Chapter 3: Resources Planning

1. Overview of planning
2. Capacity planning
3. Tactical planning
4. Short-term schedules
5. Demand forecasting

1
 1. Overview of Planning
Why do we have to make plan?
All activities have to be planned – which means that we design
timetables to show when they will be done.

Delivery plans, for example, might show the

planned schedules for deliveries over the next
month. If an organization does not plan for the
future, it can only work from hour-to-hour,
without any continuity, and in constant danger
of meeting unexpected circumstances that it
cannot cope with.
 Planning Levels

Strategic Planning

Business Planning

Sales & Operations Planning

Plant, Supplier, Distribution Scheduling

& Execution
 Types of Planning
 Capacity plans, which make sure there is enough capacity to
meet long-term demand.

 Aggregate plans, which give summaries of the work done in

related activities, typically by month at each location.

 Master schedules, which show a detailed timetable for all

activities, typically by week.

 Short-term schedules, which show detailed timetables for

jobs and resources, typically by day.
 2. Capacity Planning

 Definitions

 Bottlenecks

 Matching capacity and demand

 Adjusting capacity
2.1. Definitions
 A manufacturer of ballet shoes built up a production facility which is
designed to produce up to 300 shoes per week. However, the
factory can produce only 230 shoes per week in reality, despite
working at its maximum effort. What is the meaning of
manufacturer's capacity utilizations relative to both design and
effective capacity if output is 200 shoes per week?
 2.2. Bottlenecks

Not all parts of a supply chain have the same capacity.

There must be some part that limits overall throughput, and
this forms a bottleneck.
The bottlenecks in a supply chain limit its overall capacity.
 Bottlenecks- Example

• The main bottling plant at J&R Softdrinks has a capacity of

80,000 litres a day, and works a seven-day week.
• It fills standard bottles of 750 ml, and these are passed to a
packing area which can form up to 20,000 cases a day with
12 bottles each. The packing area works a five-day week.
• The cases are taken to warehouses by a transport
company whose 8 lorries can each carry 300 cases, and
make up to 4 trips a day for 7 days a week. There are two
main warehouses, each of which can handle up to 30,000
cases a week. Local deliveries are made from the
warehouses by a fleet of small vans that can handle
everything passed to them by the warehouse.
• What is the capacity of this part of the distribution system?
How can J&R increase the capacity?
 Solution
• The bottling plant has a capacity of 80,000 litres a day, or:
7 × 80,000/0.75 = 746,666 bottles a week

• The packing area has a capacity of 20,000 cases a day, or:

5 × 12 × 20,000 = 1,200,000 bottles a week

• The transport company’s lorries can handle 300 cases on

each journey, so their capacity is:
7 × 4 × 8 × 300 × 12 = 806,400 bottles a week

• Each warehouse can handle 30,000 cases a week, giving

a capacity of:
2 × 30,000 × 12 = 720,000 bottles a week

We know that the capacity of the delivery vans is greater

than the capacity of the warehouses.
Solution (Cont.)
 Solution (Cont.)

 The capacity of this part of the supply chain is the smallest of

these separate capacities, and this is 720,000 bottles a week in
the warehouses.

 J&R can only increase capacity by expanding the warehouses.

Improving other parts of the supply chain will have no effect at
all.
 2.3. Matching Capacity and Demand

 The aim of capacity planning is to match the available capacity of

facilities to the demands put on them. Any mismatch can be
expensive.

 If capacity is less than demand, bottlenecks restrict the movement of

materials, and customer service declines;

 if capacity is greater than demand, the organization can move all its
materials but it has spare capacity and underused resources.
 Example

• Anne Jenkins has a contract to deliver 100 computer

systems a week to schools in South Wales.

• The systems have customized software installed, which

takes an hour to test before delivery. The testing is done
by trained staff, who achieve an average efficiency of
75%.
They work a single eight-hour shift five days a week, but
could move to double shifts or have overtime at
weekends.

• How many testers should Anne employ?

 Compare 3 plans

Full time wage: 120$/day

Part time wage: 18$/hour
Overtime wage: 20$/hour
 Solution

 Each tester is available for 8 × 5 = 40 hours a week.

Average efficiency is 75%, so their useful time is 40 × 0.75 = 30 hours a
week.
Each computer takes 1 hour to test, so each employee can test 30
systems a week.

Hence:
■ designed capacity = 40 units a tester a week
■ effective capacity = 30 units a tester a week
 Solution (Cont.)

There are several ways of meeting the demand of 100 units a week:

■ Working a single shift on weekdays would need 100/30 = 3.33 testers. If Anne
only employs full-time testers, she has to round this up to 4. Then the utilization
of each would be 3.33/4 = 0.83 or 83%.

■ Employing 3 testers full-time, and one part-time tester for 1/3 time would meet all
capacity with 100% utilization.

■ Using overtime at the weekends would need 3 full time testers who are willing to
finish 10 tests at the weekend (working 10 / 0.75 = 13.3 hrs).
 The main steps in capacity planning
1. Examine forecast demand and translate this into a capacity needed

2. Find the capacity available in present facilities

3. Identify gaps between capacity needed and that available

4. Suggest alternative plans for overcoming any gap

5. Compare these plans and find the best

6. Implement the best and monitor performance

This is a standard approach to all kinds of planning, which is sometimes

called resource requirement planning.
 Example
 A&B Coaches of Blackpool plan their capacity in terms of ‘coach-days’.
 Forecasts show expected annual demands for the next two years to
average 400,000 full-day passengers and 750,000 half-day passengers.
 A&B have 61 coaches, each with an effective capacity of 40 passengers a
day for 300 days a year. Breakdowns and other unexpected problems
reduce efficiency to 90%.
 They employ 86 drivers who work an average of 220 days a year, but illness
and other absences reduce their efficiency to 85%. If there is a shortage of
coaches the company can buy extra ones for £110,000 or hire them for
£100 a day. If there is a shortage of drivers they can recruit extra ones at a
cost of £20,000 a year, or hire them from an agency for £110 a day.
 How can the company approach its tactical planning?
 Solution
 Step 1 Translate forecasts and other information into a demand for
resources
■ 400,000 full-day passengers are equivalent to 400,000/40 = 10,000
coach days a year, or 10,000/300 = 33.33 coaches.

■ 750,000 half-day passengers are equivalent to 750,000 / (40 × 300 × 2)

= 31.25 coaches.

■ Adding these two gives the total demand as 64.58 coaches. Each coach
needs 300/220 drivers, so the company needs a total of 88.06 drivers.

 Step 2 Find the resources currently available

■ The company has 61 coaches, but the efficiency of 90% gives an
availability of 61 ×0.9 = 54.9 coaches.

■ There are 86 drivers, but an efficiency of 85% reduces this to 86 × 0.85

= 73.1 drivers.
 Solution (Cont.)
 Step 3 Identify mismatches between resources needed and available
Without details of the timing. There is a total shortage of:
64.58 – 54.9 = 9.68 coaches and 88.06 – 73.1 = 14.96 drivers.
 Step 4 Suggest alternative plans for overcoming any mismatches
■ To buy 10 coaches would cost £1,100,000. To hire coaches to make up
the shortage would cost 9.68 × 300 × 100 = £290,400 a year. There is, of
course, the alternative of buying some coaches and hiring others.
■ To hire 15 drivers would cost £300,000 a year, while using temporary
drivers from an agency would cost 14.96 × 220 × 110 = £362,032 a year.
There is also the option of hiring some drivers and making up shortages
from an agency.
 Step 5 Compare these plans and find the best
We do not have enough information to make the final decisions, and we
have only outlined some of the alternatives. This very limited analysis might
suggest a reasonable solution of buying eight coaches and making up any
shortages by hiring, and hiring 12 drivers and making up the shortage from
the agency.
 2.4. Adjusting Capacity

 Problems with capacity planning

 Short-term adjustments to capacity

 Changing capacity over time

 Problems with capacity planning

 Demand comes in small quantities and can take almost any

value, while capacity comes in large discrete amounts.
 There is no way of exactly matching the discrete capacity to a
continuous demand. Use one of three basic strategies:
(a) more or less match capacity to demand, so that there is sometimes
excess capacity and sometimes a shortage
(b) make capacity at least equal to demand by early expansion, which
needs more investment in facilities and gives lower utilization.
(c) only add capacity when the additional facilities would be fully used,
which has lower investment and high utilization, but restricts
throughput.
Capacity expansion
 Short-term Adjustment to Capacity Planning

There are two ways of making these short-term

adjustments to capacity:

capacity management adjusts capacity

to match demand

demand management adjusts demand to

match available capacity.
 Ways of adjusting capacity

 Changing the work pattern to match demand

 Employing part-time staff to cover peak demands
 Using outside contractors
 Renting or leasing extra facilities
 Adjusting the speed of working
 Rescheduling maintenance periods
 Making the customer do some work, such as packing their own
bags in supermarkets
 Ways of adjusting demand

 Vary the price

 Limit the customers served, by demanding specific ‘qualifications’
 Change the marketing effort
 Offer incentives to change demand patterns, such as off-peak
travel rates
 Change related products to encourage substitution, such as
holiday destinations
 Vary the lead time
 Use a reservation or appointment system
 Use stocks to cushion demand.
 Changing Capacity over Time

 In practice, the effective capacity of a supply chain can change

quite markedly.
 Learning curve: The more often you repeat something, the easier
it becomes and the faster you can do it
 Changing Capacity over Time (Cont.)
 Preventive maintenance and rational replacement policies.
 READ Example (page 148-149)
 3. Tactical Planning

• Tactical plans show how the capacity will be used, and

develop medium-term timetables for activities. Different
names are used for this level of planning, but the most
common are aggregate plans and master schedules.
 3.1. Aggregate Plans

 AGGREGATE PLANNING makes the tactical decisions that translate

forecast demand and available capacity into schedules for families of
activities.
 Aggregate Plans (Cont.)

Aggregate planners are looking for answers to questions:

 Should we keep throughput at a constant level, or change it to meet
varying demand?
 How should we use stocks to meet changing demand?
 Should we vary the size of the workforce with demand?
 Can we change work patterns to meet changing demand?
 Should we use subcontractors or outside organizations to cover peak
demands?
 Can we allow shortages, perhaps with late delivery?
 Can we smooth the demand?
 Aggregate Plans (Cont.)

 At the end of the aggregate planning, an organization has schedules

for its major types of activity, typically for each month, at each location.

 The next stage is to add more detail, and this is done in the master
schedules.

 The MASTER SCHEDULE gives a timetable for activities, typically for

each week. Its aim is to achieve the activities described in aggregate
plans as efficiently as possible.
 3.2. Aggregate Planning Strategies

 Reactive: Alter capacity to match demand

 Pure strategy
 Chase
 Level regular production
 Mixed strategy
 Trial-and-Error
 Linear programming: Finding optimal if exists.

 Proactive: Alter demand to match capacity

 Mixed: Some of each
 Level Production

Demand

Production
Units

Time
41
 Level Production Strategy
Level production
(50,000 + 120,000 + 150,000 + 80,000)
= 100,000 pounds
4

SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 0
400,000 140,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,000 X $.50) = $870,000
Level Production with Excel
 Chase Demand

Demand

Production
Units

Time
 Chase Demand Strategy

SALES PRODUCTION WORKERS WORKERS WORKERS

QUARTER FORECAST PLAN NEEDED HIRED FIRED

Spring 80,000 80,000 80 0 20

Summer 50,000 50,000 50 0 30
Fall 120,000 120,000 120 70 0
Winter 150,000 150,000 150 30 0
100 50

Cost of Chase Demand Strategy

(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000
Chase Demand with Excel
 Mixed Strategy
 Combination of Level Production and Chase Demand
strategies
 Examples of management policies
 no more than x% of the workforce can be laid off in one quarter
 inventory levels cannot exceed x dollars
 Many industries may simply shut down manufacturing during
the low demand season and schedule employee vacations
during that time
Linear Programming Approach Using
Excel
Using Solver: Data Analysis Solver
Step 1: setup decision variables table
with demand
Step 2: setup constraint table
Step 3: Create a cell containing the
objective function
Step 4: call Solver  input parameters
 Example: Red Tomato Tools
Input data:
 Demand

Month Jan Feb Mar April May June

Demand 1,600 3,000 3,200 3,800 2,200 2,200
 Costs

Cost Material Inv. S’kout Hire Layoff Labor hr R-hr OT Sub

 Others
Value $10/pcs $2 $5 $300 $500 4/unit $4/hr $6 $30/unit
 selling price =$40/unit Initial workforce = 80
 initial Inv = 1,000 units working days/month = 20
 working hours = 8hrs/day limit OT/month = 10hrs
 ending inventory in June = 500 units
 Example: Red Tomato Tools
Decision Variables:
 Wt = workforce size for month t, t = 1, 2,…, 6
 Ht = number of employees hired at the beginning of month t
 Lt = number of employees layoff at the beginning of month t
 Pt = number of units produced in month t
 It = Inventory at the end of month t
 St = number of units stock-out/backlog at the end of month t
 Ct = number of units subcontracted for month t
 Ot = number of overtime hrs worked in month t
 Example: Red Tomato Tools
Objective function:
Min. TC = RT + OT +hire&layoff+Inv.+Stockout+Prod.+Subcontract

Constraints:
 Workforce, hiring and layoff:
Wt = Wt-1 + Ht – Lt
 Capacity: Pt ≤ 40Wt + Ot/4
 Inventory balance: It-1 + Pt + Ct = Dt + St-1 + It - St
 Overtime limit: Ot ≤ 10Wt
 Ending inventory = 500, ending backlog = 0
 3.3. Planning Cycles

 Planning is not a job that is done once and is then finished. It is

continuous, and as plans for one period are finalized and implemented,
planning moves on to the next period.
 4. Short-term Schedules

 SHORT-TERM SCHEDULES give detailed timetables for jobs, people,

materials, equipment and all other resources. The aim of these
schedules is to organize the resources needed for the master schedule,
giving low costs, high utilizations, or achieving some other measure of
performance.
 Approaches to Scheduling

Two ways:
● Backward scheduling, where schedulers know when a job has to
be finished. Then they can work back through all the activities to
find the date when the job must be started.
● Forward scheduling, where schedulers know when a job can
start. Then they can work forward through all activities to find the
date when the job will be finished.
 Scheduling Rules

1. First come, first served.

2. Most urgent job first
3. Shortest job first.
4. Earliest due date first
 Example

 Zambrucci Transport has to schedule the following six jobs for a

heavy lift crane. How can it design a reasonable schedule?
 Solution

 The simplest way of tackling this problem is to use some decision

rules. Using ‘first come, first served’ gives the schedule:

12
20
24
40
42

The jobs are

finished by day 52.
 Solution

”Shortest first”

• The average time in the system (which is the same as the average
finish time) is 134/6 = 22.3 days, compared with 190/6 = 31.7 days for
‘first come, first served’.
• By day 36 this schedule has finished five journeys, while the previous
schedule had only finished three.
 Solution (Cont.)

”Minimum the maximum lateness”

 Minimize the maximum lateness by taking jobs in order of due date

This gives a maximum lateness of 4 days for jobs D and F, and

an average lateness of 10/6 = 1.7 days.
 Criterions

1. Finish date

2. Average time in system
3. Average waiting time
4. Average lateness
 5. Demand forecasting
 Forecasting is an important element of demand management. It
provides an estimate of future demand and the basis for planning
and sound business decisions.  some error between a forecast
and actual demand is to be expected.
 the goal of a good forecasting technique is to minimize the
deviation between actual demand and the forecast.
 Having accurate demand forecasts allows the purchasing
department to order the right amount of parts and materials, the
operations department to produce the right quantity of products,
and the logistics department to deliver a correctly sized order
 timely and accurate demand information is a critical component
of an effective supply chain.
 Many have argued that demand forecasting is both an art
and a science. Since there are no accurate crystal balls
available, it is impossible to expect 100% forecast accuracy
at all times. The impact of poor communication and
inaccurate forecasts resonates all along the supply chain and
results in the bullwhip effect.
5.1 FORECASTING TECHNIQUES
 5.2 Qualitative Methods
 Generally used when data is limited, unavailable, or not currently
relevant.
 Jury of Executive Opinion: group of the firm’s senior management
executives who are knowledgeable about their markets, their
competitors, and the business environment collectively develop
the forecast.
 Delphi Method: A group of internal and external experts are
surveyed during several rounds separately and iteratively.
 Sales Force Composite: forecast is generated based on the sales
force’s knowledge of the market and estimates of customer needs
 Customer Surveys
 5.3 Quantitative Methods
 Time series forecasting is based on the assumption that the future
is an extension of the past; thus, historical data can be used to
predict future demand.
 Cause-and-effect forecasting assumes that one or more factors
(independent variables) are related to demand (dependent
variable) and, therefore, can be used to predict future demand.
 For long-time horizon forecasts, it is generally recommended to
utilize a combination of both quantitative and qualitative
techniques.
 A time series typically has four components: trend, cyclical,
seasonal, and random variations.
 Time Series Forecasting Models
Naïve Forecast

Simple Moving Average Forecast

Calculate F6, F7, F8?
Weighted Moving Average Forecast


 Cause-and-Effect Models
 The cause-and-effect models have a cause
(independent variable or variables) and an effect
(dependent variable). Some common methods are:
 Simple Linear Regression Forecast
 Multiple Regression Forecast
 Forecast accuracy (forecast error, Mean absolute
deviation (MAD), Mean absolute percentage error
(MAPE), Mean square error (MSE) , Running sum of
forecast errors (RSFE).