and profit. items when capacity is fully loaded

Costs Company overhead Waste of company plus Subskills, tooling and contractors equipment overhead utilized in slack periods

Remarks Less control of Requires schedulescapital and investment for quality levels peak production rate, which will be under-utilized in slack periods

Strategy 3 Changing the size of the work force to vary the production level in accordance with demand Methods Costs Hire additional Hiring cost for Lay-off personnel as Cost of laying off, personnel as demand advertising, travel, demand of efficiency increasesdecreases loss interviewing, morale (due to lay- due to decline training, etc in offs) level is required

Remarks Skilled labour may Capital investment not be available in equipments when needed for peak work force

Choice of appropriate strategy a)The total costs for each alternative plan b)Maintaining positive relations between management and trade unions, (attitude of workers towards working overtime) c)Fatigue, reduced morale and increased costs could result from working too much overtime on a continual basis. d)Product quality might be better with overtime plan rather than sub-contracting plan because all production would be in-house and under the direct control of the firm. e)The flexibility of increasing or decreasing production levels either by hiring or laying-off, by over time or idle time or by subcontracting.

Aggregate plans for service 1.Service system that supply standardized service to the customer 2.So aggregate planning is much easier and simple compared to products producing firms 3.One problem in capacity level planning because no furnished goods are available 4. Master Production scheduling (MPS) 1.Master schedule – Quantity of each end item to be completed in each time period( short range horizon) 2.MPS is developed to review market forecast, customer order, inventory levels etc..

Objectives 1.To schedule end items to be completed promptly and when promised to customers. 2.To avoid overloading or under-loading the production facility, so that, production capacity is efficiently utilized and low production costs result. Functions (a) Translating aggregate plans into specific end items (b) Evaluating alternative schedules (c) Generating material requirements (d) Generating capacity requirements (e) Facilitating information processing (f) Maintaining valid priorities (g) Utilizing capacity effectively

Time Interval And Planning Horizon For MPS §Time interval depend upon the type, volume and component lead times of the products to be produced §Also upon product characteristics Time Fences in MPS MPS is divided into 4 section based on time called time fence 1.Frozen – 1st section – MPS cannot be changed except on extraordinary situation After getting authorization from higher levels Because costly 2.Firm – Change occur but exceptional situation 3.Full – All products are allocated to orders, Change makes production cost to be affected in less amount 4. Open – Not all production capacity has been allocated

Procedure for developing MPS

1.Total demand of end items from all sources are estimated. 2.Orders are assigned to production set. 3.Delivery promises are made to customer before detailed calculations are made on work load on work centers for a MPS. 4. Guidelines to Master Scheduling 1.Work from an aggregate production plan. 2.Schedule common modules when possible. 3.Load facilities realistically. 4.Release orders on a timely basis. 5.Monitor inventory levels closely. 6.Reschedule as required.

Updating MPS vUpdated weekly MPS in Produce to stock & Produce to order firm The element of MPS are affected by, a)Demand Management b)Lot – Sizing c)No. of products to be scheduled. In produce – to Stock vOrder come from warehouse within company vOrder based on future demand vForecast play important role in demand management. vLot size depend on economy.

In Product to order 1.Demand management is customer. 2.Lot size is also depending on customer order. Symptoms of poorly designed MPS 1.Overloaded facilities 2.Under-loaded facilities. 3.Excessive inventory levels on some end items and frequent stock-outs on others. 4.Unrealistic schedules that production personnel do not follow. 5.Unreliable delivery promises to customers. 6.Excessive expediting or follow-up.

Resource Requirement Planning: Defines the amount and timing of production resources (ie) personnel, materials , cash , production capacity need to produce finished goods as per master production schedule. It is also known as Rough – cut capacity planning.

The various steps involved are 1.Developing a trial production plan 2.Computing the work load that will impose the production plan 3.Checking for the land profile 4.If it is not feasible ,plan should be revised. 5.Then again evaluate capacity requirement for new plan. 6.Repeat the previous steps to get the satisfactory plan

Resource Requirement Planning Systems

There are 2 main elements 1.Material Requirement Planning (MRP/ MRP I) 2.Capacity Requirement Planning (CRP) Materials Requirement Planning(MRP): Objectives: 1.To improve customer service by meeting delivery schedules promised. 2. To reduce the inventory cost by reducing the inventory levels. 3.To improve plant operating efficiency.

Three facts about MRP: 1.It is a requirement calculator. 2.A manufacturing, planning and control system . 3.A manufacturing resource planning system. Manufacturing Resource Planning (MRP II) When material requirement plan is extended to integrate financial, accounting , personnel, engineering and marketing along with production and control activities of basics MRP resulting broadband co-ordination is called as manufacturing resource planning.

Flow chart of MRP:

Operations of MRP systems:

Inputs: 1.Master Production Schedule 2.Bill of Material BOM or product structure file 3.Inventory status file.

Outputs: 1.Planned order schedule 2.Exception reports 3.Inventory transaction data. Issues of MRP: 1.Lot sizing 2.Safety stock 3.Scrap allowance 4.Pegging 5.Cycle counting 6.Updating 7.Time fence 1.

Potential benefits of MRP: 1.Inventory 2.Production 3.Sales 4.Engineering 5.Planning 6.Purchasing 7.Scheduling 8.Finance.

Implementation of MRP: 1.Management commitment 2.User involvement 3.Education and training 4.Selection of packages 5.Data Accuracy 6.Realistic MPS Problems in using MPS: 1.Preparation of MPS 2.Maintaining accurate BOM files. 3.Incorrect stock status 4.Unrealistic lead times.

Problems in Designing the MRP system: 1.Inadequacies of software chosen. 2. Deficient system design 3.Improper and ultimately information flow among various related departments. Solutions to overcome the problems are, 1.Careful choice of software packages to suit the organizational specific needs. 2.Careful planning of activities and scheduling 3.Assigning work to competent work power. 4.Continuous monitoring of progress against schedule. 5.Substancial education and training at all the levels. 6.Involvement of users at system design stage itself. 7.Maximum attention at the stage of creating the database.

Problems in managing the MRP system: 1.Need for the formal system and role of system. 2.Need for proper organization of functions 3.Importance of proper appreciation of planning and control system 4.Timeliness of generating information required in managing the plant. 5.Effective communication system 6.Proper motivation of people. 7.Right leadership. Advantages of MRP: 1.Improved customer service 2.Reduced inventory services. 3.Improved operating efficiencies of production departments.

Production System suitable for MRP should have the following characteristics 1.Effective computer system 2.Computerized BOM files and inventory status file for all the end products and materials with highest accuracy. 3.Production system that manufactures discrete products made up of raw materials ,parts , assemblies. 4.Production process requiring long processing time. 5.Short and reliable lead times for procurement of raw materials. 6.The time fence for the frozen MPS should be sufficient to procure materials without under expediting effort. 7.Support and commitment of the top management.

Manufacturing Resource Planning(MRP II) Developed by manufacturing managers to address the planning and controlling of a manufacturing process. It is a management for breaking up the business plan into detailed task that people evaluate ,agree upon and held accountable.