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MODULE 5 Capacity planning

Capacity Planning:

Capacity refers to the maximum load an operating unit can handle. The operating unit might be a plant, a department, a machine, a store or a worker.

Production capacity:

The production capacity of a facility or a firm is the maximum rate of production the facility or the firm is capable of producing. It is usually expressed as volume of output Per period of time.

Types of capacity

(i) Fixed capacity: This refers to the capital assets (buildings and equipments) a firm possesses at a particular time. It cannot be easily changed in a short period of time.

(ii) Variable capacity: This refers to the size of the work force. The no. of hrs per day or per week the equipment and labour work and the extent of overtime and subcontracting of work.

(iii) Immediate capacity: is that which can be made available within the current budgeted period.

(iv) Potential capacity: is that which can be available within the decision Horizon of the management.

(v) Design capacity: It is the planned rate of output of goods or services under normal working conditions. It sets the upper limit to capacity assuming that there is no capacity loss due to absenteeism, poor planning & Non-availability of materials etc.
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(vi) Operating capacity: It is the capacity which can be utilized after taking into account the capacity losses due to ineffectiveness, bad planning, rejections and sc rap rate etc.

(vii) System capacity: is the maximum output of a specific product or product mix, a production system can produce. It is less than design or installed capacity because of limitation on the system due to (i) Changes in product mix (ii) Quality specifications (iii) Balance of equipment and labour.

(viii) Normal or Rated capacity: It is the estimated quantity of output or production that should be normally achieved taking into consideration the overall efficiency of equipment and labour. The actual capacity which is available for utilization is less than the rated capacity and is expressed as a percentage of rated capacity.

ix) Utilized capacity: This is the actual output achieved during a particular time period.

Utilization = Actual output

Design capacity

Actual output System efficiency= System capacity

X) Peak capacity: It is the maximum output that a process or facility can achieve under ideal conditions, peak capacity can be reached by using excessive overtime, extra shifts, over staffing and subcontracting.

Xi) Surplus capacity: It is the excess or unutilized capacit6y which is available as surplus to be utilized for any new customers order or any increased in forecasted demand for a Future time period.
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xii) Bottle neck capacity: Most facilities have multiple operations and often their effective capacities are not identical. A bottle neck is an operation which has the lowest effective capacity of any operation in the facility and thus limits the systems capacity and output.

Factors affecting determination of plant capacity:

i) Market demand for the product ii) Capital Investment required iii) Level of automation desired. iv) Type of Technology selected v) Changes in product design, process design, market conditions and product life cycle. vi) Product obsolescence and Technology obsolescence. vii) Flexibility for capacity additions.

Capacity planning decisions:

Capacity planning involves activities such as a) Assessing the capacity of existing facilities b) Forecasting the long range future capacity needs. c) Identifying and Analyzing sources of capacity for future needs d) Evaluating the alternative sources of capacity based on financial, Technological and Economic considerations. e) Selecting a capacity alternative most suited to achieve strategic mission of the firm.

Types of capacity planning

A) On the basis of time horizon,

a) Long range (term) capacity planning b) Short range (term) capacity planning
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B) Based on the amount of resources employed,

a) Finite capacity planning b) Infinite capacity planning

(i) Long term capacity planning: long term capacity planning is done to include major changes that affect the overall level of output in the long run .the major change could be decisions to develop new product lines, expanding existing facilities and construct new or phase out existing production plants.

(ii) Short term capacity planning: is concerned with meeting the relatively intermediate variation in demand due to seasonal or economic factors. Short term capacity planning involves adjusting the capacity to match the varying demand in short run by a) Use of overtime or idle time b) Increasing the No. of shifts c) Subcontracting to other firms.

Finite capacity planning: when the customer doesnt specify the delivery schedule or where the products are produced to stock and sell. It is simpler to use forward scheduling based on finite capacity. (The surplus capacity available to accommodate the new customer order) to arrive at the delivery or completion schedule.

Infinite capacity planning: If the delivery schedule is fixed by the customer, then the backward scheduling is done to accommodate this delivery schedule by planning for infinite capacity (capacity required to execute the customer order in the shortest period possible)

Factors affecting capacity planning:

a) Controllable factors b) Less controllable factors.

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Controllable factors include amount of labour employed, facilities installed. Machines, tooling shifts of work per day, days worked per week, overtime work, subcontracting, preventive maintenance, and no. of production set ups.

Less controllable factors include absenteeism. Labour performance, machine break-downs, material shortages, scrap and reworks, strike, lock-out fire accidents etc.

Developing capacity alternatives: To enhance capacity Management, the following approaches to capacity alternatives could be developed.

i) Designing flexibility into the system:

Designing flexible production systems can offer potential benefits in long range capacity planning because of the risks inherent in long term forecasts. Ex: It would be less expensive to provide for future expansion in the originated design of a structure rather than remodeling an existing structure to accommodate higher production capacity.

ii) Differentiating between new and mature product and services: Capacity requirements of mature products can be predicted more precisely and mature products may have limited life spans. The possible limited life span of matured products or service may necessiate finding an alternative use for the resulting excess capacity at the end of life span. On the other hand, new products tend to carry higher risk because the quantity demanded and duration of the demand cannot be predicted accurately.

iii) Taking a big- pitcher approach to capacity changes: - When developing capacity alternatives a firm must consider how different parts of the system interrelate. Ex., when the management of a five star Hotel makes a decision to Increase the No of rooms, it must also consider probable increased demand for parking lots restaurant seating capacity, bigger dining hall and kitchen capacity.
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iv) Preparing to deal with Chunks of capacity: - Usually, capacity increases are often acquired in the form of fairly large chunks of capacity rather than small increments is capacity.

Ex.: in a steel pant, the existing capacity of a furnace may not be enough to meet the Demand, but installing an additional furnace would result in having less capacity because additional furnaces cannot be installed in small capacity chunks. v) Attempting to smooth out capacity requirements: - Having unevenness in capacity requirement may be problematic. For eg. During seasons of bad or extreme weathers, more and more people may tend to use public transport vehicles for their travel rather than using their own vehicles. Consequently the public transportation system may tend to alternate between under utilization and over utilization.

vi) Identifying the optimal operating level:-

The optimal operating level is the Ideal level of operation at which the cost per unit is the lowest for the production unit. Larger or smaller volumes of output would result in higher unit cost.

Aggregate production planning:-

It is the process of determining output levels (units) of product groups over the next 6 to 18 months period on a weekly or monthly basis. The plan indicates the overall level of outputs supporting the business plan. The aggregate plan is a statement of a firms production rates, work-force levels and Inventory holding based on estimates of customer requirements and capacity Limitations.

Objectives of Aggregate planning:1. The overall objective is to balance conflicting objectives involving customer service, work force stability, cost and profit.
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2. To establish company-wide strategic plan for allocating resources.

3. To develop an economic strategy to meet customer demand.

Importance of Aggregate planning:1. Engineering: - New products, product design changes and machine standards. 2. Materials: - Supplier capabilities, storage capacity and materials availability. 3. Operations: - Current Machine capacities, plans for future capacities, workforce capacities and current staff levels. 4. Marketing & Distributions: - Customer needs demand forecasts, competition behavior. 5. Accounting & Finance: - Cost data and financial condition of the firm. 6. Human Resources: - labour market conditions and training capacity.

Aggregate Capacity Planning:-

It is the process of devising a plan for providing a production capacity scheme to support the intermediate range sales forecast.

As forecasted demand becomes known in the form of customer orders, aggregate capacity plans may have be to revised upward and downward to avoid either over loaded or under loaded facilities.

Need for aggregate capacity planning:-

1. It facilitates fully loaded facilities and minimizes overloading and under loading and keeps the production costs low. 2. Adequate production capacity is provided to meet expected aggregate demand.

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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, get the maximum output for the amount of resources enhanced. 5. To manage change in production / operations management by planning for production resources that adapt to the changes is customer demand.

Steps in Aggregate Capacity planning:-

Prepare the sales forecast for each product that indicates the quantities to be sold in each time period over the planning horizon. Sum up the individual product or service forecast into one aggregate demand for the factory. Transform the aggregate demand for each time period into labour, materials, machines and other elements of production capacity required to satisfy aggregate demand. Develop alternative resource schemes for supplying the necessary production capacity to support the cumulative aggregate demand. Select the capacity plan from among the alternatives considered that satisfies aggregate demand and best meets the objectives of the organization.

Approaches to Aggregate planning:-

1. Top Down approach: - Involves development of the entire plan by working only at the highest level of consolidation of products. It consolidates the products into an average product and then develops one overall plan. This plan is disintegrated to allocate capacity to product families and individual products.

2. Bottom-up Approach: - Involves development of plans for major products or product families at some lower level within product line. These sub plans are then consolidated to arrive at the aggregate plan which gives the overall output and the capacity required to produce it.
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3. Capacity Requirement Planning:Capacity requirement planning is a technique for determining what labour / personnel and equipment capacities are needed to meet the production objectives symbolized in the Master Production schedule (MPS) and the Material requirement planning (MRP-I)

Aggregate capacity planning strategies:-

Aggregate capacity planning involves the best quantity to produce during time periods in the Intermediate-range Horizon and planning the lowest cost Method of providing the adjustable capacity to accommodate production requirements.

Two types of aggregate plans that are commonly used are-

a. Level capacity plan. b. Matching capacity with aggregate Demand plan.

a) Level capacity plan: Level capacity plans have uniform capacities per day from time period to time period. The underlying principle of Level Capacity Plan is produce to stock and sell firms is operate production systems at uniform production levels and let finished goods inventories rise and fall as they will to buffer the differences between aggregate demand and production levels from time period to time period.

Advantages: cost of hiring and laying off workers and using overtime is practically eliminated. The cost of locating and developing new sources of material supplies is minimized. ii) Labour and material cost/unit of output is low. iii) Simplified supervision and low scrap rates since workers are experienced in their jobs. iv) Low operating cost v) Dependable production rates.

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Disadvantages:

a) Results in higher finished goods. b) Higher Inventory levels c) Increased Inventory carrying costs.

B) Matching capacity with Aggregate demand plan: In this plan, the production capacity is matched with the aggregate demand in each time period. The work force is fluctuated to support the aggregate plan. Material flows and machinery capacity would be allowed to change from quarter to quarter to match the aggregate demand.

The main advantage of this plan is the lower levels of finished goods. Inventory resulting in lesser carrying costs when compared to level capacity plan. However labour and materials cost tend to be higher because of frequent changes in work force, material supplies and increasing or decreasing machine capacities.

Strategies for aggregate capacity planning:

1) Active strategies: The objective is to smooth out the peaks and valleys of demand during the planning horizon to obtain a smoother load on production facilities. During periods of low demand, increased sales can be encouraged through price cuts. During periods of high demand, management can choose not to meet all the demand requirement but this approach ignores opportunities of increased revenue.

2) Passive strategies: The objective is not to change demand but to absorb somehow the fluctuations in demand. The alternatives include varying any one of the work force size, production rate, and inventory, sub contracting and capacity utilization.

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Resource Requirement planning: Resource requirement planning is directed at determination of the amount and timing of production resources such as personnel, materials, cash and production capacity needed to produce the finished products or end Items as per the master production schedule.

It is an aggregate planning tool that is used to sum up and evaluates the work load that a production plan (MPS) imposes either on all work centers or on only selected key work centre where resources are limited, expensive or difficult to obtain from outside sources.

Rough cut capacity planning is usually applied to the critical work centers which are most likely to be bottlenecks.

Resource Requirement Planning System (Diagram)

Functional Inputs

Resource planning

requirement Outputs

Marketing

short

range

Marketing

end

item

demand forecast Finance cash availability inventory norms.

production schedule Finance/accounting Inventory level schedule

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OPERATIONS MANAGEMENT Production capacity Master production schedule (MPS)

10MBA33 Production -MPS, load profile capacity utilization data,

constraints, development of MPS, CRP and MRP. Engineering changein

Planned materials order, shop floor plans.

product design and product structure. Personal availability Purchasing material Material planning(MRP) requirement employee

Engineering

new

design

incorporation data.

supply availability MIS. Data base system Bill of material file.

Personnel

employee

requirement schedule

Purchasing planned order and order releases Capacity planning(CRP) requirement MIS. data base system updated inventory status file.

Material Requirement planning: Material requirement planning is computer based system in which the given MPS is exploded into the required amounts of raw materials, parts and sub assemblies, needed to produce the end items in each time period of the planning horizon. The gross requirement of these materials is reduced to net requirements by taking into account that material that are in inventory or on order.

Objectives of MRP

1) to improve customer service by meeting delivery schedules promised and shortening delivery schedules promised and shortening delivery lead times.

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3) To improve plant operating efficiency by better use of productive resources.

Benefits of MRP:

a) Inventory: the info provided by the MRP system is useful to better co ordinate orders for components with production plans for parent items. This results in reduced levels of average inventory for dependent demand items.

b) Production: Info from MRP facilitates between utilization of human and capital resources.

c) Sales: MRP helps to check in advance whether the desired delivery dates are achievable. It improves the companys ability to react to changes in customer orders.

d) Engineering: MRP helps in planning the time of design releases and design changes.

e) Planning: MRP can simulate changes in the MPS for purpose of evaluation of alternative MPS. It facilitates projection of equipment and facility requirement.

f) Purchasing: MRP helps purchase dept. by making known the real priorities and recommending changes in due dates for orders so that the purchase staff may expedite or delay the orders placed on vendors.

g) Scheduling: better scheduling can result from MRP through better knowledge of priorities.

h) Finance: MRP can help better planning of cash flow requirements. It can identify time capacity constraints or bottleneck work centers thereby helping operations managers to make better capital investment decisions.

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Master production schedule (MPS)

The MPS specifies what end products are to be produced and when the planning Horizon should be long enough to cover the cumulative lead times of all components that must be purchased or manufactured to meet the end product requirements.

b) Bill of Materials (BOM) file:

This file provides there info regarding all the materials parts and sub assemblies that go into the end product. The bill of materials can be viewed as having a series of levels, each of which h represents a stage in the manufacture of the end product. The highest level of BOM represents the final assembly or end product. The BOM file identifies each component by a unique part number and facilitates processing by exploding the end product requirements into component requirements.

c) Inventory status file: The inventory status file gives complete and up to date info on hand quantities. Gross requirements scheduled receipts and planned order releases for the item. It also includes other into such as lot sizes, lead times, safety stock levels and sc rap allowances. The gross requirements are total needs from all resources whereas the net requirements are net after allowing for available inventory and scheduled receipt.

Scheduled receipts are the quantities already on order from a vendor or in house shop. Planned receipts are quantities that will be ordered on a vendor or in house shop. Planned order release indicates the quantity and date to initiate the purchase or manufacture of materials that will be received on schedule after the lead time offset.

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