Supply Chain Management

Chapter 8
Aggregate Planning

Sharfuddin Lisan
BBA,MBA-SCM(Canada), MHRM(DU), PGDSCM(Malaysia),
CertSCM(Switzerland), CSCP(Canada),SCEM
lisanbd@ymail.com, info@bihrm.org
01731822888

8-1

Production System
 In a broader sense, a production system is anything that takes inputs
and transforms them into outputs.

 Production system is the collection of people, equipment, and

procedures organized to accomplish the operations of a company (or
other organization).
– Manufacturing
– Service

8-2
 Production Planning
 Production Planning is the analysis, design and management of
production systems.
Objective: Transform a variety of inputs (such as raw material, labor,
capital, etc.) into outputs (goods and services) in a manner that is
both efficient in using resources and effective in achieving high
customer satisfaction.
 In today’s competitive business environment it is important to know
methods and specific analysis tools for operational decisions to
effectively manage these systems.

8-3

Production Planning Decisions

LL-LR-LC-LS-LS(U)-LL(U)-L(F)-SL-FC-QC-PCK
OL-OP-BLD-OR-JD: Production Line
 Long-term (Strategic) Decisions:
– Top Management Decisions
– 3-10 years
– Decisions: Capacity, Product, Supplier needs, Quality Policy

 Intermediate-term (Tactical) Decisions:

– Middle Management Decisions
– 6 months - 3 years
– Decisions: Work-force levels, processes, production rates, inventory
levels, contracts with suppliers, quality level, quality costs

 Short-term (Operational) Decisions:

– Operational Management Decisions
– 1 week - 6 months
– Decisions: Allocation of jobs to machines, overtime, undertime,
subcontracting, delivery dates for suppliers, product quality
8-4
 Production Planning and Control
General Framework IE Time Study - Motion study

Resources Aggregate Demand

Planning Planning Management

Rough-cut Master Production

Capacity Scheduling
Planning

Detailed Detailed Material

Capacity Planning
Planning

Material and
Capacity Plans

Shop Floor Purchasing

Systems

8-5

Role of Aggregate Planning

in a Supply Chain
Aggregate planning:
– process by which a company determines levels of capacity,
production, subcontracting, inventory, stockouts, and pricing
over a specified time horizon
– goal is to maximize profit
– decisions made at a product family level
– time frame of 3 to 18 months
– how can a firm best use the facilities it has?

8-6
 Role of Aggregate Planning
in a Supply Chain
Specify operational parameters over the time horizon:
– production rate Transport cost, Lost sales, Satisfaction
– workforce
– overtime
– machine capacity level
– Subcontracting
– Backlog
– inventory on hand
All supply chain stages should work together on an
aggregate plan that will optimize supply chain
performance
8-7

The Aggregate Planning Problem

Given the demand forecast for each period in the
planning horizon, determine the production level,
inventory level, and the capacity level for each period
that maximizes the firm’s (supply chain’s) profit over
the planning horizon
Specify the planning horizon (typically 3-18 months)
Specify the duration of each period
Specify key information required to develop an
aggregate plan

8-8
 Information Needed for
an Aggregate Plan (Input)
Demand forecast in each period (Retailer-Dealer-Customer)
Production costs
– labor costs, regular time ($/hr) and overtime ($/hr)
– subcontracting costs ($/hr or $/unit)
– cost of changing capacity: hiring or layoff ($/worker) and
cost of adding or reducing machine capacity ($/machine)
Labor/machine hours required per unit
Inventory holding cost ($/unit/period)
Stockout or backlog cost ($/unit/period)
Constraints: limits on overtime, layoffs, capital
available, stockouts and backlogs
8-9

Outputs of Aggregate Plan

Production quantity from regular time, overtime, and
subcontracted time: used to determine number of
workers and supplier purchase levels
Inventory held: used to determine how much warehouse
space and working capital is needed
Backlog/stockout quantity: used to determine what
customer service levels will be
Machine capacity increase/decrease: used to determine
if new production equipment needs to be purchased
A poor aggregate plan can result in lost sales, lost
profits, excess inventory, or excess capacity
8-10
 Fundamental Tradeoffs in
Aggregate Planning
Capacity (regular time, overtime, subcontract)
Inventory
Backlog / lost sales
Basic Strategies
Chase strategy
Time flexibility from workforce or capacity
Level strategy

8-11

Aggregate Planning Strategies

Trade-off between capacity, inventory,
backlog/lost sales
Chase strategy – using capacity as the lever
Time flexibility from workforce or capacity
strategy – using utilization as the lever
Level strategy – using inventory as the lever
Mixed strategy – a combination of one or more of
the first three strategies

8-12
 Chase Strategy
Production rate is synchronized with demand by
varying machine capacity or hiring and laying off
workers as the demand rate varies
However, in practice, it is often difficult to vary
capacity and workforce on short notice
Expensive if cost of varying capacity is high
Negative effect on workforce morale
Results in low levels of inventory
Should be used when inventory holding costs are high
and costs of changing capacity are low
8-13

Level Strategy
Maintain stable machine capacity and workforce
levels with a constant output rate
Shortages and surpluses result in fluctuations in
inventory levels over time
Inventories that are built up in anticipation of future
demand or backlogs are carried over from high to low
demand periods
Better for worker morale
Large inventories and backlogs may accumulate
Should be used when inventory holding and backlog
costs are relatively low
8-14
 Time Flexibility Strategy
Can be used if there is excess machine capacity
Workforce is kept stable, but the number of hours
worked is varied over time to synchronize production
and demand
Can use overtime or a flexible work schedule
Requires flexible workforce, but avoids morale
problems of the chase strategy
Low levels of inventory, lower utilization
Should be used when inventory holding costs are
high and capacity is relatively inexpensive
8-15

Comparison of production planning

strategies
Item Chase Demand Level Capacity

Labor skill required Low High

Job discretion Low High

Working conditions Sweatshop Pleasant

Training required Low High

Labor turnover High Low

Supervision required High Low

8-16
 Aggregate Planning Problem

Costs in Aggregate Planning:

•Material Cost
•Inventory Holding Cost
•Shortage cost
•Regular Time Costs
•Overtime and Subcontracting Costs
•Hiring and Firing Costs
•Idle Time Costs
•Backlogging costs
•Costs associated with lost sales
•Control system cost.
8-17

Abc ltd has a backlog of 250 barrels of Tomato

sauce at the end of December. Demand expected
400 in January, 500 in February, 550 in March.
Each worker can produce 50 barrels. With regular
wages around 1000/- per month. Hiring cost 2500/-
, Firing cost 5000/-. Backlog costs is 25/- per unit ,
there is no cost with carrying the inventory.
Develop a production plan and determine the plan.

8-18
 Abc ltd has a backlog of 250 barrels of Tomato sauce at the end of
December. Demand expected 400 in January, 500 in February, 550 in
March. Each worker can produce 50 barrels. With regular wages around
1000/- per month. Hiring cost 2500/-, Firing cost 5000/-. Backlog costs is
25/- per unit , there is no cost with carrying the inventory . Develop a
production plan and determine the plan. Level strategy
January February March Backlog
..
Demand. 400. 500. 550 250 400+500+550+25
0= 17000/3=
Production. 567 567 567
Output-forec 167 67 17
Beg Inventory. 0 0 0
Ending. 0 0 1
Backlog. 83 16 0

Regular cost
68,475
For workers. 12x1000 12x1000 12x1000 = 66000
12x2500

Back order 83x25 16x25 0 = 2475

8-19

Abc ltd has a backlog of 250 barrels of Tomato sauce at the end of
December. Demand expected 400 in January, 500 in February, 550 in
March. Each worker can produce 50 barrels. With regular wages around
1000/- per month. Hiring cost 2500/-, Firing cost 5000/-. Backlog costs is
25/- per unit , there is no cost with carrying the inventory . Develop a
production plan and determine the plan. Chase strategy
January February March Backlog
..
Demand. 400 500. 550 250
Production. 650 500 550
Output-forec 250 0 0
Beg Inventory. 0 0 0
Ending. 0 0 0
Backlog. 0 0 0

Regular cost
84,000
For workers. 13x1000 10x1000 11x1000 =34000
13x2500 3x5000 1x2500 =50,000
Back order 0 0 0
8-20
Abc ltd has a backlog of 250 barrels of Tomato sauce at the end of
December. Demand expected 400 in January, 500 in February, 550 in
March. Each worker can produce 50 barrels. With regular wages around
1000/- per month. Hiring cost 2500/-, Firing cost 5000/-. Backlog costs is
25/- per unit , there is no cost with carrying the inventory . Develop a
production plan and determine the plan. Level strategy
January February March Backlo
.. g
Demand. 400. 500. 550 250 400+500+550+250=
1700/3= 567
Production. 567 567 567
Output-forec 167 67 17
Beg Inventory. 0 0 0
Ending. 0 0 1
Backlog. 83 16 0

Regular cost
68475
For workers. 12x1000+25 12x1000 12x1000 = 66000
00x12
Back order 83x25 16x25 0 = 2475 8-21

Abc ltd has a backlog of 250 barrels of Tomato sauce at the end of
December. Demand expected 400 in January, 500 in February, 550 in
March. Each worker can produce 50 barrels. With regular wages around
1000/- per month. Hiring cost 2500/-, Firing cost 5000/-. Backlog costs is
25/- per unit , there is no cost with carrying the inventory . Develop a
production plan and determine the plan. Chase strategy
January February March Backlog
..
Demand. 400 500. 550 250
Production. 650 500 550
Output-forec 250 0 0
Beg Inventory. 0 0 0
Ending. 0 0 0
Backlog. 0 0 0

Regular cost

For workers. 13x1000 10x1000 11x1000 =

13x2500 3x5000 1x2500 84000
Back order 0 0 0
8-22
Abc ltd has a backlog of 250 barrels of Tomato sauce at the end of
December. Demand expected 400 in January, 500 in February, 550 in
March. Each worker can produce 50 barrels. With regular wages around
1000/- per month. Hiring cost 2500/-, Firing cost 5000/-. Backlog costs is
25/- per unit , there is no cost with carrying the inventory . Develop a
production plan and determine the plan.

January. February. March

Demand. 400. 500. 550=1450+250/3
Production. 567. 567. 567
Output-forec 167. 67. . 17
Beg Inventory. 0. . 0. .0
Ending. 0. . 0. 0.
Backlog. 83. . 16. 0.

Regular cost
For workers. 12000. 12000. 12000
Back order 13*25. 16*25. 0

8-23

Production Plan : Level

Item January February March April May June Total

Production Requirement 1,850 1,425 1,000 850 1,150 1,725

Production Hours Required
(Production Requirement x 5 9,250 7,125 5,000 4,250 5,750 8,625
Hr./Unit)
Working Days per Month 22 19 21 21 22 20
Hours per Month per Worker (Working
176 152 168 168 176 160
Days x 8 Hrs/Day)
Workers Required (Production Hours
Required/Hours per Month per
53 47 30 25 33 54
Worker, must round this number
up)
New Workers Hired (Assuming opening
workforce equal to first month's 0 0 0 0 8 21
requirement of 53 workers.)
Hiring Cost (new Workers Hired x $200) $0 $0 $0 $0 $1,600 $4,200 $5,800
Workers Laid Off 0 6 17 5 0 0
Layoff Cost (Workers Laid Off x $250) $0 $1,500 $4,250 $1,250 $0 $0 $7,000
Straight Time Cost (Production Hours
$37,000 $28,500 $20,000 $17,000 $23,000 $34,500 $160,000
Required x $4)
Total Cost $172,800

8-24
 What is MRP
Material requirements planning (MRP) is a
dependent demand production planning and
inventory control system.
MRP integrates data from production
schedules (MPS) with inventory records,
scheduled receipts and the bill of materials
(BOM) to determine purchasing and
production schedules for the components
required to build a product.

© 2011 Pearson Education,

Inc. publishing as Prentice

MRP
A computer-based information
system that translates master
production schedule (MPS)
requirements for end items into
time-phased requirements for
subassemblies, components, and
raw materials.
12-26
© 2007 Pearson Education
 MRP

The MRP is designed to answer

three questions:
»What is needed? BOM
»How much is needed?
»When is it needed?

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Inc. publishing as Prentice

Benefits of MRP

1. Better response to customer

orders
2. Faster response to market
changes
3. Improved utilization of facilities
and labor
4. Reduced inventory levels

© 2011 Pearson Education,

Inc. publishing as Prentice
 Inputs to MRP
MRP is a dependent demand technique that uses
– Bill-of-Material (BOM)
– On-hand inventory data
– Expected receipts (outstanding purchase orders)
– Master Production Schedule (MPS)
– Lead Time information
to determine material requirements.

Overview of MRP
 Bills of Material (BOM)
 List of components,
ingredients, and materials
needed to make product
 Provides product structure
Items above given level are
called parents
Items below given level are
called children
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Inc. publishing as Prentice

Assembly Diagram and

Product Structure Tree

12-32
© 2007 Pearson Education
 BOM Example (Determine requirements for all
components to satisfy demand for 50 Awesome
Speaker Kits) Bill of Material
Level Product structure for “Awesome” (A)
0 A

1 B(2) Std. 12” Speaker kit C(3) Std. 12” Speaker kit w/
amp-booster

2 E(2) E(2) F(2) Std. 12” Speaker

booster assembly

Packing box and

3 D(2) installation kit of wire, G(1) D(2)
bolts, and screws

Amp-booster

12” Speaker 12” Speaker

© 2011 Pearson Education,

Inc. publishing as Prentice

BOM Example
Level Product structure for “Awesome” (A)
0 A

Part B: 2 x number of As = (2)(50) =Std. 12” Speaker100

kit w/
1 BPart
(2) Std.
C:12” 3Speaker kit
x number of As = C(3) =amp-booster 150
(3)(50)
Part D: 2 x number of Bs
+ 2 x number of Fs = (2)(100) + (2)(300) = 800
2 E(2)
Part E: 2 x number of Bs E(2) F(2) Std. 12” Speaker
booster assembly
+ 2 x number of Cs = (2)(100) + (2)(150) = 500
Part F: 2 x Packing
numberbox ofand
Cs = (2)(150) = 300
3 D(2) G(1) D(2)
Part G: 1installation
xbolts,
number kit of wire,
of Fs
and screws = (1)(300) = 300

Amp-booster

12” Speaker 12” Speaker

© 2011 Pearson Education,

Inc. publishing as Prentice
 Updating the MRP System
An MRP is not a static document
– As time passes
» Some orders get completed
» Other orders are nearing completion
» New orders will have been entered
» Existing orders will have been altered
Quantity changes
Delays
Missed deliveries

BOM Example (Determine requirements for all

components to satisfy demand for 50 Awesome
Speaker Kits)
Level Product structure for “Awesome” (A)
0 A

1 B(2) Std. 12” Speaker kit C(3) Std. 12” Speaker kit w/
amp-booster

2 E(2) E(2) F(2) Std. 12” Speaker

booster assembly

Packing box and

3 D(2) installation kit of wire, G(1) D(2)
bolts, and screws

Amp-booster

12” Speaker 12” Speaker

© 2011 Pearson Education,

Inc. publishing as Prentice
Awesome Speaker Kits

© 2011 Pearson Education,

Inc. publishing as Prentice

Awesome Speaker Kits

© 2011 Pearson Education,

Inc. publishing as Prentice
 Net Requirements Plan
(Awesome Speaker Kits)

© 2011 Pearson Education,

Inc. publishing as Prentice

Net Requirements Plan

© 2011 Pearson Education,

Inc. publishing as Prentice
 Determining Net Requirements
 Starts with a production schedule for the
end item – 50 units of Item A in week 8
 Because there are 10 Item As on hand,
only 40 are actually required – (net
requirement) = (gross requirement - on-
hand inventory)
 The planned order receipt for Item A in
week 8 is 40 units – 40 = 50 - 10

© 2011 Pearson Education,

Inc. publishing as Prentice

Determining Net Requirements

 Following the lead time offset procedure,
the planned order release for Item A is
now 40 units in week 7
 The gross requirement for Item B is now
80 units in week 7
 There are 15 units of Item B on hand, so
the net requirement is 65 units in week 7
 A planned order receipt of 65 units in
week 7 generates a planned order release
of 65 units in week 5
© 2011 Pearson Education,
Inc. publishing as Prentice
 Determining Net Requirements
 A planned order receipt of 65 units in
week 7 generates a planned order release
of 65 units in week 5
 The on-hand inventory record for Item B
is updated to reflect the use of the 15
items in inventory and shows no on-hand
inventory in week 8
 This is referred to as the Gross-to-Net
calculation and is the third basic function
of the MRP process
© 2011 Pearson Education,
Inc. publishing as Prentice

Manufacturing Resource Planning

(MRP II)
Goal: Plan and monitor all resources of a
manufacturing firm (closed loop):
– manufacturing
– marketing
– finance
– engineering
Simulate the manufacturing system
Thanks

8-45