Page 167 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Entrepreneurship and Small Business Management

Notes Following things need to be considered for capacity planning:
Demand forecasting: Forecasting the demand for future will give an idea about the requirements
of the production/operation.

Aggregate Planning: Capacity planning is also dependent on overall aggregate planning of
production/operation which involves decisions on material requirement planning, production
scheduling and inventory management.
Overall business strategy: Capacity planning is dependent on overall business strategy of
expansion, contraction or constant production/operation. Though it is also dependent on market
demands, finally the overall vision of the entrepreneur guides capacity planning.
Availability of Manpower: Capacity planning is also dependent on the availability of manpower
in that area (for expansion) and labor laws in relation to retrenchment, layoff, overtime etc.

11.1.2 Inventory Management

Continuous a production process may be, however effective production planning may be, there
is always some room for unpredictable rise/fall in demand and/or in availability of raw material
and/or lead-time between machines due to breakdowns on one machine. Therefore, inventory
is to be managed. Inventory is managed at three levels:

Raw material inventory: The stock of raw material is kept to meet the unforeseen changes
in the market forces.
Goods in process inventory: Inventory is managed at each level of work-in-progress.

Finished goods inventory: Inventory is also managed of the final goods.

Notes Inventory is managed for the smooth flow of work and for making up the
uncertainties in the availability of raw material and in the demand of the final goods. But
keeping inventory involves costs; moreover, it holds working capital and also occupies
space and therefore inventory needs to be planned.

There are two types of inventories:
(a) Normal inventory: The inventory ensuring availability of materials at different stages in
normal conditions is called normal inventory.
(b) Buffer inventory: The inventory ensuring availability of materials at the time of uncertainty
is called buffer inventory.
But holding inventory involves cost and therefore inventory of only adequate amount should
be maintained at each level. The following things should be kept in mind:

When to Order Inventory? (Reorder Point)
(a) Order Lead Time: Average time between placing order and receiving goods.
(b) Usage Rate: The average rate at which inventory is drawn over a period.
(c) Reorder Point: Level at which new order must be placed so that inventory is replenished
before the stock runs out.

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