week 2 resource and capacity planning

Resource & Capacity Management

International BusinessLiam Fassam

International Business - 'Resource & Capacity Management' - Liam Fassam

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Resource & Capacity planningIn this lesson we will review the following components and how they intercede with resource and capacity management:

• Capacity forecasting and planning• Materials and manufacturing requirement planning• Production scheduling• Enterprise resource planning (ERP)• Capacity adjustment to meet demand• Demand manipulation• Operations scheduling


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The Supply Chain Mantra• Supply chain management is distinguished by its role to

provide a strategic and integrating function at all levels of logistics including the suppliers.

• Ideally, the supplier becomes part of the team and is involved in the planning process, not only for scheduling of deliveries when required, but also in the design stage for new products.

• The business objective to convert customer demand by optimising the utilisation of resources to deliver effective customer service applies to all organisations regardless of whether they are in manufacturing or service sectors.


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Theoretical capacityIn supply chain management capacity refers to the amount of inventory that can be held in the supply chain. The aggregate capacity is the sum of the total inventory that could be held simultaneously at each stage.

In theory this total is the capacity of the entire chain. However, a supply chain does not stand still, material is constantly moving into the factories and food processing plants, through road, rail, sea and air transportation (multi modal) and through successive stages out to the end user.


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Effective capacity• The effective capacity can be defined as the amount of

material or product available at each upstream stage of the supply chain.

• Some SCM academia purport effective capacity being the holding capacity of individual warehouses along the various supply chain nodes.

• However, movement through the warehouse will be limited by the speed and reliability of inward supply and by the availability of outward transport. The objective of good warehouse management is not to have huge amounts of material, but to have a high rate of throughput.


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Effective capacityBeginning with the end user, how much could the upstream supplier provide at any given time to customers and so on up through the various tiers of the chain and what are our risks?

Lets take a short while to compare our Kellogg’s business case with effective capacity and risks.

• Cost of premises• Cost of capital (interest on cash tied up in stock holding)• Handling costs• Insurance• Damage and deterioration of materials• Stock shrinkage due to miscoding and theft• Loss due to obsolescence, fashion changes and passed used by dates


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Capacity forecast and planningWild (2002) says ‘Capacity management is concerned with the matching of the capacity of the operating system and the demand placed on that system’. Planning to match demand and capacity begins with the forecasting of what the demand is likely to be.

Capacity decisions are based on forecasts of demand at several different levels. Long-range capacity planning needs forecasts to be made several years ahead and includes facility planning. Short- and medium-term forecasts span 2–3 years, and generally are used to determine people requirements, leasing of premises, machines and equipment, and product details.

In the more immediate short-term forecasts are used to plan, order and schedule resources on a monthly, weekly and daily basis. The shorter the time frame, the more precise the forecast must be. Cast minds back to lesson 1 – Sales and operations planning!


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Qualitative forecastingLast quarter (spring) the demand was twice that of the previous (winter) quarter. Further examination might show that the trend for the last few years that demand in the spring quarter has always been double that of the previous quarter (winter).

However, the circumstances existing each previous spring might have influenced the results. For one year demand might have been high due to a new product launch, another year the high demand was due to a successful TV promotion, and on another occasion a major competitor might have failed and we got the business by default.

The figures cannot stand alone but need to be supported by informationas to the circumstances at the time, in this case promotions are skewing the figures.


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Life cycle analysisThe product life cycle curve of develop, launch, growth, maturity and decline is shown below:

Demand low at launch

Rise in demand Real risk of

obsolescence if the Supply chain has not recognised this


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Life cycle analysisAt the launch stage demand is low, the growth stage shows a rapid demand increase and relatively stable demand at the maturity stage. Most product life cycles are predictable and for a product such as petrol the life cycle has extended over many decades but for some fast-moving consumer goods and fashion items the rate of growth/decline can be dramatic. Some consumables only reach the decline stage if there is a dramatic change in technology. An example is the replacement of canned vegetables such as peas by frozen vegetables, however, once the decline has steadied there is still a demand. Where there is an obvious life cycle capacity decisions can be made, such as ordering and holding materials during the growth stage in anticipation of a high demand in the growth stage, i.e. Apple with the iPhone.


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Time series forecasting

Forecasting by time series employs analysis of past demand and trends of demand to anticipate future demand. Any forecast or method of forecast can be tested for past accuracy. Accuracy is usually monitored by the deviation of the actual result from the forecast result.


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Time series forecastingShort-term forecasting considers historical data patterns (of demand) from past periods and projects these patterns into a forecast. Thus, if last period demand was 50,000 the forecast for the next period would be 50,000. If for each period the trend is upwards then the forecast will follow the trend but always lag behind:

What would be the consequence if Demand rose to period 2 figures

In period 4 and 5?


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Time series forecastingThe method gives a quick response to trends, depending on the length of time of each period. If trend go upwards then forecasts will follow but lag behind by a period. The total absolute deviation in the example, indicates that having a higher forecast than actual is as serious as having a lower than actual forecast. In the calculation of total absolute deviation the symbols for plus or minus are ignored. The mean absolute deviation is the average deviation of forecast from actual and in this case the forecast on average is 6000 wrong on each occasion.


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Time series forecastingIf the forecast is too high it is likely that too much resource will be provided, and if too low there will not be sufficient resource to satisfy demand – cast minds back remember how we discuss resource is not infinite! If the periods shown above are daily forecasts and the resource is not perishable the damage in poor forecasting might not be great – where/when would this not be acceptable?

If however each period represents a year the damage done could be serious.

Lean or TPS manufacturing – poor resource management is waste and this is adding cost and no value.


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Materials requirements & planning• In most manufacturing companies the focus is on a reliable

flow of inwards materials. • This is achieved through a materials requirements plan (MRP)

for inbound logistics so as to achieve an appropriate balance of stock and to satisfy demand.

• MRP is the set of techniques which uses bills of material, inventory on hand and on order data, and the production schedule or plan to calculate quantities and timing of materials.

• Such a plan is incomplete if it does not take into account whether manufacturing resources (e.g. plant, people, energy and space) will be available at the desired time.


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Materials requirements & planningFrom the business plan, an operations plan is formulated which covers the materials and other resources needed to translate the business plan into reality. It follows that to keep the operations plan in line with updates to the business plan, regular communication is required between the various functions involved.This updating process is best achieved by face-to-face meetings which we recommend should take place at least once a month and always with all parties present at the one time. There is a very real danger of misunderstandings and ambiguities if meetings are not face-to-face and if all concerned are not present at the same time.


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Materials requirements & planning


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Materials requirements & planning• The issues that will be agreed will include time and availability

of resources, and conflicting requirements and priorities will be resolved.

• Above all demand is the crucial issue, and as future demand can never be certain there should be a formal mechanism of forecasting using the best combination of historical models, past results from promotions, data from customers and market intelligence.

• Likewise, the inventory data system has to be up to date and accurate with details of raw materials (RM) on hand, goods on order, lead times and finished goods on hand.


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Materials requirements & planning• The next stage is to follow a rough-cut capacity planning

process to assess to what extent the capacity of manufacturing facilities could meet the master schedule. The feedback loop at this level tests the master plan against problem areas such as known bottlenecks and other critical resource areas.

• Often, as this is a short- to medium-term approach, action has to be taken to make the best use of existing resources rather than to add extra long-term resources.

• The company should decide which alternative to follow if the existing resources are not adequate, for example review the schedule, increase resources, work extra shifts, delay maintenance, outsource to third parties and so on.


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Materials requirements & planning• Having established that the resources are sufficient or adjusting

the plan to fit the resources, the next step is detailed MRP and capacity requirements planning for day-to-day operations (detailed bills of materials for each product or batch of products).

• The revised master schedule for each product and for each stock keeping unit (SKU) and bills of material for each SKU, the materials required for each item of raw materials (RM) and packaging materials (PM) are matched with current inventory levels to derive the additional procurement requirements.

• The requirements are modified, if required, after comparing with the detailed capacity planning process and the planning process then commences with the final production scheduling and purchasing (supply planning) processes.


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Materials requirements & planning

• With the ‘push’ system stocks of materials and of finished goods are used to ensure maximum plant capacity utilization by having level production.

• The ‘pull’ system is driven by customer orders and just-in-time principles which can result in some under utilization of capacity. It is said that just-in-time requires greater flexibility and reliability of plant plus a multi-skilled workforce.

• In its simplistic form just-in-time is reactive (demand pull), whereas MRPII can be described as proactive.


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Enterprise resource & ops planningERP replaces the old standalone computer systems for finance, manufacturing, HR, and distribution and replaces them with a single integrated software system divided into software modules that approximately represent the old standalone systems.There are five major factors why companies undertake ERP systems:

1. Integrate financial information2. Integrate customer order information & demand plan3. Standardise and speed up supply processes4. Reduce inventory5. Standardise HR information

One collective view


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Operations resource planning


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Operations resource planningA partnership with suppliers and a partnership with customers are the beginnings of a radical change in supply chain management. As a result, the service provider, the supplier and the customer achieve benefits in:

• lower operating cost,• improved service level,• a greater certainty of a continued relationship.

The boundaries between companies will blur as they view themselves as part of an ecosystem, supply chain, or value chain.

(Hasso Platner, Co-founder and Vice Chairman, SAP)


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Capacity managementThere are two approaches to managing capacity: one is to adjust capacity and the other is to manipulate demand. Generally, organisations will seek to match capacity and demand using both approaches.

The constraint could seemingly be • lack of space• lack of handling equipment• lack of people• lack of reliable supply.

Once the constraint that limits your capacity to serve your customers is identified then corrective action can be taken.


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Variation or capacity adjustmentThis strategy has short and longer term implications.In the short-term capacity can to some extent be adjusted. • Overtime/double shifts can be worked• Unskilled workers can be employed to make better use of

trained people• Workforce can be re-deployed• Jobs or deliveries can be prioritised• Supply and production expedited• Subassemblies subcontracted• Non-essential maintenance delayed

Lets discuss some of the risks associated with the above


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Variation or capacity adjustmentLonger-term • Facilities, machines/equipment and people can be added.

Production can be made in advance and stockpiled. • Adding extra people will not immediately add to effective

capacity. All organisations rely heavily on people, and a strong corporate culture with the goodwill of people will in the short-term ease the burden of increases in demand.

• However when demand falls it is often difficult to sell or dispose of capital assets such as buildings, machines, equipment, and vehicles. Generally, disposal of assets will not realise book value.


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Reducing the need to adjust• It is never the strategy to keep the customer waiting• However to reduce excess capacity there always lies a danger

that customers will have to wait for order fulfilment and in doing so a reputation for poor service will ensue.

• Organisations can avoid over commitment with resource deployment utilising a manipulated demand strategy.

• This works by lowering prices when demand drops enticing customers to buy and furthermore increase prices when capacity is low, which can assist in carrying an extra costs associated with ramping up production and put off some customers from the purchase until the price drops again.

Lets discuss some of the risks associated with the above


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In summary

• Resource and capacity management is all about planning. Planning is not possible without information. Resource and capacity planning begins with knowing what our effective capacity is.

• Effective capacity is the amount of material or product that can be delivered in a given period of time to customers. Having the capacity to meet customer demand requires advanced knowledge of what the demand will be.