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OM/U3 Topic 1 Demand Forecasting; Capacity Planning; Resources Planning

Demand forecasting is the art and science of forecasting customer demand to drive holistic execution of such demand by corporate supply chain and business management. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data and statistical techniques or current data from test markets. Demand forecasting may be used in production planning, inventory management, and at times in assessing future capacity requirements, or in making decisions on whether to enter a new market

Demand forecasting is predicting future demand for the product. In other words, it refers to the prediction of a future demand for a product or a service on the basis of the past events and prevailing trends in the present.

There are a number of reasons why demand forecasting is an important process for businesses:

  • It allows businesses to more effectively optimize inventory, increasing turnover rates and reducing holding costs.
  • It provides an insight into upcoming cash flow, meaning businesses can more accurately budget to pay suppliers and other operational costs.
  • Anticipating demand means knowing when to increase staff and other resources to keep operations running smoothly during peak periods.

Types of demand forecasting

Most demand forecasting techniques fall into one of three basic categories:

(1) Qualitative forecasting

Qualitative forecasting techniques are used when there isn’t a lot of data available to work with, such as for a relatively new business or when a product is introduced to the market. In this instance, other information such as expert opinions, market research, and comparative analyses are used to form quantitative estimates about demand.

(2) Time series analysis

When historical data is available for a product or product line and trends are clear, businesses tend to use the time series analysis approach to demand forecasting. A time series analysis is useful for identifying seasonal fluctuations in demand, cyclical patterns, and key sales trends.

The time series analysis approach is most effectively used by well-established businesses who have several years’ worth of data to work from and relatively stable trend patterns.

(3) Causal models

The causal model is the most sophisticated and complex forecasting tool for businesses because it uses specific information about relationships between variables affecting demand in the market, such as competitors, economic forces, and other socioeconomic factors. As with time series analyses, historical data is key to creating a causal model forecast.

CAPACITY PLANNING

Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products. In the context of capacity planning, design capacity is the maximum amount of work that an organization is capable of completing in a given period. Effective capacity is the maximum amount of work that an organization is capable of completing in a given period due to constraints such as quality problems, delays, material handling, etc.

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.

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Long-term capacity planning-

Over the 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. For example, if the firm’s addition of a third shift to its current two-shift plan still does not produce enough output, and subcontracting arrangements cannot be made, one feasible alternative is to add capital equipment and modify the layout of the plant (long-term actions). It may even be desirable to add additional plant space or to construct a new facility (long-term alternatives).

Short-term capacity planning-

In the short term, capacity planning concerns issues of scheduling, labour 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.

Capacity planning techniques

There are four procedures for capacity planning; capacity planning using overall factors (CPOF), capacity bills, resource profiles, and capacity requirements planning (CRP). The first three are rough-cut approaches (involving analysis to identify potential bottlenecks) that can be used with or without manufacturing resource planning (MRP) systems. CRP is used in conjunction with MRP systems.

Capacity using overall factors is a simple, manual approach to capacity planning that is based on the master production schedule and production standards that convert required units of finished goods into historical loads on each work center. Bills of capacity is a procedure based on the MPS. Instead of using historical ratios, however, it utilizes the bills of material and routing sheet (which shows the sequence or work centres required to manufacture the part, as well as the setup and run time). Capacity requirements can then be determined by multiplying the number of units required by the MPS by the time needed to produce each. Resource profiles are the same as bills of capacity, except lead times are included so that workloads fall into the correct periods.

RESOURCES PLANNING

What Are Resources?

Resources can be anything from equipment to project sites to people. Here’s a short list of some resources you’ll have to identify when planning your project:-

  • Type of team you’ll need
  • Roles and key responsibilities for each team member
  • Number of people required to fill each role
  • What equipment they’ll need and its purposes
  • Job locations or meeting rooms required
  • Types and number of equipment needed
  • Total amount of material needed.

How to Create a Resource Plan

A resource plan also has to:

  • Schedule the dates for using the planned resources. That includes when and for how long you’ll need the people assigned to your team, equipment rental, project site rental and anything else.
  • Identify the amount of resource required per project activity. Each day you’ll be using many resources. Use this part of the plan to detail them on a daily basis.
  • Create a detailed resource use schedule. Now take those durations and amounts and collect them on a calendar or timeline to make sure you’ve allocated those resources correctly.
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