Production Planning

Dr. Hyunsoo Kim

Dept. of IE
Kyonggi Univ.
Suwon, Korea

1
Aggregate Planning
 Organizations cannot predict exactly the quantity and timing of
demand for specific products or services months in advance
under the seasonal variations in demand with uneven demand

 They typically must assess their capacity needs (e.g., labor,

inventory) and costs months in advance in order to be able to
handle demand

 How do they do it?

 Use a process often referred to as aggregate planning

 The goal of aggregate planning is to achieve a production plan

that will effectively utilize the organization’s resources to match
expected demand
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 Concept of Aggregation
 Planners focus on a group of similar products or services or
entire product or service line (instead of individual product)
 Example: producing television sets (not 21”,25”, 27”)

 Aggregate planning begins with a forecast of aggregate demand

for the intermediate range

 The task of aggregate planners is to achieve rough equality of

demand and capacity over the entire planning horizon

 Effective aggregate planning requires good information

1. The available resources over the planning period must be known

2. Forecast of expected demand must be available
3. Planners must take into account any policies regarding changes
in employment levels
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 The aggregate plan will guide the more detailed planning that eventually
leads to a master schedule.

Corporate Economic,
Strategies and Competitive, Aggregate
policies and political demand
conditions forecasts

Establishes operations
Business Plan and capacity strategies

Establishes
Aggregate plan
operations capacity

Master schedule Establishes schedules

for specific products

Planning Sequence 4
The aggregate plan will guide the more detailed planning that eventually
leads to a master schedule.

‫سیاست ها و‬ ‫ شرایط‬،‫اقتصاد‬ ‫پیش بینی تقاضا‬

‫استراتژی های‬
‫رقابتی و سیاسی‬ ‫ادغامی‬
‫سازمانی‬

Establishes operations
‫برنامه کسب وکار‬ and capacity strategies

Establishes
‫برنامه ادغامی‬ operations capacity

Establishes schedules
‫زمانبندی اصلی‬
for specific products

Planning Sequence 5
 Demand and Capacity Options

 Aggregate planning strategies can be as proactive, reactive or

mixed

 Proactive strategies involve demand options: attempt to

alter demand so it matches capacity

 Reactive strategies involve capacity options: it attempt to

alter capacity so it matches demand

 Mixed strategies involve an element of each of these

approaches

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 Demand Options (proactive strategy)
 Pricing: pricing differentials are used to shift demand from peak
periods to off-peak periods (e.g., early bird specials)

 Promotion: advertising, displays, direct marketing can be

effective in shifting demand; there is much less control over the
timing of demand

 New demand: create new demand to use capacities more fully

 fast-food restaurants are open for breakfast

 Back orders: can shift demand to other periods by allowing back

orders; depends on how willing customers are to wait for delivery
 Orders are taken in one period and deliveries promised for a later
period

 Success depends on how willing customers are to wait for delivery

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 Capacity Options (Reactive strategy)

 Hire & lay off workers: changes in workforce level will have on
capacity(e.g., different # workers at different time interval)

 May be limited by the need for highly skilled workers

 Hiring & laying off entails certain costs

(hiring costs: recruitment, screening, and training)

 Overtime/slack time: less severe method for changing capacity

than hire & lay off workers

 can be applied more quickly; attractive in dealing with

seasonal demand peaks

 some companies use slack time for training

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 Capacity Options (Reactive strategy)

 Part-time workers: use off part-time workers is viable option-

much depends on nature of work; training and skills needed, and
union agreements

 Inventories: Use of finished-goods inventory allows firms to

produce goods in one period (capacity exceeds demand) and sell
the in another period (demand exceeds production capacity)

 Subcontracting: planners to acquire temporary capacity,

although it affords less control over the output and may lead to
higher costs and quality problems

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 General procedure for Aggregate Planning

1. Determine demand for each period

2. Determine capacities (regular time, overtime, subcontracting)

for each period
3. Identify company or departmental policies that are pertinent(e.g.,
maintain a safety stock of 5% of demand, maintain a reasonably
stable workforce)
4. Determine units costs for regular time, overtime,
subcontracting, holding inventories, back orders, layoffs, and
other relevant costs
5. Develop alternative plans and compute the cost for each

6. If satisfactory plans emerge, select the one that best satisfies

objectives. Otherwise return to step 5.
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 Example 1 – Aggregate Planning

 Planners for a company that makes several models of skateboards

are about to prepare the aggregate plan that will cover six periods

Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800

Regular time output cost = $2 per skateboard

Overtime output cost = $3 per skateboard
Subcontract output cost = $6 per skateboard
Inventory cost = $1 per skateboard per period on average inventory
Back orders cost = $5 per skateboard per period

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 Example 1 – Aggregate Planning

 Evaluate a plan that calls for a steady rate of regular-time

output, mainly using inventory to absorb uneven demand

 Allowing some backlog

 Overtime and subcontracting are not used because they want

steady output

 Start with zero inventory on hand in the first period, and

planned ending inventory is zero

 Level output rate of 300 units (skateboards) per period with

regular time (e.g., 1800/6 = 300)

 15 workers (each can produce 20 skateboards per period)

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 Example 1 - Solution
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1800
Output
Regulr 300 300 300 300 300 300 1800
Overtime 0 0 0 0 0 0
Subcontract 0 0 0 0 0 0
Output-Forecast 100 100 0 -100 -200 100 0

Inventory
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0?
Average 50 150 200 150 50 0 600
Backlog 0 0 0 0 100 ? 0 100

Cost
Output
Regular $600 600 600 600 600 600 $3,600
Overtime 0 0 0 0 0 0
Subcontract 0 0 0 0 0 0
Hire/lay off 0 0 0 0 0 0
Inventory $50 150 200 150 50 0 $600
Back orders $0 0 0 0 500 0 $500
Total $650 750 800 750 1150 600 $4,700

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Example 1 - Cumulative Graph

Demand
Exceeds
output

Surplus
Output

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Disaggregating the Aggregate Plan
For the production plan to be translated into meaningful terms for

production, it is necessary to disaggregate the aggregate plan

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Disaggregating the Aggregate Plan
 Master schedule: The result of disaggregating an
aggregate plan; shows quantity and timing of specific
end items for a scheduled horizon

 It reveals when orders are scheduled for production

and when completed orders are to be shipped

 Master Production Schedule (MPS) indicates the

quantity and timing of planned production, taking into
account desired delivery quantity and timing as well
as on-hand inventory

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Example: Disaggregating the Aggregate Plan

 Totals of aggregate and disaggregated units are equal

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Master Scheduling Process

Inputs Outputs
Beginning inventory Projected inventory
Master
Forecast Master production schedule
Scheduling (MPS)
Customer orders Uncommitted inventory
(Available-to-promise (ATP))

 MPS is one of the primary outputs of the master

scheduling process
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Available-to-promise (ATP) inventory

 Ex: Company that makes industrial pumps wants to prepare a

master production schedule for June and July. Marketing has
forecasted demand of 120 pumps for June and 160 pumps for
July

 These have been evenly distributed over the four weeks in each
month: 30 per week in June and 40 per week in July

June July
1 2 3 4 1 2 3 4
Forecast 30 30 30 30 40 40 40 40

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Available-to-promise (ATP) inventory

 Suppose that there are currently 64 pumps in inventory (i.e.,

beginning inventory is 64 pumps), and there are customer

orders that have been committed (booked) and must be filled

Beginning
Inventory
June July
64 1 2 3 4 1 2 3 4
Forecast 30 30 30 30 40 40 40 40
Customer 33 20 10 4 2
orders
(committed)

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 Projected On-hand Inventory
(It is computed week by week until it becomes negative)

Beginning Projected on-hand = Inventory from - Current week’s

Inventory Inventory previous week requirements

JUNE JULY
64 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders
(committed) 33 20 10 4 2
Projected on-hand
Forecast is larger than
inventory 31 1 -29
Customer orders in week 3
1-30=-29
Customer orders are
Forecast is larger than
larger than forecast in
Customer orders in week 2
week 1: 64-33=31
31-30=1 21
Determining the MPS and Projected on-
hand inventory (lot size: 70 pumps)
 Every time projected inventory becomes negative, this is a signal
that production will be needed to replenish inventory
 Another production (lot of 70 pumps) is added to the schedule

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 Projected on-hand inventory and MPS
are added to Master Schedule

Projected on-hand 41
inventory
11 41 1 31 61

MPS 70 70 70 70

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 Uncommitted Inventory

 Determine the amount of inventory that is uncommitted

and hence, available to promise

 Ex: (in the 1st week) from beginning inventory plus the MPS
(zero) subtract the sum to obtain amount that is available to
promise: 64 + 0 – (33 + 20) = 11

 This inventory is uncommitted, and it can be delivered in either

week 1 or 2 or part can be delivered in week 1 and week 2

 ATP quantity is only calculated for the first week and for other
weeks in which there is an MPS quantity.

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 ATP(Available-to-promise) inventory quantities
have been added to master schedule

 For 1st week, ATP = Beginning Inventory + MPS quantity – (‘look-ahead’ quantity)

 For weeks other than 1st week, ATP = MPS quantity – (‘look-ahead’ quantity)
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Example
 Forecast for each period is 70 units. The starting inventory is zero
 MPS rule is to schedule production if the projected inventory on hand is negative
 Production lot size is 100 units
Starting
Inv. = 0 1 2 3 4
Forecast 70 70 70 70
Customer
Orders 80 50 30 10
Projected
On-hand
Inventory

MPS

ATP

(A) (C = A - B) (MPS + C)
Period Inventory from (B) Net Inventory Projected
Previous Period Requirements* Before MPS MPS Inventory

1 0
2
3
4
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* Requirements equal the larger of forecast and customer orders in each period
Example
 Forecast for each period is 70 units. The starting inventory is zero
 MPS rule is to schedule production if the projected inventory on hand is negative
 Production lot size is 100 units
Starting
Inv. = 0 1 2 3 4
Forecast 70 70 70 70
Customer
Orders 80 50 30 10
Projected
On-hand
Inventory 20 50 80 10
MPS 100 100 100 0
ATP
? ? ? ?
(A) (C = A - B) (MPS + C)
Period Inventory from (B) Net Inventory Projected
Previous Period Requirements* Before MPS MPS Inventory

1 0 80 -80 100 20
2 20 70 -50 100 50
3 50 70 -20 100 80
4 80 70 10 0 10
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* Requirements equal the larger of forecast and customer orders in each period
 Example
 Determine the amount of inventory that is uncommitted (ATP)

Starting
Inv. = 0 1 2 3 4
Forecast
70 70 70 70
Customer
Orders 80 50 30 10
Projected
On-hand
Inventory

MPS

ATP

 ATP is only calculated for the first week and for other weeks in which there is an MPS

 ATP 1: Starting Inv. + MPS – promised amount (customer orders) =

 ATP 2: MPS – promised amount (customer orders) =
 ATP 3: MPS – promised amount (customer orders) =

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 Example
 Determine the amount of inventory that is uncommitted (ATP)

Starting
Inv. = 0 1 2 3 4
Forecast
70 70 70 70
Customer
Orders 80 50 30 10
Projected
On-hand 20 50 80 10
Inventory

MPS 100 100 100 0

ATP 201 502 603 0

 ATP is only calculated for the first week and for other weeks in which there is an MPS

 ATP 1: Starting Inv. + MPS – promised amount (customer orders) = 0 + 100 – 80 = 20

 ATP 2: MPS – promised amount (customer orders) = 100 – 50 = 50
 ATP 3: MPS – promised amount (customer orders) = 100 – (30 + 10) = 60

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Independent and Dependent Demand

Independent Demand
(uncertain)

A Dependent Demand
(certain)

B(4) C(2)

D(2) E(1) D(3) F(2)

 Example: Automobile (Independent demand) vs.

parts and raw materials (dependent 30

demand)
MRP (Material Requirements Planning)

 MRP is a planning and scheduling technique used for batch

production of assembled items

 MPR is designed to answer three questions:

 What is needed?
 How much is needed?
 When is it needed?

 Three primary inputs of MRP:

 Master (Production) Schedule: tells how much finished product
is desired and when
 BOM(bill of materials): tells the composition of a finished
product
 Inventory Record File: tells how much inventory is on hand or
on order 31
Overview of MRP

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 BOM (Bill-of-Materials)

Bill-of-Materials: A listing of all of the raw materials,

parts, subassemblies, and assemblies needed to
produce one unit of a product.
 Each finished product has its own BOM
 The listing in the BOM is hierarchical: it shows the
quantity of each item needed to complete one unit of
the following level of assembly.
 Product structure tree: Visual depiction of the
requirements in a bill of materials, where all
components are listed by levels.
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Assembly diagram and product
structure tree for chair assembly

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 A product structure tree for end item X
 A product structure tree is useful in illustrating how the BOM is
used to determine the quantities of each of the ingredients
(requirements) needed to obtain a desired number of end items.

End Item

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 Example 1
a. Determine the quantities of B, C, D, E, and F needed
to assemble one X
b. Determine the quantities of these components that
will be required to assemble 10 Xs, taking into
account the quantities on hand (i.e., in inventory) of
various components:
Component On Hand
B 4
C 10
D 8
E 60
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Example 1 – Solution

One X will require

B: 2
C: 1
D: 6
E: 28 (Note that E occurs in three places, which requirements of
24 + 2 + 2 = 28)
F: 2
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 Example 1 – Solution
10

10 Xs will require
B: 2 X 10 = 20, 20 - 8 = 16
C: 1 X 10 = 10, 10 - 10 = 0 (no lower-level components required)
D: 3 X 16 = 48, 48 - 8 = 40
E: 4 X 40 = 160, 160 - 60 = 100.
1 X 16 = 16, 100 + 16 = 116 38
F: 0
 MRP Processing

 MRP processing combines the time phasing and “explosion” into

a sequence of spreadsheet section, where each section has the
following format:

Week # Beg. 1 2 3 4 5 6 7 8
Inv
Items:

Gross
Requirements
Scheduled receipts

Projected on hand

Net requirements

Planned-order
receipts
Planned-order
releases 39
 MPR Processing
 Gross requirements
 Total expected demand during each time period without regard to amount
on hand.

 Scheduled receipts
 Open orders (orders that have been placed and are scheduled to arrive
from vendors by the beginning of a period)

 Projected on hand (inventory)

 Expected amount of inventory on hand at the beginning of each time
period (= scheduled receipts + available inventory from last period)

 Net requirements
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 Actual amount needed in each time period
 MPR Processing
 Planned-order receipts
 Quantity expected to received by the beginning of the period
 Lot-for-lot ordering: equal net requirements
 Lot-size ordering: exceed net requirements

 Planned-order releases
 Indicates a planned amount to order in each time period;
equals planned-order receipts offset by lead time.
 This amount generates gross requirements at the next
level in the assembly or production chain.

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 Inventory Requirements

 Net requirements:
Net Requirements = Gross Requirements – Available Inventory

 Available Inventory:
Available Inventory = Projected on-hand – Safety stock

– Inventory allocated to other items

In examples, unless otherwise stated, safety stock and

allocated stock are equal to zero

Net requirements = Gross requirements – projected on-hand

inventory

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 Example
 A firm that produces wood shutters and bookcases has received two orders
for shutters: one for 100 shutters and one for 150 shutters

The 100-unit order is due for delivery at the start of week 4 of the current
schedule, and 150-unit order is due for delivery at the start of week 8

Each shutter consists of two frames and four slatted wood sections. Wood
sections are made by the firm, and fabrication takes one week. The frames
are ordered and lead time is two weeks. Assembly of shutters requires one
week
There is a scheduled receipt of 70 wood sections in (at the beginning of)
week 1

 Determine the size and timing of planned-order releases necessary to

meet delivery requirements under each of these conditions:
 Lot-for-lot ordering(i.e., planned-order release equal to net requirements)
 Lot-size ordering with a lot size of 320 units for frames and 70 units for
43
wood section
 Example
 Develop a product structure tree:

Shutter
LT: 1 week

Frames(2) Wood Sections(4)

LT: 2 week LT : 1 week

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 Example
 MRP schedule with lot-for-lot ordering

 Develop a master schedule (master production schedule)

Week # Beg. Inv. 1 2 3 4 5 6 7 8
Quantity 100 150

Shutters: Gross Req. 100 150

LT=1
Week Scheduled
Receipts
Projected on
hand
Net Req. 100 150

Planned-order
receipts 100 150

Planned-order
releases 100 150

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 Lot-for-lot ordering (i.e., planned-order release equal to net requirements)
 Example
 MRP schedule with lot-for-lot ordering

100 150
times times
2 2

Frames: Gross Req. 200 300

LT=2
Week Scheduled
Receipts
Projected on hand

Net Req. 200 300

Planned-order
200 300
receipts
Planned-order 300
releases 200

 Lot-for-lot ordering (i.e., planned-order release equal to net requirements)

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 Example
 MRP schedule with lot-for-lot ordering

100 150
times times
4 4

Wood Gross Req. 400 600

Secti
Scheduled 70
on:
LT=1 Receipts
Week Projected on hand 70 70 70
Net Req. 330 600

Planned-order
330 600
receipts
Planned-order 600
releases 330

 Lot-for-lot ordering (i.e., planned-order release equal to net requirements)

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 MRP Outputs
 MRP systems have the ability to provide management with a fairly
broad range of outputs. These are often classified as primary reports,
which are the main reports, and secondary reports, which are
optional outputs

 Primary reports : production and inventory planning and control

 Planned orders - schedule indicating the amount and timing of
future orders.
 Order releases - Authorization for the execution of planned
orders.
 Changes - revisions of due dates or order quantities, or
cancellations of orders.
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 Benefits of MRP
 MRP offers a number of benefits for typical manufacturing or
assembly type of operation, including

 Low levels of in-process inventories

 Ability to keep track of material requirements

 Ability to evaluate capacity requirements generated by a

given master schedule

 Means of allocating production time

 Ability to easily determine inventory usage

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Thank you!!