Puño, Vinabie A.

AC – 103

I. Capacity Planning
DEFINITION
 Capacity planning is the process used to determine how much capacity is needed (and when) in order to
manufacture greater product or begin production of a new product. A number of factors can affect capacity—
number of workers, ability of workers, number of machines, waste, scrap, defects, errors, productivity,
suppliers, government regulations, and preventive maintenance. Capacity planning is relevant in both the
long term and the short term. However, there are different issues at stake for each.
 Capacity planning refers to determining what kind of labour and equipment capacities are required and when
they are required. Capacity is usually planned on the basis of labour or machine hours available within the
plant. Thus, capacity planning is planning for quantity or scale of output.

There are four major considerations in capacity planning:

 Level of demand
 Cost of production
 Availability of funds
 Management policy.

Production has no meaning unless its products can be sold at a remunerative price. Generally, the
capacity of plant is limited by the level of current demand. Stable demand makes the task of capacity
planning simple while fluctuations in demand create problems concerning the acquisition of resources and
matching them up with demand levels. Estimation of demand is, therefore, the first step in capacity planning.
Size of the market depends upon the sales potential rather than on the geographical areas.

DEMAND FORECASTS

Demand forecasting is fundamental to effective capacity and sales planning. A demand forecast establishes link
between the internal management of the firm and its external environment. Before making a demand forecast, the
period of forecast should be decided and an appropriate method of forecasting should be selected.

CAPACITY PLANNING CLASSIFICATION

Capacity planning based on the timeline is classified into three main categories long range, medium
range and short range.

Long Term Capacity: Long range capacity of an organization is dependent on various other
capacities like design capacity, production capacity, sustainable capacity and effective capacity. Design
capacity is the maximum output possible as indicated by equipment manufacturer under ideal working
condition. Long term capacity planning relates primarily to strategic issues involving the firm's major
production facilities. In addition, long-term capacity issues are interrelated with location decisions.
Technology and transferability of the process to other products is also intertwined with long-term capacity
planning. Long-term capacity planning may evolve when short-term changes in capacity are insufficient.

Medium Term Capacity: The strategic capacity planning undertaken by organization for 2 to 3
years of a time frame is referred to as medium term capacity planning.
 Short Term Capacity: The strategic planning undertaken by organization for a daily weekly or
quarterly time frame is referred to as short term capacity planning. In the short term, capacity planning
concerns issues of scheduling, labor shifts, and balancing resource capacities. The goal of short-term
capacity planning is to handle unexpected shifts in demand in an efficient economic manner. The time frame
for short-term planning is frequently only a few days but may run as long as six months.

IMPORTANCE OF CAPACITY PLANNING

Capacity planning is important due to the following reasons:

1. Capacity limits the rate of output. Therefore, capacity planning determines the ability of an
enterprise to meet future demand for its products and services.

2. Capacity influences the operating costs. Capacity is determined on the basis of estimated demand.
Actual demand is often different from estimated demand. As a result, there arises excess capacity or under
capacity. Excess or idle capacity increases the cost per unit of output. Whereas under capacity results in the
loss of sales.

3. Capacity decisions leave a direct impact on the amount of fixed investment made initially.

4. Capacity decisions result in long-term commitment of funds. Such long-term decisions cannot be
reversed except at major costs.

The following concepts of capacity are involved in capacity planning:

a. Design Capacity: It refers to the maximum output that can possibly be produced in a given period
of time. It is the ideal situation.

b. Effective Capacity: Refers to the maximum possible output, given the changes in product mix,
machine maintenance, scheduling and operating problems, labour problems, etc. It is usually less than the
design capacity.

c. Actual Output: It is the rate of output actually achieved. It cannot exceed effective capacity due to
machine breakdowns, labour absenteeism, irregular supply of raw materials, unusual delay in supply of
equipment, power breakdown, etc.

PROCEDURE FOR CAPACITY PLANNING

1. Assessment of Existing Capacity

Capacity of a unit can be measured in terms of output or inputs. Output measure is appropriate in
case of manufacturing concerns, e.g., automobile plant (number of cars), iron and steel plant (tons of steel,
etc. Service concerns like hospitals (number of beds), airlines (number of seats), theatres (number of seats),
etc., can measure capacity in terms of inputs.

2. Forecasting Future Capacity Needs

Short term capacity requirements can be estimated by forecasting product demand at different stages
of the product life cycle. It is more difficult to anticipate long-term capacity requirements due to
uncertainties of market and technology. Capacity forecast helps to determine the gap between the existing
capacity and estimated capacity so that necessary adjustments may be made.

3. Identifying Alternative ways of Modifying Capacity

 In case where the existing capacity is inadequate to meet the forecast demand capacity, the expansion
is required to meet the shortage. Additional shifts may be employed to expand the capacity. Expansion will
provide economies of scale and help in meeting the forecast demand. But it involves additional investment
and danger of fall in forecast demand in future. When the existing capacity exceeds forecast capacity, there is
a need for reduction of excess capacity. Developing new products, selling of existing facilities, layout of
workers or getting work from other firms are the methods of overcoming it.

4. Evaluation of Alternatives

Various alternatives for capacity expansion or reduction are evaluated from economic, technical and
other viewpoints. Reactions of employees and local community should also be considered. Cost Benefit
analysis, Decision theory and Queuing theory are the main techniques of evaluating alternatives.

5. Choice of Suitable Course of Action

After performing the cost-benefit analysis of various alternatives to expand or reduce the capacity,
the most appropriate alternative is selected.

DETERMINANTS OF EFFECTIVE CAPACITY

1. Facilities

The design of production facilities is the most important determinant of effective capacity. Design
includes the size and also the provision for expansion of the facilities. Design facilities should be such that
the employees should feel comfortable at their work place.

2. Products or Services

Design of the company’s products or services exerts a significant influence on capacity utilization.
When more uniform is the output, greater can be the standardization of materials and methods and greater
can be the utilization of capacity.

3. Process

Quantity capacity of a process is the obvious determinant of effective capacity. But if quantity of
output does not meet the quality standards, the rate of output is reduced due to the need for inspection and
rework activities.

4. Human factors

Job design (tasks that comprise a job), nature of the job (variety of activities involved), training and
experience required to perform the job, employee motivation, manager’s leadership style, rate of absenteeism
and labour turnover are the main human factors influencing the rate of output.

5. Operational Factors

Materials management, scheduling, quality assurance, maintenance policies and equipment

breakdowns are important determinants of effective capacity. Late delivery and low acceptability of materials
will reduce effective capacity. Inventory problems are a major hurdle in a capacity utilization. Similarly,
when the alternative equipment have different capabilities there may be scheduling problems.

6. External Factors
 Product standards (minimum quality and performance standards), pollution control regulations,
safety requirements and trade union attributes exercise tremendous influence on effective capacity.
Generally, the external factors act as constraints in capacity utilization.

FORECASTING

Forecasting involves using several different methods of estimating to determine possible future outcomes for
the business. Planning for these possible outcomes is the job of operations management.

Forecasts serve as decision support tools that allow leaders to plan for the future by performing “what-if”
analyses to determine how changes in inputs affects outcomes. For example, forecasts help a business identify
appropriate responses to changes in demand levels, price-cutting by the competition, economic ups and downs and
more. To receive the greatest benefit from forecasts, leaders must understand the finer details of the different types of
forecasting methods, recognize what a particular forecasting method type can and cannot do, and know what forecast
type is best suited to a particular need.

Naive Forecasting Methods

The naïve forecasting methods base a projection for a future period on data recorded for a past period. For example,
a naïve forecast might be equal to a prior period’s actuals, or the average of the actuals for certain prior periods.
Naïve forecasting makes no adjustments to past periods for seasonal variations or cyclical trends to best estimate a
future period’s forecast. The user of any naïve forecasting method is not concerned with causal factors, those factors
that result in a change in actuals. For this reason, the naive forecasting method is typically used to create a forecast to
check the results of more sophisticated forecasting methods.

Qualitative and Quantitative Forecasting Methods

Whereas personal opinions are the basis of qualitative forecasting methods, quantitative methods rely on past
numerical data to predict the future. The Delphi method, informed opinions and the historical life-cycle analogy are
qualitative forecasting methods. In turn, the simple exponential smoothing, multiplicative seasonal indexes, simple
and weighted moving averages are quantitative forecasting methods.

Casual Forecasting Methods

Regression analysis and autoregressive moving average with exogenous inputs are causal forecasting methods that
predict a variable using underlying factors. These methods assume that a mathematical function using known current
variables can be used to forecast the future value of a variable. For example, using the factor of ticket sales, you
might predict the variable sale of movie-related action figures, or you might use the factor number of football games
won by a university team to predict the variable sale of team-related merchandise.

Judgmental Forecasting Methods

The Delphi method, scenario building, statistical surveys and composite forecasts each are judgmental forecasting
methods based on intuition and subjective estimates. The methods produce a prediction based on a collection of
opinions made by managers and panels of experts or represented in a survey.

Time Series Forecasting Methods

The time series type of forecasting methods, such as exponential smoothing, moving average and trend analysis,
employ historical data to estimate future outcomes. A time series is a group of data that’s recorded over a specified
period, such as a company’s sales by quarter since the year 2000 or the annual production of Coca Cola since 1975.
Because past patterns often repeat in the future, you can use a time series to make a long-term forecast for 5, 10 or
20 years. Long term projections are used for a number of purposes, such as allowing a company’s purchasing,
manufacturing, sales and finance departments to plan for new plants, new products or new production lines.

II. Process Selection and Facility Layout

DEFINITION
Operations management is the strategic administration of production processes and personnel to maximize
output, minimize errors and continually enhance product quality. Facility layout refers to the way in which work
stations, equipment, machinery and employees are positioned within a work facility. Process selection involves
strategically choosing which types of work processes to include in the production of a product. Process selection and
facility layout are both important elements of operations management. Understanding the basics of each and their
correlation can help you to design more efficient production processes.
Facility Layout Basics
Business owners have a range of options to choose from when it comes to designing their facilities
layouts, depending on the total size of the buildings, yards and other spaces they have to work with.
Operations managers set up production facilities in such a way as to minimize the travel or holding time of
semi-finished goods between different stations. Noise and air pollution can be a large factor in certain
businesses -- while it may be convenient to locate a large number of work stations in a small area, you may
need to spread things out to maintain a safe and healthy work environment.
As a simple example, consider a car wash and wax business. Washing cars in one building then
driving them to an adjacent building for drying and waxing would waste time and require two buildings
rather than one. Locating a dry and wax station immediately after the wash station in a single building would
be a more efficient facility layout.
Process Selection
Each step in a production process can be completed in a variety of ways. Consider the process of
sewing a garment, for example. The key to process selection is to balance the costs, efficiency, output and
quality of each option to meet your production goals. Some options may produce a higher output per hour
while costing twice as much as other options, for example, while other options are less costly but produce
more errors.
A single employee could sew an entire garment, then pass it down to a packaging line; several
employees could be set up next to each other, each sewing a single stitch or section before quickly passing it
on, or the sewing could be handled by a machine. The finished garment could be sent off to the packaging
line via an employee pushing large bins or via a conveyor belt stretching around the factory, as another
example.
 Process Selection
 Process selection
 Deciding on the way production of goods or service delivery will be organized
 Needed when:
 Planning new products or services
 Competitive pressure
 Technological changes in product or equipment
 Process choice is demand driven:
 Variety
 How much?
 2. Volume
 Expected output?
 Goal:
 Have process capabilities match product/service requirements
 Major implications:
 Capacity planning
 Layout facilities
 Equipment
 Design of work systems
Facilities Layout
 Layout
 The configuration of departments, work centers, and equipment, with particular emphasis on
movement of work (customers or materials) through the system
 The Need for Layout Planning
 Inefficient Operations
 High cost
 Bottlenecks
 Changes in product or service design
 Introduction of new products or services
 Changes in output volume or product mix
 Changes in methods or equipment
 Accidents or safety hazards
 Changes in environmental or other legal requirements
 Morale problems
 Importance of Layout Decisions
 Requires substantial investments of money and effort
 Involves long-term commitments
 Has significant impact on cost and efficiency of short-term operations
 Basic Layout Types
 Process Layout
 Layout that can handle varied processing requirements
 Product Layout
 Layout that uses standardized processing operations to achieve smooth, rapid, high-
volume flow
 Fixed Position Layout
 Layout in which the product or project remains stationary, and workers, materials,and
equipment are moved as needed
 Combination layouts
Correlation
 Choosing the right processes and laying out processes in the most efficient manner can increase
production output, decrease operational costs and enhance product quality -- the ultimate goals of operations
management. Operations managers continually re-evaluate their production setups to look for opportunities
to save money or boost production effectiveness.
Critical Path Method (CPM)
The Critical Path Method can help you to make informed process selection and facility layout
decisions. This production mapping technique uses a visual string of nodes representing individual activities
to show the flow of materials in a multi-step process, while conveying a range of useful information about
each activity, including its shortest and longest possible completion times, its required inputs, expected
outputs and labor needs. Using CPM to map out your production processes can reveal areas of slack time,
non-value-adding activities and opportunities to streamline production processes.
III. Work Design and Measurement
DEFINITION
Work measurement is a process of analyzing jobs for the purpose of setting the performance
standards and benchmarks. It involves linking the employee responsibilities to the time required to complete
specific tasks to achieve desired levels of performance. Job design or work design refers to the content,
structure, and organization of tasks and activities. It is mostly studied in terms of job characteristics, such as
autonomy, workload, role problems, and feedback. Job design involves specifying the work activities of an
individual or group in an organizational setting. To this end, job design seeks to enhance job performance
through clear definition of responsibilities for different work activities.
WORK DESIGN
Work design concerns the "content and organization of one’s work tasks, activities, relationships, and
responsibilities" (Parker, 2014).
Imagine designing the role of a police officer. Illustrative work design decisions include:

 Which activities should be grouped together to form a meaningful police officer job?

 Which decisions should be made by officers and which by their supervisors?

 Should individual jobs be grouped together into a team?

 Can one build in routine tasks amidst complex ones to ensure officers are not overwhelmed?
These decisions - about the content and organization of one’s work tasks, activities, relationships, and
responsibilities - will affect outcomes at multiple levels including whether individual officers feel engaged or
stressed at work, and whether the wider police service achieves its targets, such as how effectively crime is detected
and prevented.
Often work design is described in terms of "job characteristics", or features of work that affect how people feel about
their jobs. Research has identified many job characteristics that are positive, that result in work being more
motivating or less stressful. Examples of positive job characteristics include:

 Job autonomy: Being able to make decisions within the job

 Task variety: Having a range of tasks in the job

 Skill utilisation: The opportunity to use one's skills in the job

 Task significance: Doing a job that is important

  Task identity: Doing a whole job

 Job feedback: Getting feedback whilst doing one's work

Job design involves specifying the content and methods of job. In general the goal of the job design is to
create a work system that is not only productive but also efficient.

Job designers are concerned with:

 What will be done?
 Who will do the job?
 How the job will be done?
 Where the job will be done?
 Ergonomics

A successful Job Design must have the following qualities

1. Carried out by experienced personnel who have the necessary training and background.
2. Consistent with the goals of the organization.
3. In documented form.
4. Understood and agreed by both management and employees.
5. Shared with the new employees.
6. Factors that affect Job Design

Factors that affect job design include:

1. Lack of knowledge of the employees.
2. Lack of Management support.
3. Lack of documented job design which often leads to poor audit review and referral.

In order to make jobs more interesting and meaningful job designers often consider Job Enlargement,Job
Rotation and Job Enrichment.
 Job Enlargement relates to giving a worker a larger portion of the total task by horizontal loading
 Job Rotation pertains to Workers periodically exchange jobs
 Job Enrichment is increasing responsibility for planning and coordination tasks, by vertical loading

WORK MEASUREMENT
Work measurement has been defined by British Standard Institution as, “The application of techniques
designed to establish the time for a qualified worker to carry out a specified job at a defined level of performance”.
This time is called standard or allowed time. Time study may also be defined as “the art of observing and recording
the time required to do each detailed element of an industrial operation”.

Objectives of Work Measurement:

1. To compare the times of performance by alternative methods.
2. To enable realistic schedule of work to be prepared.
3. To arrive at a realistic and fair incentive scheme.
4. To analyse the activities for doing a job with the view to reduce or eliminate unnecessary jobs.
5. To minimise the human effort.
6. To assist in the organisation of labour by daily comparing the actual time with that of target time.
Uses of Work Measurement:
1. Wok measurement is used in planning work and in drawing out schedules.
2. Wok measurement is used to determine standard costs.
3. Wok measurement is used as an aid in preparing budgets.
4. It is used in balancing production lines for new products.
5. Wok measurement is used in determining machine effectiveness.
6. To determine time standards to be used as a basis for labour cost control.
7. To establish supervisory objectives and to provide a basis for measuring supervisory efficiency.
8. To determine time standards to be used for providing a basis for wage incentive plans.

Techniques of Work Measurement:

Work measurement is investigating and eliminating ineffective time. It not only reveals the existence of
ineffective time. But it can be used to set standard times for carrying out the work so that ineffective time does not
evolve later. It will be immediately found out by the increased standard time. For the purpose of work measurement,
work may be regarded as repetitive work and non-repetitive work.

For the purpose of work measurement, work can be regarded as:

 Repetitive work: The type of work in which the main operation or group of operations repeat
continuously during the time spent at the job. These apply to work cycles of extremely short
duration.
 Non-repetitive work: It includes some type of maintenance and construction work, where the
work cycle itself is hardly ever repeated identically.
The principal techniques of work measurement are classified under the following heads:
1. Time Study
2. Synthesis
3. Work Sampling
4. Pre-determined Motion Time System
5. Analytical Estimating

 Time study: A work measurement technique for recording the times and rates of working for the elements of
a specified job carried out under specified conditions and for analyzing the data so as to determine the time
necessary for carrying out the job at the defined level of performance. In other words measuring the time
through stop watch is called time study.
 Synthetic data:A work measurement technique for building up the time for a job or pans of the job at a
defined level of performance by totaling element times obtained previously from time studies on other jobs
containing the elements concerned or from synthetic data.
 Work sampling:A technique in which a large number of observations are made over a period of time of one
or group of machines, processes or workers. Each observation records what is happening at that instant and
the percentage of observations recorded for a particular activity, or delay, is a measure of the percentage of
time during which that activities delay occurs.
  Predetermined motion time study (PMTS):A work measurement technique whereby times established for
basic human motions (classified according to the nature of the motion and conditions under which it is made)
are used to build up the time for a job at the defined level of performance. The most commonly used PMTS
is known as Methods Time Measurement (MTM).
 Analytical estimating: A work measurement technique, being a development of estimating, whereby the time
required to carry out elements of a job at a defined level of performance is estimated partly from knowledge
and practical experience of the elements concerned and partly from synthetic data. The work measurement
techniques and their applications are shown in the following table.

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