UNIT II

Demand Forecasting Need, Types, Objectives and

Steps. Overview of Qualitative and Quantitative
methods.
Capacity Planning Long range, Types, Developing
capacity alternatives. Overview of sales and
operations planning. Overview of MRP, MRP II and
ERP.
Facility Location Theories, Steps in Selection,
Location Models. Facility Layout Principles, Types,
Planning tools and techniques.
Forecasting Defined : Estimating the future demand
for products and services and the resources necessary
to produce these outputs.

It involves taking historical data and projecting them

into the future.

Effective planning in both the short and the long run

depends on forecast of demand.
Needs of Demand Forecasting:
New facility Planning
The new facility for the factory layout is being found
out
Production Planning
The rate of production must vary to meet the
fluctuating demand from time to time .
Work force scheduling
Where the demand for products and services varies
from week to week.
Financial planning
Planning for raising funds
 Types of Forecasts

1. Short term forecasts

Looking ahead not more than three months
2. Intermediate term forecast
Not more than three months to two years.
3. Long term forecasts
Has a time frame of two to five years
 Objectives of Demand Forecasting

1. Short term objectives of demand

forecasting:
i. Formulation of production strategy and
policy
ii. Formulation of pricing policy
iii. Planning and control of sales
iv. Financial planning
 Objectives of Demand Forecasting

2. Long term objectives of demand

forecasting:
i. Planning for a new project
ii. Assessing long term financial needs
iii. Arranging suitable manpower
iv. Evolving a suitable strategy for changing
pattern.
 Steps in the Forecasting Process
The seven basic steps

i. Determine the purpose (objectives) of the

forecast
ii. Select the items for which forecasts are needed
iii. Determine the time horizon for the forecast
iv. Select the forecasting model (method or
technique)
v. Gather and analyse the data needed for the
forecast
vi. Prepare the forecast
vii. Monitor the forecast
 Determine the purpose (objectives) of the
forecast :
What are all the objectives of forecasting?
When the forecast are needed?
Questions such as the above are required to be
answered to determine the levels of details
required in the forecast.
The amount of resources (manpower, computer
time, finance etc.) that can be justified and the
level of accuracy needed.
 Select the items for which forecasts are needed:
Determine whether the forecast is needed for a single
product or for a group of products.
Determine the time horizon for the forecast: It is
short-term, medium-term or long-term ? The forecast
must indicate the time horizon and whether to
develop forecast weekly, monthly, quarterly or yearly
Select the forecasting model (method or
technique): Determine whether to use statistical
models (quantitative)
 Gather and analyze the data needed for the
forecast:
Before preparing the forecast, data must be gathered and
analyzed.
Identify any assumptions that are made in conjunction
with preparing and using the forecast

Prepare the forecast: using the selection method

Monitor the forecast:
Monitor the forecast to determine whether it is
performing satisfactorily.
If not review the method, assumptions, validity of data.
 Over view of Forecasting
Methods : (Dec 2014, June 2014)
The two general methods to forecasting are :
(i) Qualitative
Qualitative methods consist mainly of
subjective inputs, often of non-numerical
description.
(ii) Quantitative.
Quantitative methods involve either
projection of historical data or the
development of association models
 Qualitative Methods
1. Consumer Survey method
1. Direct method of forecasting demand in a short run.
2. Sales force opinion method
1. Opinion of the salesman is sought
3. Delphi method
1. Getting the opinions of specialists in a particular field.
4. Past analogy
1. For new product sales trend of other products are over seen
5. Executive opinion
1. A committee based opinion method with knowledgable experts
6. Nominal group technique
1. It is a structured problem solving and decision making method.
Quantitative Methods
 Time series models use a series of past data to
make a forecast for the future.
Time series is a time-ordered sequence of
observations taken at regular intervals over a
period of time.
Casual Models such as linear regression,
incorporate the variable factors that might
influence the quantity being forecast.
The demand or sales forecast is a dependent
variable and other factors that affect demand are
independent variables.
Naive Approach: Assume the forecast of demand in the
next period is equal to the actual demand in the most
recent period.
For example:
For a product in January 2003 is 100 units, the
forecast demand for February 2003 will also be 100
units.
Moving Averages Method: It uses a number of most
recent historical actual data values to generate a
forecast.
 The moving average for n numbers of periods in the
moving average is calculated as follows
Moving
Average= demand in previous n periods
n
Exponential Smoothing Method:
It requires only three items of data:
This periods forecast,
The actual demand for this period and
which is referred as smoothing constant
 Trend Projection Method:
The trend components of a time series
reflects the effect of any long term factors on the
series.
Analysis of trend involves developing an
equation that ill suitably describe demand.
A simple plot of the data can often reveal
the nature of trend.
Trend Equation Y = a +bx
 Capacity
Amount of output a system is
capable of achieving over a specific
period of time.
 Capacity planning

Capacity plans are made at two levels:

(i)Long-term capacity plans which deal with
investments in new facilities and equipments and
(ii)Short-term capacity plans which focus on work-
force size, overtime budgets, inventories etc.
 Long-Range Capacity Planning

A long term strategic decision that establishes a

firms overall level resources.
Three major capacity decisions are:
i. How much capacity to be installed,
ii. When to increase capacity and
iii. How much to increase.
 Types of Capacity
(Nov 2013)
Production capacity: Maximum rate of production or output
of an organization.
For ex: 100 cars per day or 200 refrigerators per day etc.

Design capacity: The maximum output that can possibly be

attained.

Effective capacity: The maximum output given a product

mix, scheduling difficulties, machine maintenance, quality
factors, absenteeism etc.

Maximum capacity: The maximum output that a facility can

achieve under ideal conditions. Also known as peak capacity.
 Measures of capacity:
For ex:
Capacity of an automobile plant can be
measured in terms of the number of
automobile produced per unit of time
Capacity of a hospital is measured in terms
of the number of patients that can be treated
per day.
 Determinants of Effective Capacity

The main factors relate to the following:

(i) Facilities,
(ii) Product or services,
(iii) Process
(iv)Human resource considerations,
(v) Operations and
(vi) External forces.
 Facilities Factors: The key factor is the design of
facilities including size and provision for future
expansion, Transport, Supply etc.

Product or Service Factors: Uniformity of

products/services provides opportunities for
standardization of methods and materials.

Process Factors: The quantity and quality capability

of a process or equipment increase the rate of output
and hence the effective capacity.
 Human Resource Factors: Job design, variety of
activities involved, training skill & experience
required to perform job, employer motivation,
employee absenteeism, employee turn-over.

Operational Factors: Difficulties in capabilities of

alternative equipments and difference in job
requirement may create scheduling problems.

External Factors: These relate to product standards,

safety regulations, labor activities, pollution control
standards etc., which may often reduce effective
capacity
Economies and Diseconomies of Scale
Economies scale: The concept which states that
the average unit cost of product can be reduced by
increasing the rate of output.

Best operating level: The annual output which

results in the least average unit cost.

Diseconomies of scale: Above a certain level of

output, additional volume of output results in ever-
increasing average unit costs.
 Economies of scope: Ability of a firm to produce
many product types in one highly flexible
manufacturing facility at a lesser cost.

The experience curve: The concept that allows a

firm to increase its production capacity without
additional capital investment.
 Developing Capacity Alternatives
To enhance capacity management, the following
approaches to capacity alternatives could be developed:

i. Designing flexibility into the system

ii. Differentiating between new and mature products or
services
iii. Taking a big-picture approach to capacity changes
iv. Preparing to deal with chunks of capacity
v. Attempting to smooth out capacity requirements
 Resource Requirements Planning:
Determination of the amount and timing of
production resources needed to produce finished
products as per master production schedule.

Resource Requirements Planning System:

Working of a resource requirements planning system.
Overview of Sales and Operations Planning
Flow Chart of Resource Requirements Planning System
or Rough-cut Capacity Planning Process
 MRP Systems
(April 2015)

Materials Requirements planning (MRP-1 or MRP):

Computer based information system for ordering and
scheduling of dependent demand inventories.

Objectives of MRP
1. To improve customer service by meeting delivery schedules
promised and shortening delivery lead times.
2. To reduce inventory costs by reducing inventory levels.
3. To improve plant operating efficiency by better use of
productive resources.
Three main purposes of a basic MRP system are to:
Control inventory levels
Assign operating priorities
Assign capacity to load production systems.

Manufacturing Resource Planning (MRP II ): Broad-

based resource co-ordination system involving other areas of
a firm in the planning process, such as marketing, finance
and the human resource.

Three important functions of MRP are:

Order planning and control
Priority planning and control
Providing a basis for planning capacity requirements.
Information Flow for Planning and Controlling with
MRP
Operation of MRP System
 MRP System Inputs
Master Production Schedule: One of the three primary
inputs in MRP, specifies what end products are to be
produced, in what quantities and when.

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.
MRP System Outputs

Primary outputs of MRP Systems:

Planned order schedule

Changes in planned orders.

Secondary inputs of MRP system:

Exception reports
Performance reports
Planning reports.
 Manufacturing Resource Planning (MRP II)
Manufacturing Resource Planning (MRP II)
addresses the planning and control of activities
related to materials, capacity, finance,
engineering, sales and marketing.

Closed-loop MRP:
A system built around material requirement
planning (MRP-I) and also including additional
planning functions such as master production
scheduling and capacity requirement planning.
 MRP In Services
In an MRP system for services, the master
schedule can represent services to be provided.

An example, of a product-service package is a

food catering service which requires preparing and
serving meals for a large number of customers.

Distribution Requirement Planning (DRP): A

time-phased stock-replenishment plan for all levels
of a distribution network.
 Enterprise Resource Planning
Definition: A software package developed for optimum use of
resources of an enterprise in a planned manner.
Features of ERP
1. Accommodating variety
Providing solutions on both multi lingual and multi currency.
2. Integrated Management Information
Work flow automation and electronic data interchange.
3. Seamless integration
Changes to the existing products fully into the enterprise system.
4. Supply chain management
End to end supply chain management is crucial for enterprises.
5. Resource management
Human resources and equipment resources should be managed.
6. Integrated data model
Providing the data for employees suppliers and customers
 Scope of ERP

a. Financials
b. Logistics
c. Human resources
d. Work flow

Application of ERP

ERP is gaining popularity in India at a rapid pace.

This is mainly due to the need for reducing costs
especially when the sales are sluggish in the sub-
merging markets.
 Advantages of ERP
1. Inventory reduction
2. Reduction in production and delivery lead time
3. Realistic commitment
4. Increased efficiency
5. Modular approach
6. Decision support
7. Distributed computing
 Disadvantages of ERP

1. Expensive and time consuming

2. Difficulty implementing change
3. Difficulty integrating with other systems
4. Risks in using one vendor
5. Risk of implementation failure
 Facility Location
Facility location is the function of determining
location for a plant for maximum operating economy
and effectiveness.
The most important, which is faced by an
entrepreneur while launching a new enterprise.
A selection on pure economic considerations will
ensure an essay and regular supply of raw materials,
labor force.
Efficient facility layout , proper utilization of
production capacity and reduced cost of production is a
needy one.
 Theories of Facility Location
Primary causes (regional factors)
Weight to be transported
Distance to be covered
Type of transportation system
Nature of the region
Nature of goods
Secondary Causes (agglomerative and deglomerative)
Index of manufacture
Locational weight
High coefficient of manufacture
 Steps in Location Selection

1. Define the location objectives and associated

constraints
2. Identify the relevant decision criteria
3. Relate the objectives to the criteria using
appropriate models.
4. Evaluate the alternative location
5. Select the location that best satisfies the
criteria.
 Location Models
Various models are available which help identify a
near ideal location. The most popular models are:
1. Factor Rating Method
2. Weighted factor rating method
3. Locational break even analysis
4. Simple median method
5. Transportation method
6. Load distance method.
7. Centre of gravity.
 Factor Rating Method
Is used to evaluate alternative locations

Advantages:
1. Simplicity which facilities communication about
why one location/site is better than other.

2. Enables bringing diverse location considerations

into the evaluation process.

3. Foster consistency of judgment about location

alternatives.
 Weighted factor Rating Method
Developing a list of relevant factors and adding
weight to it for evaluation purpose.

Simple Median Method

Transportation cost is a major consideration in facility
location planning.
 Point Rating Method
In selection a site or location, companies have several
objectives, but not all are of equal importance.

The relative weight a company assigns to each

objective or to each location factors.

If two alternatives locations are found to be equally

attractive by comparing the cost then these two
alternatives potential locations may further to be
evaluated
 Locational Break-even Analysis
The only revenues and cost that need to be considered
are the ones that vary from one location to another.

If avenue per unit is the same regardless of where the

good is produced, the total revenues can be
eliminated from consideration.

An economic comparison of locations can be made

by identifying fixed costs and variable costs.
 The step involved in this method are

1. Determine all relevant costs that vary with each

location.
2. Calculate the total cost for the desired volume
of production per annum, for each location.
3.Plan the total costs associated with each
location on a single chart or graph.
4. Select the location with the lowest total annual
cost(TC) and the expected volume per annum
 Facility Layout
A Facility layout refers to the arrangement of
machinery, equipment .
Other industrial facilities such as receiving and
shipping departments, tool rooms, maintenance
rooms and employee amenities.
The purpose of achieving the quickest and smoothest
production at the least cost.
A more simple, clear and comprehensive definition is
given by Knowles and Thomson. They say that plant
layout involves:
Objectives of a Good Layout:

1. Provide enough production capacity.

2. Reduce Material Handling costs

3. Reduce congestion that impedes the movement of

people or material

4. Reduce hazards to personnel.

5. Utilize labor efficiently.
6. Increase employee morale.
7. Reduce accidents.
8. Utilize available space efficiently and effectively
9. Provide for volume and product flexibility
10.Provide ease of supervision
11.Facilitate Co-ordination and face-to-face
communication with appropriate.
12.Provide for employee safety and health
13. Allow ease of maintenance
14. Allow high machine/ equipment utilization
15. Improve Productivity
Factors Influencing facility Layout

Materials
Product
Worker
Machinery
Types of Industry
Location
Managerial Policies
 Principles of Layout
The Principle of Minimum Travel : Men and
Materials should travel the shortest distance
between operations

Principle of Sequence: This principle is best

achieved in product layout, and efforts should be
made to have if adopted in the process layout.

Principle of Usage: Every foot of available space

should be effectively utilized.
 Principle of Compactness: There should be a
harmonious fusion of all the relevant factors so that
the final layout looks ell integrated and compact.

Principle of Safety and Satisfaction : The layout

should contain built in provisions for safety for the
workmen.

Principle of Flexibility: The layout should permit

revisions with the least difficulty and at minimum
cost.

Principle of Minimum Investment: The layout

should result in savings in fixed capital investment.
 Types of Layout

i. Process layout or functional layout or job shop

layout;
ii. Product layout or line processing layout or
flow-line layout;
iii. Fixed position layout or static layout;
iv. Cellular manufacturing (CM) layout or Group
Technology layout;
v. Combination layout or Hybrid layout.
Process Layout or Functional Layout or Job Shop
Layout
Line Layout or Product Layout
Fixed Position Layout or Static Layout
Cellular Manufacturing Layout or Group Technology
Layout
Combined Layout or Hybrid Layout for Gear
Manufacturing
 Service Facility Layout

Service facility layout should provide easy

entrance to service facilities from free ways and
busy thoroughfares.
Steps in Layout Planning and Design
 Layout Tools and Techniques
Plant layout template is a scaled representation of a physical
object in a layout.

Templates

Operations Sequence Analysis

Operations sequence analysis helps arrange departments

graphically analyzing the layout problem.

Line balancing is the study that nearly equally divides the

work to be done among the workers and minimizes the
number of employees.
 Criteria for Selection and Design of
Layouts
Material handling cost and worker effectiveness are the
two criteria used for selecting layout design.
The various methods used for selecting the best layout
among several alternatives layouts are
1. Travel Chart Method
2. Load-Distance Analysis Method
3. Systematic Layout Planning
 Travel Chart Method:
Also known as form-to-chart method.
Is helpful to analyzing the overall flow
of material

It shows the number of moves made

between departments and identifies the most
active departments.

The solution is obtained by the trial and

error method.
 Load-Distance Analysis Method:

Is useful in comparing alternative layouts to identify the

one with least product or material travel time.

This method helps to minimize transportation costs by

evaluating alternative layouts.

The layout with the lowest total is the best choice

 Systematic Layout Planning:

The amount of material that flows between departments may

not be critical for developing a good facility layout.

This method develops a chart known as relationship chart

which rates the relative importance of locating.

The importance ratings are indicated by code letters a,e,i,o,u,x

is known as nearness codes, which indicate the following
degrees of importance
Nearness Of Codes Degrees of Comparison

a Absolutely necessary

e Very important or essential

i Important

o Ordinary importance

u Undesirable
Reason Code Reason

1 Use of common personnel

2 Noise isolation

3 Safety Purposes

4 Ease of supervision

5 Common equipment

6 Type of customer