Course Code: DIPK205T

Course Name: Operations & Supply Chain Management

UNIT 2
Unit 2: Sales and Operations Planning 8 - lecture hours
• Overview of Sales and Operations Planning Activities, Aggregate
Operations Plan, Aggregate Planning Techniques, Material Requirements
Planning, Master Production Schedule, Theory of Constraints, Capacity
Planning Concepts in OSCM, Capacity Planning in Services versus
Manufacturing.
 Sales and Operations Planning

• LO-1: Understand what sales and operations planning is and how it coordinates
manufacturing, logistics, service, and marketing plans.
• LO-2: Construct and evaluate aggregate plans that employ different strategies for
meeting demand.
• LO–3: Explain what material requirements planning (MRP) is.
• LO–4: Understand how the MRP system is structured.
• LO–5: Analyze an MRP problem.
• LO–6: Evaluate and compare MRP lot-sizing techniques.
 Introducing Sales and Operations Planning
Sales and Operations Planning Meeting
Members Present: President, Chiefs of Marketing, Supply
Chain and Finance.

Marketing Chief: “We keep running out of products. How do you

expect us to sell? Customer response is unacceptably long.”

Supply Chain Chief: “Marketing forecasts are terrible: selling 30

percent more than forecast!”

Marketing Chief:“Great month. We warned in the middle of the

month.”

Supply Chain Chief: “Schedules are fixed six weeks in advance so

that we can be efficient.”
 The Sales and Operations
Planning Meeting contd..
• President: “Should we bump everything up by 30 percent to avoid shortages?”
• Marketing Chief: “If you are willing keep running the 2-for-1 deal. We may not
make much money”
• Finance Chief: “Now I understand where the big negative revenue variance
comes from! We cannot give stuff away.”
The problem is one of matching supply with demand at a price that makes the firm
profitable—a difficult balancing act for most companies.
Let us open the door to sales and operations planning.
Case let: Aggregate Planning Provides a Competitive Advantage at
Frito-Lay
• At Frito-Lay, effective aggregate planning plays a crucial role in
aligning fluctuating demand with production capacity across its
36 North American plants. This planning, which spans the
intermediate term (3 to 18 months), is vital for optimizing plant
utilization and ensuring efficient resource allocation. By
efficiently matching demand to capacity, Frito-Lay can minimize
idle equipment, maximize utilization rates, and ultimately
enhance profitability.
• With over three dozen brands of snacks and chips, including
popular names like Fritos, Lay’s, Doritos, and Cheetos, Frito-Lay
operates specialized processes tailored to each product. These
processes, while incurring high fixed costs, are designed for
high-volume production with low variable costs. Therefore,
maintaining high utilization rates is critical to achieving
economies of scale and profitability, given the significant capital
investment in specialized equipment.
Aggregate Planning Provides a Competitive Advantage at Frito-Lay
Aggregate Planning Provides a Competitive
Advantage at Frito-Lay
At Frito-Lay's headquarters near Dallas, planners compile a comprehensive demand profile by integrating
historical sales data, forecasts for new products, promotional activities, and dynamic local demand insights
provided by account managers. This demand profile is then matched with existing capacity and expansion
plans, considering cost implications, to formulate the aggregate plan. This plan is communicated to the
firm's 17 regions and 36 plants, where it is further refined quarterly to adapt to changing market dynamics
and plant performance.

Subsequently, each plant translates the quarterly aggregate plan into a 4-week plan, detailing specific
product assignments for production runs. Weekly resource allocation, including raw materials and labor, is
then determined based on these plans. Effective aggregate planning not only facilitates high plant
utilization but also contributes to cost efficiency, as evidenced by Frito-Lay's substantial market share of
60%.

In summary, Frito-Lay's emphasis on effective aggregate planning serves as a cornerstone for achieving
operational excellence, maintaining competitiveness, and maximizing profitability in the snack and chips
industry.
 Discussion Questions
1. How does Frito-Lay's approach to aggregate planning demonstrate the strategic significance of aligning
production capacity with fluctuating demand in the snack and chips industry?

2. Additionally, how might advancements in technology and data analytics further improve Frito-Lay's
ability to forecast demand and optimize production capacity?
 What is Sales and Operations Planning?
Sales and operations planning (S&OP) was coined by companies to refer to
aggregate planning.
• The new terminology is meant to capture the importance of cross-functional
work.
• Aggregate means at the level of major groups of products.
• Aggregation on the supply side is done by product families, and on the
demand side it is done by groups of customers.
Aggregate operations plan or S&OP translates annual and quarterly business
plans into broad labor and output plans for the intermediate term.
• Sales and operations planning is a process that helps firms provide better
customer service, lower inventory, shorten customer lead times, stabilize
production rates, and give top management a handle on the business.
• The process consists of a series of meetings, finishing with a high-level
meeting where key intermediate-term decisions are made.
• This must occur at an aggregate level and at the detailed individual product
level.
 Types of Planning
Long-range planning
▪ Planning focusing on a horizon greater than one year.
▪ Usually performed annually.

Intermediate-range planning
▪ Planning focusing on a period from 3 to 18 months.
▪ Time increments are weekly, monthly, or quarterly.

Short-range planning
▪ Planning covering a period from a day to six months.
▪ Daily or weekly time increments.
Major Operations and Supply Planning Activities
 The Aggregate Operations Plan
Aggregate plan precedes the master schedule
Specifies the optimal combination of:
• Production rate (units completed per unit of time).
• Workforce level (number of workers needed in a period).
• Inventory on hand (inventory carried from previous period).
• Product group or broad category (aggregation).
• Planning done over an intermediate-range planning period of 3
to 18 months.
 Aggregate Planning
Oxford Reference defines aggregate planning as "an approach to planning

that enables overall output levels and the appropriate resource input mix to be

set for related groups of products over the near to medium term.

Thus, the aggregate plan for a car factory would consider the total number of

units produced per month but would not be concerned with scheduling

individual models or colors. It would, instead, be concerned with the labor and

machine hours available in a given period."

 Aggregate Production Planning Strategies
• Aggregate planning strategies are the plans for meeting demand.
• Trade-offs involved include workers employed, work hours, inventory, and
shortages.
• A pure strategy uses just one of these approaches, a mixed strategy uses
two or more.
1. Chase strategy.
• Match the production rate by hiring and laying off employees.
• Must have a pool of easily trained applicants to draw on.
2. Stable workforce—variable work hours.
• Vary the number of hours worked through flexible work schedules or overtime.
• Use part-timers, overtime, or idle time to absorb changes
• Use subcontractors
3. Level strategy.
• Demand changes are absorbed by fluctuating inventory levels, order backlogs,
and lost sales.
 Aggregate Planning Strategies
-Capacity Options
 Changing inventory levels (Level output rate
plan)

 Increase inventory in low demand periods to

meet high demand in the future
 Increases costs associated with storage,
insurance, handling, obsolescence, and capital
investment 15% to 40%
 Shortages can mean lost sales due to long
lead times and poor customer service
 Capacity Options
 Varying workforce size by hiring or
layoffs (Chase plan)

 Match production rate to demand

 Training and separation costs for
hiring and laying off workers
 New workers may have lower
productivity
 Laying off workers may lower morale
and productivity
 Capacity Options
 Varying production rate through overtime
or idle time (Utilization rate plan)

 Allows constant workforce

 May be difficult to meet large increases in
demand
 Overtime can be costly and may drive
down productivity
 Absorbing idle time may be difficult
 Subcontracting
• Managers also may choose to subcontract some portion of
production.
• Similar to the chase strategy, but hiring and laying off are
translated into subcontracting and not subcontracting
• Some level of subcontracting can be desirable to accommodate
demand fluctuations.

• Unless the relationship with the supplier is strong, a

manufacturer can lose some control over schedule and quality.
 Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Changing Changes in Inventory Applies mainly to
inventory human holding cost production, not
levels resources are may increase. service,
gradual or Shortages may operations.
none; no abrupt result in lost
production sales.
changes.

Varying Avoids the costs Hiring, layoff, Used where size

workforce of other and training of labor pool is
size by alternatives. costs may be large.
hiring or significant.
layoffs
Table 13.1
 Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Varying Matches Overtime Allows flexibility
production seasonal premiums; tired within the
rates fluctuations workers; may aggregate plan.
through without hiring/ not meet
overtime or training costs. demand.
idle time

Sub- Permits Loss of quality Applies mainly in

contracting flexibility and control; production
smoothing of reduced profits; settings.
the firm’s loss of future
output. business.

Table 13.1
 Relevant Costs

1. Basic production costs. The fixed and variable costs incurred in producing
a given product type in a given time period.

2. Costs associated with Hiring, training, and laying off personnel.

changes in the production
rate.

3. Inventory holding costs. Capital, storing, insurance, taxes, spoilage, and

obsolescence.

4. Backorder costs. • Hard to measure.

• Loss of goodwill.
• Loss of sales revenues.
 Budgets and Aggregate plans
• Operations managers are generally required to submit annual
budget requests.
• Sometimes quarterly.

• Aggregate plan is key to the success of the budgeting process.

• Provides justification for the requested budget amount.
• Accurate medium-range planning increases the likelihood of:
1. Receiving the requested budget.
2. Operating within the limits of the budget.
 Aggregate planning Example
ABC a manufacturer of roofing tiles has developed
monthly Forecasts for roofing tiles and presented the
period January January-June in the table 1.
To represent the projected demand, ABC also draws a
graph (figure 1) that charts the daily demand each
month. The dotted line across the chart represents the
production rate required to meet average demand
which is computed by dividing the total expected
demand by number of production days.
 Level output rate plan:
Roofing Supplier Example 1

Production Demand Per Day

Month Expected Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Table 13.2
Average Total expected demand
requirement =
Number of production days
6,200
= = 50 units per day
124
 Level output rate plan:
Roofing Supplier Example 1
Forecast demand

Production rate per working day 70 –

Level production using average
monthly forecast demand
60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
Figure 13.3 working days
 Level output rate plan:
Roofing Supplier Example 1
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

Table 13.3
 Level output rate plan:
Roofing Supplier Example 1
Monthly
Cost Information
Production at Demand Inventory Ending
Month carry
Inventory 50 Units
cost per Day Forecast $ 5Change
per unit per Inventory
month
Jan
Subcontracting 1,100
cost per unit 900 $10 +200
per unit 200
Feb pay rate 900
Average 700 +200
$ 5 per 400
hour ($40 per day)
Mar 1,050 800 +250
$ 7 per hour 650
Overtime pay rate
(above 8 hours per day)
Apr 1,050 1,200 -150 500
Labor-hours to produce 1.6 hours per unit
May 1,100 a unit 1,500 -400 100
Cost of increasing daily production rate $300 per unit
June 1,000
(hiring and training)
1,100 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs)
Total units of inventory carried over from one
Table 13.3 month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
 Level output rate plan:
Roofing Supplier Example 1
Monthly
Costs
Cost Information
Production at Demand Calculations
Inventory Ending
Month carry
Inventory
Inventory 50 Units
cost per Day $9,250
carrying Forecast $ 5Change
perunits
(= 1,850 unit per Inventory
month
carried x $5
Jan
Subcontracting 1,100
cost per unit 900 per $10unit)
per unit
+200 200
Regular-time
Feb pay rate
Average labor
900 49,600
700 (= 10
$ 5 workers
+200
per x $40per
hour ($40 per
400
day)
Mar 1,050 800 day x+250
124 days)
$ 7 per hour 650
Overtime pay rate
Other (above 8 hours per day)
Apr costs (overtime,
1,050 1,200 -150 500
hiring, layoffs,
Labor-hours to produce a unit 1.6 hours per unit
May
subcontracting) 1,100 1,500
0 -400 100
Cost of increasing daily production rate $300 per unit
June
Total cost
(hiring
1,000
and training)
1,100
$58,850 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs)
Total units of inventory carried over from one
Table 13.3 month to the next = 1,850 units
Workforce required to produce 50 units per day = (50*1.6)/8=10 workers
 Hybrid/ Subcontracting plan:
Roofing Supplier Example 1
7,000 –

6,000 – Reduction
of inventory

Cumulative demand units

5,000 – Cumulative level 6,200 units
production using
4,000 – average monthly
forecast
requirements
3,000 –

2,000 – Cumulative forecast

requirements
1,000 –
Excess inventory

–
Jan Feb Mar Apr May June
Figure 13.4
 Hybrid/ Subcontracting plan:
Roofing Supplier Example 2
Production Demand Per Day
Month Expected Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Minimum requirement = 38 units per day

 Roofing Supplier Example 2
Forecast demand

Production rate per working day 70 –

Level production
60 – using lowest monthly
forecast demand
50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
 Hybrid/ Subcontracting plan:
Roofing Supplier Example 2
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
Hybrid/ Subcontracting plan: Roofing Supplier Example 2
In-house production =38 units per day
x 124 days
= 4,712 units
Workforce required to produce In- house 38 units per day =
(38*1.6)/8=7.6 workers
Subcontract units =6,200 - 4,712 =1,488 units

Costs Calculations
Regular-time labor $37,696 (= 7.6 workers x $40 per day x 124
days)
Subcontracting 14,880 (= 1,488 units x $10 per unit)
Table 13.3

Total cost $52,576

 Chase plan:
Roofing Supplier Example 3
Forecast demand and
Production rate per working day monthly production
70 –

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
 Chase plan:
Roofing Supplier Example 3
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

Table 13.3
 Chase plan:
Roofing Supplier Example 3

Basic
Cost Information Production
Cost Extra Cost of Extra Cost of
Inventory carrying cost (demand x
Daily $ 5 perDecreasing
Increasing unit per month
Forecast Prod 1.6 hrs/unit x Production Production
Subcontracting
Month (units) cost
Rate per unit
$5/hr) $10
(hiring cost) per unitcost) Total Cost
(layoff
Average
Jan pay
900 rate 41 $ 7,200 — $ 5 per hour
— ($40 per$ day)
7,200

Feb 700 $ 7 per hour

$1,200
Overtime pay rate39 5,600 —
(= 2 x $600)
6,800
(above 8 hours per day)
$600
Mar 800 to produce
Labor-hours 38 6,400
a unit — 1.6 hours per
(= 1 x unit
$600)
7,000

Cost
Apr of increasing
1,200 57daily production
9,600 rate
$5,700$300 per unit
— 15,300
(hiring and training) (= 19 x $300)
$3,300
Cost
May of decreasing
1,500 68daily production
12,000 rate $600 per unit
(= 11 x $300)
— 15,300
(layoffs)
$7,800
June 1,100 55 8,800 — 16,600
(= 13 x $600)
Table 13.3
$49,600 $9,000 $9,600 $68,200

Table 13.4
 Comparison of Three Plans

Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0

Regular labor 49,600 37,696 49,600
Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 14,880 0
Total cost $58,850 $52,576 $68,200

Plan 2 is the lowest cost option Table 13.5

 Aggregate Planning Techniques
• Cut-and-try charting and graphic methods
• Involves costing out various production planning alternatives
and selecting the one that is best.
• Elaborate spreadsheets developed to facilitate the decision
process.

• Linear programming
• Use of mathematical analysis to determine an optimal plan.
• Simulation
• What-if analysis using simulated demand to evaluate
effectiveness of alternative plans.
 Material Requirements Planning

• Material requirements planning (MRP): the logic

that ties production functions together from a
material planning and control view.
• M R P has been installed almost universally in
manufacturing firms.
• Even small ones.

• A logical, easily understood approach to the problem

of managing the parts, components, and materials
needed to produce end items.
• How much of each part to obtain?
• When to order or produce the parts?
46
47
Overall View of the Inputs to and Reports from an MRP Program

48
 Dependent Demand
• Dependent demand drives the MRP system.
• Dependent demand is caused by the demand for a higher–level
item.
• Cars need tires.
• Planes need wings.

• Determining the number of dependent demand items needed

is essentially a straightforward multiplication process.
• If one Part A takes five parts of B to make it, then five parts of A
require 25 parts of B.

49
 Where MRP Can Be Used

• MRP is most valuable in industries where a number of products are made in

batches using the same productive equipment.
• MRP is most valuable to companies involved in assembly operations and least
valuable to those in fabrication.
• MRP does not work well in companies that produce a low number of units
annually.
• Better handled using project management.

50
 Industry Applications and Expected Benefits of MRP

Industry Type Examples Expected Benefits

Assemble–to–stock This combines multiple component parts into a finished product, which is High
then stocked in inventory to satisfy customer demand. Examples: watches,
tools, appliances.
Make–to–stock Items are manufactured by machine rather than assembled from parts. Medium
These are standard stock items carried in anticipation of customer
demand. Examples: piston rings, electrical switches.
Assemble–to–order A final assembly is made from standard options that the customer High
chooses. Examples: trucks, generators, motors.
Make–to–order Items are manufactured by machine to customer order. These are Low
generally industrial orders. Examples: bearings, gears, fasteners.
Engineer–to–order Items are fabricated or assembled completely to customer specification. High
Examples: turbine generators, heavy machine tools.
Process This includes industries such as foundries, rubber and plastics, specialty Medium
paper, chemicals, paint, drug, food processors.

51
 Master Production Scheduling

• The result of disaggregating an aggregate plan.

• It shows the quantity and timing of specific end items for a scheduled

time (6 to 8 weeks ahead).

• It shows planned output for individual products along with time of

production.

• Shows when completed orders are to be shipped.

52
 Duties of Master Scheduler

• Include all demands.

• Never lose sight of the aggregate plan.
• Be involved with customer order promising.
• Be visible to all levels of management.
• Objectively trade off manufacturing, marketing, and
engineering conflicts.
• Identify and communicate all problems.

53
 The Aggregate Plan and the Master Production
Schedule for Mattresses

• Aggregate production plan shows overall quantities to produce.

• Does not specify type.
• Master production schedule shows quantities of each type, with
information about the production time frame.

• Access the text alternative for slide images.

54
 Master Production Schedule
• Master production schedule (MPS): the time–phased plan
specifying how many and when the firm plans to build each end
item.
• Aggregate plan specifies production on a monthly or quarterly
basis.
• MSP identifies exact models on a period–by–period bases.
• Period is usually weekly.

• Further down the disaggregation process is the material

requirements (MRP) program.
• MRP calculates and schedules all raw materials, parts, and
supplies needed to make the mattress specified by the MPS.

55
 Time Fences
• Flexibility within a master production schedule depends on
several factors.
• Production lead time.
• Commitment of parts and components to an end item.
• Relationship between customer and vendor.
• Amount of excess capacity.
• How willing management is to make changes.

• Time fences maintain a controlled flow.

• Time fences: periods of time having some specified level of
opportunity for customer to make changes.

56
 Master Production Schedule Time Fences

• Frozen: Changes to production plan not allowed.

• Slushy: Limited changes to production plan allowed.
• Liquid: Any changes to production plan allowed.

• Access the text alternative for slide images.

57
 Available to Promise

• Some firms use a feature known as available to promise for

items that are master scheduled.
• Identifies the difference between the number of units currently
included in the master schedule and firm customer orders.
• For example, if Master schedule shows production of 100 items.
• Of those, 65 have already been sold.
• The remaining 35 (100 − 65) are available to promise to
another customer.

• This can be a powerful tool for coordinating sales and

production activities.

58
Material Requirements Planning System Structure

• The MPS states the number of items to be produced during

specific time periods.
• A bill–of–materials file identifies the specific materials used to
make each item and the correct quantities of each.
• The inventory records file contains data such as the number of
units on hand and on order.
• MRP expands the production schedule into a detailed order
scheduling plan for the entire production sequence.

59
 Master Production Schedule
Ex1: A bicycle manufacturer is developing a Master Production
Schedule (MPS) for the next six weeks. The following information is
available:
• Initial inventory (Week 0): 200 bicycles
• Lot size: 500 bicycles
• Production per run: 500 bicycles
• Lead time: 1 week (components need to be ordered one week
before production)

Also Prepare the Master Production schedule with available to

promise Inventory.

60
 Master Production Schedule for Bicycles (6 Weeks)
Given Information:
• Initial Inventory (Week 0): 200 bicycles, Lot Size: 500 bicycles
• Production per Run: 500 bicycles, Lead Time: 1 week (components need to be
ordered one week before production)

Calculations:
• Gross Requirements: Starting inventory (Week 0) + Demand Forecast + Customer Orders for the week
• Net Requirements: Gross Requirements - Previous Week's Available to Promise (ATP)
• Scheduled Receipts (Considering Lead Time): Production from the order placed one week prior
(considering lead time)
• Planned Production Orders (for next week): Based on Net Requirements for the upcoming week,
considering the lot size (round up if necessary)
• Available to Promise (ATP): Previous Week's ATP + Scheduled Receipts for the week - Net Requirements
for the week
61
 Master Production Schedule for Bicycles (6 Weeks)
Weeks Week 0 Week 1 Week 2 Week 3 Week 4 Week 5
Demand Forecast 400 300 500 600 400
Customer orders 100 200 300 100
Opening Inventory =200 200 200 300 0 0 -100
Requirement (Demand Forecast or 0 400 300 500 600 400
Customer order whichver is higher)
Net inventory before production 200 -200 0 -500 -600 -500
(Opening inventory- Requirement)
MPS (Planned Production) if Net 0 500 0 500 500 500
inventory is less than zero
Projected inventory (MPS+ Opening 200 300 0 0 -100 0
Inventory- Requirement)
ATP Inventory (MPS-Customer Order 200 200
500+200-400 500 200 400
62
 Master Production Schedule for Bicycles (6 Weeks) with ATS
Weeks Week 0 Week 1 Week 2 Week 3 Week 4 Week 5
Demand Forecast 400 300 500 600 400
Customer orders 100 200 300 100
Opening Inventory =200 200 200 300 0 0 -100
Requirement (Demand Forecast or 0 400 300 500 600 400
Customer order whichver is higher)
Net inventory before production 200 -200 0 -500 -600 -500
(Opening inventory- Requirement)
MPS (Planned Production) if Net 0 500 0 500 500 500
inventory is less than zero
Projected inventory (MPS+ Opening 200 300 0 0 -100 0
Inventory- Requirement)
ATP Inventory (MPS-Customer Order 200 200 500 200 400
till next MPS) Calculate ATS after MPS Initially
projected 500-100-200 500-0 500-300 500-100
inventory
63
 Master Production Schedule
Ex2: A Car manufacturer is developing a Master Production
Schedule (MPS) for the next months. The following information is
available:
• Initial inventory (Week 1): 500 Cars
• Lot size: 1000 units
• Production per run: 10000 cars
• Lead time: 1 week (components need to be ordered one week
before production)

64
65
The upper limit or ceiling on the load that
an operating unit can handle

•Plant department
•Machine
•Store
•worker
Achieve a match between supply
capabilities and the predicted level of
demand

It is a long-term capacity planning

Reasons of capacity planning

Changes in
demand

Changes in
Opportunity
technology

capacity
planning

Changes in Perceived
environment threats
The basic questions in capacity planning

How much
is needed?

forecasting

What kind
When is it of capacity
needed? is needed?
 When capacity planning ?

It is made infrequently and in others, it is

made regularly depends on the following
factors :
➢ Equipment and product design
•The stability of demand
•The rate of technological change
➢ Competitive factors
➢ Others factors
•The type of product and services
•Whether styles changes are important
 Capacity terminology
 Design capacity ( Max. Capacity ) is the
maximum theoretical output of a system
 Normally expressed as a rate
 Under ideal conditions
 Effective capacity ( Best Operating Level ) is the
capacity a firm expects to achieve given current operating
constraints
 Often lower than design capacity
 Under ideal conditions
 Actual output ( Capacity Used ) is rate of
output actually achieved
 Cannot exceed effective capacity.
 Utilization and Efficiency

Utilization is the percent of

design capacity achieved
Utilization = Actual Output/Design Capacity

Efficiency is the percent of

effective capacity achieved
Efficiency = Actual Output/Effective Capacity

Both measures expressed as percentages

Ex. Efficiency/Utilization
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Actual output 36 units/day

Efficiency = = = 90%
Effective capacity 40 units/ day

Actual output 36 units/day

Utilization = = = 72% Design
capacity 50 units/day
 Efficiency vs Utilization
100.00%

90.00%
90.00%

80.00%
72.00%
70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%
Efficiency Utilization
 Utilization Example

• Best operating level = 120 units/week

• Actual output = 83 units/week

Capacity used 83 units/wk

•Utilizatio =
n =?
Utilization = = .692
Best operating level 120 units/wk
 Best Operating Level

Average
unit cost
of output

Underutilization Over-utilization

Best Operating
Level

Volume
 Ex. Measuring capacity
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week,
Shifts/day = 3,
Hours/shift = 8
Design capacity = (7 x 3 x 8) x (1,200)
= 201,600 rolls/week
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%
 Examples of Capacity Measures

Type of Measures of Capacity

Organization Inputs Outputs
Manufacturer Machine hours Number of units
per shift per shift
Hospital Number of beds Number of
patients treated
Airline Number of planes Number of
or seats seat-miles flown
Restaurant Number of seats Customers/time
Retailer Area of store Sales dollars
Theater Number of seats Customers/time
 Determinants of Effective Capacity

• Facilities (size, location, layout, heating, lighting, ventilations)

• Product and service factors (similarity of products)
• Process factors (productivity, quality)
• Human factors (training, skills, experience, motivations, absentation,
turnover)

• Policy factors (overtime system, no. of shifts)

• Operational factors (scheduling problems, purchasing
requirements, inventory shortages)

• Supply chain factors (warehousing, transportation, distribution)

• External factors (product standards, government agencies, pollution
standard)
 Steps for Capacity Planning
Estimate future capacity requirements
Evaluate existing capacity
Identify alternatives
Conduct financial analysis for each alt.
Assess key qualitative issues for each alt.
Select one alternative
Implement alternative chosen
Monitor results
 Calculating Processing
Requirements

✓Determine type of products or services

✓Forecast for the Demand
✓Determine the process requirements
•The standard processing time / unit of
product
•The number of workdays / year
•The number shifts that will be used
 Calculating Processing Requirements

A dept. works 8-hour shift, 250 days/year

Standard
Annual processing time Processing time
Product Demand per unit (hr.) needed (hr.)

#1 400 5.0 2,000

#2 300 8.0 2,400

#3 700 2.0 1,400

5,800

annual capacity is 250*8 = 2000 hours,

number of machines required = 5,800 hours/2,000 hours = 2.90 machines
then we need three machines to handle the required volume
 Theory of Constraints
The Theory of Constraints (TOC) is a management philosophy introduced by Eliyahu M. Goldratt in his book "The

Goal." It is based on the idea that every system, whether it's a manufacturing process, a project, or an organization,

has a constraint that limits its ability to achieve its goals. TOC aims to identify and manage these constraints in order

to improve overall system performance. Some examples of constraints includes: Machine capacity, Sales saturation,

Limited demand, and Raw materials shortage.

For a preliminary example of the Theory of Constraints, imagine you are building electric cars. You have all the pieces

except for one key component: the batteries. Due to a material shortage, your company will need to wait an extra

month to receive them. Waiting for the next shipment of batteries is the largest limiting factor within your operation.

Even though your cars are practically finished, not one product can be delivered until you receive the batteries and

install them.
 Key Principles of Theory of Constraints:
• Identify the Constraint: The first step is to identify the constraint, also known as the bottleneck, which limits the
system's output or performance.
• Exploit the Constraint: Once the constraint is identified, efforts should be made to maximize its utilization and
efficiency to get the most out of the system.
• Subordinate Everything Else to the Constraint: Other activities within the system should be aligned to support
and enhance the performance of the constraint. This ensures that non-constraint activities do not overwhelm the
constraint.
• Elevate the Constraint: If the constraint cannot be overcome by exploiting and subordinating other activities,
actions should be taken to alleviate or remove the constraint. This might involve investing in additional resources
or changing processes.
• Repeat: Once the initial constraint is addressed, the process is repeated by identifying the next constraint in the
system. Continuous improvement is achieved by iteratively identifying and addressing constraints.
 Identify the Constraint
Steps is to identify the constraint, also known as the bottleneck, which limits the system's output or
performance.

1. Observation and Data Analysis: Start by closely observing the production line and collecting data on
production rates, work-in-progress inventory, and cycle times for each process.
2. Performance Metrics: Analyze key performance metrics such as throughput, cycle time, and work-in-
progress inventory levels. A process with consistently high work-in-progress inventory and low throughput
compared to other processes is likely a bottleneck.
3. Constraint Analysis: Use TOC principles to identify constraints. Constraints can be physical resources like
machines, labour, or processes with limited capacity.
 Example of the theory of constraints
An outdated policy is causing a bottleneck in maintenance activities. Steps to eliminate bottlenecks

Step 1: Identify
A policy that states all maintenance requests must be approved by upper management is creating a bottleneck that
is preventing maintenance activities from being completed. This policy has not been updated for 5 years.
Step 2: Exploit
The Maintenance Manager and his team are assigned to develop a new policy to address maintenance requests.
Step 3: Subordinate
Employees are trained to submit all maintenance requests directly to the Maintenance Manager. The manager then
chooses if the request should require additional approval and who that approval should come from.
Step 4: Elevate
The new policy is overwhelming the Maintenance Manager with requests. The company will hire an additional
employee to be tasked with receiving and monitoring the maintenance requests.
Step 5: Repeat
Performance data is re-analyzed and it is confirmed that maintenance activities have improved, and the constraint
is broken. The next constraint must now be identified and the Five Focusing Steps repeat.