OPERATIONS MANAGEMENT

UNIT – II
FORECASTING, CAPACITY AND FACILITY DESIGN
DEMAND FORECASTING
MEANING OF FORECASTING:
 Forecasting is the art and science of predicting future events. It is not a mere guess or
prediction about the future without any rational basis.

DEFINITION OF FORECASTING:
 Forecasting is defined as estimating the future demand for products and service and
the resource necessary to produce these outputs
 Estimates of the future demand for products or service are commonly referred to as
sales forecast. The sales forecast or demand forecasts are the starting point for the
entire planning in production and operation management.

NEED FOR DEMAND FORECASTING:

1. New Facility Planning
2. Production Planning
3. Workforce Scheduling
4. Financial Planning

New facility planning:

Designing and building a new facility or designing and implementing a new
production process may take as long as five years or even more. This is based on long-range
forecasts of demand. It includes plant location, plant-layout, and installation of machinery to
produce product or service to meet the demand.

Production planning:
The rate of producing the products must be matched with the demand which may be
variable over the time period in future. Production manager need medium and intermediate
range demand forecasts to enable them to arrange for the production capacities to meet the
monthly demands.
Workforces scheduling:
The forecasts of monthly demand may further be broken down to weekly demands
and the workforce may have to be adjusted to meet these weekly demands. Short-range
forecasts are needed to enable mangers to have the necessary lead time to tune the changes in
daily workforce for production demand.
Financial planning:
 Sales forecasting are driving force in budgeting. Sales forecasts provide the timing of
cash inflows and also provide a basis for budgeting the requirements of cash outflows for
purchasing materials, payments to employees and to meet other expenses of power and
utilities etc.
USES OF FORCASTING:
(a) Help managers to:
(i) Plan the productive system.
(ii) Plan the use of the system.

Plan the productive system involves Long-range plan like:

 Planning type of products
 Planning services to offer
 Planning what the facilities & equipments to have
 Planning where to locate etc.,

Plan the use of the system refers to Short-range & Intermediate range planning
like:
 Planning inventory
 Planning work force levels
 Planning purchasing & production, scheduling & budgeting.
(b) Other uses include predicting of:
(i) Profits
(ii) Revenues
(iii) Costs
(iv) Productivity changes
(v) Prices and availability of energy
(vi) Raw materials
(vii) Interest rates
(viii) Prices of stocks and bonds
FORECASTING TIME HORIZONS:
A. Short-range forecast:
This forecast has a time span of up to one year, but is generally less than 3 months. It
can be even for monthly or weekly forecast. It is used for
 Planning purchasing
 Job-scheduling
 Work force levels
 Job assignment and
 Production levels
B. Medium range forecast

A medium range forecast generally from 3 months to 3 years. It is used in

 Sales planning
 Production planning and budgeting
 Cash budgeting and
 Analyzing various operating plans

C. Long range forecast:

Generally 3 years or more in time span, long range forecast are used
 New product planning and development
 Capital expenditure planning
 Planning for facility location or expansion
 Planning research and development.

Features of Forecasting Time Horizons:

 Intermediate and long range forecast pertain to more comprehensive issues and
support management decisions.
 Forecasting methods used in short term are different from long term forecasting.
 Short range forecast tend to be accurate than longer range forecast.

TYPES OF DEMAND FORECASTING:

1. Technological forecasting
2. Economic forecasting
3. Demand forecasting
A. Technological forecasting:
 It’s concerned with technological changes. Technological changes will provide
many companies with new products and material to offer for sale.
 Even if the products remain unchanged, a new technology producing the products
can be developed.
B. Economic forecasting:
 This forecast address the business cycle by predicting inflation rates, money supplies,
housing starts and other economic indicators such as tax revenues, level of
employment, gross national products etc.,
C. Demand Forecasting:

It is also called as sales forecast that gives the expected level of demand for a
company’s goods or service throughout some future period and usually provide the
basis for the company’s planning and control decision.
OBJECTIVE OF DEMAND FORECASTING:
A. Short range objectives
B. Medium or long range objectives

A. Short range objectives:

i. Formulation of production strategy and policy:
 Estimating the requirement of material to be purchased.
 Material requirement is based on volume of production in a particular time
period.
 Optimum utilization of plant and equipments by adjusting the production
capacity using overtime, subcontracting, lay offs or hiring casual employees
etc.,
 Planning the availability of labor on a regular basis to meet the requirements
of production schedules.

ii. Formulation of pricing policy:

Demand forecasts enable management to formulate a suitable mechanism for

fixing the prices for products to be sold.
iii. Planning and control of sales:

Demand forecast facilitate territory design and determination of sales quotas to

be assigned to sales people.
iv. Financial planning:
 Demand forecast facilitate estimating cash outflows for the products
for which forecast are made.
 Accordingly the funds requirements can be properly planned and cost
of funding can be reduced.

B. Medium or Long range objectives:

i. Labour range planning for production capacity:
 The installed capacity of the plant is usually based on long term demand
forecasts.
ii. Labour requirements:

Employment levels are based on reliable long term demand forecast.

iii. Restructuring the capital structure:

Long term forecast facilitate planning for long term finance requirements at
reasonable financial costs.
FEATURES COMMON TO ALL FORECASTS:
(i) Forecasting techniques generally assume that same underlying reasons that existed
in the past will continue to exist in the future.
(ii) Forecasts are rarely perfect.
(iii) Forecasts for groups of items tend to be more accurate than forecasts for
individual items.
(iv) Forecasts accuracy decreases as the time period covered by the forecast increases.

ELEMENTS OF A GOOD FORECAST:

(i) The forecast should be timely.
(ii) The forecast should be accurate and the degree of accuracy should be known.
(iii) The forecast should be reliable.
(iv) The forecast should be expressed in meaningful units such as rupees, units of
products, machines and skills needed,
(v) The forecast should be in the written form to permit an objective basis for
evaluating the forecast once the actual results are known.
(vi) The forecasting techniques should be simple to understand and use.

STEPS IN THE FORECASTING PROCESS

1. Determine the purpose of the forecast:
2. Select the items for which forecast are needed:
3. Determine the time period for the forecast:
4. Select the forecasting model:
5. Gather and analyze the data needed for the forecast:
6. Prepare the forecast
7. Monitor the forecast

 Determine the purpose of the forecast:

What are the objectives of forecasting and when forecast are needed this kind of
question should be answered to determine the level of details required in the forecast
and amount of resources needed.
 Select the items for which forecast are needed:
 Determine whether the forecast is needed for a single product or for a group of
products.
 Determine the time period for the forecast:

Is the forecast is Short-term, Medium-term or Long-term.

 Select the forecasting model:

Determine whether to use statistical models like moving average, exponential

smoothing and regression analysis or qualitative techniques.
 Gather and analyze the data needed for the forecast:

Before preparing the forecast, data must be gathered and analyzed. Identify any
assumption to be made in conjunction with preparing and using the forecasts
 Prepare the forecast
Use the selected method.
 Monitor the forecast
Monitor the forecast to determine whether it is performing satisfactorily. If not,
review the method, assumptions, validity of data and modify the forecast if needed
and prepare a revised forecast.

FORECASTING APPROACHES:
(i) Qualitative approach
(ii) Quantitative approach

QUALITATIVE APPROACH:
Qualitative methods consist mainly of subjective inputs, often of non-numerical description.
There are 2 methods in this approach:
1. Jury of executive opinion
2. Sales force composite method
3. Market Research method
4. Other Judgmental methods

JURY OF EXECUTIVE OPINION:

It is a forecasting technique in which the opinions of a small group of high-level executive
(managers) are taken, based on which a group estimate of demand is obtained as the
forecasts.
Merits:
(i) Uses experience and knowledge of two or more mangers to arrive at a single
forecast
(ii) Can be used for technological forecasting
(iii) Can be used for forecasting the demand for new products.
(iv) Can be used to modify an existing forecast to account for unusual circumstances.
Demerits:
(i) Executive opinion can be costly because it takes valuable executive time.
(ii) It sometimes gets out of control or gets delayed.
(iii) Difficult to obtain consensus opinion of several experts.

SALESFORCE COMPOSITE METHOD:

This is also known as “pooled sales force estimate” method. Each sales person
estimates what sales will be in his or her territory. These estimates are then reviewed to
ensure that they are realistic. Then they are combined at the district and national level to
arrive at the overall forecast.
Merits:
(i) The sales force is the group closest to the customers.
(ii) Sales territories often are divided into districts or regions and forecasts for districts
or regions will be useful in inventory management, distribution and sales force
staffing.

Demerits:
(i) Individual biases of sales people may affect the sales forecast
(ii) Sales people may be unable to distinguish between what customers would like to
do and what they actually will do.
(iii) Sometimes, sales people may be overly influenced by their recent experiences.
(iv) If the firm uses individual sales person’s estimate as a performance measure, sales
people may deliberately under estimate their forecasts so that their performances
will look good when they exceed their quotas which are fixed based on their
estimates.

MARKET RESEARCH METHOD (or consumer survey method):

This is a systematic approach to determine consumer interest in a product or service by
conducting a consumer survey and sample consumer opinions. This method may be used
to forecast demand for short, medium and long term.
Merits:
(i) Consumer’s opinion regarding the future purchasing plans, are better.
(ii) Information that might not be available elsewhere can be obtained by consumer
surveys.

Demerits:
 (i) It may not be possible to contact every customer and hence opinions obtained
from sample customers may lead to forecast error.
(ii) Surveys require considerable amount of knowledge and skill to handle correctly.
(iii) Surveys can be expensive and time consuming.
(iv) The response rate for mailed questionnaire may be poor.
(v) The survey results may not reflect the opinions of the market.

OTHER JUDGEMENTAL METHODS (Delphi Method):

In this method opinions are solicited from a number of other managers and staff personnel.
The decision makers consist of a group of 5 to 10 experts who will be making the actual
forecast. The staff personnel assist decision makers by preparing, distributing, collecting and
summarizing a series of questionnaires and survey results.
The managers whose judgments are valid are the respondents. Responses of each respondent
are kept anonymous which tends to encourage honest responses. The goal is to achieve
consensus forecast.
Merits:
(i) This method can be used to develop long –range forecasts of product demand and
sales projections for new products.
(ii) A panel of experts may be used as participants.

Demerits:
(i) The process can take a long time
(ii) Reponses may be less meaningful because respondents are not accountable due to
anonymity.
(iii) High accuracy may not be possible.
(iv) Poorly designed questionnaire will result in ambiguous or false conclusions.

QUANTITATIVE APPROACH:
Quantitative methods involve either projection of historical data or development of
association models which attempt to use causal variables to arrive at the forecasts. 5 Methods
of quantitative are:
A. Time series models:
1. Naïve approach
2. Moving average method
3. Exponential smoothing method
B. Causal models:
1. Trend projection
2. Linear regression analysis

TIME SERIES MODELS:

This model predict on the assumption that the future is a projection of the past.
A time series is a time ordered sequence of observations taken at regular intervals over a
period of time. The data may be measurement of demand, earnings, profits, outputs,
productivity, consumer price index etc.
1. Naïve approach:
The simplest way to forecast is to assume the forecast of demand in the next period is
equal to the actual demand in the most recent period.

2. Moving average method:

Moving average =  demand in previous n periods / n

n may be 3, 4, 5 or 6 periods for 3, 4, 5 or 6 period moving average.
Two types of moving averages are:
 Simple moving average
 Weighted moving average

Simple moving average:

It is used to estimate the average of a demand time series and remove the effects of
random fluctuation.
Weighted moving average:
In this method for each historical demand in the moving average can have its own
weight and the sum of the weight will be equal to 1.
3. EXPONENTIAL SMOOTHING METHOD:

It is a sophisticated weighted moving average method that is still relatively easy to

understand and use. It requires only 3 items of data:
o This period forecast
o The actual demand for this period
o smoothing constant ()

Next Period forecast = this period’s forecast +  (This period actual demand – This
period forecast)
CAPACITY PLANNING

Capacity planning:
Capacity planning is a long term strategic decision that establishes a firm’s overall level of
resources. Capacity is viewed as the amount of output a system is capable of achieving over a
specific period of time.
Activities involved in Long range capacity planning
a. Estimating capacities of current facility
b. Forecasting long range future capacity demand
 c. Identifying and analyzing sources of capacity to meet future demand
d. Developing capacity alternatives
e. Selecting from among the alternative sources of capacity

Estimating the capacities of the current facilities:

To estimate the capacities of existing facilities, it is necessary to know the various types and
measures of capacity.
(i) Production capacity
(ii) Design capacity
(iii) Effective capacity
(iv) Maximum capacity
(v) Measures of capacity

Production capacity:
It is the greatest level of output that a plant can maintain within the frame work of a realistic
work schedule, taking into account of normal downtime and assuming sufficient availability
of inputs to operate machinery and equipment in place.

Design Capacity:
It refers to the maximum output that can possibly be attained. It is the maximum rate of
output achieved under ideal conditions.
Effective capacity:
It is the maximum possible output given a product mix, scheduling difficulties, machine
maintenance, quality factors, absenteeism etc.
Maximum capacity:
Also known a peak capacity, it is the maximum output that a facility can achieve under ideal
conditions. Where capacity is measured relative to equipment alone, it is known as rated
capacity.
Measures of capacity:
Capacity of a facility can be either measured in terms of outputs or in terms of inputs. Two
types of measures are available they are:
(i) Capacity utilization rate
(ii) Efficiency

Capacity utilization rate= Capacity used (ie. actual output)/Best operating level
Best operating level is the level of capacity for which the facility was designed and thus is the
volume of output at which average unit cost is minimum.
Efficiency = Actual output/ Effective capacity
Determinants of Effective capacity are:
 Facilities factors
 Product/service factors
 Process factors
 Human resource factors
 Operational factors
 External factors

Forecasting Long-term future capacity demand:

Forecasting production capacity for a product or service usually involves following 4 steps:
(i) Estimate the total demand for a particular product from all producers
(ii) Estimate the market share for the company for which capacity has to be forecasted
(iii) Estimate the demand for the company by multiplying the total demand by its
market share.
(iv) Translate the product and service demand for the company into capacity needs.

Identifying and analyzing sources of capacity to meet future capacity needs:

The long-range capacity needs of an organization can be changed in following ways:
(i) In case of sufficiency, capacity can be expanded by:
a. Subcontracting component parts, sub units or even entire products to other
firms.
b. Acquiring other firms, facilities or resources
c. Building new plants and buying equipments/machinery etc.
d. Expanding, modernizing or modifying existing facilities.
e. Reactivating facilities which are on stand-by status.
(ii) In case of excess, capacity can be reduced by:
a. Selling off existing facilities, selling inventories and laying-off or transferring
employees.
b. Placing some facilities on stand-by status and selling inventories and laying-
off or transferring employers of such surplus facilities.
c. Developing and phasing in new products as other products decline, so that
capacity rendered surplus can be made use of.
1. Explain various types of Capacities (16 marks)
1. Production Capacity:
It is the maximum rate of production (or output) of an organization The capacity
estimated in terms of sustainable practical capacity which is defined as “the greatest
level of output that a plant can maintain within the frame work of a realistic work
schedule, taking into account of normal downtime, and assuming sufficient
availability of inputs to operator machinery and equipment in place”.
2. Design Capacity:
Design capacity refers to the maximum output that can possibly be attained. It is the
maximum rate of output achieved under ideal conditions
3. Effective Capacity:
Effective capacity is the maximum possible output given a product-mix,
scheduling difficulties, machine maintenance, Quality factors, absenteeism etc.
a. Effective capacity is usually less than capacity (it cannot exceed design
capacity) because of capacity losses due to realities such as product-mix
changes and balancing operations, coffee breaks, lunch breaks and so on.
b. Actual output can be lesser than effective capacity because of machine break
down absenteeism, shortage of materials and quality problems.

4. Maximum capacity:
Also known as peak capacity, it is the maximum output that a facility can achieve
ideal conditions, where capacity measured relative to equipment alone, it is known as
rated capacity.
5. 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 the number of
automobiles product per unit of the time (shift, day, week/month) Therefore ,capacity
of a facility can be either measured in terms outputs or in terms of inputs.
6. Fixed Capacity:
The capital assets of the company at a particular time are known as the fixed capacity.
They cannot be easily changed within the intermediate range time horizon. Fixed
capacity represents an upper limit to the internal capacity that the company can use in
its efforts to meet demand.
7. Adjustable Capacity:
It is in the size of the workforce, the number of hours per week they work, the number
of shifts and the extent of subcontracting.
8. Design Capacity:
Design capacity of a facility is the planned rate of output of goods or services under
normal or full-scale operating conditions. It is also known as installed capacity. It sets
the maximum limit to capacity and serves to judge the actual utilization of capacity
9. System Capacity:
It is the maximum output of a specific product or product-mix that the system of
workers and machines i.e., the productive system is capable of producing as an
integral whole. It is less than or equal to the design capacity of the individual
components because the system may be limited by,
a. The Product-mix
b. Quality specifications
10. Potential Capacity:
It is that which can be made available within the decision horizon of the top
management.
11. Immediate Capacity:
It is that which can be made available within the current budgeted period.
12. Effective Capacity:
 It is the capacity which is used within the current budget period. It is also known as
practical capacity or operating capacity. No plant can work up to the maximum or the
theoretical capacity (installed or designed capacity) because of loss of capacity due to
scheduling delays, machine break down, and preventive maintenance. This results in
the plant working at efficiency less than 100%. Also the actual output will be less than
the designed output due to rejections and scarp.
a. Practical Capacity=theoretical capacity minus capacity lost due to inefficiency
and scarp factor
b. Usually the practical capacity ranges from 75% to 85% of theoretical capacity
13. Normal capacity or rated capacity:
This is the estimated quantity of output or production that should be usually achieved
as per estimation done by industrial Engineering department. Actual capacity is
usually expressed as a percentage of rated capacity.
14. Actual or utilized capacity:
This is the actual output achieved during a particular time period. The actual output
may be less than the rated output because of short-range factors such as actual
demand, employee absenteeism, labour inefficiency and low productivity levels.

CAPACITY REQUIREMENT PLANNING (CRP)

Capacity Planning:
Facility Planning includes determination of how much long-range production capacity
is needed, when additional capacity is needed, where production facilities should be located
and the layout and characteristics of the facilities.
Capacity Requirement Planning:
Capacity requirement planning is a technique for determining what labour/personnel
and equipment capacities are needed to meet the production objectives symbolized in the
master production schedule(MPS) and the material requirement planning (MRP-1).
Capacity Requirement Planning (CRP) Process:
The CRP Process in a schematic form (flow chart).End item requirements arising
from the aggregate plan and MPS are exploded into tentative planned orders for components
by the MRP system
The CRP System converts those orders into standard labour and machine hours of
load on the appropriate workers and on the machines as identified from the work centre status
and shop routing files. The output is a load-projection report work centre wise. If the work
centre capacities are adequate, the planned order releases are verified for the MRP systems
and released orders become purchase and shop orders. Work load reports are also used for
controlling input and uotputs. If the initial load projection report reveals inadequacy of
capacity in any work centre either the capacity must be increased (by using overtime or sub-
contracting) or the master production schedule must be revised
CRP inputs
 The major inputs for CRP process are:
a) Planed orders and released orders from MRP systems
b) Loading information from the work centre status file.
c) Routing information from the shop routing file
d) Changes which modify capacity, give alternative routings or altered planned orders.
All these input must be given in time if the system is to function effectively.
Planning Activity: Infinite loading and finite loading
Infinite Loading: It is the process of loading work centre with all the loads when they are
required without regard to the actual capacity of work centre. This given information about
actual released order demand upon the production system so that decisions about overtime,
using alternative routings, delaying selected orders, etc., can be taken.
Finite Loading: can be done automatically with computerized loading systems, limiting the
load assigned to work centre in each period as per the installed/available capacity each work
centre. This method of loading forces changes back into the MPS which is the always the best
solution to scheduling problems and hence not useful at CRP stage. Find loading is more
useful to single Work Centre in the capacity control stage where jobs are being scheduled.

Aggregate plan Resource planning

Rough-cut capacity
MPS planning
Work centre status file
Shop routing file (equipment capacity,
Labour capacity)

CRP
Orders converted into label
Yes
MRP

Load projection report Is Capacity No

(Infinite loading by modification
WorkCentre) feasible?

Planned orders &Released

Yes Is Capacity No
orders
adequate?

Yes

Job (work) orders vendor

(purchase) orders Workload report
(finite loading by
WorkCentre)
CRP Outputs
1. Rescheduling information which call for capacity modifications or reversion of MPS.
2. Verification of planned orders for MRP system
3. Load reports.

ENTERPRISE RESOURCE PLANNING

ERP:-
ERP stands for enterprise Resource Planning
ERP is a software package that organizes and manages a company’s business
processes by sharing information across all functional areas in the organization.

DEFINITION:
ERP is defined as the ability to deliver an integrated suite of business applications.
ERP tools share a common process and data model covering broad and deep operational end
to end processes, such as those found in finance, HR, distribution, manufacturing, service and
supply chain.
FEATURES OF ERP:
The general ERP model represents the concept of enterprise, represented by four
quadrants in the enterprise resources planning and execution. Some of the salient features of
ERP:
 Accommodating variety
 Integrated management information
 Seamless integration
 Supply chain management
 Resource management
 Integrated data model

SCOPE OF ERP:
The various areas normally covered by ERP are:
Financials:
 Financial accounting
  Treasury management
 Assets management and enterprise control.
Logistics:
 Production planning
 Materials management
 Plant maintenance
 Quality management
 Project management
 Sales and distribution management.
Human Resources:
 Personnel management
 Training and development
 Skills inventory.

Work Flow:
ERP integrates the entire organization with flexible assignment of tasks and responsibilities.

FUNCTION OF ERP:
The following example gives a simple understanding of now ERP functions. Suppose, an
order is placed by the dealer then the ERP:
 Checks for stocks
 Reserves the inventory for dispatch
 Opens the dealer account to verify the credit limit of the dealer and processes the order.
 If the credit limit exceeds then it places hold on the order.
All these functions are carried out instantaneously, as ERP integrates production, logistics
distribution, marketing, human resource development and finance.
AN ERP SYSTEM:
An ERP system is a set of integrated business applications or modules which carryout
common business functions such as general ledger accounting, accounts payable, accounts
receivables, material requirement planning, order management, inventory control and human
resource management. Usually these modules are purchased from a software vendor.

BENEFITS OF ERP:
There are two types of benefits as follow:
 Tangible benefits of ERP
 Intangible benefits of ERP

TANGIBLE BENEFITS OF ERP:

 Reduction of lead time by 60 percent
 99 percent on-time shipments
 Doubled business
 Increase of inventory turnover to over 30 percent
 Reduction of cycle time to 80 percent reduction of work in process inventory to 70
percent
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INTANGIBLE BENEFITS OF ERP:

 Better customer satisfaction
 Improved vendor performance
 Reduced quality costs
 Improved resources utilization
 Improved information accuracy
 Improved decision-making capability
ADVANTAGES OF ERP SYSTEM:
 ERP system help companies manage their resources efficiently and at the same time
better serve their customers.
  ERP simplifies customer interaction and speeds production with its configure-to-order
capabilities.
 Data entered once into an ERP system say from manufacturing, need not be
reconciled with accounting or warehouse records because the records are all the same.
 The indirect benefits include better corporate image, improved customer good will,
customer satisfaction etc.
 ERP system also centralize control over information and standardizes processes

DISADVANTAGE OF ERP SYSTEM:

 Implementation of an ERP system is extremely difficult because the company must
change its way of doing business.
 ERP systems are very expensive.
 Choosing the right ERP software is a difficult task.
 For multi-divisional firms implementing an ERP system is a very complex
challenging task that needs the best minds and careful attention of internal
information system.

MRP I:

Resource requirements planning (RRP)

 Resource requirement planning determines the amount and timing of production
resources such as personnel, materials, cash and production capacity needed to
produce the finished products
 Resource requirement planning is also known as rough-cut capacity planning.
 It can be used to evaluate the feasibility of a trial master production schedule.

Steps involved in RRP:

1. Developing a trial production plan. The company’s products that are planned for
production during each week or month of the planning.
2. Computing the work load this production plan will impose on each key work centre
and key sub contractors for each period of the planning.
3. The load profile (i.e) the load on each work centre over time, is evaluated for
feasibility by comparing the load with the available capacity in each of the key
work.
4. If the trial production plan does not appear to be feasible or does not appear to be
feasible or does not make optimal use of the resources in the key work centers, the
plan may be revised.
5. The capacity requirements of the revised production plan can be evaluated to
determine the feasibility of the plan.
6. Step 4 and 5 are repeated until a plan considered to be satisfactory is developed.
Resource requirements planning systems:
There are two main elements of resource requirements planning systems namely:
 Material requirements planning (MRP)
 Capacity requirements planning (CRP).

Functional inputs RRP outputs

Marketing-short range Marketing – end item production

demand forecast schedule
Master
Finance- cash availability production Finance/accounting- inventory
inventory norms schedule (MPS) level schedule

Production- capacity Production- MPS, load profile

constraints development capacity utilization data
of MPS, CRP and MRP.
Material
Engineering- change in
requirement Engineering- new design
product design and
planning (MRP) incorporation data.
product structure.
Personal- employee requirement
Personnel- employee
schedule
availability
Purchasing- planned orders and
Purchasing- Materials Capacity
order releases
supply availability requirements
planning (CRP) MIS database system- update
MIS data base system
inventory status file
inventory status file bill of
material

Resource requirements planning system

Flow chart of resources requirements planning system

 Estimated end
item demand

Needed production of
Inventory
end item
status of end
item

Lot sizing and safety sock Rough-cut capacity

policies planning

Trail master production Modificatio

Modification
schedule (MPS) n to MPS
to MPS

Materials Capacity requirements

requirements planning planning (CRP)

No Is material yes MPS yes IsNo

capacity
available? economically
MRP available?
CRP

OPERATIONS OF THE MRP SYSTEM:

Materials requirements planning:
Basically MRP consists of a set of computer programs that are run periodically to
incorporate the latest schedule of production requirements. The three important functions,
viz..,
1) Order planning and control
2) Priority planning and control
 3) Provision of a basic for planning capacity requirements and development of board
business plans.

MRP is applicable primarily to companies that carry out fabrication of parts and assembly of
standard products in batch quantities.
MRP system inputs:
Master production schedule (MPS)
The MPS specifies what end products are to be produced and when. The planning
horizon should be long to cover the cumulative lead times of all components that must be
purchased or manufactured to meet the end product requirements.
Bill of material file or product structure file
Bill of materials file provides the information regarding all the materials, parts and
sub assemblies that go into the end product.
Inventory status file:
Gives complete and up-to-date information on the on- hand inventories, gross
requirements scheduled receipts and planned order releases for the item.
Net requirement for a period = Gross requirement for a period - scheduled receipt for
the period + on hand inventory at the end of the period.

Operation of the MRP system:

Business plan

Forecast Production plan Current

conditio
ns
Tentative master
production schedule Rough-cut
capacity check

Master schedule
Inventory MRP program Product
status file structure file

Buy Make
items items

Purchase CRP
order

Vendor Detailed
feedback production plan

Production activity
control

Information flow for planning and controlling with MRP

Inputs Processing Outputs

Inventory status Inventory

file transactions data

Planned order
MPS file MRP system schedule

B.O.M file Exception reports

MRP system outputs:

Two primary outputs are:
 Planned order schedule which is a plan of the each material to be ordered
in each time period.
 Changes in planned order .i.e., modification of previous planned orders.
The secondary outputs are:
 Exception reports which list items requiring.
 Performance reports regarding how well the system is operating.
 Planning reports such as inventory forecasts purchase commitment
reports, etc.
MRP I:
Potential benefits from MRP:
 MRP is not just a way of calculating how much materials to order and
when; but it is a new way of managing manufacturing operations
 MRP is a decision support system or managerial information system
which provides timely and valuable information to operations managers
 When properly developed and implemented MRP Can provide the
following benefits to the firm;

1. Inventory:
 The information provided by the MRP system is useful to better
coordinate orders for components and production plans for parent items.
This results in reduced levels of average inventory for dependent –demand
items(i.e., raw material and work in process)

2. Production:
 Information from MRP facilitates better utilization of human and capital
resources. Because of more accurate priority information from MRP, it is
possible to improve delivery performance.

3. Sales:
 MRP helps to check in advance whether the desired delivery dates are
achievable. It improves the company’s service by helping production meet
assembly dates and helps cut delivery lead times.

4. Engineering:
 MRP helps in planning the time of design releases and design changes.

5. Planning:
 MRP can stimulate changes in the MPS for purpose of evaluation of
alternative MPS.

6. Purchasing:
 MRP helps purchase department by making known the real priorities and
recommending changes in due dates for orders so that the purchase staff
may expedite or delay the orders placed on vendors.

7. Scheduling:
 Better scheduling can result from MRP through better knowledge of
priorities.
8. Finance:
 MRP can help better planning of cash flow requirement. It can identify
time capacity constraints or work centers thereby helping operations
managers to make better capital investment decisions.

IMPLEMENTATION OF MRP

 Management commitment:
 Top level managers and others managers in all parts of the organization
that will be affected by MRP system, will be responsible for the
development and implementation of MRP.

 User involvement:
 A team consisting of the people from all those parts of the company that
will use the MRP system will be responsible for the development and
implementation of MRP.

 Education and training:

 All of the people who work with the MRP systems must understand it and
must know how to use it. They must know what information to provide
and how to provide it, what information to ask and how to obtain it.
Hence, it is necessary that all people connected with MRP system must be
trained in its application and use.

 Selection of packages:
 The potential user must be able to decide about the use of net change
MRP package knowing their advantages and disadvantages.

 Data accuracy:
 After a MRP system is installed, careful attention and discipline must
always be exercised to ensure that all data by the system are accurate.

 Realistic MPS:
 The MPS developed should be realistic and achievable. The MPS should
not overload the plant capacity. The company must develop MPS that
effectively users its capacity without causing overloads.

PROBLEMS IN USING MRP

 Preparation of MPS:
 Which is realistic in the midst of uncertainties in market environment and
 non-availability of adequate lead time from customers for delivery of end
products?

 Maintaining accurate BOM files:

 Changes incorporated in BOM by design department should be
communicated to all users of a BOM.
 Incorrect stock status:
 A major problem is to know the correct status of all materials at all stages.
Incorrect stock status results in erroneous net requirement of materials.
 Unrealistic lead times:
 Most crucial step in MRP system which minimizes inventory is the time-
phasing of requirements and release of orders; by advancing by the lead
time required so that materials arrive just when required.
 Problems in designing the MRP system
 1. Inadequacies of software chosen.
 2. Deficient systems design.
 3. Improper and untimely information flow among various related
department.
SOLUTIONS TO OVERCOME THE ABOVE PROBLEMS IN THE DESIGN
OF MRP SYSTEMS ARE:
 1. Care choice of software package to suit organization’s specific needs.
 2. Careful planning of activities and scheduling.
 3. Assigning work to competent manpower.
 4. Substantial education and training at all levels.
 5. Involvement of users at the systems design stage itself.
 6. Maximum attention at the stage of creating the data base.
PROBLEMS IN MANAGING THE MRP SYSTEM:
 Need for formal system and role of systems.
 Need for proper organization of function viz; production planning and
control, materials, production, quality, engineering, etc.
 Importance of proper appreciation of planning and control systems.
 Timeliness of generating information required in managing the plant.
 Effective communication systems.
 Right leadership.
EVALUATION OF MRP
The advantages of MRP systems over conventional inventory-planning
approaches viz; fixed order quality system(q system)and fixed order-point system(p
system)are:
 Improved customer service,
 Reduced inventory levels and
 Improved operating efficiencies of production departments.
THE PRODUCTION SYSTEMS SUITABLE FOR MRP SHOULD HAVE THE
FOLLOWING DESIRABLE CHARACTERISTICS:
 an effective computer system,
 Computerized BOM files and inventory status file for all end products and
materials with highest possible accuracy.
 A production system that manufactures discrete products made up of raw
materials, parts, sub assemblies and major assemblies which are processed
through several productions.
 Production processes or operation requiring long processing times.
 Short and reliable lead time for procurement of raw materials and
components from vendors.
 The time fence for the frozen MPS should be sufficient to procure
materials without undue expediting effort.
Support and commitment of top management.
MRP II
MRP-II:-
MRPII is a management process for taking the business plan and breaking it
down into specific, detailed tasks that people evaluates, agree upon and are held
accountable for.
Evolution of MRPII:-
 The earlier resource requirement planning systems were quite simple and
unsophisticated.
 The MRP technique was used for its most limited capability to determine
what materials and components are needed.
 As manufacturing planning and control system MRP laid the basic
foundation for production activity control or shop floor control.
Development Closed-loop MRP:-
Later during 1970s, closing the loop in MRP system was thought of by expert in
manufacturing management.
The closed-loop MRP system implies that not only the above element include in the
system but also that there is feedback from the executed function so that planning can
be kept valid at all times.
Development MRP:
Manufacturing resource planning is a broader resource co-ordination system.
In this the capabilities of closed-loop MRP are extended to provide information on
financial resources, personnel needs and labor budgets.
It provides a means of simulating to provide information on the use of various assured
plans.
Information about inventory investment levels, plant expansion need and work force
requirements is useful for co-coordinating marketing, finance, engineering and
manufacture effort to achieve the overall business plan of the firm.
 In this process a production plan is developed from a business plan to
specify production level for each month for each product line for the next
one to five years.
  The production department is expected to produce at the committed levels,
the sales department to sell at these levels and the finance department to
ensure adequate financial resource for these levels of production.
 Based on the production plan the MPS specifies the quantities of specific
products to be produced every week.
Development of MRPII:
MRPII is an integrated system for planning and control.

Manufacturing
Business Plan
(materials,capacity
production schedules)
Production Plan Purchasing
(vendor orders)

Master Production
schedule

Rough cut
capacity plan

Engineering (process and

Material requirements product design)
plan

Marketing (sales order entry,

delivery projections)
Detailed capacity
plan
Finance (capital requirements
for capacity, working capital
requirements)
Shop floor control,
purchase control
Accounting (Bills payable,
Accounts receivable)
 The MPS is then used to generate material requirement and priority
schedules for production.
 Then detailed capacity planning is done to determine whether the capacity
is sufficient for producing specific components at each work centre during
the schedule time periods.
 After a realistic capacity-feasible schedule is developed the plan is
executed.
 Purchase schedule and shop floor schedules are generated, based on which
 work centre loading, ship floor control and vendor follow-up activities can
determined to ensure that the MPS is met.

Facility Layout :
Facility layout ideally involves the allocation of space and the arrangement of
equipment in such manner that overall operations cost be minimized.
Layout decisions are important for three basic reasons:
1. require substantial investments of money and effort
2. involve long-term commitments, which makes mistakes difficult to overcome
3. have a significant impact on the cost and efficiency of operations
Objectives of facility lay out
1. Integrate the production centers
2. Reduce material handling
3. Effective utilisation of available space
4. Worker convenience and job satisfaction
5. Flexibility
6. Quick disposal of work
7. Avoid industrial accidents
Factors affecting Plant Layout
1. Plant location and building
2. Nature of Product
3. Type of Industry
4. Plant Environment
5. Spatial Requirements
6. Repairs and Maintenance
7. Balance
8. Management Policy
9. Human Needs
10. Types of machinery and equipment

Principles of layout
1. Max.Flxibility
2. Max. Coordination
 3. Max use of volume
4. Max visibility
5. Max Accessibility
6. Minimum distance
7. Minimum handling
8. Minimum discomport
9. Inhérent safety
10. Efficient process flow
Different types Layout
Product oriented plant layout: This type of layout is generally used in systems
where a product has to be manufactured or assembled in large quantities.
Cellular layout or group lay out
A grouping of equipment for performing a sequence of operations on family of similar
components or products has become all the Combined Layout: A combination of
process and product layouts combines the advantages of both types of layouts.
Fixed position plant layout: The product is kept at a fixed position and all other
material; components, tools, machines, workers, etc. are brought and arranged around
it.
Tools and Techniques of Layout
Operation Process Chart: The manufacturing process is divided into separate
operations with the help of the operation process chart.
Flow Process Chart:
Process Flow Diagrams: This diagram is used to supplement the flow process chart.
Machine Data Cards:
Templates:
Scale Models:
Facility location
 Facility location is the process of identifying the best geographic location for a
service or production facility.
Need of Facility Location:
I.Location for the new organisation:
 Identification of new region
 Choosing a site in a region
  Dimensional analysis
II.Existing organisation
 Manufacturing plants supplying to a specific market are.
 Plants divided on the basis of the process or stages in manufacturing.
 Plants emphasizing flexibility.
III. In case of global location:
 Virtual proximity: communication
 Virtual factory: outsource
Factors Affecting Facility Location
Primary Factors Affecting Plant Location
O Nature of Inputs ( Raw Materials)
O Nature of Outputs (Product and Services)
O Nature of Technology Employed.
O Working environment
O Proximity to the markets
O Quality of life
O Proximity of suppliers and the resources.
Secondary Factors Affection Plant Location.
o Availability of Labours and their skill
o Transportation and Communication Facilities
o Availability of Services
o Suitability of Land and Climate
o Opportunity for Expansion
o Political, Cultural and Economic Situation and Regional Regulation.
o Special Grants, Regional Tax and Import Export Barriers
Types of facility location
Single facility layout
 Defining the location objectives and the associated constraints.
 Identifying relevant decision making criteria
 Relating the objectives to criteria by using various appropriate models
 Evaluating alternative location
 Selecting the best alternative
Multi facility location
 Separate facilities for different products/Services
 Separate facilities to serve different geographical areas
 Separate facilities for different processes
Analysis should follow 3 step process:
1. Identify dominant location factors
2. Develop location alternatives
3. Evaluate locations alternatives
Making Location Decisions
 Factor rating method
 Load-distance model
 Center of gravity approach
 Break-even analysis
 Transportation method

Factor rating method

 Identify the important location factors.
 Rate each factor according to its relative importance, i.e., higher the ratings is
indicative of prominent factor.
 Assign each location according to the merits of the location for each factor.
 Calculate the rating for each location by multiplying factor assigned to each
location with basic factors considered.
Find the sum of product calculated for each factor and select best location having
highest total score.