CAPACITY PLANNING
impossible to modify without incurring major costs.
Capacity refers to an operating unit’s potential and its
upper limit or ceiling for producing goods or delivering
services over a specified time interval.
Capacity decisions are important because capacity is a
ceiling on output and a major determinant of operating
costs
Capacity issues are important for all organizations, and at
all levels of an organization. Capacity refers to an upper
limit or ceiling on the load that an operating unit can
handle. The operating unit might be a plant, department,
machine, store, or worker.
3 Key Inputs to Capacity Planning:
1. Kind of capacity needed
2. How much capacity is needed to match demand
3. When is it needed
The capacity of an operating unit is an important piece of
information for planning purposes: It enables managers to
quantify production capability in terms of inputs or
outputs, and thereby make other decisions or plans
related to those quantities.
Goal of Strategic Capacity Planning:
To achieve a match between the long-term supply
capabilities of an organization and the predicted level of
long-term demand.
Main Reasons for Capacity Planning:
 Changes in demand.
 Changes in technology.
 Changes in environment.
 Perceived threats or opportunity.
Capacity Decision are Strategic Due to the Following
Reasons:
1. Capacity decisions have a real impact on the ability of
the organization to meet future demands for products
and services; capacity essentially limits the rate of
output possible.
2. Capacity decisions affect operating costs.
3. Capacity is usually a major determinant of initial cost.
4. Capacity decisions often involve long-term
commitment of resources and the fact that, once they
are implemented, those decisions may be difficult or
5. Capacity decisions can affect competitiveness.
6. Capacity affects the ease of management; having
appropriate capacity makes management easier than
when capacity is mismatched.
7. Globalization has increased the importance and the
complexity of capacity decisions.
8. Because capacity decisions often involve substantial
financial and other resources, it is necessary to plan
for them far in advance.
Capacity utilization Percentage measure of how well
available capacity is being used.
Two Measures of Capacity:
1) Design Capacity- the maximum output rate or
service capacity an operation, process, or facility
is designed for.
2) Effective Capacity- design capacity minus
allowances such as personal time, equipment
maintenance, delays due to scheduling problems,
and changing the mix of products.
(Regardless of how much capacity we have, we also need to
measure how well we are utilizing it. Capacity utilization simply
tells us how much of our capacity we are actually using. Certainly
there would be a big difference if we were using 50 percent of our
capacity, meaning our facilities, space, labor, and equipment,
rather than 90 percent. Capacity utilization can simply be
computed as the ratio of actual output over capacity)
Two Measures of System Effectiveness:
1) Efficiency- is the ratio of actual output to effective
capacity.
2) Utilization- or capacity utilization is the ratio of
actual output to design capacity.
DETERMINANTS OF EFFECTIVE CAPACITY 7) Implement the selected alternative.
1.Facilities 8) Monitor results.
Design
Location Layout I. Capacity planning decisions involve both long-term
Environment and short-term considerations.

2.Product or Service Factors Long-term Considerations- relate to overall level of

Design capacity, such as facility size.
Product or service mix
Short-term Considerations- relate to probable variations
3.Process Factors in capacity requirements created by such things as
Quantity Capabilities seasonal, random, and irregular fluctuations in demand.
Quality Capabilities
II.Determining Needed Capacity
4.Human Factors
Job Content
Job Design
Training and Experience
III. Developing Capacity Strategies
Motivation
Some of the Capacity Strategies:
Compensation
1. Design flexibility into systems.
Learning Rates
The long-term nature of many capacity decisions and the
Absenteeism and Labor Turnover
risks inherent in long-term forecasts suggest potential
benefits from designing flexible systems.
5.Policy Factors
 Provision for future expansion.
Policy on overtime
 Layout of equipment
Policy on the number of shifts
 Location
 Equipment selection
6.Operational Factors
 Production planning
Scheduling
 Scheduling
Materials
 Inventory policies
Management
Quality Assurance
2. Take stage of life cycle into account.
Maintenance Policies
Capacity requirements are often closely linked to the
Equipment Breakdowns
stage of the life cycle that a product or service is in.
Stages of Life Cycle:
7.Supply Chain Factors
 Introduction phase
Substantial Capacity Changes
 Growth phase
 Maturity phase
8.External Factors
 Decline phase
Product Standards
Safety Regulations
3. Take a “big-picture” (i.e., systems) approach to
Unions
capacity changes.
Pollution Control Standards

Steps in the Capacity Planning Process:

1) Estimate future capacity requirements.
2) Evaluate existing capacity and facilities and
identify gaps.
3) Identify alternatives for meeting requirements.
4) Conduct financial analyses of each alternative.
5) Assess key qualitative issues for each 4. Prepare to deal with capacity “chunks.”
alternative. 5. Attempt to smooth out capacity requirements.
6) Select the alternative to pursue that will be best Smooth out capacity requirements by introducing
in the long term. products with complementary demand patterns.

6. Identify the optimal operating level.
Economies of Scale-If the output rate is less than the
optimal level, increasing the output rate results in
decreasing average unit costs.
Diseconomies of Scale- If the output rate is more than the
optimal level, increasing the output rate results in
increasing average unit costs
7. Choose a strategy if expansion is involved.
Factors to Consider:
 Competitive pressures.
 Market opportunities.
 Costs and availability of funds.
 Disruption of operations.
 Training requirements.
 “Lead or follow competitors” strategy.
IV. Financial Analyses
Common Techniques for Evaluating Capacity
Alternatives from an Economic Standpoint are as
follows:
 Cost-volume analysis - focuses on relationships
between cost, revenue, and volume of output.
Break-even Point (BEP)- the volume at which
total cost and total revenue are equal.
 Financial analysis -an approach used to allocate
scarce funds or to rank investment proposals
taking into account the time value of money.
 Decision theory - tool for financial comparison of
alternatives under conditions of risk or
uncertainty. Involves identifying a set of possible
future conditions that could influence results,
listing alternative courses of action, and
developing a financial outcome for each
alternative–future condition combination.
 Waiting line analysis - is useful in helping
managers choose a capacity level that will be
cost-effective through balancing the cost of
having customers wait with the cost of providing
additional capacity. It can aid in the
determination of expected costs for various
levels of service capacity. The lines are
symptoms of bottleneck operations.
V. Constraint Management
7 Categories of Constraints:
 Market: Insufficient demand
 Resource: Too little of one or more resources
(e.g., workers, equipment, and space), also
referred to as Bottleneck Operation
 Material: Too little of one or more materials
 Financial: Insufficient funds
 Supplier: Unreliable, long lead time, substandard
quality
 Knowledge or competency: Needed knowledge or
skills missing or incomplete
 Policy: Laws or regulations interfere
PROCESS SELECTION
 A process is a group of related tasks with specific inputs
and outputs.
 Processes exist to create value
 Process design defines what tasks need to be done and
how they are to be coordinated among functions,
people, and organizations.
(Processes are planned, analyzed, and redesigned as
required by changes in strategy and emerging
technology.)
Some Factors to be considered in Designing a Process
1. Product variety – Is the product highly
standardized, or is the product highly
customized?
2. Volume of output – Is the business created to
produce large volumes or a small amount of
output?
3. Is the technology to be used general purpose or
specialized? Is it capital intensive?
4. The skill level of employees, it is very high or low?
5. Production Lifespan - What is the expected
duration?
6.
Process Strategy Decisions
• A process involves the use of an organization’s
resources to provide something of value.
• No service can be provided and no product can
be made without a process, and no process can
exist without at least one service or product.
Four Basic Process Decisions
1. Process structure determines the process type
relative to the kinds of resources needed, how
resources are partitioned between them, and
their key characteristics. A layout, which is the
physical arrangement of operations created from
the various processes, puts these decisions into
tangible form.
2. Customer involvement reflects the ways in which
customers become part of the process and the
extent of their participation.
3. Resource flexibility is the ease with which
employees and equipment can handle a wide
variety of products, output levels, duties, and
functions.
 4. Capital intensity is the mix of equipment and
human skills in a process. The greater the relative
cost of equipment, the greater is the capital
intensity.
Process Types
1. Project
• One time event
• High degree of customization
• substantial use of resources
• a complex set of related activities
• Produced only single output
(such as construction of an apartment building,
implementation of a new ERP system, or writing a
book)
2. Job Shop
 Make – to – order type of business (intermittent
production)
 Product uniqueness based on customer
perspective
 Workers performing are well skilled
 Production volume is low
 very highly skilled in their craft or trade. Often
they are referred to as craftsmen or makers.
 Examples include a small bakery that produces
beautiful custom wedding cakes, or a business
that makes custom guitars or bicycles based on
the customer’s measurements and preferences of
materials and components.
3. Batch
 Has set of steps to be complete
 It is intermittent
 Equipment used is general in purpose and suits to
the industry
 Employees need to be skilled and experienced
● Intermittent – start, stop, start
● Examples of products made using batch
production are baked goods, aircraft parts,
clothing, and vaccines.
4. Repetitive
 Products are standardized in nature
 Output is high
 Equipment used is specialized
 Skill level of employees is low because the steps
are highly standardized.
 Used Flexible automation in production
● The skill level of the employees is usually low
because the steps are highly standardized.
Although these types of jobs may not require a
trade or extensive experience, they often do
require skills such as multi-tasking, concentration,
problem solving, and teamwork.
● Examples of a repetitive process include assembly
lines such as assembling automobiles or
electronics, a carwash, or a cafeteria line.
5. Continuous
• High volume of standardized products are
produced
• Product produced is describe as non-discrete
• No set workstations – product flows one step /
system
• Equipment is high complex and designed
specifically only for that certain facility.
• Few workers with specific task (monitoring,
maintenance, cleaning)
● non-discrete. This means that these businesses
do not produce individual products, rather a
product that is often a liquid or a product such as
sugar, gasoline, or steel.
● An example of this type of process is an oil
refinery.
6. Hybrids
 Mass customization model of production
 use of computer-aided manufacturing systems
 Requires modular design
● In mass customization, a company combines low-
cost high volume of output, but each and every
customer order is customized to the customers
specifications.
● Examples include furniture makers who wait to
produce the exact model of sofa based on the
customers dimensions and fabric choice, or the
vehicle manufacturer that has dozens of
customization packages and paint options such
that each vehicle is custom for the purchaser
Production Technology
(Advances in technology that enhance production and
productivity are changing how things are designed, made,
and serviced around the world.)
1. Machine Technology
• Machines perform in operations by removing
material such as cutting, drilling, boring and
milling.
• Computer intelligence in machine
- Computer Numerical Controls (CNC)
 • Electronic controls increase speed, reduce waste
and enhance the flexibility.
2. Automatic Identification Systems (AISs) and RFID
• Digital Electronic signals – data to electronic form
• RFID – is a integrated circuitry with its own own
tiny antennas that use radio waves to send signals
a limited range—usually a matter of yards.
• RFID tags provide identification for tracking and
monitoring.
3. Process Control
• used to determine and control temperatures,
pressures, and quantities in petroleum refineries,
petrochemical processes, cement plants, steel
mills, nuclear reactors, and other product-
focused facilities
• Process control systems – sensor collect data,
translating digital signals, computer programs,
etc.
(Used of information technology in monitoring and
control processes.
For instance, process control is used to measure the
moisture content and thickness of paper as it travels over
a paper machine at thousands of feet per minute.)
4. Vision Systems
• Combination of video cameras and computer
technology for inspections roles.
• Visual inspection is an important task in most
food-processing and manufacturing
organizations.
5. Robots
• A machine which has the ability to hold, move
and grab items.
• are mechanical devices that use electronic
impulses to activate motors and switches
• used effectively to perform tasks that are
especially monotonous or dangerous or those
that can be improved by the substitution of
mechanical for human effort
(consistency, accuracy, speed, strength, or power can be
enhanced by the substitution of machines for people. The
automobile industry, for example, uses robots to do
virtually all the welding and painting on automobiles.)
6. Automated Storage and Retrieval Systems (ASRSs)
• provide for the automatic placement and
withdrawal of parts and products into and from
designated places in a warehouse
7. Automated Guided Vehicles (AGVs)
• Automated material handling can take the form
of monorails, conveyors, robots, or automated
guided vehicles.
• They are electronically guided and controlled
carts used in manufacturing and warehousing to
move parts and equipment.
(They are also used in agriculture to distribute feed, in
offices to move mail, and in hospitals and jails to deliver
supplies and meals.)
8. Flexible Manufacturing Systems (FMSs)
• a central computer provides instructions to each
workstation and to the material- handling
equipment such as robots, ASRSs, and AGVs (as
just noted), the system is known as an automated
work cell or FMS
• is flexible because both the material-handling
devices and the machines themselves are
controlled by easily changed electronic signals
(computer programs)
(Operators simply load new programs, as necessary, to
produce different products. The result is a system that can
economically produce low volume but high variety.)
8. Computer – Integrated Manufacturing (CIM)
• computer-aided design (CAD) generates the
necessary electronic instructions to run a
numerically controlled machine
• CIM environment - a design change initiated at a
CAD terminal can result in that change being
made in the part produced on the shop floor in a
matter of minutes
(When this capability is integrated with inventory
control, warehousing, and shipping as a part of a
flexible manufacturing system, the entire system is
called computer-integrated manufacturing (CIM))
▹ Process Analysis and Design
▹ When analyzing and designing processes, we ask
questions such as the following:
 o Is the process designed to achieve competitive
advantage in terms of differentiation, response,
or low cost?
o Does the process eliminate steps that do not add
value?
o Does the process maximize customer value as
perceived by the customer?
o Will the process win orders?
(Process analysis and design not only addresses these
issues, but also related OM issues such as throughput,
cost, and quality. Process is key. Examine the process;
then continuously improve the process. )
Tools help us understand the complexities of process
design and redesign
1.Flowchart
• The first tool is the flowchart, which is a
schematic or drawing of the movement of
material, product, or people.
• Such charts can help understanding, analysis, and
communication of a process
2. Time-Function Mapping
 A second tool for process analysis and design is a
modified flowchart with time added on the
horizontal axis.
 Such charts are sometimes called time-function
mapping, or process mapping.
 With time-function mapping, nodes indicate the
activities, and the arrows indicate the flow
direction, with time on the horizontal axis.
 This type of analysis allows users to identify and
eliminate waste such as extra steps, duplication,
and delay.
3. Process Charts
• use symbols, time, and distance to provide an
objective and structured way to analyze and
record the activities that make up a process
• They allow us to focus on value-added activities.
4. Value-Stream Mapping
• A variation of time-function mapping is value-
stream mapping (VSM); an expanded look at
where value is added (and not added) in the
entire production process, including the supply
chain.
• As with time-function mapping, the idea is to
start with the customer and understand the
production process, but value-stream mapping
extends the analysis back to suppliers
5. Service Blueprinting.
• Products with a high service content may warrant
use of yet a fifth process technique.
• Service blueprinting is a process analysis
technique that focuses on the customer and the
provider’s interaction with the customer.
FORECASTING
• Forecast is a prediction of future events used for
planning purposes.
• Planning is the process of making management
decisions on how to deploy resources to best
respond to the demand forecasts.
(Forecasting methods may be based on mathematical
models that use available historical data, or on
qualitative methods that draw on managerial
experience and judgments, or on a combination of
both.)
Common Features of Forecasting Models
1. Forecasts are rarely perfect.
2. Forecasts are more accurate for groups or
families of items rather than for individual items.
3. Forecasts are more accurate for shorter than
longer time horizons.
Five basic steps of forecasting process;
Types of Forecasting Methods
● Qualitative forecasting methods, often called
judgmental methods, are methods in which the
forecast is made subjectively by the forecaster. It
translates the opinions of managers, expert
opinions, consumer surveys, and salesforce
estimates into quantitative estimates.
● Quantitative forecasting methods, on the other
hand, are based on mathematical modeling.
Because they are mathematical, these methods
are consistent. The same model will generate the
exact same forecast from the same set of data
every time. These methods are also objective.
Four types of Judgment method (qualitative forecasting between the key variables. Sometimes called associative
methods); models, use a very different logic to generate a forecast.

● Salesforce estimates. The forecasts that are

compiled from estimates of future demands
made periodically by members of a company’s
salesforce.
● Executive opinion. A forecasting method in which
the opinions, experience, and technical
knowledge of one or more managers are
summarized to arrive at a single forecast. This
method is often used for strategic forecasting or
forecasting the success of a new product or
service.
● Market research. A systematic approach to
determine external consumer interest in a service
or product by creating and testing hypotheses
through data-gathering surveys. It is an approach
that uses surveys and interviews to determine
customer likes, dislikes, and preferences and to
identify new-product ideas.
● Delphi method. A process of gaining consensus
from a group of experts while maintaining their
privacy. The researcher puts together a panel of
experts in the chosen field. These experts do not
have to be in the same facility or even in the
same country. They do not know who the other
panelists are.

In Time Series Model there are five basic patterns of

demand:

1. Horizontal. The fluctuation of data around a

Two Main approaches of qualitative forecasting;
1.Time series examine the pattern of past behavior of a
single phenomenon over time taking into account reasons
for variation in the trend in order to use the analysis to
forecast the phenomenon’s future behavior.
● assume that all the information needed to
generate a forecast is contained in the time series
of data. A time series is a series of observations
taken at regular intervals over a specified period
of time.
2.Causal modelling is an approach which describes and
evaluates the complex cause–effect relationships
constant mean.
2. Trend. The systematic increase or decrease in the
mean of the series over time.
3. Seasonal. A repeatable pattern of increases or
decreases in demand, depending on the time of
day, week, month, or season.
4. Cyclical. The less predictable gradual increases or
decreases in demand over longer periods of time
(years or decades).
5. Random. The unforecastable variation in demand.
Patterns of Demand
The four patterns of demand—horizontal, trend,
seasonal, and cyclical—combine in varying degrees to
define the underlying time pattern of demand for a
service or product. The fifth pattern, random variation,
results from chance causes and thus, cannot be
predicted. Random variation is an aspect of demand that
makes every forecast ultimately inaccurate.
• Forecast errors are defined as providing
important clues for making better forecasts.
Forecast error for a given period t is simply the difference
found by subtracting the forecast from actual demand, or
The cumulative sum of forecast errors (CFE) measures the
total forecast error:
• CFE is also called the bias error and results from
consistent mistakes—the forecast is always too
high or too low.
• This type of error typically causes the greatest
disruption to planning efforts.
• For example, if a forecast is consistently lower
than actual demand, the value of CFE will
gradually get larger and larger. This increasingly
large error indicates some systematic deficiency
in the forecasting approach.
The average forecast error, sometimes called the mean
bias, is simply:
n = number periods
The mean squared error (MSE), standard deviation of
the errors (s), and mean absolute deviation (MAD)
measure the dispersion of forecast errors attributed to
trend, seasonal, cyclical, or random effects:
• standard deviation (s) A measurement of the dispersion
of forecast errors.
• mean absolute deviation (MAD) A measurement of the
dispersion of forecast errors.
• mean squared error (MSE) A measurement of the
dispersion of forecast errors.
The mean absolute percent error (MAPE) relates the
forecast error to the level of demand and is useful for
putting forecast performance in the proper perspective:
The naïve method is one of the simplest forecasting
models. It assumes that the next period’s forecast is equal
to the current period’s actual.
Mathematically, we could put this in the following form:
For example, if your sales were 500 units in January, the
naïve method would forecast 500 units for February. It is
assumed that there is little change from period to period.
The statistical techniques that do have an adaptive quality
in estimating the average in a time series are; simple
moving averages, weighted moving averages, and
exponential smoothing.
The statistical techniques that do have an adaptive quality
in estimating the average in a time series are; simple
moving averages, weighted moving averages, and
exponential smoothing.
1. simple moving average method
• A time-series method used to estimate the
average of a demand time series by averaging the
demand for the n most recent time periods.
(The average of a set of data. A forecasting method in
which only n of the most recent observations is averaged.)
2. weighted moving average method
• A time-series method in which each historical
demand in the average can have its own weight;
the sum of the weights equals 1.0.
(A forecasting method in which n of the most recent
observations are averaged and past observations may be
weighted differently.)
3. Exponential smoothing method
• A weighted moving average method that
calculates the average of a time series by
implicitly giving recent demands more weight
than earlier demands.
• exponential smoothing requires only three items
of data:
1. the last period’s forecast;
2. the actual demand for this period; and
3. a smoothing parameter, alpha (a), which has
a value between 0 and 1.0.
Trend-adjusted exponential smoothing
Uses three equations
1. The first smooths out the level of the series,
2. the second smooths out the trend, and
3. the third generates a forecast by adding up the findings
from the first two equations.
Linear trend line is a time series technique that computes
a forecast with trend by drawing a straight line through a
set of data.
A linear trend line uses the following equation to
generate a forecast:
Y = a + bX
Where:
Y = forecast for period X
X = the number of time periods from X = 0
a = value of Y at X = 0 (Y intercept)
b = slope of the line
(This approach is a version of the linear regression
technique, and is useful for computing a forecast when
data display a clear trend over time.)
(The coefficients a and b are computed using the least-squares
method, which minimizes the sum of the squared errors.
Developing the equations for a and b can be complicated, so we
will only provide the equations needed for computation.)
SEASONAL PATTERN
 are regularly repeating upward or downward
movements in demand measured in periods of
less than one year (hours, days, weeks, months,
or quarters).
• For example, enrollment is usually much higher in
the fall than in the summer.
• Other examples of seasonality include sales of
turkeys before Thanksgiving or ham before
Easter, sales of
The amount of seasonality is the extent to which actual
values deviate from the average or mean of the data.
• multiplicative seasonality, in which the
seasonality is expressed as a percentage of the
average. The percentage by which the value for
each season is above or below the mean is a
seasonal index.
2. Causal Methods
 used when historical data are available and the
relationship between the factor to be forecasted
and other external or internal factors (e.g.,
government actions or advertising promotions)
can be identified.
 It also good for predicting turning points in
demand and for preparing long-range forecasts.
linear regression
 A causal method in which one variable (the
dependent variable) is related to one or more
independent variables by a linear equation.
 dependent variable. The variable that one wants
to forecast.
 independent variables. Variables that are
assumed to affect the dependent variable and
thereby “cause” the results observed in the past.
 dependent variable. The variable that one wants
to forecast.
 independent variables. Variables that are
assumed to affect the dependent variable and
thereby “cause” the results observed in the past.
Correlation coefficient - Statistic that measures the
direction and strength of the linear relationship between
two variables.
• which measures the direction and strength of the
linear relationship between the independent and
dependent variables.
Three measures commonly reported in linear regression;
(1) the sample correlation coefficient, (r)
(2) the sample coefficient of determination, (r²) and
(3) the standard error of the estimate. ( Sxy ¿
● The sample correlation coefficient, r, measures
the direction and strength of the relationship
between the independent variable and the
dependent variable.
● The sample coefficient of determination measures
the amount of variation in the dependent
variable about its mean that is explained by the
regression line.
● The standard error of the estimate, sxy, measures
how closely the data on the dependent variable
cluster around the regression line.
MULTIPLE REGRESSION is an extension of linear
regression.
• unlike in linear regression where the dependent
variable is related to one independent variable,
multiple regression develops a relationship
between a dependent variable and multiple
independent variables.
(For example, the dependent variable might be sales
and the independent variables might be number of
sales representatives, number of store locations, area
population, and per capita income)
Tracking Signals
 is a measure that indicates whether a method of
forecasting is accurately predicting actual
changes in demand.
 Tool used to monitor the quality of a forecast.
 It is computed as the ratio of the algebraic sum of
the forecast errors divided by MAD:
Tracking signal = algebraic sum of forecast errors / MAD
Tracking signal = Σ (actual – forecast) / MAD
Collaborative Planning, Forecasting, And Replenishment
(CPFR)
- is a collaborative process between two trading
partners that establishes formal guidelines for
joint forecasting and planning.
- The premise behind CPFR is that companies can
be more successful if they join forces to bring
value to their customers, share risks of the
marketplace, and improve their performances.

(CPFR) is a specific nine-step process for supply chain

integration that allows a supplier and its customers to
collaborate on making the forecast by using the Internet.

Forecast across the Organization

 Finance needs forecasts to project cash flows and
capital requirements.

 Human resources uses forecasts to anticipate

hiring and training needs.
 Marketing is an important source for sales
forecast information because it is closest to
external customers.
 Operations and supply chain managers need
forecasts to plan output levels, purchases of
services and materials, workforce and output
schedules, inventories, and long-term capacities.

(Forecasting overall demand typically originates with

marketing, but internal customers throughout the
organization depend on forecasts to formulate and
execute their plans as well. Forecasts are critical inputs to
business plans, annual plans, and budgets.)