UNIT - III

OPERATIONS MANAGEMENT

UNIT III : DEMAND FORECASTING

Purpose of demand management is to coordinate and control all sources of demand so the productive system can be used efficiently and the product delivered at time. Two basic sources of demand : dependent demand and independent demand Dependent demand is the demand for a product or service caused by the demand for other products or services. For example, demand for Maruti SX-4 is an independent demand but demand for wheels of the car are dependent demand. Forecasting : forecasting can be classified into four basic types Qualitative Time series analysis Casual relationship Simulation

UNIT III : DEMAND FORECASTING FORECASTING TECHNIQUES

1.QUALITATIVE GRASS ROOTS SUBJECTIVE; JUDGEMENTAL.BASED ON ESTIMATES & OPINION

Derives a forecast by compiling input from those at the end of hierarchy who deals with what is being forecast. For example, an overall sales forecast may be derived by combining inputs from each salesperson who is nearest to his or her own territory This is typically used to forecast longrange and new product sales by collecting data through surveys & interviews. Free open exchange at meetings. The idea is that discussion by the group will produce better forecasts than any one individual. Participants may be

MARKET RESEARCH

PANEL CONSENSUS

UNIT III : DEMAND FORECASTING FORECASTING TECHNIQUES

1.QUALITATIVE HISTORICAL ANALOGY SUBJECTIVE; JUDGEMENTAL.BASED ON ESTIMATES & OPINION

Important in planning new products where a forecast may be derived by using the history of similar product. Group of experts responds to questionnaire. A moderator compiles results and formulates a new questionnaire that is submitted to the group. Thus, there is a learning process for the group as it receives new information and there is no influence of group pressure or dominating individual.

DELPHI METHOD

UNIT III : DEMAND FORECASTING FORECASTING TECHNIQUES

2.TIME SERIES ANALYSIS BASED ON THE IDEA THAT THE HISTORY OF OCCURANCES OVER TIME CAN BE USED TO PREDICT THE FUTURE

SIMPLE MOVING AVERAGE

A TIME PERIOD CONTAINING A NUMBER OF DATA POINTS IS AVERAGED BY DIVIDING THE SUM OF THE POINT VALUES BY THE NUMBER OF POINTS. EACH, THEREFORE, HAS EQUAL INFLUENCE. SPECIFIC POINTS MAY BE WEIGHTED MORE OR LESS THAN THE OTHERS, AS SEEN FIT BY EXPERIENCE.
RECENT DATA POINTS ARE WEIGHTED MORE WITH WEIGHTING DECLINING EXPONENTIALLY AS DATA BECOMES OLDER. FITS A STRAIGHT LINE TO PAST DATA GENERALLY RELATING THE DATA VALUE TO TIME.MOST COMMON FITTING TECHNIQUE

WEIGHTED MOVING AVERAGE

EXPONENTIAL SMOOTHING

REGRESSION ANALYSIS

UNIT III : DEMAND FORECASTING

FORECASTING TECHNIQUES
TREND PROJECTIONS

2.TIME SERIES ANALYSIS

BASED ON THE IDEA THAT THE HISTORY OF OCCURANCES OVER TIME CAN BE USED TO PREDICT THE FUTURE FITS A MATHEMATICAL TREND LINE TO THE DATA POINTS AND PROJECTS IT INTO THE FUTURE AN EFFECTIVE METHOD TO DECOMPOSE A TIME SERIES INTO SEASONALS, TRENDS, AND IRREGULAR. IT NEEDS AT LEAST THREE YEARS OF HISTORY. VERY GOOD IN IDENTIFYING TURNING POINTS, FOR EXAMPLE, IN COMPANY SALES.

SHISKIN TIME SERIES

UNIT III : DEMAND FORECASTING FORECASTING TECHNIQUES

CASUAL TRIES TO UNDERSTAND THE SYSTEM UNDERLYING AND SURROUNDING THE ITEM BEING FORECAST.FOR EXAMPLE, SALES MAY BE AFFECTED BY ADVERTISING, QUALITY AND COMPETITORS SIMILAR TO LEAST SQUARES METHOD IN TIME SERIES BUT MAY CONTAIN MULTIPLE VARIABLES.BASIS IS THAT FORECAST IS CAUSED BY THE OCCURRENCE OF OTHER EVENTS. ATTEMPTS TO DESCRIBE SOME SECTOR OF THE ECONOMY BY A SERIES OF INTERDEPENDENT EQUATIONS. STATISTICS THAT MOVE IN THE SAME DIRECTION AS THE SERIES BEING FORECAST BUT MOVE BEFORE THE SERIES, SUCH AS AN INCREASE IN PETROL PRICE INDICATING A FUTURE DROP IN IN THE SALES OF LARGE CARS.

REGRESSION ANALYSIS

ECONOMETRIC MODEL

LEADING INDICATORS

UNIT III : DEMAND FORECASTING FORECASTING TECHNIQUES

SIMULATION MODEL THIS IS USUALLY COMPUTER BASED THAT ALLOW THE FORECASTER TO MAKE ASSUMPTIONS ABOUT THE INTERNAL VARIABLES AND EXTERNAL ENVIRONMENT IN THE MODEL.DEPENDING ON THE VARIABLES IN THE MODEL, THE FORECASTER MAY ASK SUCH QUESTION AS WHAT WOULD HAPPEN TO MY FORECAST IF PRICE IS INCREASED BY 10%?WHAT EFFECT WOULD A MILD NATIONAL RECESSION HAVE ON MY FORECAST?

UNIT III : DEMAND FORECASTING TIME SERIES MODEL AND SOME OF THEIR CHARACTERISTICS
FORECASTING METHOD AMOUNT OF HISTORICAL DATA 5 TO 10 OBSERVATION TO SET THE WEIGHT 10 TO 20; FOR SEASONALITY AT LEAST 5 PER SEASON 10 OBSERVATIONS PER INDEPENDENT VARIABLE ENOUGH TO SEE 2 PEAKS & TROUGHS FORECAST HORIZON

EXPONENTIAL SMOOTHING

SHORT

REGRESSION TREND MODEL

SHORT TO MEDIUM

CASUAL REGRESSION MODEL TIME SERIES DECOMPOSITION

SHORT,MEDIM OR LONG SHORT TO MEDIUM

UNIT III : DEMAND FORECASTING

FORECASTING TECHNIQUES

In business forecasting, short term usually refers to under three months. Short-term models compensate for random variation and adjust for short-term changes such as consumers responses to new products. Medium-term refers to three months to two years. Medium-term forecasts are useful for seasonal effects. Long-term refers to greater than two years. Long-term models detect general trends and are specially useful in identifying turning points. Choosing a forecasting model depends on : Time horizon to forecast Data availability Accuracy required Size of forecasting budget Availability of qualified personnel

UNIT III : DEMAND FORECASTING

FORECASTING TECHNIQUE 1. SIMPLE MOVING AVERAGE When demand for a product is neither

growing nor declining rapidly, and if it does not have seasonal characteristics, a moving average can be useful in removing the random fluctuations for forecasting
THE FORMULA FOR SIMPLE MOVING AVERAGE IS :

Ft = (At-1 + At-2 + At-3+..+ At-n) / n Where Ft = Forecast for the coming period n = Number of periods to be averaged At-1 = Actual occurrence in the past period At-2, At-3, and At-n = Actual occurrences two periods ago, three periods ago, and so on n periods ago

UNIT III : DEMAND FORECASTING

FORECASTING TECHNIQUE

2. WEIGHTED MOVING AVERAGE - The simple moving average gives equal weight to each component of the moving average data base; a weighted moving average allows any weight to be placed on each element such that sum of all weights equals 1. The formula for a weighted moving average is : Ft = w1.At-1 + w2.At-2 + .+ wn. At-n Where At-1 = Actual occurrence in the past period At-2, At-3, and At-n = Actual occurrences two periods ago, three periods ago, and so on n periods ago W1= Weight to be given to the actual occurrence For period t-1 W2= Weight to be given to the actual occurrence For period t-2 Wn= Weight to be given to the actual occurrence For period t-n n = Total number of periods in the forecast W1 + W2 + W3 + .+Wn = 1

UNIT III : DEMAND FORECASTING FORECASTING TECHNIQUE 3. EXPONENTIAL SMOOTHING - In many applications, the most recent

occurrences are more indicative of the future than those in the more distant past. If this premise is valid, then the importance of data diminishes as the past becomes more distant. Then exponential smoothing may be the most logical method to use. Exponential smoothing is the most used of all forecasting techniques It is an integral part of virtually all computerized forecasting techniques It is widely used in ordering inventory in retail firms, wholesale companies, and service agencies

UNIT III : DEMAND FORECASTING FORECASTING TECHNIQUE

Exponential smoothing techniques have become well accepted for following reasons : Exponential models are surprisingly accurate Formulating an exponential model is relatively easy Little computation is required to use the model Computer storage requirement is small because of the limited use of historical data Tests for accuracy as to how well the model is performing are easy to compute SMOOTHING CONSTANT ( ) : This smoothing constant determines the level of smoothing to differences between forecasts and actual occurrences. The value of the constant is determined both by the nature of the product and by managers judgment of what constitutes a good response rate.

UNIT III : DEMAND FORECASTING FORECASTING TECHNIQUE THE EQUATION FOR A SINGLE EXPONENTIAL SMOOTHING FORECAST IS : Ft = Ft-1 + (At-1 Ft-1) Where Ft = THE EXPONENTIAL SMOOTHED FORECAST FOR PERIOD t Ft-1 = THE EXPONENTIAL SMOOTHED FORECAST MADE FOR THE PRIOR PERIOD At-1 = THE ACTUAL DEMAND IN THE PRIOR PERIOD = THE DESIRED RESPONSE RATE, OR SMOOTHING CONSTANT

If a firm produced standard item with relatively stable demand, the reaction rate to differences between actual and forecast demand would tend to be small, perhaps 5 or 10 percentage points. If the firm were experiencing growth, it would be desirable to have a higher reaction rate, perhaps 15 to 30 percentage points.

UNIT III : DEMAND FORECASTING

CHOOSING APPROPRIATE VALUE FOR ALPHA :

SMOOTHING CONSTANT BE GIVEN A VALUE BETWEEN 0 & 1 If the real demand is stable(such as demand for electricity or food), a small Value may be chosen to lessen the effects of short-term or random changes. If the real demand is rapidly increasing or decreasing(such as fashion items or new small appliances), a large value may be chosen to keep up with the change. Two approaches of controlling value of : If the amount of error between the forecast and the actual demand is large, = 0.8; If the error is small, = 0.2 A tracking alpha computes whether the forecast is keeping pace with genuine upward or downward changes in demand. The tracking alpha is defined as the exponentially smoothed actual error divided by the exponentially smoothed absolute error. Alpha changes from period to period within the possible range of 0 to 1.

UNIT III : DEMAND FORECASTING FORECASTING TECHNIQUE

Exponential smoothed forecast can be corrected somewhat by adding another smoothing constant, . The reduces the impact of the error that occurs between the actual and the forecast.

To more closely track actual demand, a trend factor may be added. An upward or downward trend in data collected over a sequence of time periods causes the exponential forecast to always leg behind (be above or below) the actual occurrence.

UNIT III : DEMAND FORECASTING

THE EQUATION TO COMPUTE THE FORECAST INCLUDING TREND (FIT) IS : FITt = Ft + Tt Ft = FITt-1 + (At-1 FITt-1) Tt = Tt-1 + (Ft FITt-1) Where Ft = The exponential smoothed forecast for period t Tt = The exponential smoothed trend for period t FITt = The forecast including trend for period t FITt-1 = The forecast including trend made for the prior period At-1 = The actual demand for the prior period = Smoothing Constant, = Smoothing constant

UNIT III : DEMAND FORECASTING

Q1. The Table below shows the monthly demand over six months period for a product. (a)Determine the forecast of demand for the 7th month using 3 month sample moving average method. (b)If the weightage given for the demand for 6th, 5th, and 4th month are 0.5, 0.3, and 0.2 respectively, determine the forecast of demand for 7th month using weighted moving average method.
MONTH DEMAND (UNITS) 1 120 2 130 3 110 4 140 5 110 6 130

UNIT III : DEMAND FORECASTING (a)Forecast of demand for 7th month =

++ ++ = = = 126.67

Units

(b) Using weighted moving average, demand for 7th month = =

.+.+. ++ . +. +. .+.+.

= 126 Units

UNIT III : DEMAND FORECASTING Q2. ABC company predicted the sales for a product as 150 units for February 2003. Actual demand for February 2003 was 158 units. Using a smoothing constant ( ) of 0.3, forecast the demand for March 2003. Solution :

UNIT III : DEMAND FORECASTING

FMARCH = FFEB + x ( DFEB - FFEB ) = 150 + (0.3) x ( 158 150 ) = 150 + 0.3 x 8 = 150 + 2.4 = 152.40 i.e. 152 units # [I.P.University, 2007] The demand for PCs in the north district of Delhi for last eight months is given below. Using a four month moving average, calculate the smoothing forecast for the 9th month (=0.18) Month 1 2 Demand 30 35 3 28 4 32 5 31 6 34 7 35 8 30

UNIT III : DEMAND FORECASTING

Ft = Ft-1 + (At-1 Ft-1) Where Ft = The exponential smoothed forecast for period t Ft-1 = The exponential smoothed forecast made for the prior period At-1 = The actual demand in the prior period = The desired response rate, or smoothing constant F9 = F8 + (A8 F8) =33 + 0.18(30 33) =33 0.54 =32.46

F8 =(32+31+34+35) 4 = 33

UNIT III : DEMAND FORECASTING

Q. Assuming an initial starting Ft of 100 units, a trend of 10 units, an of 0.20 and a of 0.30. If actual demand turns out to be 115 rather than the forecast 100,calculate the forecast for the next period.

UNIT III : DEMAND FORECASTING

SOLUTION : ADDING THE STARTING FORECAST AND THE TREND, WE HAVE FITt-1 = Ft-1 + Tt-1 = 100 + 10 = 110 Given that At-1 = 115 Therefore, Ft = FITt-1 + (At-1 FITt-1 ) = 110 + 0.2(115 110) = 111 Tt = Tt-1 + (Ft FITt-1 ) = 10 + 0.3(111 110) = 10.3 FITt = Ft + Tt = 111 + 10.3 = 121.3 If, instead of 121.3, the actual turned out to be 120, the sequence would be repeated and the forecast for the next period would be Ft+1 = FITt + (At FITt ) = 121.3 + 0.2(120 - 121.3) = 121.04 Tt+1 = Tt + (Ft+1 FITt ) = 10.3 + 0.3(121.04 121.3) = 10.22 FITt+1 = Ft+1 + Tt+1 = 121.04 + 10.22 = 131.26

UNIT III : DEMAND FORECASTING MEASURES OF FORECAST ACCURACY

Some common measures are inevitable to measure the accuracy of a forecasting technique. This measure may be an aggregate error of the forecast values from the actual demands. The different types of errors which are generally computed are furnished below : 1.Mean Absolute Deviation (MAD) 2.Mean Square Error (MSE) 3.Mean Forecast Error (MFE)
The formula for error is given by Et = Dt Ft Where Dt = Actual Demand for the period t Ft = Forecast Demand for the period t, and Et = Forecast error for the period t

UNIT III : DEMAND FORECASTING

MEAN ABSOLUTE DEVIATION (MAD) MAD Is the average error in the

forecasts, using absolute values. MAD measures the dispersion of some observed value from some expected value. MAD is computed using the differences between the actual demand and the forecast demand without regard to sign. It equals the sum of the absolute deviations divided by the number of data points.
MAD = ( I Dt Ft I) / n, WHERE t = Period number for i = 1 to n

D = actual demand for the period F = forecast demand for the period n =total number of periods I I = symbol used to indicate absolute value disregarding positive and negative sign

1 MAD = 0.8 x STANDARD DEVIATION

UNIT III : DEMAND FORECASTING

TRACKING SIGNAL A tracking signal is a measurement that indicates

whether the forecast average is keeping pace with any genuine upward or downward changes in demand. The tracking signal is the number of mean absolute deviations that the forecast value is above or below the actual occurrence. A tracking signal (TS) can be calculated using arithmetic sum of forecast deviations divided by the mean absolute deviation. TS = RSFE / MAD Where RSFE is the running sum of forecast errors MAD is the average of all forecast errors. It is the average of the Absolute Deviations.

UNIT III : DEMAND FORECASTING

Mean Square Error (MSE) Mean square error is the mean of the squares of deviations of the forecast demands from the actual demand values. A method of measuring errors that penalizes large errors than small errors is sometimes desired. The Mean Square Error sometimes provides this type of measure of forecast error. MSE = [(Dt Ft )2 ] n Dt = Actual Demand for the period t Ft = Forecast Demand for the period t, and n = Number of years used Mean Forecast Error (MFE) Mean forecast error is the mean of the deviations of the forecast demands from the actual demand values. MFE = [(Dt Ft )] n Dt = Actual Demand for the period t Ft = Forecast Demand for the period t, and n = Number of years used

UNIT-III

METHOD OF LEAST SQUARES

The method of least square is a mathematical device which fits a fine line through a series of plotted points such that the sum of squares of deviations of the actual points above and below the trend line is at the minimum. This method gives us what is known as the line of best fit. It is the line from which the sum of the deviations of various points on either side is equal to zero. In other words, if we sum up the positive and negative deviations on either side of the line of best fit, the sum will be zero. Advantages : 1.Free from personal bias 2.Trend values for all years of series may be obtained 3.This method gives most satisfactory result

UNIT-III

Method : The equation of straight line can be written as Y= a + bX Where Y is the dependent variable, such as sales, demand etc., X is the unit of time, a and b are two unknown constants, whose values are to be found. To determine a and b, the following equations are solved. Y = na + bx and xY = ax + bx2 Where n = Number of items in the series and x = X - X We can take the variable from any point of time as origin. But to simplify the calculations, the mid-point of time series is taken as the origin. In this process, the negative values of half of the series balance out the positive values in the series, so that x=0 Therefore, Y = na + 0 and xY = a.0 + b.x2 = b.x2 So, a =
Y n

and b =

xY x2

UNIT-III

NOTE : While dealing with the method of Least Squares, it is better to use middle-point of the Time Series as the origin. In case the series has got odd number of years, the origin is the middle of the year. If the series has even number of years, the origin falls between the two middle years. Here the value of a is merely intercept or the height of the line at the origin. The other constant b represents the slope of the trend line.

UNIT-III

Q.The sales of XYZ Two-wheelers in the last six months are given below [I.P.University, 2009] : Month January February March April May June Demand (Units) 145 110 100 140 130 130

(a)Establish Trend Equation (b)Calculate MSE at the end of June (c)Explain the process of Purchase Management

UNIT-III

SOLUTION :
MONTH (X) JAN FEB MAR APR DEMAND (Y) 145 110 100 140 x = X 3.5 -2.5 -1.5 -0.5 0.5 xY - 362.5 - 165 - 50 70 x2 6.25 2.25 0.25 0.25

MAY JUNE
TOTAL :

130 130
Y=755

1.5 2.5
x=0

195 325
xY=12.5

2.25 6.25
x2 = 17.5

First Method for finding values of a and b : a = Y n = 755 6 = 125.83 b = (xY) (x2 ) = 12.5 17.5= 0.714 (a) Trend equation is Y = a + bx = 125.83 + 0.714 x

UNIT-III Second Method for finding value of a and b : The Trend Line is Y = a + bx Where, a = Y - bx ; Y = Y n x = x n b =* xY n.x.Y ] [ x2 n.(x)2 ]

Y = 755/6 =125.83 x = 0/6 = 0 b = [12.5 6 x 0 x 125.83] [17.5 6 x 0 x 0 ] = 12.5 17.5 = 0.714 a = 125.83 0.714 x 0 = 125.83 The Trend Equation is Y = a + bx = 125.83 + 0.714x = 125.83 + 0.714(X 3.5) = 125.83 + 0.714X 2.50 = 123.33 + 0.714X

UNIT - II Y (Ft )= = 123.33 + 0.714X

X Dt Ft = 123.33 + 0.714X (Dt Ft ) (Dt Ft )2

1
2 3 4

145
110 100 140

123.33+.714x1=124.04
123.33+.714x2=124.76 123.33+.714x3=125.47 123.33+.714x4=126.19

20.96
-14.76 -25.47 13.81

439.32
217.85 648.72 190.71

5
6

130
130

123.33+.714x5=126.90
123.33+.714x6=127.61

3.1
2.39

9.61
5.71 (Dt Ft )2 = 1511.92

MSE = (Dt Ft )2 n = 1511.92/6 = 251.98

CAPACITY PLANNING
LONG TERM CAPACITY PLANNING SHORT TERM CAPACITY PLANNING MAJOR CAPACITY QUESTIONS TO BE ADDRESSED : HOW MUCH CAPACITY? HOW MANY CUSTOMERS? HOW MUCH CUSHIONS? KINDS OF PROBLEMS ON CAPACITY EXPANSION? TO EXPAND BASED ON FORECAST DEMAND? FACTORS PROVIDING INPUTS INTO LONG TERM STRATEGIC PLANNING : FORECAST ON GROWTH OF DEMAND FUTURE UPGRADING OF TECHNOLOGY ANTICIPATED MOVE BY COMPETITIVE FIRMS FORECAST ON FUND AVAILABILITY

UNIT III : CAPACITY PLANNING

Capacity Planning : Capacity planning is the study of the level of capacity the organization provides at each stage of the production or service delivery system to meet its objectives. Capacity plans are made at two levels : 1.Long term capacity plans which deal with investment in new facilities and equipment covering the requirements for at least two years into the future. 2.Short term capacity plans which focus on workforce size, overtime budgets, inventories etc. Importance of Long Term Capacity Planning It is an important part of strategic planning of the firm. It establishes some expectations about the capacity a company acquires and develops over time which is important to the companys strategic success.

UNIT III : CAPACITY PLANNING

Managers need to address major capacity questions : 1.How much capacity should be planned to be utilized for production for a particular period of time? 2.How many customers should a service facility be able to serve? 3.How much of a cushion is required to handle uncertain demand? 4.What kinds of problems arise as the production system expands? 5.Should the capacity be expanded based on forecast of demand or should the capacity expansion be taken up only after the demand becomes more certain?

UNIT III : CAPACITY PLANNING

The following factors provide important inputs into long-term strategic planning and also into short-term plans and decisions made by managers of the firm: 1.Forecast on growth in demand. 2.Future upgrading of technology which may become necessary to gain competitive edge over others. 3.Anticipated moves by competitive firms. 4.Forecast of availability of funds for the future investments. Fixed capacity - The capital assets represent a fixed capacity because they can not be easily changed within the intermediaterange time horizon. Adjustable capacity - Adjustable capacity is the size of workforce , the number of hours per week they work, the number of shifts and the extent of sub-contracting.

UNIT III : CAPACITY PLANNING

Long range capacity planning Capacity planning is a long-term strategic decision that establishes a firms overall level of resources. The objective of strategic capacity planning is to provide an approach for determining the overall level of capital intensive resources-facilities, machinery, equipment and overall size of labour force that best support the firms long range competitive strategy. The level of capacity selected has a critical impact on the firms ability to respond to customer demand, its cost structure, its inventory policies and its management and staff support requirements.

UNIT III : CAPACITY PLANNING

The major capacity decisions involve : 1.How much capacity to be installed? 2.When to increase capacity? 3.How much to increase?

Estimating the capacities of current facilities Production capacity The following factors must be considered when estimating the production capacity : 1.Variation in employee absenteeism 2.Equipment breakdown 3.Delays in materials procurement 4.Work schedule(Five days week work) 5.Working hours (Hours/Shifts) 6.Use of temporary workers, overtimes 7.Outsourcing

UNIT III : CAPACITY PLANNING

Design capacity - Design capacity refers to the maximum output that can possibly be attained. Effective capacity or System capacity - Effective/System capacity is the maximum possible output given a product-mix, scheduling difficulties, machine maintenance, quality factors, absenteeism etc. Maximum capacity - Also known as peak capacity, it is the maximum output that a facility can achieve under the ideal conditions. Where capacity is measured relative to equipment alone, it is known as rated capacity. Measures of capacity Different measures of capacity are applicable in different situations. For example, capacity of an automobile plant can be measured in terms of number of automobiles produced per unit time(day, week, month).

UNIT III : CAPACITY PLANNING

Capacity utilization rate The capacity utilization rate reveals how close a firm is to its best operating point i.e. the design capacity.
Capacity utilization rate =

Another measure of system effectiveness is System efficiency which is the ratio of actual output to effective/system capacity. Efficiency =
/

UNIT III : CAPACITY PLANNING

Determinants of effective capacity : 1.Facilities factors Plant layout, shop layout, utilities such as heating, lighting, ventilation etc. may effect labour efficiency and thereby effective capacity. 2.Product factors Uniformity of products (e.g., a product line rather than a product-mix) provides opportunities for standardization of methods and materials, which leads to greater effective capacity. 3.Process factors The capability of a process or equipment with respect to quantity and quality increases the rate of output and hence the effective capacity

UNIT III : CAPACITY PLANNING

4.Human resource factors - Human factors that affect potential and actual output are : (i) job design, (ii) training, skill & experience required to perform a job, (iii) employers motivation, (iv) employees absenteeism 5.Operational factors Inventory decision, late deliveries by suppliers, quality of purchased materials and inspection & quality control procedures.

UNIT III : CAPACITY PLANNING

# An automobile component manufacturer has the plan of buying a Grinding Machine which can manufacture 170,000 Parts per year. The Grinding Machine is a part of a product line. The system efficiency of the product line is 85%. (a) What is the required system capacity? (b) Assume that it takes 100 seconds to Grind each part and the plant operates 2000 hours per year. If the Grinding machines are used only 60% of the time and are 90% efficient, what is the actual output of the Grinding Machine per hour? (c) How many Grinding Machines would be required?

UNIT III : CAPACITY PLANNING

Solution :
/ (a)System capacity = = .

= 2000,000 Parts/year = 200,000 Parts/2000 hours = 100 Parts/hour (b)Output/hour = Unit capacity x percentage utilization x efficiency Unit capacity = 3600 sec / 100 sec per Part = 36 Parts per hour Output per hour = 36 x 0.6 x 0.9 = 19.44 Parts = 20 Parts (Approx) (c)No. of Grinding m/c needed = System capacity/output per hour = 100/20 = 5 machines

UNIT-III : AGGREGATE PLANNING Aggregate Planning - Aggregate planning is a process that follows capacity planning, and it uses medium range forecast. Nature of Aggregate Planning Decision The different capacities which are generally used to manufacture products are listed below : Regular time production capacity Subcontracting capacity Overtime capacity Hiring and firing capacity Aggregate Planning Strategies - One can use any one or a combination of following strategies for smoothing fluctuations in demands. Generally, a mixture of strategies is preferred.

UNIT-III : AGGREGATE PLANNING Building and utilizing inventory through constant work force Varying the size of the work force Overtime utilization Subcontracting Pure strategy - If a single strategy is used to meet the demand, then it is called as a pure strategy. Each of the above strategies is called as a pure strategy. Mixed strategy - If a combination of above pure strategies is used to meet the demand, then it is called as a mixed strategy.

UNIT-III : AGGREGATE PLANNING Building and utilizing inventory through constant work force : The company can use constant workforce during the planning horizon, which will result into a constant output during each period in the planning horizon. Since the demand is not a constant quantity, there may be a mismatch between the production quantity and the demand of each period. The excess production in a period can be carried as inventory for use in future periods. But this will result in inventory cost. If this pure strategy is used, the objective is to identify a desirable constant workforce which leads to the minimum total inventory cost.

UNIT-III : AGGREGATE PLANNING

Varying the size of the workforce : The company can employ varying workforce such that the output matches with the demand in each period of the planning horizon. This pure strategy can be employed by hiring and firing of employees. Hiring and firing will result in some penalty to the company in terms of training cost and firing cost. But, in this strategy, the cost of inventory is zero. A layoff frequently results in a lower worker morale and lower productivity, and the remaining employees may slowdown the output to protect themselves from similar fate. Overtime utilization : In some instances, one can maintain a constant workforce and vary the working hours. But this may not be feasible when the difference between the demands of consecutive periods in planning horizon is too large. Subcontracting : This strategy can be considered as an alternative to meet the demands of products. In this strategy, orders can be placed with a subcontractor or a set of sub-contractors depending on the demands of various products.

UNIT-III : AGGREGATE PLANNING Aggregate Planning Methods : 1.Graphical Method In this method, cumulative demand values and cumulative production capacities are plotted on the same graph. This would help us to identify the gap between demand and production capacity in different periods. Example 10.1. Bajaj Electricals has developed a forecast for a group of items that has following demand pattern :

UNIT-III : AGGREGATE PLANNING

Example 10.1. Bajaj Electricals has developed a forecast for a group of items that has following demand pattern :
QARTER 1 2 3 4 5 6 7 8 DEMAND 270 220 470 670 450 270 200 370 CUMULATIVE DEMAND 270 490 960 1630 2080 2350 2550 2920

(a)Determine the production rate required to meet average demand and plot the average demand forecast

UNIT-III : AGGREGATE PLANNING

800 700 600 500 400

Average forecast requirement

Production rate(Units/Quarter) Periods(Quarters)

300 200
100 0
1 2 3 4 5 6 7 8

Fig.10.1 Histogram of forecast and average requirements

UNIT-III : AGGREGATE PLANNING

(a)The plot of the Demand as a Histogram is shown in Fig.10.1. On the same graph, the average production rate which is required to meet an average demand of 365 Units is also plotted.

UNIT-III : AGGREGATE PLANNING

Heuristic Method - In this method a list of pure strategies and mixed strategies are generated and evaluated in terms of cost and finally a pure strategy or mixed strategy with the minimum total cost is selected for implementation. Example 10.2. The forecast for a group of items is reproduced below : Quarter 1 2 3 4 5 6 7 Demand 270 220 470 670 450 270 200 Cumulative Demand 270 490 960 1630 2080 2350 2550

8 370 2920 (a)If it costs Rs.150/unit to increase the production rate, Rs.200/unit to decrease the production rate, Rs.50/unit/quarter to carry the items on inventory and Rs.100/unit if subcontracted, compare the cost incurred if pure strategies are followed.

UNIT-III : AGGREGATE PLANNING Ans. (a) Various pure strategies are listed below : 1. Vary the work force size 2. Changing in inventory level 3. Subcontracting Plan 1 : Varying the work force size This strategy means that during the period of low demand, the company must fire employees, and during the period of high demand the company must hire employees. As per this pure strategy, the production units will be equal to the demand values in each period. The cost of this plan is Rs.197,000 as computed in Table 10.1.

UNIT-III : AGGREGATE PLANNING

Table 10.1 Varying the work force size to meet the demand Quarter Demand Forecast Cost of increasing Cost of decreasing production level production level Total cost of plan

1
2 3 4

270
220 470 670

37,500 30,000

10,000 -

10,000 37,500 30,000

5
6 7 8

450
270 200 370

25,500

44,000
36,000 14,000 TOTAL :

44,000
36,000 14,000 25,500 197,000

UNIT-III : AGGREGATE PLANNING

Plan 2 : Changing inventory level In this pure strategy, the company calculates the average demand and sets its production capacity to the this average demand. This may result in excess of units during a particular period, and shortage of units during some other periods. The excess units will be carried as inventory for future use. The shortage of units can be fulfilled using future inventory. The cost of such a plan is computed in Table 10.2. The plan incurs a maximum shortage of 255 units during period 5. Since, a certain amount of uncertainty is involved in any forecast, the firm might decide to carry 255 units from the beginning of the period 1 to avoid shortage. The total cost of plan is Rs.96,500.

UNIT-III : AGGREGATE PLANNING

Table 10.2 Cost Calculations for Changing Inventory Level Quarter Demand Forecast Cum. Demand Production level Cum. Production level Inventory Adjusted Inventory with 255 at beginning of period 1 Cost of holding inventory

1 2
3 4 5 6 7 8

270 220
470 670 450 270 200 370

270 490
960 1630 2080 2350 2550 2920

365 365
365 365 365 365 365 365

365 730
1095 1460 1825 2190 2555 2920 maintained

95 240
135 -170 -255 -160 5 0 begining

350 495
390 85 0 95 260 255 TOTAL :

17,500 24,750
19,500 4,250 0 4,750 13,000 12,750 96,500

Maximun Shortage

is 255, so this is to be

UNIT-III : AGGREGATE PLANNING Plan 3 : Sub-contracting Some firms may be interested in setting up its regular time capacity to its minimum value and meeting the rest of the demand using subcontracting.
Table 10.3 Cost Calculations for Sub-contracting Quarter 1 2 3 4 5 6 7 8 Demand Forecast 270 220 470 670 450 270 200 370 Production Units 200 200 200 200 200 200 200 200 Subcontract Units 70 20 270 470 250 70 0 170 TOTAL : Incremental cost at Rs.100/Unit 7,000 2,000 27,000 47,000 25,000 7,000 0 17,000 132,000

UNIT-III : AGGREGATE PLANNING

Mixed strategy : A mixed strategy has following components : Maintain a constant production rate of 250 per quarter Permit 20% overtime when the demand exceeds the production rate. The incremental cost of overtime is Rs.25/unit To meet any further demand, either hire or fire workers Computation of such a plan by trial and error can be carried out step by step as shown in Table 10.4. In table 10.4, when there is a change of work force, then the quantity of increase or decrease in the work force is to be computed and the same is to be multiplied with the cost per unit of hiring or firing, respectively. For example, during the quarter 3, the additional number of units needed after utilizing regular time capacity and overtime capacity is 110. Therefore, the cost of change in work force(cost of hiring) in this period is Rs.110 x 150 = Rs.16,500

UNIT-III : AGGREGATE PLANNING

Table 10.4 Mixed Strategy
Quarter Units of demand forecast Regular Time Prodn. unit Addnl. Units Needed After Regular time Over- Addnl. time Units Prodn. needed After regular Time and Overtime Prodn.
50 0 50 50 -30 (-30)* -30(-60) 170(110) 370(370)

Cost of inventory

Cost of overtime

Cost of ChangIng Workforce

Total Cost

1 2 3 4

270 220 470 670

250 250 250 250

20 -30 220 420

1500 3000 0 0

1250 0 1250 1250

0 0 16,500 39,000

2,750 3,000 17,750 40,250

5 6
7 8

450 270
200 370

250 250
250 250

200 20
-50 120

50 50
0 50

150(150) -30(-30)
-50(-80) 70(-10)

0 1500
4000 500

1250 1250
0 1250

44,000 30,000
0 0 TOTAL :

45,250 32,750
4,000 1,750 147,500

* -ve qty. in parentheses denote inventories, +ve qty. indicates items to be produced by changing the capacity [220-50]=170

UNIT-III : AGGREGATE PLANNING During Quarter 4, the additional number of units needed after utilizing regular time capacity and overtime capacity is 370. This quantity is more than the corresponding quantity of the previous period by 260 units. Therefore, the cost of change in work force(cost of hiring) in this period is Rs.150 x 260 = Rs.39,000. During Quarter 5, the additional number of units needed after utilizing regular time capacity and overtime capacity is 150.This quantity is less than the corresponding quantity of the previous period by 220 units. Therefore, the cost of change in work force(cost of firing) in this period is Rs.200 x 220 = Rs.44,000 During Quarter 6, there is an excess of 30 units. So, the size of the work force of the previous can be brought to the average regular time production quantity of 250 units in this period. So, the quantity of firing is for 150 units. Therefore, the cost of change in work force (cost of firing) in this period is Rs.200 x 150= Rs.30,000