CAPACITY AND RESOURCE

PLANNING

Charan Kamal Singh

Fiza Behal
Mahima Nanda
Rinki Gupta

) CAPACITY :

DEFINITION,

MEASURES OF CAPACITY, TIME

HORIZON IN CAPACITY PLANNING,
CAPACITY PLANNING FRAMEWORK,
ALTERNATIVES FOR CAPACITY
AUGMENTATION.

WHAT IS CAPACITY AND CAPACITY PLANNING?

Capacity is the rate of productive capability of a facility. Capacity is usually expressed as volume
of output per time period.

Capacity planning is the process of determining the production capacity needed by an

organization to meet changing demand for its products.

The objectives of capacity planning are:

To identify and solve capacity problem in a timely manner to meet consumer needs.
To maintain a balance between required capacity and available capacity.

The goal of capacity planning is to minimize this discrepancy.

Capacity is calculated: (number of machines or workers) (number of shifts) (utilization)

(efficiency).

THE NEED FOR CAPACITY PLANNING:

Capacity planning is the first step when an organization

decided to produce more or a new product.
Once capacity is evaluated and a need for a new
expanded facility is determined, facility location and
process technology activities occur.
Capacity planning is done in order to estimate whether
the demand is higher than capacity or lower than
capacity. That is comparison between demand versus
capacity is done.
It helps an organization to identify and plan the actions
necessary to meet customers present and future
demand.

CAPACITY HAS A SIGNIFICANT IMPACT ON COST OF OPERATION

Capacity investments are large and

fixed in nature. Therefore, it
manifests fixed cost of the system.
Since the total cost can come down
by using a fixed investment more,
firms can experience cost benefits
from using the available capacity to
produce more by judicious planning.
A well known economic principle,
economies of scale, indicates the
relationship between cost and
capacity in an operating system.

ECONOMIES OF SCALE
When output increases in an operating system, the system is likely to experience cost advantages on
account several factors. Due the following reasons the average unit cost begins to fall with the rise in
output level

Spreading the fixed costs of capacity over a larger output

Improved utilization of several resources in the system
Cost benefit in procurement on account of increased volume.
Efficient use of supervisory and management staff.

The economies of scale cease to occur beyond a level of production or output. This is called
Diseconomies of scale. There can be several reasons for this:
- Inefficient management due to largeness of operation and resultant lack of coordination.
- Overuse of machineries and break down of material handling equipments
- Over hiring of employees, or excessive overtime.
- Service slowdowns due to increasing complexities
- Increase in quality problems because of mismanagement and lack of focus.

HOW IS CAPACITY MEASURED?

Capacity can be expressed in terms of input & output,

depending on the nature of business.
For some organization capacity is simple to measure. General
Motors Corporation can use numbers of automobiles per year.
But what about organization whose product lines are more
diverse? For these firms, it is hard to find a common unit of
output.
As a substitute, capacity can be expressed in terms of input.
A legal office may express capacity in terms of the number of
attorneys employed per year.
A custom job shop or an auto repair shop may express capacity
in terms of available labour hours and/or machine hours per
week, month, or year.

HOW IS CAPACITY MEASURED?.......

Organization

Measure

Output
Automobile manufacturer

Numbers of automobiles

Steel producer

Tones of steel

Power company

Megawatts of electricity

Input
Airline

No. of seats

Hospital

No. of beds

Tax office

No. of accountants

HOW IS CAPACITY MEASURED?.......

Design Capacity: maximum attainable output.
Effective Capacity: maximum possible output with scheduling
difficulties, machine maintenance & so on.

Actual output
Efficiency
Effective capacity

Actual output
Utilization
Design capacity
Both measures expressed in percentage

HOW IS CAPACITY MEASURED?......

TIME HORIZON IN CAPACITY PLANNING

Capacity planning issues vary markedly with respect

to the time horizon which the decisions are made.

Time horizon are divided into three types

Long term
Medium term
Short term

CAPACITY PLANNING ISSUES IN VARYING TIME HORIZONS

Criterion

Time horizon for planning

Long term

Medium term

Short term

Time frame

2-5 years

Typically 1 year

1 week to 3 months

Planning premise

Augmenting capacity for

projected growth

Balancing
demand - supply

Maximizing availability;
Efficient use of recourses

Key decisions made

Capacity augmentation;
Capital budgeting
exercises

Adjusting demand and

supply attributes to
balance available capacity
to requirement

Resource deployment
strategies, Maintenance
routines, Improvement
projects to be undertaken

Tools and techniques

used

Investment planning;
Break- even analysis.
Discounted cash flow
techniques; Decision trees

Aggregate production
planning; make or buy

Planning & scheduling.

Total productive
maintenance, Waste
elimination by continuous
improvement; Simulation;
Waiting line models

CAPACITY PLANNING FRAMEWORK

Capacity planning framework consists of three
important steps:

Estimate the planning requirements

for the planning horizon

Identify the available alternatives and select

the best one for capacity augmentation

Compute the available capacity and

identify the quantum of capacity to be
augmented

Estimate the planning requirements for the

planning horizon
Capacity calculations are done on the basis of man hour and machine hour requirements per
unit of product manufactured.

Estimating labour requirements

The capacity requirements (labour) = D x SL
EL
Where
Projected demand per unit time during the planning horizon = D
Standard labour hours required per unit of product = S L
Efficiency of labour = EL

Estimating machine requirements

The capacity requirements (labour) = D x SM
EM
Where
Projected demand per unit time during the planning horizon = D
Standard labour hours required per unit of product = S M
Efficiency of labour = EM

Computing Capacity Availability

Availability of capacity in a system is a function of two parameters.
One is the system availability and the second is the resource availability.

System availability
Number of working days in the planning horizon : Nd
Number of working hours per day : h
System availability (hours) = Nd X h

Resource availability
Number of machine available: NM
Machine time lost in breakdowns and maintenance = b%
Number of workers available = NL
Labour : Absenteeism of workers = a%

Capacity available in system (hours)

Machine: Nd X h X Nm X (1-b/100)
Labour: Nd X h X NL X (1-a/100)

Comparison of availability and requirement

The next step is to compare the available capacity with the capacity required.

Process Mapping and Capacity Analysis

Process mapping is representation of all the available resources, the
patterns and the extent to which each of these resources are being used.

Using this information, we can compute the capacity of each resource

available in the shop and the limiting capacity for the entire shop.

Process Mapping and Capacity Analysis

First
operation

Fabrication
Shop

Shearing
unit

Paint Shop

Pressing
unit

Electrical
and wiring

Assembly
and testing

Welding
unit

Hydraulic
Press
CNC Turret
Press

NCC Press
brake
63 tonnes
ECC Press

Hierarchies in capacity planning exercise e.g.: turret press

Denotes
Bottleneck in process

ALTERNATIVES FOR CAPACITY AUGMENTATION

Straightforward option in case of deficient capacity is to add
more unit or resource i.e. increase the machines and/or hire
more labour.
But the cost of expansion is always large and it may significantly
impact long term operational costs of the system.
Therefore, alternatives for capacity augmentation is required.
Alternatives:
Waste elimination
Multi skilling of workforce
Sub-contracting or Outsourcing

Waste Elimination
Uncover capacity from system by elimination of waste.

Sources of waste includes

waste due to human resources
waste due to materials
waste due to operations
waste due to start-up
waste due to equipment
De - bottlenecking operations can help to increase capacity.
De - bottlenecking helps in significant increase in capacity incase of
process industries as the system is a continuous flow of material from
raw material to finished goods.

Multi-skilling of workforce
Capacity constraints manifest on account of non-availability of skills even when
adequate capacity is available in machines and other resources.

Multi-skilling not only solves the problem of providing each operating unit or a subdivision with the required skills but also increases the flexibility of operating such
units.

Employee absenteeism does not affect the working seriously.

At the shop floor level, multi-skilling in a machine shop would mean picking up the
skills required for operating all the machines and in the assembly shop it would
mean working at all stages of assembly.

In the fabrication shop it would call for proficiency in fitting, welding, shearing etc.
At the supervisory level and shop floor managerial level, it would mean
discharging various manufacturing support functions such as production planning
and control, inventory and stores management and procurement.

Sub-contracting or outsourcing
The logic of sub-contracting decision closely follows make or buy decision.
Firms can react much faster to market requirements by using subcontracting.
Sub-contracting is also very useful for managing peak hour demand.
Factors which influence sub-contracting decision:
1. Primary is the lack of capacity to meet the current demand.
2. The technical intensity and criticality of the item for which the item being
3.

sub - contacted.
Cost When the cost of performing the activity in-house is much higher
then what is available outside.

Sub-contracting or outsourcing
Advantages :

Flexibility to handle fluctuations in demand. By investing in in-house capacity,

the firm may run the risk of under-utilization in case the demand for the
product/service come down in the future.
In house capacity augmentation is a time consuming process.
Firms can react much faster to market requirements by using subcontracting.
Subcontracting is also very useful to mange peak hour demand.

Disadvantages :

Major challenge is to identify an suitable vendor for providing sub-contracted

services.
If the selection of the vendor is not carefully done, poor performance of the
vendors will impact the firms business and market standing adversely.

B)DESIGN OF EFFECTIVE CAPACITY

PLANNING, CAPACITY PLANNING
FOR SERVICES (DIFFERENCES IF ANY
FROM CAPACITY PLANNING FOR
GOODS).

FACTORS DETERMINING EFFECTIVE CAPACITY PLANNING

Facilities
Product and Service factors
Process factors
Human factors
Policy factors
Operational factors
Supply chain factors
External factors

FACTORS DETERMINING EFFECTIVE CAPACITY PLANNING

(CONTD..)
Facilities
The design of facilities ,including size and provision for expansion
Locational factors, such as transportation costs, distance to market ,labor
supply ,energy sources and room for expansion are also important.
Likewise, layout of the work area and environment factors also play a
significant role.
Product and services factors:
Has a tremendous effect on the capacity.
The more uniform an output is, the more opportunities there are for
standardization of methods and material.

FACTORS DETERMINING EFFECTIVE CAPACITY PLANNING

(CONTD..)
Process Factors
The quantity capability of a process is an obvious determinant of capacity but
subtle determinant is the influence of output quality.
Process improvement that increases quality and productivity can result in
increased capacity.
Human factors
The task that makes up a job ,the variety of activities involved,also the training
,skill and experience required to perform a job all have an impact on the
potential and actual ouput.
Employee motivation has a very basic relationship to capacity,as do
absenteeism.

FACTORS DETERMINING EFFECTIVE CAPACITY PLANNING

(CONTD..)
Policy factor:
Management policy can affect capacity by allowing or not allowing capacity options
such as overtime or second or third shifts.
Operational factor:
Inventory stocking decisions, late deliveries, purchasing requirements, acceptability
of purchased materials, quality inspection and control procedures also has an
impact on effective capacity.
Supply chain factors:
Must be taken into account in capacity planning if substantial capacity changes are
involved.
External factors:
Product standards, especially minimum quality and performance standards, can
restrict managements option for increasing capacity.

STEPS IN THE CAPACITY PLANNING PROCESS

Estimate future capacity requirements.
Evaluate existing capacity and facilities and identify gaps.
Developing Capacity Alternatives.
Evaluating each Capacity Alternative.
Assess key qualitative issues for each alternative.
Select the alternative to pursue that will be best in long term.
Implement the selected alternative.
Monitor results.

ESTIMATING FUTURE CAPACITY REQUIREMENTS

Capacity requirements can be evaluated from the two extreme

perspectives
Short term
Demand Forecasts: Managers plan for the capacity according to the demand of each
products for 12 months down the line.

Long term
Difficult to determine, as future demand and technology are uncertain
Use of Marketing plans, product development and life cycle of product.
Change in process technology also needs to be estimated

STRATEGIES FOR EXISTING CAPACITY MODIFICATION

Adjusting equipment and processes- which might include purchasing

additional machinery or selling/leasing existing machinery.
Making Staffing changes
Improving methods to increase throughput
Redesigning the product to facilitate more throughput(For faster
processing).

CAPACITY MODIFICATION TECHNIQUES

If there is mismatch in the demand and Capacity

Short Term: Increasing/Decreasing the labor force or creating and carrying the
inventory in lean period
Long term: Create new facility or expand existing facility or excess facility can be
sold/closed.

DEVELOPING CAPACITY ALTERNATIVES

Design flexibility into system

Provision for future expansion.

Take Stages of lifecycle into account

Capacity requirements are often closely linked to the stage of lifecycle of
product or service.

Introducti
on

Growth

Maturit
y

Decline

Take a Big picture approach to capacity changes

When developing capacity alternatives, it is important to consider how parts of
the systems interrelate.

DEVELOPING CAPACITY ALTERNATIVES

(CONT..)

Prepare to deal with capacity chunks.

No machine comes in continuous capacities.

Identify the optimal operating level.

Production units typically have an ideal or optimal level of operation in terms of unit cost of
output.

Economies of scale
If the output rate is less than the optimal level, increasing the output rate results in decreasing average unit costs .

Reasons for economies of scale:

1. Fixed costs are spread over a larger number of units.
2. Construction costs increases at a decreasing rate as facility size increases.
3. Processing costs decreases due to standardization.

DEVELOPING CAPACITY ALTERNATIVES

(CONT..)

Diseconomies of scale
If the output rate is more than the optimal level ,increasing the output rate results in
increasing average unit costs.
Reasons for diseconomies of scale :
1.
2.
3.
4.

Distribution costs increases due to traffic congestion and shipping from centralized facility
rather than multiple smaller facilities.
Complexity increases costs
Inflexibility can be an issue
Additional levels of bureaucracy.

EVALUATING CAPACITY ALTERNATIVES

Techniques used for evaluating the capacity alternatives are:

Cost-Volume Analysis
Financial Analysis
Decision Tree

COST VOLUME ANALYSIS

Cost-Volume Symbols
FC

= Fixed Cost

VC

= Variable cost per unit

TC

= Total Cost

TR

= Total Revenue

= Revenue per unit

= Quantity or volume of output

QBE = Break-Even Quantity

P
SP

= Specified Profit

COST VOLUME ANALYSIS

(CONTD..)

Cost- Volume Formulas

TC = FC + (VC x Q)
TR = R x Q
P = TR TC
P = (R X Q) [FC + (VC X Q)]
Volume = SP + FC
R - VC
QBEP =
FC
R - VC

FINANCIAL ANALYSIS

Most Commonly used methods are:

Payback: focuses on the length of time it will take for an investment to
return its original cost
Present Value(PV)- summarizes the initial cost of an investment , its
estimated annual cash flows, and any expected salvage value in a single
value called the equivalent current value, taking into account the time
value of money
Internal Rate of Return(IRR)- summarizes the initial cost, expected
annual and estimated future salvage value of an investment proposal in
an equivalent interest rate

THE CHALLENGE OF PLANNING SERVICE CAPACITY

Three important factors in planning service capacity:
The need to be near customers
Convenience for customers is often an important aspect of services. Generally a
service must be located near the customer.
The inability to store service
Speed of the delivery ,or customer waiting time becomes a major concern in a
service capacity planning.
The degree of demand volatility:
Demand volatility presents problem for capacity planners.
Demand volatility tend to be higher for services than goods , not only in timing of
demand, but also in amount of time required to the service individual customers.

MAKE OR BUY DECISIONS

Once capacity requirements have been determined , the organization must

decide whether to produce a good or provide a service itself, or
outsource(buy) from another organization.

FACTORS FOR MAKE OR BUY DECISIONS

Available capacity
If an organization has available equipments, necessary skills ,and time ,if often
makes sense to produce an item of perform a service in house. The additional cost
would be relatively small compared with those required to buy items or subcontract
services.
Expertise
If a firm lacks the expertise to do the job satisfactory buying might be reasonable
alternative.
Quality considerations
Firm that specialize can usually offer higher quality than an organization can attain
itself. conversely unique quality requirements or the desire to closely monitor quality
may cause an organisation to perform a job itself.

FACTORS FOR MAKE OR BUY DECISIONS (CONTD..)

The nature of demand
When demand for an item is high and steady , the organization is better off doing
the work itself.
Cost
Any cost savings achieved from buying of making must weighted against the
preceding factors. Cost savings might come from the item itself or from
transportation cost savings. If there are fixed costs associated with making an item
that can not be reallocated if the service or product outsourced, that has to be
recognized in the analysis.
Risk
Outsourcing may involve certain risks. One is loss of control over operations.
Another is need to disclose proprietary information.

C) DECISION TREE FOR

CAPACITY PLANNING

The capacity planning exercise requires methods by which alternative

options are evaluated.
Two metrics are useful to perform the evaluation:
a)Cost based method
b) Operational-performance based method

Decision trees are useful to evaluate alternative capacity choices on the

basis of cost of the capacity and the benefits.
A decision tree is a schematic model in which different sequences and
steps involved in a problem and the consequences of the decisions
are systematically portrayed.

A decision tree comprises of

Nodes- Each node represents the decision point.
Branches- These represent the potential outcomes of the decision.
The consequence of each outcome is measured as the cost of the impact,
and the uncertainty associated with each outcome could be associated with
the requisite branch.

Once the tree is constructed, each branch in the tree is evaluated with
respect to the costs, benefits and uncertainty.
The tree is evaluated from Right to Left. As we move from end towards
beginning, the unattractive portions of the tree are eliminated to arrive at the
final decision.

EXAMPLE
Q= A manufacturer of computer accessories has a capacity of 40,000 pieces
per month. The business strategy group for the company recently
performed a forecasting exercise to assess the emerging demand of the
accessories in the next 5 yrs.
The study revealed that:
40 % probability is of strong growth in demand of accessories.
60% probability of moderate growth in demand

The study identified 3 options for the manufacturer to augment capacity,

which were:
1) Expanding the capacity by adding new capacity
2) To augment capacity in the existing factory itself by some de-bottlenecking
operation
3) To go for sub-contracting. If there is a strong demand in growth, then the
new capacity could be added a year later.

ADDITIONAL INFORMATION
Options

Cost

Revenue in case of
strong growth

Revenue in case of
moderate growth

1: Adding new capacity

Rs 7,50,000

Rs, 8,50,000

Rs 4,00,000

2: Augmenting/
Expanding capacity in
the existing factory

Rs 2,75,000

Rs 5,50,000

Rs 3,00,000

3: Go for subcontracting

Negligible

Rs 3,50,000

Rs 1,80,000

Also, the cost of adding new capacity goes up by 5% if it is deferred by an year.

Arrive at an appropriate capacity planning strategy using a decision tree.
(All revenues are yearly figures)

SOLUTION

There are 3 decision alternatives at the 1st stage.

After 1 year there are only two decision alternatives i.e. either to go for
expansion or continue with the sub-contracting.
At each stage there are 2 possible outcomes for the demand.
The decision points are denoted by square nodes and the outcomes by
circular nodes.

NODE A

Revenue in case of high demand= 8,50,000*5 = 42,50,000

Revenue in case of moderate demand= 4,00,000*5 = 20,00,000
Expected Revenue of node A:
E[A]= (42,50,000*0.40+ 20,00,000*0.60)= 29,00,000
Cost of adding new capacity= 7,50,000
Net revenue= 21,50,000

NODE B

Revenue in case of high demand= 5,50,000*5 = 27,50,000

Revenue in case of moderate demand= 3,00,000*5 = 15,00,000
Expected Revenue of node B:
E[B]= (27,50,000*0.40+ 15,00,000*0.60)= 20,00,000
Cost of expanding the capacity= 2,75,000
Net revenue= 17,25,000

DECISION POINT 2

Revenue from adding new capacity= Rs 8,50,000*4= Rs 34,00,000

Cost of adding new capacity= Rs 7,87,500
Net Revenue from this option=Rs 26,12,500
Revenue from sub contracting option= Rs 3,50,000*4= Rs 14,00,000

Therefore the best option at this stage is to go for adding new capacity.

NODE C

Revenue in case of high demand= Rs 26,12,500(From last 4 yrs)+ Rs

3,50,000(From 1st yr)= Rs 29,62,500
Revenue in case of moderate demand= 1,80,000*5 = 9,00,000
Expected Revenue of node C:
E[C]= (29,62,000*0.40+ 9,00,000*0.60)= 17,05,000
Cost of sub contracting= Nil
Net revenue= 17,05,000

FINAL RESULT

Since the expected value of Node A is the highest, we go with the decision
of adding new capacity at the beginning itself rather than just debottlenecking or waiting for a year to sense the demand.

D)

RESOURCE PLANNING : CRP,

DRP, MRP, ERP AND RESOURCE
PLANNING FOR SERVICES

RESOURCE PLANNING
Planning methodologies (1960s)- problem of high inventories in manufacturing
organizations.
Process of determining the production capacity required to meet demand.
Capacity- maximum workload in certain time.
(Capacity demand) = inefficiency (minimize).

Types of Inventories:
1.
Operating (material and capacity resources)
2.
Distribution (market consumption)

OPERATIONS PLANNING

capacity

Long-range
>year, general, first, major decisions

Intermediate/medium range
6-18 months, minor changes in

Short range
Few days - few weeks, detailed and
specific.

Dependent & Independent Demand

Nature of demand
Goal
Service level
Demand occurrence
Estimation of demand
How much to order?
When to order

No uncertainty, dependent
Make availability meet
requirements exactly
100% a necessity, feasible to
achieve
Often lumpy
By production planning
Known with certainty
Very critical, can be estimated

Considerably uncertainty,
independent
For a targeted service level
100% Not feasible
Often continuous
By forecasting
Estimate based on past
consumption
Cannot be answered directly

BUILDING BLOCKS OF RESOURCE PLANNING

(a)

The existence of multiple levels of dependency

-

(b)

Parent child relationship

Level-by-level
Explosion- Iterative process and moving down.

Product Structure Bill of Materials

Depicts the relationship among various items
Low level coding
Bill of Materials (BOM)- list of all parts, ingredients, or materials needed to assemble or put
together one unit of a product. Alternative representation of PS

BUILDING BLOCKS (CONT.)

(c) Time phasing the requirement
- answer when rather than how much
- time bucket (computational efficiency & accurate ormation)
- integrated (cycle counting) inventory data
(d) Determining the Lot Size
- process of determining the size of the order quantities of each of the components
in a product.
- large lot sizes- fewer setups-huge inventory, long
time.
- smaller lot- several setups- increased setup costs

THREE LOT SIZING RULES

Lot - for - Lot (LFL)

- Size= net requirement during every period
- cost from one period to next is very high.
- sparse and highly discontinuous demand.
Fixed order Quantity (FOQ)
- orders placed always for a fixed order quantity
- continuous demand
Periodic Order Quantity (POQ)
- to cover requirements of P periods (successive)
*review cycle
*economic order quantity

(e) Incorporating Lead Time Information

- to correctly schedule launch of work order
- consists (set up, processing, waiting, move) time
(f) Establishing the Planning Premises
- Master Production Schedule (MPS)
disaggregates the information contained in an aggregate plan, links it to specific
varieties of the product being manufactured and specifies the exact timing of the
requirement.

MATERIAL REQUIREMENTS PLANNING

(MRP)
structured approach for launching and ensuring
availability of orders
MPS
Invent
ory
Status

BOM

Lot
Sizing
Rule

Net

Lot

Explode

Offset

Lead
Time
Procure
ment

USING THE MRP

Advantages:

Reduction in inventory.
Increased visibility of items & dependencies.
Inculcate a certain discipline.

Major Problems:
1.
2.
3.
4.

Low data integrity.

Updation not as and when changes happen.
Uncertainty with several issues.
Large computation.

Updating MRP Schedules - (i) Regeneration (ii) net change

Safety Stock & Safety Lead Time absorb uncertainties.

MANUFACTURING REQUIREMENTS PLANNING

(MRP-II)
Enlarged version of MRP.
Expanded application through Computing power and software.
Covers following modules:

Business Planning
MPS
Forecasting/demand
MRP
Advantage: provide numerous feedback loops,
Management
CRP
closing more and
more gaps
Order entry and
Purchasing
management
Inventory control

Shop Floor Control

DRP
minimize re-planning,
SRP
Accounting

CAPACITY REQUIREMENTS PLANNING (CRP)

Technique that applies to MRP logic to address the capacity issues in an organization.
Develops schedules for planned releases of capacities.
Output of MRP basis for CRP. (MPS-MRP-CRP)
MRP
Planned
order
Releases

Routing
File
(Process
Plan)

CRP

Loading
Schedules
for Each
Resources

Criteria for
Comparison

MRP

CRP

Input

BOM

Routing

MPS

MRP

Lead Time Data

Lead Time Data

Inventory

Capacity

Capacity
Status

Lot Sizing
Output

Purchase

Capacity Loading

Work orders

Capacity usage

DISTRIBUTION REQUIREMENTS PLANNING (DRP)

Extension of MRP in downstream supply chain.
Helps organizations and S.C. partners to jointly
investment in inventory.
Unlike MRP, relies on planned order releases.

plan and reduce

Advantage respond to changes, sudden surges &

drops, cost effective
operation, good service.
Losses due to information sharing- inventory
build up (shortages), poor service,
increased
costs of operation.

ENTERPRISE RESOURCES PLANNING (ERP)

Organization wide planning system that utilizes a common software and an integrated
database for planning and control purposes.
Mammoth transaction engine common software

Production Planning
Purchasing
Sales and Distribution
Finance and Cost Control
Logistics
Operational (Shop Floor) Control
Accounts Payable/Receivables, Treasury Human Resources
Less expensive, higher customization.
Link various functional areas of business tightly through software.
Cut down cycle time, transaction costs, layers of decision making - improves
responsiveness and flexibility - greater sense of empowerment - better visibility of
information - improved customer service - improved competitiveness.

RESOURCES PLANNING IN SERVICES

Similar to the manufacturing situation, one can develop a Bill of Resources [BOR]
in the case of service organizations and employ a similar planning exercise to
schedule service deliveries and associated resources and materials.

Ex- treated eye patient and telephone instrument.

E) EQUIPMENT
SELECTION

Operation Managers often initiate proposals for the purchase of equipment,

such as production and office machinery, software, cars and trucks. The
reasons for its purchase include the following:
1: New equipment is required for the production of new products or
services.
2: Increased sales volume demand an expansion of the available capacity.
3: Existing equipment has become obsolete and/or changes in technology
are required to maintain competitiveness.
4: Existing equipment has entered the wear-out phase of its life and must be
replaced.

Equipment Selection is the process of identifying a set of suitable equipments

which are most suitable for processing a set of products.

FACTORS AFFECTING CHOICE OF EQUIPMENT:

1: Capacity
2: Compatibility
3: Availability of associated equipment
4: Reliability and after service
5: Ease of Maintenance
6: Ease of Learning to use

7: Ease of Preparation
8: Safety
9: Ease of Installation
10: Delivery
11: State of Development
12: Effect on existing organisation

ECONOMIC APPRAISAL CONCEPTS

There are a number of ways of carrying out an economic analysis, but

whatever technique is used, it must be consistently applied to all the
equipment.
An analysis is useful in distinguishing between different items of equipment.
The aim of an economic analysis is to appraise the cost of producing from a
given piece of equipment, not just the cost of the plant itself. This can be
considered to be made up of 2 parts:

The Standing cost, which is the cost incurred by the equipment installed
and ready for use but not being operated;
The Running cost, which sets down the cost of running the equipment in
order to generate the required products or service.

THE STANDING COST

For calculating standing cost, executives decisions have to be made:

notably, What depreciation should be considered, what is the expected
return on investment capital, etc
These together with the purchase price, are summed to give an average
annual standing cost. This applies, when equipment is purchased outright.

 Other ways of obtaining equipment are:

a) Hire Purchase
b) Leasing
c) Hiring
All these methods should be considered as they may have cash flow
advantages over outright purchase.

THE RUNNING COST

To calculate the average running cost, a knowledge of the average annual

total output is required.
For equipment producing for stock, this info is derivable from sales
forecast.
For equipment used to produce entirely to customers orders or
service req, the details of output required cannot be forecasted in detail.
The most satisfactory approximation is obtained by forecasting the
anticipated average output.

DEPRECIATION AND OBSOLESCENCE

An installed equipment immediately starts losing its value because of:
a)Depreciation- Decrease in the intrinsic value of an asset due to use of
and/or lapse of time, and is a result of normal usage, bad handling, bad
maintenance, accidents or wear due to disease or chemical action.

b)Obsolescence- Loss in the intrinsic value of an asset due to its supersession, and is a result of a reduction in market for the product or service for
which the equipment is intended, a change in the design of equipment, or a
change in legislation.

THE LIFE OF EQUIPMENT:

An equipment has several different life spans Physical
Technological
Product
Book
Economic