Week 2 resource and capacity planning

Resource & Capacity
Management

International Business
Liam Fassam

Resource & Capacity planning
In 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
International Business - 'Resource &
2
Capacity Management' - Liam Fassam

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.
3

Theoretical capacity
In 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.
4

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.
5

Effective capacity
Beginning 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

6

Capacity forecast and planning
Wild (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!

7

Qualitative forecasting
Last 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 information
as to the circumstances at the time, in this case promotions are skewing the
figures.
8

Life cycle analysis
The product life cycle curve of develop, launch, growth, maturity and decline
is shown below:
Rise in
demand Real risk of
obsolescence if the
Supply chain has not
Demand recognised this
low at
launch

9

Life cycle analysis
At 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.
10

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.

11

Short-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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The 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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If 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?
Lean or TPS manufacturing – poor resource management
is waste and this is adding cost and no value.
If however each period represents a year the damage done
could be serious.

14

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.

15

From 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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17

• 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.

18

• 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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• 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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• 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.

21

Enterprise resource & ops planning
ERP 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 information
2. Integrate customer order information & demand plan
3. Standardise and speed up supply processes
4. Reduce inventory
One collective view
5. Standardise HR information

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Operations resource planning

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Operations resource planning
A 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)
24

Capacity management
There 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.
25

Variation or capacity adjustment
This 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 adjustment
Longer-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.

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Week 2 resource and capacity planning

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