CAPACITY PLANNING are implemented, those decisions may be difficult or

impossible to modify without incurring major costs.

Capacity refers to an operating unit’s potential and its 5. Capacity decisions can affect competitiveness.
upper limit or ceiling for producing goods or delivering 6. Capacity affects the ease of management; having
services over a specified time interval. appropriate capacity makes management easier than
when capacity is mismatched.
Capacity decisions are important because capacity is a 7. Globalization has increased the importance and the
ceiling on output and a major determinant of operating complexity of capacity decisions.
costs 8. Because capacity decisions often involve substantial
financial and other resources, it is necessary to plan
Capacity issues are important for all organizations, and at for them far in advance.
all levels of an organization. Capacity refers to an upper
limit or ceiling on the load that an operating unit can
Capacity utilization Percentage measure of how well
handle. The operating unit might be a plant, department, available capacity is being used.
machine, store, or worker.
Two Measures of Capacity:
3 Key Inputs to Capacity Planning: 1) Design Capacity- the maximum output rate or
1. Kind of capacity needed service capacity an operation, process, or facility
2. How much capacity is needed to match demand is designed for.
3. When is it needed 2) Effective Capacity- design capacity minus
allowances such as personal time, equipment
The capacity of an operating unit is an important piece of maintenance, delays due to scheduling problems,
information for planning purposes: It enables managers to and changing the mix of products.
quantify production capability in terms of inputs or
outputs, and thereby make other decisions or plans (Regardless of how much capacity we have, we also need to
measure how well we are utilizing it. Capacity utilization simply
related to those quantities. 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
Goal of Strategic Capacity Planning: capacity, meaning our facilities, space, labor, and equipment,
rather than 90 percent. Capacity utilization can simply be
To achieve a match between the long-term supply computed as the ratio of actual output over capacity)

capabilities of an organization and the predicted level of

Two Measures of System Effectiveness:
long-term demand. 1) Efficiency- is the ratio of actual output to effective
capacity.
Main Reasons for Capacity Planning:

 Changes in demand.
 Changes in technology.
 Changes in environment. 2) Utilization- or capacity utilization is the ratio of
 Perceived threats or opportunity. actual output to design capacity.

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

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
Two Main approaches of qualitative forecasting; day, week, month, or season.
1.Time series examine the pattern of past behavior of a 4. Cyclical. The less predictable gradual increases or
single phenomenon over time taking into account reasons decreases in demand over longer periods of time
for variation in the trend in order to use the analysis to (years or decades).
forecast the phenomenon’s future behavior. 5. Random. The unforecastable variation in demand.
● assume that all the information needed to
generate a forecast is contained in the time series Patterns of Demand
of data. A time series is a series of observations The four patterns of demand—horizontal, trend,
taken at regular intervals over a specified period seasonal, and cyclical—combine in varying degrees to
of time. define the underlying time pattern of demand for a
2.Causal modelling is an approach which describes and service or product. The fifth pattern, random variation,
evaluates the complex cause–effect relationships results from chance causes and thus, cannot be
predicted. Random variation is an aspect of demand that Mathematically, we could put this in the following form:
makes every forecast ultimately inaccurate.
For example, if your sales were 500 units in January, the
• Forecast errors are defined as providing naïve method would forecast 500 units for February. It is
important clues for making better forecasts. assumed that there is little change from period to period.
Forecast error for a given period t is simply the difference The statistical techniques that do have an adaptive quality
found by subtracting the forecast from actual demand, or in estimating the average in a time series are; simple
moving averages, weighted moving averages, and
The cumulative sum of forecast errors (CFE) measures the exponential smoothing.
total forecast error:

• CFE is also called the bias error and results from

consistent mistakes—the forecast is always too
high or too low. The statistical techniques that do have an adaptive quality
• This type of error typically causes the greatest in estimating the average in a time series are; simple
disruption to planning efforts. moving averages, weighted moving averages, and
• For example, if a forecast is consistently lower exponential smoothing.
than actual demand, the value of CFE will
gradually get larger and larger. This increasingly 1. simple moving average method
large error indicates some systematic deficiency • A time-series method used to estimate the
in the forecasting approach. average of a demand time series by averaging the
demand for the n most recent time periods.
The average forecast error, sometimes called the mean (The average of a set of data. A forecasting method in
bias, is simply: which only n of the most recent observations is averaged.)

n = number periods
The mean squared error (MSE), standard deviation of
the errors (s), and mean absolute deviation (MAD) 2. weighted moving average method
measure the dispersion of forecast errors attributed to • A time-series method in which each historical
trend, seasonal, cyclical, or random effects: 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.)

• standard deviation (s) A measurement of the dispersion

of forecast errors. 3. Exponential smoothing method
• mean absolute deviation (MAD) A measurement of the • A weighted moving average method that
dispersion of forecast errors. calculates the average of a time series by
• mean squared error (MSE) A measurement of the implicitly giving recent demands more weight
dispersion of forecast errors. than earlier demands.
• exponential smoothing requires only three items
The mean absolute percent error (MAPE) relates the of data:
forecast error to the level of demand and is useful for 1. the last period’s forecast;
putting forecast performance in the proper perspective: 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

The naïve method is one of the simplest forecasting Uses three equations
models. It assumes that the next period’s forecast is equal 1. The first smooths out the level of the series,
to the current period’s actual. 2. the second smooths out the trend, and
3. the third generates a forecast by adding up the findings  dependent variable. The variable that one wants
from the first two equations. to forecast.
 independent variables. Variables that are
Linear trend line is a time series technique that computes assumed to affect the dependent variable and
a forecast with trend by drawing a straight line through a thereby “cause” the results observed in the past.
set of data.
A linear trend line uses the following equation to Correlation coefficient - Statistic that measures the
generate a forecast: direction and strength of the linear relationship between
Y = a + bX two variables.
Where:
Y = forecast for period X • which measures the direction and strength of the
X = the number of time periods from X = 0 linear relationship between the independent and
a = value of Y at X = 0 (Y intercept)
b = slope of the line
dependent variables.
(This approach is a version of the linear regression
technique, and is useful for computing a forecast when Three measures commonly reported in linear regression;
data display a clear trend over time.) (1) the sample correlation coefficient, (r)
(The coefficients a and b are computed using the least-squares (2) the sample coefficient of determination, (r²) and
method, which minimizes the sum of the squared errors. (3) the standard error of the estimate. ( Sxy ¿
Developing the equations for a and b can be complicated, so we
will only provide the equations needed for computation.) ● The sample correlation coefficient, r, measures
the direction and strength of the relationship
SEASONAL PATTERN between the independent variable and the
 are regularly repeating upward or downward dependent variable.
movements in demand measured in periods of ● The sample coefficient of determination measures
less than one year (hours, days, weeks, months, the amount of variation in the dependent
or quarters). variable about its mean that is explained by the
• For example, enrollment is usually much higher in regression line.
the fall than in the summer. ● The standard error of the estimate, sxy, measures
• Other examples of seasonality include sales of how closely the data on the dependent variable
turkeys before Thanksgiving or ham before cluster around the regression line.
Easter, sales of
The amount of seasonality is the extent to which actual MULTIPLE REGRESSION is an extension of linear
values deviate from the average or mean of the data. regression.
• multiplicative seasonality, in which the • unlike in linear regression where the dependent
seasonality is expressed as a percentage of the variable is related to one independent variable,
average. The percentage by which the value for multiple regression develops a relationship
each season is above or below the mean is a between a dependent variable and multiple
seasonal index. independent variables.
2. Causal Methods (For example, the dependent variable might be sales
 used when historical data are available and the and the independent variables might be number of
relationship between the factor to be forecasted sales representatives, number of store locations, area
and other external or internal factors (e.g., population, and per capita income)
government actions or advertising promotions)
can be identified. Tracking Signals
 It also good for predicting turning points in  is a measure that indicates whether a method of
demand and for preparing long-range forecasts. forecasting is accurately predicting actual
linear regression changes in demand.
 A causal method in which one variable (the  Tool used to monitor the quality of a forecast.
dependent variable) is related to one or more  It is computed as the ratio of the algebraic sum of
independent variables by a linear equation. the forecast errors divided by MAD:
 dependent variable. The variable that one wants Tracking signal = algebraic sum of forecast errors / MAD
to forecast. Tracking signal = Σ (actual – forecast) / MAD
 independent variables. Variables that are
assumed to affect the dependent variable and
thereby “cause” the results observed in the past.
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.)