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 Measure of Capacity
Automobile factory Number of vehicles
Steel Mill Tones of Steel
Power Plant Mega watt of electricity generated
Job shop Labour hours worked.
Airline Number of seats
Hospitals Number of beds
University Number of students
Banks 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
Expansion
change Sub-contracting with other companies to
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
Reduction
change Selling off existing facilities, selling
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
the product or result in lost Not feasible for

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 non-
uniform demand pattern
Methods Costs Remarks
(a)Work additional Overtime premium pay Reduces the time
hours without
(b) Staff changing Excessive labour
for high available
Some timeforworkforce
the workforce
production sizeso that wages during periods may
levels maintenance work
be used for
no over-time is required. of slack demand (Idle without
deferredinterrupting
maintenance
time cost) production
during slack periods
Methods Costs Remarks
(c) Sub-contracting Company overhead Less control of
(d)
workRevise make-or-
to outside Waste of company
plus Sub- Requires
schedulescapital
and
buy
firmsdecisions to buy
and profit. skills, tooling and
contractors investment for
quality levels
items when capacity equipment
overhead utilized peak production
is fully loaded in slack periods 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 Remarks
Hire additional Hiring cost for Skilled labour may
Lay-off personnel as Cost of laying off, Capital investment
personnel as demand advertising, travel, not be available
demand
increasesdecreases loss of efficiency
interviewing, in equipments
when needed for
morale (due to lay- due to decline
training, etc in peak work force
offs) level is required
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.