CHAPTER

3
P L A N N I N GR E S O U R C E
S
How activities along the supply chain are planned, and how
resources are controlled.
LEARNING OBJECTIVES
• Discuss the role of planning in logistics.
• Measure the capacity of a supply chain.
• Use a standard approach to capacity planning.
• Know how to design medium-term tactical plans.
• Expand the tactical plans into short-term schedules.
• Explain the role of demand forecasting in a supply chain.
• Compare qualitative and quantitative forecasting techniques.

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MAIN CONTENT
1. Overview of Planning

2. Capacity Planning

3. Tactical Planning

4. Short-term Schedules

5. Demand Forecasting

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1.
OVERVIEW
OF PL
AN N IN G
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 WHY TO MAKE A PLAN?
• All activities along the supply chain have to be planned  It means that
we
design timetables to show when they will be done.

• Planning helps us face the future with some confidence.

• If an organization does not plan for the future  it can be in danger of meeting
unexpected circumstances that it cannot cope with.

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AN APPROACH TO PLANNING LOGISTICS

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 TYPES OF PLANNING
• Capacity plans  ensure there is enough capacity to meet long-term
demand.
• Aggregate plans  give summaries of the work done in
related activities, typically by month at each location.
• Master schedules  show a detailed timetable for all
activities, typically by week.
• Short-term schedules  show detailed timetables for jobs
and resources, typically by day.

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2 . C APA C IT
Y PL
AN N IN G
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 DEFINITIONS
• Capacity of a supply chain sets the maximum amount of product
that can be delivered to final customers in a given time.
• Designed Capacity is the maximum possible throughput in ideal
conditions.
• Effective Capacity is the maximum realistic throughput
in normal conditions.
• Actual Throughput/Output is normally lower than effective capacity.

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MEASURE THE CAPACITY UTILIZATION

Actual output
Effective utilization = ∗100%
Effective capacity

Actual output
Design utilization = ∗100%
Design capacity

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 EXAMPLE
• A manufacturer of ballet shoes built up a production facility designed to
produce up to 300 shoes/week.

• However, the factory can produce only 230 shoes/week in

reality, despite working at its maximum effort.

• What is the meaning of manufacturer's capacity utilizations relative to both

design and effective capacity if output is 200 shoes/week?

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 SOLUTION
Effective utilization = Actual output∗100% = 200 = 86.9%
∗100%
Effective capacity 230

Design utilization = Actual output

∗100% = ∗100% = 66.7% 200
Design capacity 300

The utilization rates show that the current output is lower than both its design
capacity and effective capacity  The manufacturer is not using capacity to its
fullest extent.

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 BOTTLENECKS

• Not all parts of a supply chain have the same capacity  Some parts limit
overall throughput, and this forms a bottleneck.
 The bottlenecks in a supply chain limit its overall capacity.

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 BOTTLENECK OPERATION
An operation in a sequence of operations whose capacity is lower than that of
the other operations.

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 EXAMPLE
• The bottling plant at J&R has a capacity of 80,000 liters/day and works a 7-day week.
•It fills standard bottles of 750 ml, and these are passed to a packing area which can form up to

20,000 cases/day with 12 bottles each. The packing area works a 5-day week.
• The cases are taken to warehouses by a transport company whose 8 lorries can each

carry 300 cases, and make up to 4 trips/day for 7 days/week.

• There are two main warehouses, each of which can handle up to 30,000 cases/week.

• Local delivery vans can handle everything passed to them by the warehouse.
 What is the capacity of these parts of the distribution system? How can J&R increase
the capacity?

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 SOLUTION (1/2)
• The bottling plant has a capacity = 7×80,000/0.75 = 746,666 bottles/week.
• The packing area has a capacity = 5×12×20,000 = 1,200,000 bottles/week.
• The transport company has a capacity = 7×4×8×300×12 = 806,400 bottles/week.
• Warehouses have a capacity = 2×30,000×12 = 720,000 bottles/week.
• The capacity of the delivery vans is greater than that of the warehouses (>720,000).

The capacity of the warehouses is the smallest among other parts’ capacities in the
supply chain.
 J&R can only increase capacity by expanding the
warehouses  Improving other parts of the supply chain will have no effect at all.

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SOLUTION (2/2)

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 MATCHING CAPACITY AND DEMAND
• The aim of capacity planning is to match the available capacity of facilities to
the demands put on them  Mismatch can be expensive.
o If capacity < demand, bottlenecks restrict the movement of
materials and customer service declines.
o If capacity > demand, the organization can move all its materials but it has
spare capacity and underused resources.

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 EXAMPLE
• Anne Jenkins has a contract to deliver 100 computer systems/week to schools
in South Wales.
• The systems have customized software installed, which takes an hour to test
before delivery.
• The testing is done by trained staffs, who achieve an average efficiency of
75%. They work a single eight-hour shift five days a week, but could move
to double shifts or have overtime at weekends.
 How many testers should Anne employ?

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 SOLUTION (1/2)
• Each tester is available for 8 × 5 = 40 hours/week.
• The tester’s useful time is 40 × 0.75 = 30 hours/week.
• Each tester can test 30 systems/week since each system needs 1 hour to test.

 Thus, we have:
o Designed capacity = 40 units a tester a week
o Effective capacity = 30 units a tester a week

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 SOLUTION (2/2)
Three cases to meet the demand of 100 units/week:
• Case 1: Working a single shift on weekdays would need 100/30 = 3.33 testers. If
Anne only employs full-time testers, she has to round this up to 4 testers.
• Case 2: Employing 3 testers full-time, and one part-time tester for 10 hours/week
would meet all capacity with 100% utilization.
• Case 3: Using overtime at the weekends would need 3 full time testers who are
willing to finish 10 tests at the weekend (working 10 / 0.75 = 13.3 hours).
 Anne needs to complete her capacity planning by comparing these alternatives
and implementing the best.

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 ADJUSTING CAPACITY

Problems with capacity Short-term adjustments to

planning capacity

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PROBLEMS WITH CAPACITY PLANNING
• There are several practical problems with capacity planning.

• Demand comes in small quantities and can take almost any value, while
capacity comes in large discrete amounts.
• There is no way of exactly matching the discrete capacity to
a continuous demand  Use one of three basic strategies:

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CAPACITY MORE OR LES
S M AT C H E S D E M A N D

T h e r e is sometimes excess capacity and

sometimesa shortag 24
C A P A C I T Y A L W AY S E X C E E D S D E M A N D

C o m p a n y n e e d s m o r e i n v e s t m e n t in f a c i l i t i
es 25
and g i v e s l o w e r u t i l i z a t i o n .
D E M A N D A L W AY S E X C E E D S C A P A C I T
Y

O n l y add c a p a c i t y w h e n t h e a d d i t i o n a f a c i l i t i e
l w o u l d be f u l l y u s e d  l o w e r i n v e s t m s a n dh i g
e n t u t i l i z a t i o n , but r e s t r i c t s t h r o u g h p u h 26
SHORT-TERM ADJUSTMENTS TO CAPACITY
• The capacity planning includes decisions at all levels; strategic plans give
the overall picture, modified by shorter term adjustments.
• There are two ways of making short-term adjustments to capacity:
o Capacity management adjusts capacity to match demand.
o Demand management adjusts demand to match
available capacity.

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 WAYS OF ADJUSTING CAPACITY
• Changing the work pattern to match demand.
• Employing part-time staff to cover peak demands.
• Using outside contractors.
• Renting or leasing extra facilities.
• Adjusting the speed of working.
• Rescheduling maintenance periods.
• Making the customer do some work, such as packing their
own bags in supermarkets.

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 WAYS OF ADJUSTING DEMAND
• Vary the price.
• Limit the customers served, by demanding specific ‘qualifications’.
• Change the marketing effort.
• Offer incentives to change demand patterns, such as off-peak travel rates.
• Change related products to encourage substitution, such as
holiday destinations.
• Vary the lead time.
• Use a reservation or appointment system.
• Use stocks to cushion demand.

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3.
TA C T I C A L
PL AN N IN G
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 TACTICAL PLANS
• Tactical plans show how the capacity will be used, and develop medium-term
timetables for activities. Two tactical plans are discussed:
• Aggregate planning makes the tactical decisions that translate forecast demand and
available capacity into schedules for families of activities, typically for each month.
• Master schedule gives a timetable for activities, typically for each week. Its aim
is to achieve the activities described in aggregate plans as efficiently as possible.

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 AGGREGATE PLANS
Aggregate planners are looking for answers to questions:
• Should we keep throughput at a constant level, or change it to
meet varying demand?
• How should we use stocks to meet changing demand?
• Should we vary the size of the workforce with demand?
• Can we change work patterns to meet changing demand?
• Should we use outside organizations to cover peak demands?
• Can we allow shortages, perhaps with late delivery?
• Can we smooth the demand?

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OVERALL APPROACH OF TACTICAL PLANNING
Step 1. Translate forecasts and other information into a demand for resources.

Step 2. Find the resources currently available.

Step 3. Identify gaps between resources needed and available. Step 4.

Suggest alternative plans for overcoming any gaps.

Step 5. Compare these plans and find the best.

Step 6. Implement the best and monitor performance.

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 EXAMPLE
• A&B Coaches of Blackpool plan their capacity in terms of ‘coach-days’. Based on
the information in the below table, How can the company approach its
tactical planning?

Annual demands Current Capacity of the company

Forecasting Coaches Drivers

• 400,000 full- • 61 coaches, each with an • 86 drivers who work an

day passengers effective capacity of 40 average of 220 days a year.
passengers a day for 300 • But illness and other absences
• 750,000
days a year. reduce their efficiency to
half- day
• But unexpected 85%.
passengers
problems • If there is a shortage of drivers
reduce efficiency to 90%. they can recruit extra ones at
• If there is a shortage of coaches, a cost of £20,000 a year, or
the company can buy extra ones hire them from an agency for
for £110,000 or hire them for £110 a day. 34
 SOLUTION (1/2)
Step 1. Translate forecasts and other information into a demand for resources
o 400,000 full-day passengers: 400,000/40 = 10,000 coach days a
year, or 10,000/300 = 33.33 coaches.
o 750,000 half-day passengers: 750,000 / (40 × 300 × 2) = 31.25 coaches.
o The total demand: 33.33 + 31.25 = 64.58 coaches.
o Each coach needs 300/220 drivers  company needs a total of 88.06 drivers.

Step 2. Find the resources currently available

o There are 61 coaches with an efficiency of 90%: 61 ×0.9 = 54.9 coaches.
o There are 86 drivers with an efficiency of 85%: 86 × 0.85 = 73.1 drivers.

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 SOLUTION (2/2)
Step 3. Identify mismatches between resources needed and available
o There is a total shortage of: 64.58 – 54.9 = 9.68 coaches and 88.06 – 73.1 = 14.96 drivers.

Step 4. Suggest alternative plans for overcoming any mismatches

o To buy 10 coaches would cost £1,100,000. To hire coaches to make up the shortage would cost 9.68
× 300 × 100 = £290,400/year. There is the alternative of buying some coaches and hiring others.
o To hire 15 drivers would cost £300,000/year, while using temporary drivers from an agency would
cost 14.96 × 220 × 110 = £362,032/year. There is also the option of hiring some drivers and making
up shortages from an agency.

Step 5. Compare these plans and find the best

o Based on some of the alternatives, this very limited analysis might suggest a reasonable solution of
buying eight coaches and making up any shortages by hiring, and hiring 12 drivers
and making up the shortage from the agency.

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4. S H O R T-
TERM
SCHEDULES
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 DEFINITIONS
• Short-term schedules give detailed timetables for jobs, people,
materials, equipment and all other resources.
• The aim of these schedules is to organize the resources needed for the master
schedule, giving low costs, high utilizations, or achieving some other
measure of performance.

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 APPROACHES TO SCHEDULING
• Backward scheduling, where schedulers know when a job has to be
finished. Then they can work back through all the activities to find the date
when the job must be started.

• Forward scheduling, where schedulers know when a job can start. Then
they can work forward through all activities to find the date when the job will
be finished.

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 SCHEDULING RULES
1. First Come, First Served (FCFS).

2. Most Urgent Job first (MUJ).

3. Shortest Job first (SJ).

Time in the system = processing time + waiting time

4. Earliest Due Date first (EDD).

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 EXAMPLE
Zambrucci Transport has to schedule the following six jobs for a
heavy lift crane. How can it design a reasonable schedule?

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 SOLUTION – FCFS RULE
The simplest way of tackling this problem is to use some decision rules.
Using ‘first come, first served’ gives the schedule:

 The jobs are finished by day 52

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 SOLUTION – SJ RULE

 The jobs are finished by day 52

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 SOLUTION – EDD RULE

 The jobs are finished by day 52

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 5 . D E MAN D
FORECASTING

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 IMPORTANCE OF DEMAND FORECASTING
• (1/2)
Nowadays, organizations are moving to a more effective demand-driven supply
chain to enable them to respond quickly to shifting demand.
• Companies must be able to accurately forecast demand so they can produce and
deliver the right quantities demanded by their customers in a timely and cost-
effective way.
• Forecasting is an important element of demand management. It provides an
estimate of future demand but some error between a forecast and actual demand is to be
expected.
 the goal of a good forecasting technique is to minimize the deviation between
actual demand and the forecast.

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 IMPORTANCE OF DEMAND FORECASTING (2/2)
• Having accurate demand forecasts allows
o the purchasing department to order the right amount of materials,
o the operations department to produce the right quantity of products,
o the logistics department to deliver a correctly sized order.
• The benefits of better forecasts are lower inventories, reduced
stockouts, smoother production plans, reduced costs, and improved customer
service.
 Accurate demand information is a critical component of an effective SC.

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 FORECASTING TECHNIQUES
• Qualitative Methods: base on opinions and intuition.
o generally used when data is limited, unavailable, or not currently relevant.
o for new product introductions when current data simply does not exist.

• Quantitative Methods: use mathematical models and relevant historical data

o Time series models.
o Cause-and-effect models.

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 QUALITATIVE METHODS
• Jury of Executive Opinion: a group of the firm’s senior management executives who are
knowledgeable about their markets, their competitors, and the business environment
collectively develop the forecast.
• Delphi Method: a group of internal and external experts are surveyed during several rounds
separately and iteratively.
• Sales Force Composite: this forecast is generated based on the sales force’s knowledge of
the market and estimates of customer needs.
• Customer Surveys: forecasting questionnaire can be developed that uses inputs from
customers on important issues.

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 QUANTITATIVE METHODS
• Time series forecasting is based on the assumption that the future is an extension of
the past; thus, historical data can be used to predict future demand.

• Cause-and-effect forecasting assumes that one or more factors (independent

variables) are related to demand (dependent variable) and, therefore, can be used to
predict future demand.

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 TIME SERIES FORECASTING MODELS (1/3)
• Naïve Forecast:

• For example, if the current period’s actual demand is 100 units, then
the next period’s forecast is 100 units.
• This method is easy to understand, develop, store data and
operate. However, the method may not generate accurate forecasts.

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 TIME SERIES FORECASTING MODELS (2/3)
• Simple Moving Average Forecast:

• Weighted Moving Average Forecast:

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 EXAMPLE
Using the data provided, Calculate the forecast for Actual
Period Weight
period 5 using a 4-period simple moving average? Demand
Calculate the forecast for period 11 using a 10- 1 1600 0.1
period weighted moving average. 2 2200 0.2
3 2000 0.3
SOLUTION: 4 1600 0.4
1600 + 2200 + 2000 + 1600 5 2500 0.3
𝑭𝟓 = = 1850 6 3500 0.2
4
7 3300 0.5
𝑭𝟏𝟏 = 0.1 ∗ 1600 + 0.2 ∗ 2200 + ⋯ + 0.1 ∗ 4700 8 3200 0.4
= 1840 9 3900 0.3
10 4700 0.1
11 4300 0.3
12 4400 0.653
 TIME SERIES FORECASTING MODELS (3/3)
• Exponential Smoothing Forecast: a • Linear Trend Forecast:
using
sophisticated weighted moving simple linear regression to fit a line to
average forecasting technique. a series of data occurring over time.

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 CAUSE-AND-EFFECT MODELS
• The cause-and-effect models have a cause (independent variable or variables) and an
effect (dependent variable).
• One of the most common models used is regression analysis.

Simple Linear Regression Forecast Multiple Regression Forecast

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 FORECAST ACCURACY
• Forecast error is the • Several measures of
difference between the actual forecasting accuracy:
quantity and the forecast.

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