FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning Chapter 5 – Capacity Planning Objectives: Discuss the concept of capacity planning. Relate how MRP logic uses the dependent demand relationship to drive component order releases and due dates. Table of Contents Chapter 5 – Capacity Planning......................................................................................1 2. Production-Planning Hierarchy..............................................................................3 3. Aggregate Planning................................................................................................4 4. An Overview of MRP..............................................................................................8 5. The implementation of MRP................................................................................12 6. Knowledge Assessment.......................................................................................13 ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning 1. Concept of Capacity Planning The term aggregate1 planning is often employed in the capacity context. This concept is concerned with total demand. Capacity planning will seek to estimate, or measure all demands and express the total in such a way as to enable all resources to be provided. Demand for all outputs must therefore be expressed in common capacity-related units such as number of resources or resource hours required. The estimated demand for each source expressed in, for example, hours per unit time, required for each type of resource must be identified and totalled. Given this aggregate demand, an overall capacity plan can be developed to cope with the projected demand. Week Working Days Cumulative Days Estimated Demand (Hours) Cumulative Demand (Hours) W1 5 5 40 40 W2 5 10 40 80 W3 6 16 48 128 Table 5-1: Estimated Weekly Demand Capacity is the maximum rate of productive or conversion capability of an organisation’s operations. Capacity planning involves assessing existing facilities, estimating future needs, identifying alternatives, evaluating alternatives, and selecting a capacity alternative. Capacity requirements can be evaluated from two perspectives – short-term and longterm. 1.1 Short Term Capacity Planning Organisations use forecasts of product demand to estimate the short-term work load the facility must handle. By looking ahead a few months or at the most a year, managers can anticipate output requirements. These will be compared to market actual demand and the capacity can be adjusted. 1.2 Long Term Capacity Planning These are more difficult to determine because of the uncertainties of the future. What are produced today may not exist tomorrow. Demand for products and services changes with time. Long term capacity planning will also influence whether expansion to existing factories is needed or whether facilities will be shifted to other countries or simply if the facility will be shut down. 1 collective ©GMLS Page 4 v 2021
Planning Horizon Long-range Capacity Planning Master Production Schedule Production Planning & Control Systems Long range (years) Medium range (2-12 months) Short range (a few weeks, to a few months) Machine loading Job assignments Employment Output Long term capacity Location / layout Push System - MRP Pull System - JIT Bottleneck Management Description Aggregate Planning FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning 2. Production-Planning Hierarchy The Figure 5-1 illustrates the long-range, medium-range and short-range production plans. Long-range plans are necessary to develop facilities and equipment, major supplies, and production processes and become constraints on the medium- and short-range plans. Aggregate planning develops medium-range production plans concerning employment, aggregate inventory, utilities, facility modification and material supply contracts. These aggregate plans impose constraints on the short-range production plans that follow. Figure 5.1: Production Planning in Manufacturing ©GMLS Page 4 v 2021
Facility, Labour FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning 3. Aggregate Planning Aggregate planning is the process of planning the quantity and timing of output over the intermediate time horizon, often between 3 to 12 months. Within that timeframe, the maximum capacity of a production facility is relatively fixed. Given a forecast, planners are concerned with optimising the use of the resources to respond to expected demand. While demand cannot always be met, the objective of production is to respond by managing the controllable variables which affect supply such as employment and inventory levels. Figure 5-2: Production Planning Framework Aggregate planning is necessary in POM because it provides for: Fully loaded facilities and minimises overloading and under loading, thus reducing production costs, ©GMLS Page 4 v 2021 Marke t Forecast & Orders Resource & Technology Base Capacity (Facility, labour, materials, $) Aggregate Production Plan MPS Material requirements Capacity requirements Long range > 5 years Intermediate range < 1 year Short range > 1 month < 12 months
FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning Adequate production capacity to meet expected aggregate demand, A plan for the orderly and systematic change of production capacity to meet the peaks and valleys of expected customer demand, and Getting the most output for the number of resources available, which is important in times of scarce production resources. 3.1 Aggregate Planning Policy All aggregate planning should rest firmly on underlying corporate objectives. Planning decisions may often appear to be at variance with apparent standards of short-term profits. As an example – the business may wish to penetrate a market which is entrenched with competitors. Such markets are extremely competitive, and the organisation may adopt a penetration pricing strategy. Forecasting technique Sound demand forecasting is the basis for aggregate planning and serves as an adjustment mechanism to guide production activities. The forecasting and planning horizon should be sufficiently long so that decisions, such as hiring and lay-offs, are optimal overall, and not on a period-to-period basis. Forecast controls and the robustness of the model should constantly be maintained to justify faith in the system. Appropriate units of capacity Aggregate planning decisions should be based on system capacities with allowance for system inefficiencies and learning effects. Plans should be expressed in homogeneous units of production such as worker hours, or other units which are manageable rather than in currency units. Stable workforce When hired, workers should be informed whether their employment is temporary or permanent. Control over inventory Inventory should include raw materials, WIP, and FG on an aggregate level. These should correlate to the sales volume. Flexibility to change In many firms, subcontracting work is one way to cope with fluctuating work volume, thereby preserving the stability of firm’s permanent workforce. Flexibility can also take the shape of standardisation and modularisation of subassemblies in the postponement process. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning Respond to demand in a controlled manner If firms accept the random volatility of demand, then they can respond in a measured manner. Too rapid a response creates an overcorrection, while too slow a response, creates an under correction. Evaluate planning as a routine Planning efforts are of no value unless plans are implemented and they achieve that for which they are designed. Controls should be built into the plan. Planning should be evaluated constantly, and it should be part of the role of the planner. 3.2 Major Inputs to Aggregate Planning Effective aggregate planning requires good information. Firstly, the available resources over the planning period must be known. A forecast of expected demand must then be available. Finally, planners consider any policies regarding changes in employment levels. For example, some organisations view layoffs as extremely undesirable, therefore they would only use it as a last resort. Listed below are the major inputs to aggregate planning Resources o Workforce and production rates o Facilities and equipment Demand forecast Policies on workforce changes Subcontracting Overtime Inventory levels and changes Back orders 3.2 Aggregate Planning Cost Most aggregate planning methods determine a plan which minimises costs. These methods assume that demand is fixed; therefore, strategies for modifying demand are not considered. If both demand and supply were simultaneously modified, it would be appropriate to maximise profit. When demand is considered a “given”, the following costs should be considered: ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning Hiring and Layoff Costs The hiring cost consists of the recruiting, screening, and training costs required to bring a new employee up to full productive ability. For some jobs, this cost may only be a few small, but for more highly skilled jobs, cost may increase to a much larger figure. The layoff cost includes employee benefits, severance pay, and other costs, associated with layoffs. The layoff cost may also range from a small amount to much larger costs per person. Overtime and Under time Costs The overtime costs often consist of regular wages plus 50 to 100% premium. The cost of under time is often reflected in employees operating at less than full productivity. This typically happens when the production line is underutilised, a situation where the demand is low, thereby leaving many machines and employees idling. Inventory-carrying Costs Inventory-carrying costs are associated with maintaining the product in the inventory and include the cost of capital, variable cost of storage, obsolescence, and deterioration. These costs are often expressed as a percentage of the value of inventory, ranging from 15-35% per year. This cost can be thought of as an “interest” charged against the value of inventory held in stock. Thus, if the carrying cost is 20% and each unit cost 10 to produce, it will cost 2 to carry one unit in inventory for a year. Subcontracting Costs The cost of subcontracting is the price that is paid to a subcontractor to produce the units. Subcontracting costs can either be more or less than the cost of producing units in-house. Part-time labour Costs Because of differences in benefits, the cost of part-time or temporary labour will probably be less than that of regular labour. Although part-time workers often get no benefits, a maximum percentage of part-time labour used, may be specified by operational considerations or by union contract, otherwise, there may be a tendency to use all part-time or temporary labour. However, the regular labour force is essential to the effective utilisation of part-time and temporary personnel. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning Cost of Stock-outs or Back Orders The cost for taking a back order, or for a stock-out, should reflect the effect of reduced customer service. This cost is extremely difficult to estimate, but it can be related to the loss of customer goodwill and the possible loss of future sales. Thus, we should consider stock-outs or back-order costs in terms of foregone future profits. 3.4 Material Requirements Planning (MRP) The raw materials, purchased parts, and other components of assembled items are subject to what is called “dependent demand”, which requires a different approach from inventory management techniques. 3.4.1 Independent versus Dependent Demand A crucial distinction in inventory management is whether demand is independent or dependent. “Independent demand” is influenced by market conditions outside the control of operations, e.g., finished goods inventories, and spare parts for replacement, usually have independent demand. “Dependent demand” is related to the demand for items that are subassemblies or components parts to be used in the production of finished goods e.g., the car cushions, seats, steering wheels, and windscreens, are dependent on the demand of that particular model of car. 4. An Overview of MRP Material Requirements Planning (MRP) is a computer-based information system which translates the finished product requirements of the master schedule, into time-phased requirements for subassemblies, component parts, and raw materials; working backward from the due date using lead times and other information, to determine when and how much to order. MRP is designed to answer three questions: What is needed? How much is needed? When is it needed? 4.1. MRP Inputs MRP has three major sources of information: ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning A master schedule, A bill of materials (BOM) file, and An inventory records file. 4.2. The Master Schedule This is also referred to as the “Master Production Schedule (MPS)” and states which end items must be produced, when they are needed, and in what quantities. The following illustrates a portion of the MPS showing planned output for laptops in the planning horizon. The schedule indicates that 100 laptops will be needed (e.g., shipments to a customer) at the start of week-4 and that another 150 laptops will be needed at the start of week-8. Week 1 2 3 4 5 6 7 8 No of laptops 100 150 Table 5-1: An MRP MPS Requirement The quantities in a master schedule come from a number of different sources, including customer orders, forecasts, and orders from warehouses, to build up for seasonal inventories. 4.3. Bill of Materials A bill of materials (BOM) contains a listing of all of the assemblies, subassemblies, parts, and raw materials needed to produce one unit of finished product thus, each finished product has its own bill of materials. The listing in the bill of materials is hierarchical; meaning that it shows the quantity of each item needed to complete one unit of the following level of assembly. The nature of this aspect of a bill of materials is clear when we consider a product structure tree, which provides a visual depiction of the subassemblies and components needed to assemble a product. The diagram below shows the assembly diagram as well as the product structure tree for the manufacturing of a chair: ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning Figure 5-3: BOM of a Chair 4.4. MRP Processing MRP processing takes the end item requirements specified by the master schedule and “explodes” them into time-phased requirements for assemblies, parts, and raw materials. Some of the important terms used: Gross requirement The total expected demand for an item or raw material during each time period without regard to the amount on hand. Scheduled receipts Open orders: i.e., orders that have been placed and are scheduled to arrive from vendors or elsewhere. Projected on hand The expected amount of inventory that will be on hand at the beginning of each period - scheduled receipts plus available inventory from the last period. Net requirement The actual amount needed in each time period. Planned-order receipts The quantity expected to be received at the beginning of the period in which it is shown. Planned order releases Indicate a planned amount to order in each time period and equals planned-order receipts offset by lead time. This amount generates gross requirement at the next level in the assembly or production chain. When an order is executed, it is removed from “planned-order releases” and entered under “scheduled receipts”. Example: A computer firm that produces laptops has received 2 orders as follows: Week number 1 2 3 4 5 6 7 8 Quantity 100 150 Each laptop consists of 2 USB ports and 4 memory chips. The USB ports are made by the firm, and fabrication takes one week. ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning The memory chips are ordered, and lead time (LT) is two weeks. There is a scheduled receipt of 80 memory chips in (at the beginning of) week 1. Product structure tree: Laptop USB port (2) Memory Chips (4) Determine the size and timing of planned- order releases necessary to meet the delivery requirement. Table 5-2: MRP Master Schedule ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning 5. The implementation of MRP It takes a great deal of efforts to make MRP successful. In fact, there are five key success factors: Implementation Planning It should be a prerequisite of any MRP effort. Unfortunately, too many companies jump in and start implementing MRP without adequate preparation. Later, confusion and misunderstandings occur as problems arise. Implementation planning can help smooth out implementation efforts by advance planning and problem prevention efforts. Implementation should include education of senior management. Adequate Computer Support This is probably one of the easiest factors of MRP to implement. Today, there are many MRP software packages on the market. Many companies use these standard packages rather than writing their own computer software. Accurate Data An MRP system requires accurate data, which are very difficult to obtain. Many companies are accustomed to lax record keeping in manufacturing because the company has always been managed by the informal system. But accurate data is required when decisions are made from information supplied by the computer. Management support The importance of management support to a successful MRP system can hardly be overemphasised. Many studies have shown that top management support is the key to successful implementation of systems. But management support requires more than lip service and passive support on the managers’ part. Top managers must be actively involved in installing and operating the MRP system. User Knowledge An MRP system requires an entire new approach to manufacturing. All company employees must understand how they will be affected and grasp their new roles and responsibilities. When the MRP system is first installed, only a few key managers need to be educated, but as the system begins to be used, all supervisors, middle managers, and top managers, need to understand MRP. 6. Knowledge Assessment Below is the product structure tree for an end item E. The operations manager wants to know the material requirements for ordered part R that will be needed to complete 120 ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning units of E by the start of week 5. Lead-time is one week for level 0 items, one week for level 1 items and two weeks for level 2 items. There is a scheduled receipt of 60 units of M at the end of week 1 and 100 units of R at the start of week 1. Level E 1 M (3) I (2) 2 R (2) P Q (4) K Fill in the material requirements in the master schedule below: ©GMLS Page 4 v 2021
FHDSCM Module 6 – Production & Operations Management Chapter 5 - Capacity Planning END OF MODULE ©GMLS Page 4 v 2021