3. Unit IV: Aggregate Production
Planning (APP)
• Aggregate Production Planning (APP) - Strategies,
• Master Production Scheduling – Linkages with APP,
• Evolution of ERP – Developing MRP Logic - Bill of
Materials (BoM),
• Lot Sizing Rules, Inventory Management
6. Aggregate Production Planning
Why is it necessary?
• Demand fluctuations
• Capacity fluctuations
• Difficulty level in altering production rates
– Production systems are complex and varying the rate of
production requires prior planning and co-ordination with
supplier and distributor
• Benefits of multi-period planning
Aggregate Production Planning is done in an organisation to match
the demand with the supply on a period-by-period basis in a cost
effective manner
7. Business Planning and Aggregate Planning
• Business plan is strategic in nature and addresses the following
questions:
– Should we meet the projected demand entirely or a portion of the
projected demand?
– What are the implications of this decision on the overall competitive
scenario and the firm’s standing in the market?
– How is this likely to affect the operating system and planning in
other functional areas of the business such as marketing and
finance?
– What resources should we commit to meet the chosen demand
during the planning horizon?
• Aggregate production planning seeks to translate business plans to
operational decisions
8. Business Plan
Marketing Plan Financial Plan
Production Plan
(rough cut capacity)
Master Production Schedule
Materials
Requirement Plan
Capacity
Requirement Plan
Detailed Scheduling
Shop Floor Control
Level 1
Level 2
Level 3
Planning Hierarchies in Operations
1-5 years
3-12 Months
1-3 Months
Aggregate Production Schedule
10. Aggregate Production Planning
• Aggregate planning typically focuses on manipulating several
aspects of operations-aggregate production, inventory and
personnel levels -to minimize costs over some planning
horizon while satisfying demand and policy requirements.
• Intermediate term planning is normally performed in terms
of aggregate production units and resources rather than
for individual products.
• This approach takes the demand pattern as given (using
forecasts) and focuses on minimizing costs.
11. Aggregate Production Plan
Months January February
1,500 1,200
Aggregate Plan
(Shows the total
quantity of amplifiers)
(Shows the specific type and
produced)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
quantity of amplifier to be
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100
12. Simple planning Strategies
• During periods of low demand the company’s normal production capacity
exceeds demand,
• During periods of high demand capacity is less than demand.
• Two simple strategies are obvious
1. The chase demand strategy
2. The level workforce strategy
13. The aggregate planning process
Determine demand for each period.
Determine capacity for each period
Identify company, departmental, or union policies that are pertinent.
Determine unit costs for units produced.
Develop alternative plans and compute the cost for each.
If satisfactory plans emerge, select the one that best satisfies objectives.
14. Aggregate Production Planning
Decision Variables: An illustration
• The decisions involve
– Amount of resources (productive capacity and labour hours) to be
committed
– Rate at which goods and services needs to be produced during a
period
– Inventory to be carried forward from one period to the next
• An example from Garment Manufacturing
– Produce at the rate of 9000 metres of cloth everyday during the months of
January to March
– Increase it to 11,000 metres during April to August
– Change the production rate to 10,000 metres during September to
December
– Carry 10% of monthly production as inventory during the first 9 months of
production.
– Work on a one-shift basis throughout the year with 20% over time during
July to October
15. Aggregate Production Planning:
Alternatives
Description of the alternative Costs
Alternatives for
managing demand
Reservation of capacity Planning and Scheduling costs
Influencing Demand
• Special Tariffs
• Differential Discount Structures
• Limited period al offers
Marketing oriented costs
Alternatives for
managing supply
Inventory based alternatives
Stock out, Backordering/Backlogging
Inventory Carrying/holding costs
(a) Build Inventory
Capacity Adjustment Alternatives
(a) Varying Working Hours : Over
Time/Under Time OT premium, Lost productivity
(b) Vary no. of shifts Shift change costs
(c) Hire/Lay-off workers Training/Hiring costs, Morale issues
Capacity augmentation alternatives
(a) Sub-contract/Outsource Transaction costs for sub-contract
(b) De-bottleneck Annualised de-bottlenecking cost
(c) Add new capacity Annualised cost of new capacity
16. Resource Requirements Planning (RRP)
Master Production
Scheduling (MPS)
Material Requirements
Planning (MRP)
Capacity Requirements
Planning (CRP)
Aggregate
Planning
Resource
Requirements
Planning
Three important techniques for disaggregating aggregate plans into
executable operations plans:
Master production scheduling (MPS)
Materials requirements planning (MRP)
Capacity requirements planning (CRP)
Material Requirements
Planning (MRP)
Aggregate
Planning
Master Production
Scheduling (MPS)
17. Aggregate Planning, MPS and MRP
• Aggregate Planning aims at an overall plan without distinguishing
products.
• But, master production plan/schedule (MPS) aims to prepare a
product wise schedule for manufacturing products which is consistent
with the aggregate planning.
• This process of generating a feasible master production schedule is
known as disaggregation planning.
• MPS provides the top-level input requirements to MRP (Material
Requirement Planning) system.
• MRP is a technique for determining the quantity and timing for the
acquisition of dependent items needed to satisfy the MPS.
18. Master Production Schedule (MPS)
▶A master production schedule (MPS) is a statement of how
many finished items are to be produced and when they are
to be produced.
▶ Must be in accordance with the aggregate production plan
▶ MPS is established in terms of specific products, it
disaggregates the aggregate plan
▶ As the process moves from planning to execution, each
step must be tested for feasibility
▶ The MPS is a statement of what is to be produced, not a
forecast of demand
▶ Main input to materials requirements planning
20. Master Production Schedule (MPS)
Can be expressed in any of the following terms:
1. A customer order in a job shop (make-to-order) company
2. Modules in a repetitive (assemble-to-order or forecast)
company
3. An end item in a continuous (stock-to-forecast) company
21. Master production plan/schedule (MPS)
• Statement of the volume and timing of the end-products to be
made.
• Chase master production schedule record
• Level master production schedules
23. Material Requirements Planning (MRP)
• Material Requirements Planning (MRP)
– Is a computerized information system that aids in the planning of materials
in organization
– MRP systems exploit certain unique characteristics of the production items
– Utilize information on lead time, inventory status and master production
schedule to make material available exactly at the time of requirement
– The output of an MRP system is a schedule for obtaining raw materials and
purchased parts, a detailed schedule for manufacturing and controlling
inventories, and financial information that drives cash flow, budget, and
financial needs.
• The logic applied to plan materials could be extended to other
resources required in any operations system.
• Therefore, these planning methodologies can be broadly defined as
resources planning
24. Material Requirements Planning (MRP)
• A logical, easily understood approach to the problem of
managing the parts, components, and materials needed to
produce end items
– How much of each part to obtain?
– When to order or produce the parts?
• Dependent demand drives the MRP system
25. MRP Structure
Output Reports
MRP by
period report
MRP by
date report
Planned order
report
Purchase advice
Exception reports
Order early or late
or not needed
Order quantity too
small or too large
Data Files
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Master
production schedule
Material
requirement
planning
programs
(computer and
software)
26. Planning for Materials :
Two types of inventories
• Two types of inventories exist in any operations system
– Operating Inventory:
• Denotes all the resources (broadly of material and capacity) that
are available for the operating system to consume in the
production process
– Example: Number of steering wheels required for a day’s production
of 5,000 cars in Maruti Plant
• Exhibit Dependant demand attributes
– Distribution Inventory:
• Meant for market consumption
• Exhibit Independent demand attributes
– Example: Number of Alto’s to be stocked to meet a day’s demand
• They differ in their demand attributes & therefore require
alternative planning methodologies
27. E(1
)
Independent vs. Dependent Demand
Independent Demand (Demand for the final end-
product or demand not related to other items)
Dependent
Demand
(Derived demand
items for
component
parts,
subassemblies,
raw materials,
etc)
Finished
product
Component parts
28. Key Differences Between Dependent Demand
and Independent Demand Items
Attribute Dependant Demand Independent Demand
Nature of Demand No uncertainty; Dependant;
Parent - Child relationships
cause dependency
Considerable Uncertainty,
Independent
Goal Make availability meet
requirements exactly
Make availability meet
estimated demand for a
targeted service level
Service Level 100% a necessity, Feasible to
achieve
100% is not feasible
Demand Occurrence Often lumpy Often continuous
Estimation of demand By Production Planning By Forecasting
How much to order?
(Quantity)
Known with certainty Estimated based on past
consumption
When to order? (Timing) Very critical, can be
estimated
Can not be answered directly
29. Developing MRP Logic :
Basic Building Blocks
1. Existence of multiple levels of dependency - Explosion
2. Product Structure – Bill of Materials (BOM)
3. Time phasing the requirement
4. Determining Lot Size
30. MRP Logic - terminologies
1. The iterative process of computing all requirements at a level and then
moving down the level is known as explosion in MRP
1. The requirements for end items are retrieved from the master schedule.
These are referred to as “gross requirements” by the MRP program.
2. On-hand balance and schedule of orders are used to calculate the “net
requirement.”
3. Net requirements data are used to calculate when orders should be
received to meet these requirements.
4. Planned order releases are generated by offsetting to allow for lead time.
5. Specify the quantity and time an order is to be received.
6. Repeat for all items in bill of materials.
31. MRP Logic - terminologies
2. Product Structure and Bill of Material (BOM)
• Product Structure graphically depicts the dependency relationships among
various items that make up the final product
• A Bill of Material (BOM) is a list of all materials needed to assemble or put
together one unit of the final product
• BOM is an alternative representation of a product structure.
• The data set also includes a short description and the unit of measure for each
part.
• BOM exists in various formats
– Single level BOM
– Indented BOM
– Modular BOM
37. Material Requirement Planning
3. Time Phasing the Requirement
• The computing of the requirement of items is based on simple arithmetic.
• Let us consider a two-month period as the planning horizon. Let us use the
following notations:
Gross requirement for an item during the period: A
Inventory of the item available for the period: B
Net requirement of an item during the period: C
C = A- B
Lead Times for Components
The time required to purchase, produce, or assemble an item
For production – the sum of the move, setup, and assembly or run times
For purchased items – the time between the recognition of a need and when
it's available for production
39. Material Requirement Planning
4. Determining Lot Size
• Lot sizing is the process of determining the size of the order quantities for
each component in a product.
• The lot-sizing decision also affects the lead time required and involve
balancing the carrying and ordering costs.
1. Lot-for-lot (LFL)
42. An MRP record consists of the following:
• Gross requirements are the total demand for an item derived from all of its
parents. Scheduled or planned receipts (S/PR) are orders that are due or planned
to be delivered.
• Scheduled receipt specifies the quantity and time an order is to be received.
• Planned order release specifies the planned quantity and time an order is to be
released to the factory or a supplier.
• Projected on-hand inventory is the expected amount of inventory on-hand at
the beginning of the time period considering on-hand inventory from the previous
period plus scheduled receipts or planned order receipts minus the gross
requirements.
Inventory Status Records
43. Material Requirement Planning
Example-1
Developing a Product Structure and Gross requirements.
• Speaker Kits, Inc., packages high-fidelity components for mail order. Components for the top-of-
the-line speaker kit, “Awesome” (A), include 2 Bs and 3 Cs.
• Each B consists of 2 Ds and 2 Es. Each of the Cs has 2 Fs and 2 Es. Each F includes 2 Ds and 1 G. It
is an awesome sound system. As we can see, the demand for B, C, D, E, F, and G is completely
dependent on the master production schedule for A—the Awesome speaker kits.
• Given the preceding information, construct a product structure and “explode” the requirements.
Table-1 Lead Times forAwesome
Speaker Kits (As)
COMPONENT LEAD TIME
A 1 week
B 2 weeks
C 1 week
D 1 week
E 2 weeks
F 3 weeks
G 2 weeks
Using this information, from example – 1 and table – 1,
construct the Gross Material Requirements plan
with a production schedule that will satisfy the
demand of 50 units of A by week 8.
45. Gross Requirements Plan
TABLE 2
Gross Material Requirements Plan for 50 Awesome Speaker Kits (As)
with Order Release DatesAlso Shown
WEEK LEAD
TIME
1 2 3 4 5 6 7 8
A. Required date
50
50
1 week
Order release date
B. Required date
100
100
2 weeks
Order release date
C. Required date
150
150
1 week
Order release date
E. Required date
200 300
200 300
2 weeks
Order release date
F. Required date
300
300
3 weeks
Order release date
D. Required date
600
600
200
200
1 week
Order release date
G. Required date
300
300
2 weeks
Order release date
Material Requirement Planning
46. Material Requirement Planning
Example-1
▶ Given the following on-hand inventory, speaker kits, Inc., now wants to
construct a net requirements plan.
▶ The gross requirement remains 50 units in week 8, and components
are shown in the product structure in example 1.
ITEM ON HAND
A 10
B 15
C 20
D 10
E 10
F 5
G 0
47. Net Requirements
Plan
ITEM ON HAND ITEM ON HAND
A 10 E 10
B 15 F 5
C 20 G 0
D 10
2 × number of As = 80
3 × number of As = 120
48. Net Requirements Plan
2 × number of Cs = 200
1 × number of Fs = 195
2 × number of Bs = 130
2 × number of Cs = 200
2 × number of Bs = 130
2 × number of Fs = 390
52. Mmanufacturing Resource Planning-(MRP-II)
• Manufacturing Resource Planning (MRP II) is an integrated information
system used by businesses.
• MRP II is an extension of materials requirement planning (MRP).
• Both MRP and MRP II are seen as predecessors to Enterprise resource
planning (ERP)
• A typical MRP II system will consist of the following modules:
• Business planning
• Purchasing
• Forecasting/demand management
• Inventory control
• Order entry and management
• Shop-floor control
• Master production scheduling (MPS)
• Distribution requirements planning (DRP)
• Material requirements planning (MRP)
• Service requirements planning (SRP)
• Capacity requirements planning (CRP)
• Accounting
53. Enterprise Resources Planning (ERP)
Enterprise resource planning is an organization-wide
planning system that utilizes some common software and an
integrated database for planning and control purposes.
54. Enterprise Resources Planning (ERP)
EVOLUTION OF ERP
• The history of ERP can be traced back to the 1960’s, when the
focus of systems was mainly towards inventory control.
• Most of the systems software was designed to handle
inventory based in traditional inventory concepts.
• The 1970’s witnessed a shift of focus towards MRP (Material
Requirement Planning).
• Then, in 1980’s came the concept of MRP-II i.e., the
Manufacturing Resource Planning which involved optimizing
the entire plant production process.
• This gave birth to ERP (Enterprise Resource Planning) which
covered the cross-functional coordination and integration in
support of the production process.
55. Enterprise Resources Planning (ERP)
• An Enterprise is a group of people with a common goal, which
has certain resources at its disposal to achieve that goal. The group
has some key functions to perform in order to achieve its goal.
• Resources included are money, manpower, materials, and all the
other things that are required to run the enterprise.
• Planning is done to ensure that nothing goes wrong. Planning is
necessary functions in place and more importantly, putting them
together.
• Therefore, Enterprise Resource Planning or ERP is a method of
effective planning of all the resources in an organization.
58. Enterprise Resources Planning (ERP)
▶ ERP systems have the potential to
▶ Reduce transaction costs
▶ Increase the speed and accuracy of information
▶ Facilitates a strategic emphasis on JIT systems
and supply chain integration
▶ Can be expensive and time-consuming to install
59. ERP in the Service Sector
▶ ERP systems have been developed for health care,
government, retail stores, hotels, and financial services
▶ Also called efficient consumer response (ECR)
systems in the grocery industry
▶ Objective is to tie sales to buying, inventory, logistics,
and production
60. Inventory
Management
• Inventory is the stock of any item or resource used in an
organization and can include:
– Raw materials, finished products, component parts, supplies, and
work-in-process
• It refers to any idle resource that can be put to some future
use.
▶ One of the most expensive assets of many companies
representing as much as 50% of total invested capital.
▶ Less inventory lowers costs but increases chances of running
out.
▶ More inventory raises costs but always keeps customers
happy.
61. Inventory is created to compensate for the differences in
timing between supply and demand
Input
process
Inventory
Output
process
Rate of supply from
input process
Rate of demand from
output process
Inventory
Inventory is created to compensate for the differences in
timing between supply and demand
63. • Buffer inventory: An inventory that compensates for unexpected
fluctuations in supply and demand; can also be called a safety
inventory.
• Cycle inventory: Average amount of inventory used to satisfy
demand between shipments. Depends on lot size
• De-coupling inventory: The inventory that is used to allow work
centres or processes to operate relatively independently.
• Anticipation inventory: Inventory that is accumulated to cope
with expected future demand or interruptions in supply.
• Pipeline inventory: The inventory that exists because material
cannot be transported instantaneously.
Types of Inventory
64. Functions of Inventory
• To meet anticipated customer demand
• To smooth production requirements
• To decouple operations
• To protect against stock outs
• To take advantage of order cycles
• To hedge against price increases
• To permit operations.
• To take advantage of quantity discount
65. Inventory management & control
• Inventory management involves the: “Development
and administration of policies systems and
procedures, which will minimize total cost related to
inventory decisions and related functions such as
production scheduling, purchasing and traffic”
66. Day-to-day inventory decisions
• In managing the system, operations managers are involved in three
major types of decision:
• How much to order. Every time a replenishment order is placed,
how big should it be (sometimes called the volume decision)?
• When to order. At what point in time, or at what level of stock,
should the replenishment order be placed (sometimes called the
timing decision)?
• How to control the system.
• What procedures and routines should be installed to help make
these decisions?
• Should different priorities be allocated to different stock items?
• How should stock information be stored?
67. Relevant Inventory Costs
Item Cost Includes price paid for the item plus other direct costs
associated with the purchase
Holding Costs Include the variable expenses incurred by the plant related to
the volume of inventory held . We can determine unit
holding costs by examining three cost components: capital
costs, storage costs, and risk costs.
Capital Costs The higher of the cost of capital or the opportunity cost for
the company
Storage costs Included the variable expenses for space, workers, and
equipment related to the volume of inventory held
Risk costs Obsolescence, damage, deterioration, theft, insurance and
taxes
Ordering Cost Fixed, constant dollar amount incurred for each order placed
Shortage Costs Loss of customer goodwill, back order handling, and lost sales
70. Inventory control Techniques
• EOQ Technique:
• Economic order quantity is one of the techniques of inventory
control which minimizes total holding and ordering costs for
the year.
• EOQ is the order size at which the total cost, comprising
ordering cost and plus carrying cost is the least.
72. Economic Order Quantity (EOQ)
Annual
Cost
($)
Higher
Smaller Larger
Order Quantity
Lower Balancing Carrying against Ordering Costs
Minimum
TotalAnnual
Costs
TotalAnnual
Costs
Annual
Carrying Costs
Annual
Ordering Costs
73. Economic Order Quantity
• Assumptions of the EOQ Model
1. Demand is known and constant
2. Lead time is known and constant
3. Receipt of inventory is instantaneous
4. Quantity discounts are not available
5. Variable costs are limited to: ordering cost and carrying (or
holding) cost
6. If orders are placed at the right time, stockouts can be
avoided
74. Finding the Optimal Order Quantity
Parameters:
Q* = Optimal order quantity (the EOQ)
D = Annual demand
Co = Ordering cost per order
Cc = Carrying (or holding) cost per unit per yr
P = Purchase cost per unit
Finding Q*
Recall that at the optimal order quantity (Q*):
Carry cost = Ordering cost
(D/Q*) x Co = (Q*/2) x Cc
Rearranging to solve for Q*:
Q* =
(2DCo /Cc)
75. EOQ Example: Sumco Pump Co.
Buys pump housing from a manufacturer and sells to retailers
D = 1000 pumps annually
Co = $10 per order
Cc = $0.50 per pump per year
Q* = ? and N (No. of Orders)?
Solution: Q* =
Q* = = 200 pumps
No. of Orders = D/ Q* = 1000/200 = 5 Orders
Total Cost = (D/Q*) x Co + (Q*/2) x Cc
= (5 X 10) + (100 X 0.50) = $ 100
(2DCo /Cc)
(2*1000*10/ 0.5)
76. • The classification of existing inventory is based on
annual consumption and the annual value of the items.
• The quantity of inventory item consumed during the
year is obtained and multiplied by unit cost to obtain
annual usage cost.
• The items are then arranged in the descending order of
such annual usage cost.
• A Pareto analysis can be done to segment items into
value categories depending on annual dollar volume
• A Items – typically 20% of the items accounting for
80% of the inventory value-use Q system
• B Items – typically an additional 30% of the items
accounting for 15% of the inventory value-use Q or P
• C Items – Typically the remaining 50% of the items
accounting for only 5% of the inventory value-use P
ABC analysis
