W8 8.3 Aggregate Planning, Material Requirement Planning, and Capacity Planning Operations Management © Ana G. Méndez University System, All rights reserved.

 Aggregate Planning Process  What is Aggregate Planning?  Strategies for Aggregate Planning  Material Requirement Planning (MRP)  What is MRP?  Dependent Inventory Model Requirements  MRP Structure  Lot-Sizing Techniques  MRP II Closed Loop and Capacity Planning  Breakeven Point Outline for Workshop Eight

Specific Objectives for Workshop Eight At the end of the workshop, you will be able to: 1.Define aggregate planning. 2.Identify strategies for developing an aggregate plan. 3.Understand the graphical and mathematical planning of other aggregate plans. 4.Describe Material Requirement planning (MRP) and how to build the product structure, the gross requirements plan, the net requirements plan and lot sizes for lot, and EOQ. 5.Describe Material Resource Planning (MRP II) and the closed loop. 6.Define Capacity Planning (CP), Capacity Requirement Planning (CRP), design capacity, effective capacity, utilization and efficiency. 7.Identify and compute break even.

 Aggregate planning, also known as aggregate scheduling, is concerned with determining the quantity and timing of production for the intermediate future, often from three to eighteen months ahead.  Operations managers try to determine the best way to meet forecasted demand by adjusting production rates, labor levels, inventory levels, overtime work, subcontracting rates, and other controllable variables. Aggregate Planning

Aggregate Planning Objectives  Minimize Costs/Maximize Profits  Maximize Customer Service  Minimize Inventory Investment  Minimize Changes in Production Rates (Setup cost)  Minimize Changes in Workforce Levels  Maximize Utilization of Plant and Equipment

 Should inventories be used to absorb changes in demand during the planning period?  Should changes be accommodated by varying the size of the workforce?  Should part-timers be used, or should overtime and idle time absorb fluctuations?  Should subcontractors be used on fluctuating orders so a stable workforce can be maintained?  Should prices or other factors be changed to influence demand? Aggregate Planning Strategies

OptionAdvantageDisadvantageComments Capacity Option: Changing inventory levels Changes in HR are gradual or none. Inventory holding costs may increase. Shortages may result in lost sales. Applies mainly to production not service, operations. Varying workforce size by hiring or layoffs Avoids the costs of other alternatives. Hiring, layoff, and training costs may be significant. Used when changing inventory and size of labor pool is large. Varying production rates through overtime or idle time Matches seasonal fluctuations without hiring/training costs. Overtime premiums; tired workers; may not meet demand. Allows flexibility within the aggregate plan. Subcontracting Permits flexibility and smoothing of the firm's output Loss of quality control; reduced profits; loss of future business. Applies mainly in production settings. Using part time workers Is less costly and more flexible than full-time workers. High turnover/training costs; quality suffers; scheduling difficult. Good for unskilled jobs in areas with large temporary labor pools. Demand Option: Influencing demand Tries to use excess capacity. Discounts draw new customers Uncertainty in demand. Hard to match demand to supply exactly. Creates marketing ideas. Overbooking used in some businesses. Back ordering during high-demand periods May avoid overtime. Keeps capacity constant. Customer must be willing to wait for an order or goodwill is lots. Should this be high or should it be lost? Many companies back order. Counter seasonal product and service mixing Fully utilizes resources; allows stable workforce. May require skills or equipment outside firm's areas of expertise. Risky finding products or services with opposite demand patterns. Aggregate Planning Strategies

 Chase strategy  Match output rates to demand forecast for each period  Vary workforce levels or vary production rate  Favored by many service organizations  Level strategy  Daily production is uniform  Use inventory or idle time as buffer  Stable production leads to better quality and productivity  Hybrid or Mix  Some combination of capacity options, a mixed strategy, might be the best solution Mixed options to develop a plan

Change production plan? Master production schedule Management Return on investment Capital Engineering Design completion Aggregate production plan Procurement Supplier performance Human resources Manpower planning Production Capacity Inventory Marketing Customer demand Finance Cash flow The Planning Process Source: Reizer, J., Render, B. (2007). Operations Management. 9 th Edition. Chapter 14.

Is capacity plan being met? Is execution meeting the plan? Change master production schedule? Change capacity? Change requirements?No Execute material plans Execute capacity plans Yes Realistic? Capacity requirements plan Material requirements plan Master production schedule The Planning Process and Material Requirement Plan (MRP) Source: Reizer, J., Render, B. (2007). Operations Management. 9 th Edition. Chapter 14.

 Specifies what is to be made and when  Must be in accordance with the aggregate production plan  Inputs from financial plans, customer demand, engineering, supplier performance  As the process moves from planning to execution, each step must be tested for feasibility  The MPS is the result of the production planning process  Specifies what is to be made and when  Must be in accordance with the aggregate production plan  Inputs from financial plans, customer demand, engineering, supplier performance  As the process moves from planning to execution, each step must be tested for feasibility  The MPS is the result of the production planning process  MPS is established in terms of specific products  Schedule must be followed for a reasonable length of time  The MPS is quite often fixed or frozen in the near term part of the plan  The MPS is a rolling schedule  The MPS is a statement of what is to be produced, not a forecast of demand  MPS is established in terms of specific products  Schedule must be followed for a reasonable length of time  The MPS is quite often fixed or frozen in the near term part of the plan  The MPS is a rolling schedule  The MPS is a statement of what is to be produced, not a forecast of demand Master Production Schedule (MPS)

Stock to Forecast (Product Focus) Schedule finished product Assemble to Order or Forecast (Repetitive) Schedule modules Make to Order (Process Focus) Schedule orders Examples:Print shopMotorcyclesSteel, Beer, Bread Machine shopAutos, TVsLightbulbs Fine-dining restaurantFast-food restaurantPaper Number of end items Number of inputs Typical focus of the master production schedule Different Process Strategies

From the MPS to MRP Process Inventory Bills of Material Purchase Orders Work Orders Customer Orders Master Production Schedule Forecast Demand Material Requirement Planning

 MRP is the system that has been put in place to enable a business to manage its inventory levels. Inventory in a manufacturing business is made of the materials that go into the manufacturing process.  The benefits of MRP:  Better response to customer orders  Faster response to market changes  Improved utilization of facilities and labor  Reduced inventory levels Material Requirement Planning (MRP)

 Effective use of dependent demand inventory models requires the following: 1.Master production schedule 2.Specifications or bill of material 3.Inventory availability 4.Outstanding purchase orders 5.Lead times MRP and the Dependent Demand

 There are approximately 8 types of bills of material. Here are some of the most used ones. This shows the Parent and is typically called Product Tree, and also a Multi Level Bill This is a Summarized BOM Bills of Material (BOM) Both BOM Source: DRM Associates, PD-Trak Solutions (2010). Retrieved from:

This is a Single-Level BOM This is an Indented BOM Bills of Material (BOM) Both BOM Source: DRM Associates, PD-Trak Solutions (2010). Retrieved from:

 Accurate inventory records are absolutely required for MRP (or any dependent demand system) to operate correctly  Generally MRP systems require 99% accuracy  Outstanding purchase orders must accurately reflect quantities and scheduled receipts MRP Needs Accurate Records

 The time required to purchase, produce, or assemble an item  For production – the sum of the order, wait, move, setup, store, and run times  For purchased items – the time between the recognition of a need and the availability of the item for production Lead Times

 Starts with a production schedule for the end item  Using the lead time for the item, is determined the week in which the order should be released  This step is often called “lead time offset” or “time phasing”  From the BOM, every Item A requires X amounts of Item B  The lead time for Item B is X weeks  The timing and quantity for component requirements are determined by the order release of the parent(s)  The process continues through the entire BOM one level at a time – often called “explosion”  By processing the BOM by level, items with multiple parents are only processed once, saving time and resources and reducing confusion  Low-level coding ensures that each item appears at only one level in the BOM The Process to Determine Gross Requirements

Net Requirements Plan Source: Reizer, J., Render, B. (2007). Operations Management. 9 th Edition. Chapter 14.

Available inventory Net requirements On hand Scheduled receipts +–= Total requirements Gross requirements Allocations + The Logic of Net Requirements Source: Reizer, J., Render, B. (2007). Operations Management. 9 th Edition. Chapter 14.

 BOMs, inventory records, purchase and production quantities may not be perfect  Consideration of safety stock may be prudent  Should be minimized and ultimately eliminated  Typically built into projected on-hand inventory Safety Stock also called “Buffer” Source: Resource Systems Group (2012). Lean Six Sigma Chain. Retrieve from: content/uploads/SS.png.

 Lot-for-lot techniques order just what is required for production based on net requirements  May not always be feasible  If setup costs are high, lot-for-lot can be expensive  Economic order quantity (EOQ)  EOQ expects a known constant demand and MRP systems often deal with unknown and variable demand  Part Period Balancing (PPB) looks at future orders to determine most economical lot size  The Wagner-Whitin algorithm is a complex dynamic programming technique  Assumes a finite time horizon  Effective, but computationally burdensome Lot Sizing Techniques

Utilization and Efficiency Utilization is the percent of design capacity achieved Utilization = Actual output/Design capacity Utilization = Actual output/Design capacity Efficiency is the percent of effective capacity achieved Efficiency = Actual output/Effective capacity Efficiency = Actual output/Effective capacity

 Capacity decisions impact all 10 decisions of operations management as well as other functional areas of the organization  Capacity decisions must be integrated into the organization’s mission and strategy  Forecast demand accurately  Understand the technology and capacity increments  Find the optimum operating level (volume)  Build for change Capacity Considerations Capacity and Strategy

 Technique for evaluating process and equipment alternatives  Objective is to find the point in dollars and units at which cost equals revenue  Requires estimation of fixed costs, variable costs, and revenue  Fixed costs are costs that continue even if no units are produced  Depreciation, taxes, debt, mortgage payments  Variable costs are costs that vary with the volume of units produced  Labor, materials, portion of utilities  Contribution is the difference between selling price and variable cost Break-Even Analysis Source: 12 Manage The Executive Fast Track (2011). Break Even Point Analysis. Retrieved from:

Assumptions  Costs and revenue are linear functions  Generally not the case in the real world  We actually know these costs  Very difficult to accomplish  There is no time value of money Break-Even Point Source: 12 Manage The Executive Fast Track (2011). Break Even Point Analysis. Retrieved from:

BEP x =break-even point in units BEP $ =break-even point in dollars P=price per unit (after all discounts) x=number of units produced TR=total revenue = Px F=fixed costs V=variable cost per unit TC=total costs = F + Vx TR = TC or Px = F + Vx Break-even point occurs when BEP x = F P - V BEP $ = BEP x P = P ==F (P - V)/P F P - V F 1 - V/P Profit= TR - TC = Px - (F + Vx) = Px - F - Vx = (P - V)x - F Break-Even Point Analysis

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