Capacity

The throughput, or the number of

units a facility can hold, receive,
store, or produce in a period of time
Determines fixed costs
Determines if demand will be
satisfied
Three time horizons- Short range ,
Intermediate range and Long range .
 Design and Effective
Capacity
Design capacity is the maximum
theoretical output of a system
Normally expressed as a rate
Effective capacity is the capacity a
firm expects to achieve given
current operating constraints
Often lower than design capacity
 Utilization and Efficiency
Utilization is the percent of design
capacity achieved
Utilization = Actual output/Design
capacity
Efficiency is the percent of effective
capacity achieved
Efficiency = Actual output/Effective
capacity
 Capacity Computation
Actual production last week =
148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per
hour
Bakery operates 7 days/week, 3 - 8
hour shifts
Design capacity = (7 x 3 x 8) x
(1,200) = 201,600 rolls
Utilization = 148,000/201,600 =
73.4%
 Capacity Decisions

Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts

Establishes
Business Plan
operations
and capacity
strategies
Establishes
Aggregate plan
operations capacity

Master schedule Establishes schedules

for specific products
 Capacity Decisions
Organizations make capacity decisions on three
levels:
Short-range plans (Detailed plans)
Machine loading
Job assignments
Intermediate plans (General levels)
Employment
Output, and inventories
Long-range plans
Long term capacity
Location / layout
 Aggregate planning
The goal of aggregate planning
is to achieve a production plan
that will effectively utilize the
organizations resources to
satisfy expected demand.
Intermediate-range capacity
Long range
planning, usually covering 2 to 12
Intermediate
months.
Short
range
range

Now 2 months 1 Year

 INTRODUCTION
An organization can finalize its business plans on the
recommendation of demand forecast.
Once business plans are ready, an organization can do
backward working from the final sales unit to raw materials
required.
Thus annual and quarterly plans are broken down into
labor, raw material, working capital, etc. requirements over
a medium-range period (2 months to 12 months).
This process of working out production requirements for a
medium range is called aggregate planning.
Aggregate planning is an operational activity critical to the
organization as it looks to balance long-term strategic
planning with short term production success.
Aggregate planning will ensure that organization can plan
for workforce level, inventory level and production rate in
line with its strategic goal and objective.
 Factors Affecting Aggregate Planning

A complete information is required

about available production facility
and raw materials.
A solid demand forecast covering the
medium-range period
Financial planning surrounding the
production cost which includes raw
material, labor, inventory planning,
etc.
Organization policy around labor
management, quality management,
 For aggregate planning to be a
success, following inputs are required;
An aggregate demand forecast for
the relevant period
Evaluation of all the available means
to manage capacity planning like
sub-contracting, outsourcing, etc.
Existing operational status of
workforce (number, skill set, etc.),
inventory level and production
efficiency
 Aggregate planning as an Operational Tool

Aggregate planning helps achieve balance between operation goal,

financial goal and overall strategic objective of the organization. It
serves as a platform to manage capacity and demand planning.
In a scenario where demand is not matching the capacity, an
organization can try to balance both by pricing, promotion, order
management and new demand creation.
In scenario where capacity is not matching demand, an organization
can try to balance the both by various alternatives such as.
Laying off/hiring excess/inadequate excess/inadequate
excess/inadequate workforce until demand decrease/increase.
Including overtime as part of scheduling there by creating
additional capacity.
Hiring a temporary workforce for a fix period or outsourcing activity
to a sub-contractor.
 Importance of Aggregate Planning

Aggregate planning plays an important part in achieving

long-term objectives of the organization. Aggregate
planning helps in:
Achieving financial goals by reducing overall
variable cost and improving the bottom line
Maximum utilization of the available
production facility
Provide customer delight by matching
demand and reducing wait time for customers
Reduce investment in inventory stocking
Able to meet scheduling goals there by
creating a happy and satisfied work force
 Aggregate Planning Strategies

There are three types of aggregate planning strategies available for

organization to choose from. They are as follows.
Level Strategy
level strategy looks to maintain a steady production rate and
workforce level. In this strategy, organization requires a robust
forecast demand as to increase or decrease production in anticipation
of lower or higher customer demand. Advantage of level strategy is
steady workforce. Disadvantage of level strategy is high inventory and
increase back logs.
Chase Strategy
Chase strategy looks to dynamically match demand with production.
Advantage of chase strategy is lower inventory levels and back logs.
Disadvantage is lower productivity, quality and depressed work force.
Hybrid Strategy
As the name suggests, hybrid strategy looks to balance between level
strategy and chase strategy.
Material Resource Planning
A formal computerized approach to
inventory planning, manufacturing
scheduling and supplier scheduling.
The material requirements planning (MRP)
system provides the user with information
about timing (when to order) and quantity
(how much to order), generates new
orders, and reschedules existing orders as
necessary to meet the changing
requirements of customers and
manufacturing
Material Resource Planning
Thesystemisdrivenbychangeand
constantly
recalculatesmaterialrequirementsb
asedon actualforecastorders.
Itmakesadjustmentsforpossiblepro
blems
priortotheiroccurrence,asopposed
to
traditionalcontrolsystemswhichloo
kedatmorehistoricaldemandandre
Material Resource Planning
Thelogicofthematerialrequirementsplannings
ystemis
basedontheprincipleofdependentdemand,ate
rmdescribingthedirectrelationshipbetweende
mandforoneitemanddemandforahigher-
Levelassemblypartorcomponent
Forexample,thedemandforthenumberofwhee
lassembliesonabicycleisdirectlyrelatedtothe
numberofbicyclesplannedforproduction;
Further,thedemandfortiresisdirectlydependen
tonthe demandforwheelassemblies.
Thebulkoftherawmaterialandin-
processinventoriesaresubjecttodependentdem
and
Material Resource Planning
Dependentdemandquantitiesarecalculated,
whileindependentdemanditemsareforecas
t
Independentdemand
isunrelatedtoahigher-
levelitemwhichthecompanymanufactures
or stocks.
Generally,independentdemanditemsare
carried
infinishedgoodsinventoryandsubjectto
uncertainendcustomerdemand.
 Benefits of MRP
1.Better response to customer orders
2.Faster response to market changes
3.Improved utilization of facilities and labor
4.Reduced inventory levels
 Dependent Demand
The demand for one item is related to the
demand for another item
Given a quantity for the end item, the
demand for all parts and components can
be calculated
In general, used whenever a schedule can
be established for an item
MRP is the common technique
 Dependent Demand
Effective use of dependent demand
inventory models requires the
following
1.Master production schedule
2.Specifications or bill of material
3.Inventory availability
4.Purchase orders outstanding
5.Lead times
Master Production Schedule
(MPS)
Specifies what is to be made and when
Must be in accordance with the aggregate
production plan
Inputs from financial plans, customer demand,
engineering, supplier performance
As the process moves from planning to
execution, each step must be tested for
feasibility
The MPS is the result of the production
planning process
Master Production Schedule
(MPS)
MPS is established in terms of specific
products
Schedule must be followed for a
reasonable length of time
The MPS is quite often fixed or frozen in
the near term part of the plan
The MPS is a rolling schedule
The MPS is a statement of what is to be
produced, not a forecast of demand
 MRP Computations
Example 1 Suppose you need to produce
100 units of product A eight week from
now, where product A requires one unit of
product B and two units of product C,
while product C requires one unit of
product D and two units of product E. How
many units of each type do you need?
Suppose further that the lead-times for the
products are as follows: Product A, four
weeks, product B three weeks, product C
two weeks, products D and E one week
each
Calculate the material requirement and
 MRP Computations
Requirements of each item to produce 100 units of
product A:
Req(B) = 100, Req(C) = 200, Req(D) = 200, Req(E)
= 400.
Since the production lead-time for product A is four
weeks, we must have products B and C available at
the end of week four. Since product B has a lead
time of three weeks, we need to release the
production of product B by the end of the first week.
Similarly, product C need to be released for
production at the end of week two,
while products D and E must be released for
production at the end of week one
 Enterprise Resource Planning (ERP)

Organizes and manages a companys business

processes by sharing information across functional areas

Connects with supply-chain and customer management

applications

ERP in the nutshell*

Client server software
Integrates majority of business processes
Processes majority of transactions
Enterprise wide database
Real time data access
ERP software
 ERPs Central Database]

Finance &
Accounting

Sales Production &

& ERP Data Materials
Marketing Repository Management

Human
Resources

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