Capacity Planning And Decisions

Capacity prep And stopping pointsCapacity prep is star of the key aspects of operations direction as it de endpointines the amount of goods or dos which gutter be produced within a given fourth dimension duration. Too less readiness indicates that customers wont be satisfied and too much wedge would resultant in the operation being under-utilized with resultant high fixed costs and similarly affecting breakeven and profit superpower. A ships company, when it has to increase its capacitor it has various options to consider, from working over clip to building a new mental quickness or a demonstrate. Forecasting collect is critical to might planning and companies backside adopt different st assessgies of susceptibility planning, to ensure customer satisfaction and maintain the operations well within their budget and other constraints. defraud term capacity planning is very important for any company be it a product base or a service based company especially when there ar seasonal studys, as those demands are totally unpredictable and there potbellyt a permanent plan in place for on the spur of the moment term capacity planning for seasonal demands. Momentary plans like employee overtime, subcontracting backpack a shit to be considered and the best among them and that incur least cost have to be selected and implemented and this has been discussed in detail in this project.Chapter-1 Capacity Planning Decisions1.1 Capacity PlanningFirstly, Capacity of any facility is said to be the rate of productive capability of it. Capacity otherwise can be assumed as the rate at which a facility produces or in unprejudiced words, it is the ability of a facility to produce a certain aim of output within a specific time period.When a firm decides to produce more of a product or plans to produce altogether a new product, it always starts with deciding how much capacity is needed considering the factors that affect capacity such as number of worke rs and motorcars, skill set of workers, defects, suppliers, government regulations etc. This is termed as Capacity Planning.1.2 Need for Capacity PlanningA firm can determine its facility post and choose the solve technologies notwithstanding after it has found out a need for new or expanded facilities by evaluating the capacity or capacity planning.Lack of capacity planning can result in under or over capacity and would incur extra costs in exploring ways to reduce or increase capacity.Lack of capacity planning can too trigger a series of unsuitable events such as poor delivery services, an increase in work-in-process and bring about dissatisfaction in the minds of the gross sales personnel and the team involved in manufacturing.Decision making such as producing new products, expanding productionetc can be difficult without proper capacity planning.1.3 Determinants of CapacityThe determinants of capacity areFacilitiesProduct and dish up FactorsProcess FactorsManpower Facto rsOperational FactorsSupply Chain FactorsExternal Factors1.4 How important are capacity decisions?Capacity decisions have its impacts on many different verticals of a firm. Firstly it affects the ability to meet future demands, as without capacity planning if not d wiz keeping in mind the future demands leads to a shortfall of products. If capacity is underestimated or overestimated it directly affects the operating costs as if capacity is overestimated the operating costs involved would get wasted and if underestimated the measures taken to fix it may cost a lot and so is the way it affects the sign costs too. And all these factors affect many other factors such as the competitiveness, swaymentetc.1.5 How are Capacity Decisions made?Assessment of Existing CapacityForecasting Future Capacity NeedsIdentification of Ways to Modify Capacitymilitary rating of Financial, Economical, and Technological Capacity AlternativesSelection of a Capacity Alternative some suited to achieving st rategic mission1.6 Measuring CapacityMeasuring capacity is wide for certain organizations. Reynolds, can use number of ballpoint pens produced per year, Hyundai Motors can use number of automobiles per year. But for organizations whose product lines are more diverse it is difficult to aim out a common whole of output.As an alternative, capacity can be expressed in terms of input. A consultancy can express its capacity in terms of the number of consultants employed per year. A lathe shop may express capacity in terms of available agitate instants or machine hours per week, month, or year. Following table shows some examples of capacity measures.Measures of Operating Capacity sidingOrganizationMeasureAutomobile Manufacturer egress of AutosBreweryBarrels of BeerCannery piles of FoodSteel ProducerTons of SteelPower CompanyMegawatts of electricityInputOrganizationMeasureAirlineNumber of SeatsinfirmaryNumber of BedsJob ShopLabor and/or machine hoursMerchandisingSquare Feet of Display or Sales AreaMovie TheatreNumber of SeatsRestaurantNumber of seats or tableTax OfficeNumber of AccountantsUniversityNumber of Students and/or facultyWarehouseSquare or cubic feet of storage spaceSource Productions and Operations Management, Text BookDay to day variations such as employees being absent or late, breakdowns of machines, downtime demand for facility main tennerance and repair make it often difficult to measure capacity realistically. A facility can in some cases operate at more than 100% capacity.Chapter-2 Estimating Future Capacity Needs2.1 Capacity requirements can be evaluated from twain different perspectives viz. short term and long term.2.1.1 short-run RequirementsManagers often use bodeing of product demand for estimating the short term work load the facility should be handling. By looking forward up to 12 months, managers expect output requirements for different products or services following which they compare requirements with currently existing capacity a nd find out when capacity adjustments are to be made.2.1.2 longsighted- edge RequirementsLong term capacity requirements are tougher to determine as future demand and technologies are uncertain. Forecasting five or ten years into the future is a risky and a tough job. A product existing today may not even exist in the future. It is easily visible that long range capacity requirements depend on marketing plans, product development, and the life cycles of the products.Changes in process technology should also be expected. Even if products remain unchanged, the methods for generating them may change drastically. Capacity planning should be involving forecasting of technology as well as product demand.2.2 Strategies for Modifying Capacity by and by currently existing and the future capacity requirements are determined, alternatives ways of modifying capacity must be found out.2.2.1 Short Term ResponsesFor short-term periods of up to one year, basic capacity is fixed. Majority of the fa cilities are rarely opened or closed on a regular monthly or yearly basis. more short-term adjustments for increasing or decreasing capacity are possible anyway. The adjustments to be made depend on if the conversion process is mostly labor or capital intensive and if the product is one that can be stored in the inventory.Capital-intensive processes depend a lot on physical facilities, plant, and equipment. Short term capacity can be modified by operating these facilities more or less intensively than frequent. The costs of setting up, changing over, and maintaining facilities, procuring raw materials and manpower, managing inventory, and muniment can all be modified by making such capacity changes.2.2.2 Long Term ResponsesFrom World War 2 through the 1960s, the US economy was booming and scaling great heights. Since the 1970s, the United States has faced problems of scarcity of resources and a more competitive economy. Organizations today cannot be constrained into thinking onl y about expanding the resource base they must also consider appropriate approaches to contracting it. fountA warehousing operation foresees the need for an additional 100,000 substantial feet of space by the end of the next five years. One option is to add an additional 50,000 square feet now and another 50,000 square feet after two years. Another option is to add the entire 100,000 square feet now.Estimating costs for building the entire addition now are $50/square foot. If expanded incrementally, the initial 50,000 square feet will cost $60/square foot. The 50,000 square feet will cost $60/square foot. The 50,000 square feet to be added later are estimated at $80/square foot. Which alternative is better? At a minimum, the lower social organization costs plus excess capacity costs of total construction now must be compared with higher costs of deferred construction. The operations manager must consider the costs, benefits, and risks of each option.Source Productions and Operation s Management by Everett E. Adam, younger Ronald J. Ebert2.3 Classification of Capacity Planning based on TimeLong Term Capacity PlanningShort Term Capacity Planning2.3.1 Long Term Capacity PlanningLong Term capacity planning solves strategic issues involving the firms major production facilities. Also, long-term capacity issues are interrelated to location planning. Technology and the ability to transfer the processes to other products are also interrelated to long-term capacity planning. Long-term capacity planning may come in to the picture when short-term amendments in capacity are scarce. For instance, if a firm adds a third shift to its present two-shift plan and if the output is passive insufficient, and also if subcontracting options are unavailable, one practical alternative is adding capital equipment and modifying the layout of the plant. An additional space or constructing an additional facility can also be alternatives.2.3.2 Short Term Capacity PlanningIn the short term , capacity planning concerns issues related to computer programming, labor shifts, and balancing resource capacities. The goal of short-term capacity planning is to manage unexpected shifts in demand in an efficiently economic way. The time frame for short-term planning is often only a few years but may go on as long as six months. Alternatives for making short-term changes in capacity are numerous and can even take decisions to not meet demand at all. A very easy and most commonly-used method to increase capacity in the short term is working overtime. This is a very flexible and least expensive alternative. While the firm has to pay one and one half times the normal labor rate, it is saved from the expenses of hiring, training, and paying additional benefits. When not used abusively, most workers welcome the opportunity to earn extra wages. If overtime does not provide copious short-term capacity, other alternatives are also available. These include adding shifts, employing casu al or part time workers, the use of floating workers, leasing workers, and facilities subcontracting.Firms may also increase the capacity by improving the use of their resources. The most common alternatives in this category are employee/labor cross training and overlapping or staggering shifts. or so manufacturing firms inventory some output ahead of demand so that any need for a capacity change in future is absorbed by the inventory buffer. From a technical angle, firms may initiate a process design aimed at increasing productivity at work stations. Manufacturers can also shift demand to avoid fluctuations in capacity requirement by backlogging, queuing demand, or leng then(prenominal)ing the firms lead times. Service firms achieve the same results through scheduling appointments and reservations. A more creative approach is to modify the output. Standardizing the output or offering complimentary services are examples of the same. In services, customers might be allowed to do som e of the process work themselves (e.g., self-service fuel pumps and fast-food restaurants). Another alternative reducing quality is an undesirable yet possible trick. Finally, the firm may take steps to modify demand. Changing the price and promoting the product are common. Another alternative is to split demand by initiating a yield or receipts management system. Utilities also report success in shifting demand by the use of off-peak pricing.2.4 When capacity doesnt meet demand?When capacity doesnt equal demand, then in short term capacity planning, it can be managed by temporary worker measures such as increasing or decreasing the labor force or creating and carrying inventory in the lean period to be used in the peak demand period.If there happens to be a mismatch among demand and capacity in long term capacity planning, it can be handled by changing or modifying the capacity. If the capacity is short then a new facility can be built or expand the existing facility. In case of an excess capacity then a temporary shutdown/sale/consolidation of facilities would help.2.5 Best Operating LevelSource Operations Management by William J StevensonThe term capacity means an come-at-able rate of output but mentions nothing about till what point of time that rate can be sustained. Thus, if we say that a given plant has a capacity of x units, we do not know if it is a one-day peak or a six-month average. To avoid this issue, the concept of best operating level is brought into being. This is the level of capacity for which the process was designed and thus is the volume of output at which average unit cost is at a minimum. When the output of the facility falls below this level (under role), average unit cost will increase as overhead must be allocated to fewer units. Above this level (overutilization), average unit cost also increases-here imputable to overtime, increased equipment wear, and heightened defect rates.2.6 Capacity Planning ModelsPresent Value compendium It is used to evaluate the time of capital investment and fund flows.Aggregate Planning ModelsIt helps in examining the way of using the existing capacity for short term planning.Break Even AnalysisIt determines the minimum break down volumes of production.Linear ProgrammingIt helps in determining the optimum product mix for maximizing contribution, considering the constraints imposed by capacity.Computer theoretical accountIt is helpful in determining the effects of various scheduling policies.2.7 Economies of ScaleThis well known principle of Economics illustrates the relationship between cost and capacity in an operating system. When output increases in an operating system, the system is likely to experience cost benefits on various factors. Due to the following reasons the average unit cost begins to fall with the rise in output levelSpreading the fixed costs of capacity over a larger output.Improved utilization of several resources in the system.Cost benefit in procurement on account of increased volume.Efficient use of supervisory and management staff.The economies of scale stop over to occur beyond a level of production or output. This is called Diseconomies of Scale. There can be several reasons for thisInefficient management due to large size of it of operation and the resulting lack of coordination.Overuse of machines and break down of material handling equipments.Over hiring of employees, or overtime exceeding justifiable limits.Service slows down due to increasing complexities.Increase in quality degradations because of mismanagement and lack of focus.An Example for Economies of ScaleEconomies/Diseconomies of ScaleSource Microeconomics by Robert S. Pindyck, Daniel L. Rubinfeld, Prem L. MehtaChapter-3 Capacity Planning Techniques3.1 Capacity Planning TechniquesThere are four procedures for capacity planning capacity planning using overall factors (CPOF), capacity bills, resource profiles, and capacity requirements planning (CRP). The first trio are roughly cut approaches that involve analysis to identify potential bottlenecks that can be used with or without manufacturing resource planning (MRP) systems. CRP is used along with MRP systems. Capacity using overall factors is a simple and a manual approach to capacity planning that is based on the master production schedule (MPS) and production standards that convert required units of hold oned goods into historical loads on each work station. Bills of capacity are a procedure based on the MPS. Instead of using historical ratios, it uses the bills of material and routing sheet that shows the sequence or work stations required to produce the part, as well as the apparatus and run time. Capacity requirements can then be determined by multiplying the number of units required by the MPS by the time required to force each. Resource profiles are the same as bills of capacity, except lead times being included so that workloads fall into the correct periods. Capacity requirements planning (CRP) is relevant only in companies using MRP or MRP II. CRP uses the information from one of the previous rough-cut methods, plus MRP outputs on existing inventories and lot sizing. The result will be a tabular load report for each work station or a graphical load profile for helping plan-production requirements. This will range where capacity is not adequate or idle, allowing for imbalances to be corrected by shifts in personnel or equipment or the use of overtime or added shifts. impermanent capacity scheduling is an extension of CRP that simulates job order stopping and starting to produce a detailed schedule that provides a set of start and finish dates for each operation at each work station. A failure to understand the very nature of managing capacity can lead to disorder and hard customer service issues. If there is a mismatch between available and required capacity, adjustments should be made. However, it should be taken care that firms cannot Have perfectly-ba lanced material and capacity plans that easily accommodate emergency orders. If flexibility is the companys competitive priority, excess capacity would be appropriate.3.2 exercise and EfficiencyUtilization is the percentage of design capacity achieved.Utilization = Actual Output/Design CapacityEfficiency is the percentage of effective capacity achieved.Efficiency = Actual Output/Effective CapacityBakery ExampleActual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 8 hour shiftsDesign capacity = (7 x 3 x 8) x (1,200) = 201,600 rollsUtilization = 148,000/201,600 = 73.4%Efficiency = 148,000/175,000 = 84.6%Efficiency = 84.6%Efficiency of new line = 75%Expected Output = (Effective Capacity)(Efficiency)= (175,000)(.75) = 131,250 rolls3.3 Managing entreatThere are three cases in which demand has to be managed and they areDemand Exceeding CapacityControl demand by height prices, scheduling longer lead timeLong term solution is to increase the capacityCapacity exceeds demandStimulate marketProduct changesAdjusting to seasonal worker DEMANDSProduce products with complimentary demand patternsCapacity planning in short time or short term capacity planning to meet seasonal demands is explained in detail in the following sections.Chapter-4 Seasonal Demands4.1 Seasonal DemandsSeasonal Demands are those demands those cause unusually large ups or downs in demand. Seasonal demand occurs in a number of different scenarios most frequent of them is listed in the followingNatural seasonal variations (e.g. greater demand for ice cream in summer and for cold remedies in winter).Specific calendar linked Events like Diwali (Crackers, sweets), Mothers Day (e.g. greetings cards and flowers), and Christmas.Regular every day Promotions that can happen oft and semi-randomly throughout a year.4.2 Impacts and Challenges of Seasonal DemandManaging seasonal demand getting a good forecast done, planni ng production and procurement and managing the fulfillment process introduces considerable additional repugns into the process that is already complex. For most manufacturers, the two key and important planning processes are Forecasting Demand Planning, and Production Planning Scheduling.The challenge in Forecasting and Demand Planning is mainly handling the high demand volatility and variability, and unexpected demands. Specifically, promotions events tend to cause most of the issues, and result in much larger and more frequent demand spikes and dips than natural seasonal variations. If these are not planned well in a timely way of life and introduced into downstream production and distribution plans, the result can be significant reduction in manufacturing and distribution efficiencies, increase in costs, lower customer service levels and satisfaction and all these ultimately can result in a lost business.In Planning and Scheduling, the greatest of problems is dealing with fr equent changes in forecasts and orders. The ability to react swiftly while making the best decision on the way of satisfying demand is often the desired strategy of Make to come in manufacturers. For manufacturers who are unable to meet peak demand because of capacity constraints, and for those that Make to Stock or use a combined MTO/MTS strategy, tactical planning requires wide-awake tweaking of demand and production in order to plan for a suitable pre-building of inventory and to ensure that the long lead time items are purchased in synchronising with the modified production plans.Manufacturers, of course, may, to solve some or all of their capacity issues, resort to sub-contracting. The recent upward trend in contract manufacturing, and the increase in virtual manufacturing, that is, purchasing and distributing products from foreign countries significantly add to the overall supply chain complexity. In this, with very long supply lead times, accuracy of forecast is again param ount, and, the ability to give your suppliers precise projections of your requirements in a timely manner is one of the most critical factors.Despite the push of lean strategies and principles of customer driven supply chain, one of the most common ways of dealing with any type of demand uncertainty in many of the companies of today shut away appears to be to insure against the uncertainty by holding an extra inventory across the supply chain which is an expensive and unacceptable solution.4.3 Focus on Customers and DemandGetting the demand right approach benefits every subsequent supply chain planning and execution processes from production planning, through sourcing and procurement to fulfillment and this result in reduced costs as well as improvements in the top line sales and market share. On the other hand, getting the demand wrong adds cost to almost all downstream processes, severely affecting competitiveness and again ultimately results in losing the business.In forecasting and demand planning, one very much visible guideline is to focus more on the abnormal than the normal. This does not mean not paying attention to natural seasonal variations, but paying more attention on promotions and events as these are the things that almost cause the highest volatility in demand always and are the most tough to handle.Putting in extra efforts to ensure you understand your customers and the authentic sources of demand can also pay very good dividends. Many manufacturers still use their customers demand from on their warehouses but frequently, their customers ordering process is not that good and is a poor source of history of demands or demand trends. wheresoever possible, its a lot better to have eyes on the actual source of demand, namely the consumer. Using their customers POS data as part of the demand planning process often gives much better idea of the actual demand.The ability to maximize and continuously improve forecast accuracy is very important. Incre asing sales and market share with the help of improved perfect order performance and influencing and creating demand is equally important. Focusing well on demand and getting nearby to your customers is an essential requirement to achieve these goals.Chapter-5 ConclusionConclusionShort term capacity planning to meet seasonal demands, thus is critical for any company and proper forecasting of seasonal demands and a proper plan to meet all those seasonal demands should be in place. Any flaw in this, can lead to high inventory costs, employee dissatisfaction, deteriorating customer service levels and high customer dissatisfaction that leads to losing the customers and ultimately losing the business. A firm should be at vigil all the time to see the changes happening in demands and should keep changing its strategies of short term capacity planning and achieve and sustain an outstanding business value.Appendix