W8 8.3 Aggregate Planning, Material Requirement Planning, and Capacity Planning Operations Management © Ana G. Méndez University System, 2012. All rights.

W8 8.3Aggregate Planning, Material Requirement

Planning, and Capacity Planning

Operations ManagementOperations

Management

© Ana G. Méndez University System, 2012. 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 StructureLot-Sizing TechniquesMRP II Closed Loop and Capacity PlanningBreakeven Point

Outline for Workshop Eight

Specific Objectives for Workshop EightAt 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 ProfitsMaximize Customer ServiceMinimize Inventory InvestmentMinimize Changes in Production Rates

(Setup cost)Minimize Changes in Workforce LevelsMaximize 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

Option Advantage Disadvantage CommentsCapacity 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

ManagementReturn oninvestmentCapital

EngineeringDesigncompletion

Aggregate production

plan

ProcurementSupplierperformance

Human resourcesManpowerplanning

ProductionCapacityInventory

MarketingCustomerdemand

FinanceCash flow

The Planning Process

Source: Reizer, J., Render, B. (2007). Operations Management . 9th 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 . 9th 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

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 shop Motorcycles Steel, Beer, BreadMachine shop Autos, TVs Lightbulbs

Fine-dining restaurant Fast-food restaurant Paper

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 schedule2. Specifications or bill of material3. Inventory availability4. Outstanding purchase orders5. 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: http://www.npd-solutions.com/bom.html.

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: http://www.npd-solutions.com/bom.html.

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 . 9th Edition. Chapter 14.

Available inventory

Net requirementsOn hand

Scheduled receipts+– =

Total requirements

Gross requirements Allocations+

The Logic of Net Requirements

Source: Reizer, J., Render, B. (2007). Operations Management . 9th 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: http://www.resourcesystemsconsulting.com/blog/wp-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

Efficiency is the percent of effective capacity achieved 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: http://www.12manage.com/methods_break-even_point.html

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: http://www.12manage.com/methods_break-even_point.html

BEPx =break-even point in unitsBEP$ =break-even point in dollarsP = price per unit (after all discounts)

x = number of units producedTR = total revenue = PxF = fixed costsV = variable cost per unitTC = total costs = F + VxTR = TC

orPx = F + Vx

Break-even point occurs when

BEPx =F

P - VBEP$ = BEPx P

= P

=

=

F(P - V)/P

FP - V

F1 - V/P

Profit = TR - TC= Px - (F + Vx)= Px - F - Vx= (P - V)x - F

Break-Even Point Analysis

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