UNIT II FORECASTING, CAPACITY AND FACILITY DESIGN

Demand Forecasting – Need, Types, Objectives and Steps. Overview of Qualitative and
Quantitative methods. Capacity Planning – Long range, Types, Developing capacity
alternatives. Overview of sales and operations planning. Overview of MRP, MRP II and
ERP. Facility Location – Theories, Steps in Selection, Location Models. Facility Layout
Principles, Types, Planning tools and techniques.

INTRODUCTION
Forecasts are essential for the smooth operations of business organizations. They provide
information that can assist managers in guiding future activities toward organizational goals.
FORECASTING OBJECTIVES AND USES
Forecasting is the art and science of predicting future events. Forecasts are required
throughout an organization and at all levels of decision making in order to plan for the future
and make effective decisions.
Forecasts are estimates of the occurrence, timing, or magnitude of uncertain future events.
Forecasts are essential for the smooth operations of business organizations. They provide
information that can assist managers in guiding future activities toward organizational goals.
Operations managers are primarily concerned with forecasts of demand-which are often made
by (or in conjunction with) marketing. However, managers also use forecasts to estimate raw
material prices, plan for appropriate levels of personnel, help decide how much inventory to
carry, and a host of other activities. This results in better use of capacity, more responsive
service to customers, and improved profitability.
FORECASTING DECISION VARIABLES
Forecasting activities are a function of
(1) the type of forecast (e.g., demand, technological),
(2) the time horizon (short, medium, or long range),
(3) the database available, and
(4) the methodology employed (qualitative or quantitative).
Forecasts of demand are based primarily on non-random trends and relationships, with an
allowance for random components. Forecasts for groups of products tend to be more accurate
than those for single products, and short-term forecasts are more accurate than long-term
forecasts (greater than five years). Quantification also enhances the objectivity and precision
of a forecast.
TYPES OF FORECASTS
In general, a contemporary business organization employs three distinct types of forecasts.
These are given under:
1. Economic forecasts: Economic forecasts address the business cycle by predicting inflation
rates, money supplies, housing starts, and other planning indicators.
2. Technological forecasts: Technological forecasts are concerned with rates of technological
progress, which can result in the birth of exciting new products, requiring new plants and
equipment.
3. Demand forecasts: Demand forecasts are projections of demand for a company‘s products
or services.
These forecasts, also called sales forecasts, drive a company‘s production, capacity, and
scheduling systems and serve as inputs to financial, marketing, and personnel planning.

STRATEGIC IMPORTANCE OF FORECASTING:

Forecasting plays a very important role in the following areas:
A) HUMAN RESOURCE MANAGEMENT - hiring, training and laying-off workers all
depend on anticipated demand.)
B) CAPACITY PLANNING - when capacity is inadequate, the resulting shortages can
mean undependable delivery, loss of customers, and loss of market share.)
C) SUPPLY CHAIN MANAGEMENT - good supplier relations and the ensuing price
advantages for materials and parts depend on accurate forecasts.)
STEPS IN FORECASTING
There are eight steps to a forecasting system. These are:
1. Determine the use of the forecast – (What objectives are we trying to achieve?)
2. Select the items that are to be forecasted
3. Determine the time horizon of the forecast – (Is it short, medium, or long – range?)
4. Select the forecasting model
5. Gather the data needed to make the forecast
6. Validate the forecasting model
7. Make the forecast
8. Implement the results
FORECASTING METHODS:
There are numerous approaches to forecasting depending on the need of the decision maker.
Broadly speaking, these can be categorized in two ways:
i) Quantitative forecasting
ii) Qualitative forecasting
The various Qualitative Methods in vogue are as follows:
1. Jury of executive opinion – This method takes the opinions of a small group of high-level
managers, often in combination with statistical models, and results in a group estimate of
demand.
2. Sales force composite – In this approach, each salespeople estimates what sales will be in
his or her region. These forecasts are then reviewed to ensure they are realistic, then
combined at the district and national levels to reach an overall forecast.
3. Delphi method – This is an iterative group process. There are three different types of
participants in the Delphi process: decision makers, staff personnel, and respondents. The
decision makers usually consist of a group of five to ten experts who will be making the
actual forecast. The staff personnel assist the decision makers by preparing, distributing,
collecting, and summarizing a series of questionnaires and survey results. The respondents
are a group of people whose judgments are valued and are being sought. This group provides
inputs to the decision makers before the forecast is made.
4. Consumer market survey – This method take input from customers or potential
customers regarding their future purchasing plans. It can help not only in preparing a forecast
but also in improving product design and planning for new products.
5. Naïve approach – It assumes that demand in the next period is the same as demand in the
most recent period. In other words, if sales of a product, say, Reliance WLL phones, were
100 units in January, we can forecast that February‘s sales will also be 100 phones. Does this
make any sense? It turns out that for some product lines, selecting this naïve approach is a
cost-effective and efficient forecasting model.
QUANTITATIVE METHODS
The chief Quantitative methods are:
1. Moving averages
2. Exponential smoothing
3. Time series models
4. Trend projection
The time series models of forecasting predict on the basis of the assumption that the future is
a function of the past. In other words, they look at what has happened over a period of time
and use a series of past data to make a forecast. If we are predicting weekly sales of washing
machine, we use the past weekly sales for washing machine in making the forecast.
A causal model incorporates into the model the variables or relationships that might
influence the quantity being forecast. A causal model for washing machine sales might
include relationships such as new housing, advertising budget, and competitors‘ prices.
Moving over to a structured approach to forecasting, let me introduce the basic steps involved
in this process:-
Time Series Forecasting A time series is based on a sequence of evenly spaced (weekly,
monthly, quarterly, and so on) data points. Forecasting time series data implies that future
values are predicted only from past values and that other variables, no matter how potentially
valuable, are ignored.
Decomposition of a Time Series
There are four main ways of decomposing the time series:
• Trend
• Seasonality
• Cycles
• Random variations
Two general forms of time series models are used in statistics. The most widely used is a
multiplicative model, which assumes that demand is the product of the four components:
Demand = T x Rx Cx S
where
T - denotes Trend ,
S - denotes Season
C - denotes Cycles
R - denotes random variables
An additive model provides an estimate by adding the components together. It is stated as:
Demand = T + S + C + R

MOVING AVERAGE
A centered moving average (MA) is obtained by summing and averaging the values from a
given number of periods repetitively, each time deleting the oldest value and adding a new
value. Moving averages can smooth out fluctuations in any data, while preserving the general
pattern of the data (longer averages result in more smoothing). However, they do not yield a
forecasting equation, nor do they generate values for the ends of the data series.
ΣX
MA = -------------------------
Number of Period
A weighted moving average (MAw) allows some values to be emphasized by varying the
weights assigned to each component of the average. Weights can be either percentages or a
real number.
Σ(Wt) X
MAwt=----------------------------
ΣWt

2. HAND FITTING
A hand fit or freehand curve is simply a plot of a representative line that (subjectively) seems
to best fit the data points. For linear data, the forecasting equation will be of the form:
Yc = a + b (X) (signature)
where
Yc is the trend value, a is the intercept (where line crosses the vertical axis),
b is the slope (the rise, Δ y, divided by the run, Δ x), and
X is the time value (years, quarters, etc.).
The signature‖ identifies the point in time when X = 0, as well as the X and Y units.

3. LEAST SQUARES
Least squares are a mathematical technique of fitting a trend to data points. The resulting line
of best fit has the following properties:
(1) the summation of all vertical deviations about it is zero,
(2) the summation of all vertical deviations squared is a minimum, and
(3) the line goes through the means X and Y. For linear equations, the line of best fit is found
by the simultaneous solution for a and b of the following two normal equations:
ΣY = na +b Σ X
Σ XY =aΣX+bΣX
The above equations can be used in the form shown above and are used in that form for
regression. However, with time series, the data can also be coded so that Σ = 0 X . Two terms
then dropout, and the equations are simplified to:
Σ Y = na
ΣY
a = ----------
n

Σ XY = bΣX2

ΣXY
b= -------
X2
To code the time series data, designate the center of the time span as X = 0 and let each
successive period be ±1 more unit away. (For an even number of periods, use values of ±0.5,
1.5, 2.5, etc.).
Seasonal indices:
A seasonal index (SI) is a ratio that relates a recurring seasonal variation to the corresponding
trend value at the given time. In the ratio-to-moving average method of calculation monthly
(or quarterly) data are typically used to compute a 12-month (or 4-quarter) moving average.
(This dampens out all seasonal fluctuations.) Actual monthly (or quarterly) values are then
divided by the moving average value centered on the actual month. In the ratio-to-trend
method, the actual values are divided by the trend value centered on the actual month. The
ratios obtained for several of the same months (or quarters) are then averaged to obtain the
seasonal index values. The indexes can be used to obtain seasonalized forecast values, Ysz
(or to deseasonalize actual data). Ysz = (SI) Yc

EXPONENTIAL SMOOTHING
Exponential smoothening is a moving-average forecasting technique that weights past data in
an Exponential manner so that most recent data carry more weight in the moving average.
With simple Exponential smoothening, the forecast Ft is made up of the last period forecast
Ft–1 plus a portion, α, of the difference between the last periods actual demand At–1 and last
period forecast F t –1.1
Ft= Ft–1+ (At–1– Ft–1).
Adjusted Exponential Smoothing
Adjusted exponential smoothing models have all the features of simple exponential
smoothing models, plus they project into the future (for example, to time period t + 1) by
adding a trend correction increment, Tt, to the current period smoothed average, ˆ Ft.
ˆ Ft+1 = ˆ Ft+T1
Figure 5.1 depicts the components of a trend-adjusted forecast that utilizes a second
smoothing coefficient β . The β value determines the extent to which the trend adjustment
relies on the latest difference in forecast amounts (ˆF-ˆFt– 1) versus the previous trend Tt–1
Thus:

A low β gives more smoothing of the trend and may be useful if the trend is not well-
established.
A high β will emphasize the latest trend and be more responsive to recent changes in trend.
The initial trend adjustment Tt–1 is sometimes assumed to be zero.

REGRESSION AND CORRELATION METHODS

Regression and correlation techniques quantify the statistical association between two or
more variables.
(a) Simple regression expresses the relationship between a dependent variable Y and a
independent variable X in terms of the slope and intercept of the line of best fit relating the
two variables.
(b) Simple correlation expresses the degree or closeness of the relationship between two
variables in terms of a correlation coefficient that provides an indirect measure of the
variability of points from the line of best fit. Neither regression nor correlation gives proof of
a cause-effect relationship.
5.6.1 Regression
The simple linear regression model takes the form Yc = a + bX, where Yc is the dependent
variable and X the independent variable. Values for the slope b and intercept α are obtained
by using the normal equations written in the convenient form:

STANDARD DEVIATION OF REGRESSION

A regression line describes the relationship between a given value of the independent variable
X and μy – x the mean of the corresponding probability distribution of the dependent variable
Y. We assume the distribution of Y values is normal for any given X value. The point
estimate, or forecast, is the mean of that distribution for any given value of X. The standard
deviation of regression Sy – x is a measure of the dispersion of data points around the
regression line. For simple regression, the computation of Sy – x has n – 2 degrees of
freedom.

CORRELATION
The simple linear correlation coefficient r is a number between –1 and + 1 that tells how well
a linear equation describes the relationship between two variables. As illustrated in Fig. 5.2 r
is designated as positive if Y increases as X increases, and negative if Y decreases as X
increases. An r of zero indicates an absence of any relationship between the two variables.

The deviation of all points (Y) from the regression line (Yc) consists of deviation accounted
for by the regression line (explained) and random deviation (unexplained). Fig. 5.3 illustrates
this for one point, Y.
Squaring the deviation we have variation.
Total variation = explained + unexplained
_ _
∑(Y-Y)2 = ∑(Yc – Y)2 + ∑(Y-Yc)2
The coefficient of determination r2 is the ratio of explained variation to total variation:
∑(Yc – Y)2
2
r = --------------------
_
∑(Y-Y)2

The coefficient of correlation r is the square root of the coefficient of determination:

When the sample size is sufficiently large (e.g., greater than 50), the value of r can be
computed more directly form:

CAPACITY PLANNING
INTRODUCTION
Before products can flow into a market, someone must design and invest in the facilities and
organisation to produce them. This chapter concerns the planning of the systems needed to
produce goods and services. Capacity Planning for manufacturing and service systems are
different. Both must be designed with capacity limitations in mind. The approaches for long-
term and short-term capacity planning will help the managers to make best use of resources.

MANUFACTURING AND SERVICE SYSTEMS

Manufacturing and service systems are arrangements of facilities, equipment, and people to
produce goods and services under controlled conditions.
Manufacturing systems produce standardized products in large volumes. This plant and
machinery have a finite capacity and contribute fixed costs that must be borne by the
products produced. Variable costs are added as labour is employed to combine or process the
raw materials and other components.
Value addition will takes place during the production process for the product. The cost of
output relative to the cost of input can be measured, as the actual cost is known i.e.
productivity is measurable quantity.
Service systems present more uncertainty with respect to both capacity and costs. Services
are produced and consumed in the presence of the customer and there is little or no
opportunity to store value, as in a finished goods inventory. As a result capacity of service
systems like hospitals, restaurants and many other services must be sufficiently flexible to
accommodate a highly variable demand. In addition, many services such as legal and medical
involves professional or intellectual services judgments that are not easily standardized. This
makes more difficult to accumulate costs and measure the productivity of the services.
DESIGN AND SYSTEMS CAPACITY
Production systems design involves planning for the inputs, transformation activities, and
outputs of a production operation. Design plays a major role because they entail significant
investment of funds and establish cost and productivity patterns that continue in future. The
capacity of the manufacturing unit can be expressed in number of units of output per period.
In some situations measuring capacity is more complicated when they manufacture multiple
products. In such situations, the capacity is expressed as man-hours or machine hours. The
relationship between capacity and output is shown in the Figure 3.1.

DESIGN CAPACITY
Designed capacity of a facility is the planned or engineered rate of output of goods or
services under normal or full scale operating conditions. For example, the designed capacity
of the cement plant is 100
TPD (Tonnes per day). Capacity of the sugar factory is 150 tonnes of sugarcane crushing per
day. The uncertainty of future demand is one of the most perplexing problems faced by new
facility planners.
Organisation does not plan for enough regular capacity to satisfy all their immediate
demands. Design for a minimum demand would result in high utilisation of facilities but
results in inferior service and dissatisfaction of customers because of inadequate capacity.
The design capacity should reflect management‘s strategy for meeting the demand. The best
approach is to plan for some in-between level of capacity.
System/effective capacity: System capacity is the maximum output of the specific product or
product mix the system of workers and machines is capable of producing as an integrated
whole. System capacity is less than design capacity or at the most equal it because of the
limitation of product mix, quality specification, and breakdowns. The actual is even less
because of many factors affecting the output such as actual demand, downtime due to
machine/equipment failure, unauthorized absenteeism.
The system capacity is less than design capacity because of long-range uncontrollable factors.
The actual output is still reduced because of short-term effects such as breakdown of
equipment, inefficiency of labour. The system efficiency is expressed as ratio of actual
measured output to the system capacity.
These different measures of capacity are useful in defining two measures of system
effectiveness: efficiency and utilization. Efficiency is the ratio of actual output to effective
capacity. Utilization is the ratio of actual output to design capacity.

It is common for managers to focus exclusively on efficiency, but in many instances, this
emphasis can be misleading. This happens when effective capacity is low compared with
design capacity. In those cases, high efficiency would seem to indicate effective use of
resources when it does not.

CAPACITY PLANNING
Design of the production system involves planning for the inputs, conversion process and
outputs of production operation. The effective management of capacity is the most important
responsibility of production management. The objective of capacity management (i.e.
planning and control of capacity) is to match the level of operations to the level of demand.
Capacity planning is to be carried out keeping in mind future growth and expansion plans,
market trends, sales forecasting, etc. It is a simple task to plan the capacity in case of stable
demand. But in practice the demand will be seldom stable. The fluctuation of demand creates
problems regarding the procurement of resources to meet the customer demand. Capacity
decisions are strategic in nature.
Capacity is the rate of productive capability of a facility. Capacity is usually expressed as
volume of output per period of time.
Production managers are more concerned about the capacity for the following reasons:
• Sufficient capacity is required to meet the customers demand in time.
• Capacity affects the cost efficiency of operations.
• Capacity affects the scheduling system.
• Capacity creation requires an investment.
Capacity planning is the first step when an organisation decides to produce more or new
products.

PROCESS OF CAPACITY PLANNING

Capacity planning is concerned with defining the long-term and the short-term capacity needs
of an organisation and determining how those needs will be satisfied. Capacity planning
decisions are taken based upon the consumer demand and this is merged with the human,
material and financial resources of the organisation.
Capacity requirements can be evaluated from two perspectives—long-term capacity
strategies and short term capacity strategies.
1. Long-term capacity strategies: Long-term capacity requirements are more difficult to
determine because the future demand and technology are uncertain. Forecasting for five or
ten years into the future is more risky and difficult. Even sometimes company‘s today‘s
products may not be existing in the future. Long-range capacity requirements are dependent
on marketing plans, product development and life-cycle of the product. Long-term capacity
planning is concerned with accommodating major changes that affect overall level of the
output in long term.
Marketing environmental assessment and implementing the long-term capacity plans in a
systematic manner are the major responsibilities of management. Following parameters will
affect long-range capacity decisions.
• Multiple products: Company‘s produce more than one product using the same facilities in
order to increase the profit. The manufacturing of multiple products will reduce the risk of
failure.
Having more than on product helps the capacity planners to do a better job. Because products
are in different stages of their life cycles, it is easy to schedule them to get maximum capacity
utilisation.
• Phasing in capacity: In high technology industries, and in industries where technology
developments are very fast, the rate of obsolescence is high. The products should be brought
into the market quickly. The time to construct the facilities will be long and there is no much
time, as the products should be introduced into the market quickly. Here the solution is phase
in capacity on modular basis. Some commitment is made for building funds and men towards
facilities over a period of 3-5 years. This is an effective way of capitalizing on technological
breakthrough.
• Phasing out capacity: The outdated manufacturing facilities cause excessive plant closures
and down time. The impact of closures is not limited to only fixed costs of plant and
machinery.
Thus, the phasing out here is done with humanistic way without affecting the community.
The phasing out options makes alternative arrangements for men like shifting them to other
jobs or to other locations, compensating the employees, etc.
2. Short-term capacity strategies: Managers often use forecasts of product demand to
estimate the short-term workload the facility must handle. Managers looking ahead up to 12
months, anticipate output requirements for different products, and services. Managers then
compare requirements with existing capacity and then take decisions as to when the capacity
adjustments are needed.
For short-term periods of up to one year, fundamental capacity is fixed. Major facilities will
not be changed. Many short-term adjustments for increasing or decreasing capacity are
possible. The adjustments to be required depend upon the conversion process like whether it
is capital intensive or labour intensive or whether product can be stored as inventory. Capital-
intensive processes depend on physical facilities, plant and equipment. Short-term capacity
can be modified by operating these facilities more or less intensively than normal. In labour
intensive processes short-term capacity can be changed by laying off or hiring people or by
giving overtime to workers. The strategies for changing capacity also depend upon how long
the product can be stored as inventory.
The short-term capacity strategies are:
1. Inventories: Stock finished goods during slack periods to meet the demand during peak
period.
2. Backlog: During peak periods, the willing customers are requested to wait and their orders
are fulfilled after a peak demand period.
3. Employment level (hiring or firing): Hire additional employees during peak demand
period and layoff employees as demand decreases.
4. Employee training: Develop multi skilled employees through training so that they can be
rotated among different jobs. The multi skilling helps as an alternative to hiring employees.
5. Subcontracting: During peak periods, hire the capacity of other firms temporarily to make
the component parts or products.
6. Process design: Change job contents by redesigning the job.

IMPORTANCE OF CAPACITY DECISIONS

1. Capacity decisions have a real impact on the ability of the organisation to meet future
demands for products and services; capacity essentially limits the rate of output possible.
Having capacity to satisfy demand can allow a company to take advantage of tremendous
opportunities.
2. Capacity decisions affect operating costs. Ideally, capacity and demand requirements will
be matched, which will tend to minimize operating costs. In practice, this is not always
achieved because actual demand either differs from expected demand or tends to vary (e.g.,
cyclically). In such cases, a decision might be made to attempt to balance the costs of over
and under capacity.
3. Capacity is usually a major determinant of initial cost. Typically, the greater the capacity
of a productive unit, the greater its cost. This does not necessarily imply a one for-one
relationship; larger units tend to cost proportionately less than smaller units.
4. Capacity decisions often involve long-term commitment of resources and the fact that,
once they are implemented, it may be difficult or impossible to modify those decisions
without incurring major costs.
5. Capacity decisions can affect competitiveness. If a firm has excess capacity, or can quickly
add capacity, that fact may serve as a barrier to entry by other firms. Then too, capacity can
affect delivery speed, which can be a competitive advantage.
6. Capacity affects the ease of management; having appropriate capacity makes management
easier than when capacity is mismatched.

AGGREGATE PRODUCTION (OUTPUT) PLANNING

This plan is the production portion of the business plan and addresses the demand side of the
firm's activities by showing the outputs it will produce, expressed in numbers of units of its
product groups or families. Since various product groups may be produced at diverse plants,
facilities, or divisions, each of them needs its own production plan. The division's aggregate
output plan covers the coming 6 to 18 months on a weekly or monthly basis. Planning at this
level ignores such details as how many of each individual product, style, color option, or
model to produce. The plan recognizes the division's existing fixed capacity and the -
company's overall policies for maintaining inventories and backlogs, employment stability,
and subcontracting.
Aggregate Capacity Planning: A statement of desired output is useful only if it is feasible.
This is the role of aggregate capacity planning-to keep capacity Utilization at desired levels
and to test the feasibility of planned output against existing capacity. Thus it addresses the
supply side of the firm's ability to meet the demand. As for aggregate output plans, each
plant, facility, or division requires its own aggregate capacity plan. Capacity and output must
be in balance, as indicated by the arrow between them in Figure. A capacity plan translates an
output plan into input terms, approximating how much of the division's capacity will be
consumed. A product group, for example, usually consumes predictable amounts of capacity
such as labor hours of assembly or machine hours for fabrication. Although these basic
capacities are fixed, management can manipulate the short-term capacities by the ways they
deploy their work force, by subcontracting, or by using multiple work shifts to adjust the
timing of overall outputs. As a result, the aggregate planning process balances output levels,
capacity constraints, and temporary capacity adjustments to meet demand and utilize capacity
at desired levels during the coming months. The resulting plan sets limits on the master
production schedule.

AGGREGATE PLANNING PROCESS

The process consists of four basic considerations as follows:
1. Concept of Aggregation starts with a meaningful measure of output. In a single product
output organization there is no problem with the output measure. Many organizations have
multiple products and it is difficult to find a common factor of measure of output.
For e.g. steel producer can plan in terms of tons of steel, gallons of paint in case of paint
industry.
Service organizations such as transport system may use passenger miles as a common
measure, health care facilities may use patient visits, and educational institutes may use
student to faculty contact ratio in terms of hours as a reasonable measure.
You may recall that a group of products or services that have similar demand requirements
and common processing, labour and materials requirements is called a Product Family.
Therefore a firm can aggregate its products or services into a set of relatively broad families,
avoiding too much detail at the planning stage.
For example consider the Bicycle manufacture that has aggregated all products into two
families: mountain bikes and road bikes. This approach aids production planning for the
assembly lines in the plants
2. Goals for aggregate planning
There are number of goals to be satisfied
• It has to provide the overall levels of output, inventory and backlogs dictated by the
business plan
• Proper utilization of the plant capacity. It should not be underutilized because it is waste of
resources.
It is better to operate at a near full capacity.
• The aggregate plan should be consistent with the company‘s goals and policies regarding its
employees.. A firm may like to have employee stability or hire and layoff strategy. Other
firms change employees freely as the output level is varied throughout the aggregate planning
horizon.
3. Aggregate Demand Forecasts
The benefits of aggregate planning depend on the accurate forecasting. The forecasting
models presented in Chapter 3 can be used to forecast demand for product groups as well as
individual products.
4. Interrelationships among decisions Here the managers must consider the future
consequences of current decisions. This is important mainly due to the fact that output plans
are developed for a long period of time.

Master Production Scheduling (MPS)

The purpose of master production scheduling is to meet the demand for individual products in
the product group. This more detailed level of planning disaggregates the product groups into
individual products and indicates when they will be produced. The MPS is an important link
between marketing and production. It shows when incoming sales orders can be scheduled
into production, and when each shipment can be scheduled for delivery.
It also takes into account current backlogs so that production and delivery schedules are
realistic.

Rough-Cut Capacity Planning: Rough-cut capacity planning (sometimes called resource

requirements planning) is done in conjunction with the tentative master production schedule
to test its feasibility in terms of capacity before the MPS is finally settled. This step ensures
that a proposed MPS does not inadvertently overload any key department, work center, or
machine, making the MPS unworkable. Although the check can apply to all work centers, it
is typically applied only to the critical ones that are most likely to be bottlenecks. It is a quick
and inexpensive way to find and correct gross discrepancies between the capacity
requirements (in direct labor hours, for example) of the MPS and available capacity.

Detailed Capacity Planning: Detailed capacity planning, also called capacity requirements
planning, is a companion process used with MRP to identify in detail the capacity required to
execute the MRP. At this level, more accurate comparisons of available and needed capacity
for scheduled work loads are possible.

Shop Floor Control: Shop .floor control coordinates the weekly and daily activities that get
jobs done. Individual jobs are assigned to machines and work centers (loading), the sequence
of processing the jobs for priority control is determined, start times and job assignments for
each stage of processing are decided (detailed scheduling), and materials and work flows
from station to station are monitored and adjusted (expediting). All these activities are co-
coordinated into smooth flow, especially when there are delays and priorities arise, last
minute adjustments of outputs and capacities is known as short term capacity control.

Capacity Requirements Planning (CRP) is the process of determining what personnel and
equipment capacities (times) are needed to meet the production objectives embodied in the
master schedule and the material requirements plan. MRP focuses upon the priorities of
materials, whereas CRP focuses primarily upon time. Although both MRP and CRP can be
done manually and in isolation, they are typically integrated within a computerized system,
and CRP (as well as production activity control) functions are often assumed to be included
within the concept of an MRP system. Computerized MRP systems can effectively manage
the flow of thousands of components throughout a manufacturing facility.

CRP INPUTS AND OUTPUTS

Capacity is a measure of the productive capability of a facility per unit of time. In terms of
the relevant time horizon, capacity management decisions are concerned with the following:
l. Long range-resource planning of capital facilities, equipment, and human resources.
2. Medium range-requirements planning of labor and equipment to meet MPS needs.
3. Short range-control of the flow (input-output) and sequencing of operations.
Capacity-requirements planning (CRP) applies primarily to medium-range activities. The
CRP system receives planned and released orders from the material-requirements planning
system and attempts to develop loads for the firm‘s work centers that are in good balance
with the work-center capacities. Like MRP, CRP is an iterative process that involves
planning, revision of capacity (or revision of the master schedule), and re planning until a
reasonably good load profile is developed. Planned-order releases (in the MRP system) are
converted to standard hours of load on key work centers in the CRP system.
Following are the essential inputs and outputs in a CRP system:
Inputs Outputs
• Planned and released orders from the MRP system • Verification reports to the MRP system
• Loading capacities from the work-center status file •Load reports of planned and released
• Routing data from the routing file orders on key work centers
•Changes that modify capacity, give • Rescheduling data to the MPS
alternative routings, or alter planned • Capacity modification data
orders

Material Requirements Planning (MRP) is a computer-based technique for determining the

quantity and timing for the acquisition of dependent demand items needed to satisfy the
master schedule requirements. By identifying precisely what, how many, and when
components are needed, MRP systems are able to reduce inventory costs improve scheduling
effectiveness, and respond quickly to market changes.
Following are some of the terminology used to describe the functioning of MRP systems.
• MRP: A technique for determining the quantity and timing dependent demand items.
• Dependent demand: Demand for a component that is derived from the demand for other
items.
• Parent and component items: A parent is an assembly made up of basic parts, or
components. The parent of one subgroup may be a component of a higher-level parent.
• Bill of materials: A listing of all components (subassemblies and materials) that go into an
assembled item. It frequently includes the part numbers and quantity required per assembly.
• Level code: The level on which an item occurs in the structure, or bill-of-materials format.
• Requirements explosion: The breaking down (exploding) of parent items into component
parts that can be individually planned and scheduled.
• Time phasing: Scheduling to produce or receive an appropriate amount (lot) of material so
that it will be available in the time periods when needed-not before or after.
• Time bucket: The time period used for planning purposes in MRP-usually a week.
• Lot size: The quantity of items required for an order. The order may be either purchased
from a vendor or produced in-house. Lot sizing is the process of specifying the order size.
• Lead-time offset: The supply time, or number of time buckets between releasing an order
and receiving the materials.

Figure 9.1 describes MRP and CRP activities in schematic form. Forecasts and orders are
combined in the production plan, which is formalized in the master production schedule
(MPS). The MPS, along with a bill-of-material (BOM) file and inventory status information,
is used to formulate the material requirements plan. The MRP determines what components
are needed and when they should be ordered from an outside vendor or produced in-house.
The CRP function translates the MRP decisions into hours of capacity (time) needed. If
materials, equipment, and personnel are adequate, orders are released and the workload is
assigned to the various work centers. End items, such as TV sets, have an independent
demand that is closely linked to the ongoing needs of consumers. It is random but relatively
constant.
Dependent demand is linked more closely to the production process itself. Many firms use
the same facilities to produce different end items because it is economical to produce large
lots once the set-up cost is incurred. The components that go into a TV set, such as 24-inch
picture tubes, have a dependent demand that is governed by the lot size. Dependent demand
is predictable.
MRP systems compute material requirements and specify when orders should be released so
that materials arrive exactly when needed. The process of scheduling the receipt of inventory
as needed over time is time phasing.
MRP is a system of planning and scheduling the time-phased materials requirements for
production operations. As such, it is geared toward meeting the end-item outputs prescribed
in the master production schedule.

MRP OBJCTIVES AND METHODS

MRP provides the following:
1. Inventory reduction: MRP determines how many of component is needed and when, in
order to meet the master schedule.
2. Reduction in production and delivery lead times: MRP identifies materials and components
quantities, timings, availabilities, and procurement and production actions required to meet
delivery dealings.
3. Realistic commitments: Realistic delivery promises can enhance customer satisfaction. By
using MRP, production can give marketing timely information about likely delivery times to
prospective customers.
4. Increased efficiency: MRP provides close coordination among various work centers as
products progress through them.
MRP INPUTS AND OUTPUTS
The essential inputs and outputs in an MRP system are listed below:

A bill of materials (BOM) is a listing of all the materials, components, and subassemblies
needed to assemble one unit of an end item. Major function of the bill of materials is to
provide the product structure hierarchy that guides the explosion process. Different methods
of describing a BOM are in use. Figure 9.2 shows (a) a product structure tree, and (b) an
indented BOM. Both are common ways of depicting the parent-component relationships on a
hierarchical basis. Knowledge of this dependency structure reveals clearly and immediately
what components are needed for each higher level assembly. A third method (c) is to use
single-level bills of material.

MANUFACTURING RESOURCES PLANNING (MRPII)

Historically, MRP systems typically were developed on a segregated basis, rather than as part
of highly integrated information system. More recently, however, companies are beginning to
logically relate many of their information subsystems to the MRP system. Bills of materials
data, for example, can be shared with an engineering information system data base; order
release and order receipts data can be shared by the order billing and accounts payable
information systems; and inventory status data from MRP can be part of marketing or
purchasing information systems. This type of information integration, in fact, is exactly the
impetus for a new generation of manufacturing planning and control systems.
Manufacturing resource planning (MRP II, or ―closed loop‖ MRP) is an integrated
information system that steps beyond first-generation MRP to synchronize all aspects (not
just manufacturing) of the business. The MRPII system coordinates sa les, purchasing,
manufacturing, finance, and engineering by adopting a focal production plan and by using
one unified data base to plan and update the activities in all the systems.
As shown in figure the process involves developing a production plan from the business plan
to specify monthly levels of production for each product line over the next one to five years.
Since the production plan affects all the functional departments, it is developed by the
consensus of executives and becomes their game plan for operations. The production
department then is expected to produce at the committed levels, the sales department to sell at
these levels, and the finance department to ensure adequate financial resources for these
levels. Guided by the production plan, the master production schedule specifies the weekly
quantities of specific products to be built. At this point a check is made to determine whether
the capacity available is roughly adequate to sustain the proposed master schedule. If not,
either the capacity or the master schedule must be changed. Once settled, the master schedule
is used in the MRP logic, as previously described, to create material requirements and priority
schedules for production. Then, an analysis of detailed capacity requirements determines
whether capacity is sufficient for producing the specific components at each work center
during the scheduled time periods.
If not, the master schedule is revised to reflect the limited available capacity. After a realistic,
capacity feasible schedule is developed, the emphasis shifts to execution of plan: purchase
schedules and shop schedules are generated. From these schedules, work center loadings,
shop floor control, and vendor follow-up activities can be determined to ensure that the
master schedule is met.
One use of the MRPII system is to evaluate various business proposals. If, for example, the
output of product X increases by 20 percent in weeks 15 to 20 and that of Y decreases by 15
percent in weeks 10 to 15, how would operations and profitability be affected? the system can
simulate how purchases and, hence, accounts payable are affected? The system can simulate
how purchases and, hence, accounts payable are affected, when delivers to customers and
accounts receivable occur, what capacity revisions are needed, and so on. The company-wide
implications of the proposed change can be evaluated, and various departments can be
coordinated according to a common purpose.