Aggregate Planning

Production planning
➢ Production planning is a strategic plan which describes in detail how a
company’s products and services will be manufactured and delivered
➢ Production planning is a broad discipline that involves much more than a
focus on manufacturing or service delivery process efficiency
Production planning

➢ Production planning activities include

➢ Demand forecasting, determining capacity and timelines

➢ Selecting the optimal production options and scheduling

➢ Material requirement planning

➢ Implementing Production plan and schedule

➢ Evaluating the implemented plan

➢ Controlling/Adjusting

➢ The goal is to design the most efficient way to match demand and supply the
company’s products at the desired level of quality by developing a smoother
workflow and reducing waste
Matching supply and demand

Underutilization
Supply > Demand &
waste

Opportunity Loss
&
Supply < Demand Customer
dissatisfaction

Ideal
Supply = Demand
Supply: Capacity
➢ Capacity is the number of units a facility can hold, receive, store or produce in
a given period of time
➢ It is the upper limit on the load that an operating unit can handle. The
operating unit includes:
➢ Equipment
➢ Space
➢ Employee
Types of capacity
➢ Design capacity: The maximum capacity that can be achieved under ideal
conditions. It is a theoretical judgement based on the capability of the firm.
➢ E.g., Mileage of Bullet bike: 45 KM/liter (As per the company claim)
➢ Effective capacity: While Effective Capacity is the maximum rate of output
that can be achieved by the firm in normal condition based on the constraints
such as machine breakdown, load shading, delay etc.
➢ E.g., Mileage of Bullet bike: 30 KM/liter (Real on road test drive)
Utilization of facility
➢ Utilization of facility is the percentage of design capacity achieved
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
➢ 𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 =
𝐷𝑒𝑠𝑖𝑔𝑛 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦
➢ Where, Actual output= The rate of output actually achieved
Efficiency of facility
➢ Efficiency is the is the percentage of effective capacity achieved
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
➢ 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 =
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦

➢ Where, Actual output= The rate of output actually achieved

Calculate the utilization and efficiency of the machine
➢ The design capacity of the machine is 120 units per day and the effective
capacity is 100 units per day. Determine the utilization and efficiency of the
machine.

Actual output 80
➢ Utilization of machine = = = 67%
Design capacity 120

Actual output 80
➢ Efficiencyof machine = = = 80%
Effective capacity 100
Production planning process
Production planning: Analyzing demand
➢ Without customer demand there would be no production
➢ Production planning starts with the analysis of the demand for products,
delivery timelines and schedule etc.
➢ There are various techniques for forecasting the demand: quantitative and
qualitative technique
Production planning: Determining capacity and timelines
➢ Production planning is a pre-production activity to meet anticipated demand
on the basis of the firms capacity like machines, materials and men, and the
delivery timelines
➢ After determining the demand forecast and capacity, the firms determine the
outlook
𝐷𝑒𝑚𝑎𝑛𝑑
𝑂𝑢𝑡𝑙𝑜𝑜𝑘 =
𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦

➢ If outlook>1, then it means demand is higher than capacity (Opportunity loss)

➢ If outlook<1, then it means demand is lower than capacity (Underutilization
and waste)
Production planning process: Selecting the optimal
production options and scheduling
➢ In this stage of production planning process, the organization selects the best
production options on the basis of anticipated demand, available capacity
and then schedules the production for future
➢ A scheme of utilization of firms resources like machines, materials and men
are worked out to obtain the target production in the most economical way
Production planning process: Material requirement
planning
➢ After scheduling the production, the organization plans the material
requirements to produce the forecasted level products
➢ For this purpose, the operations manager should have close coordination
with store department and other supply chain partners
Production planning process: Evaluating the implemented
plan
➢ After the production process is complete, the organization does the
evaluation of the implemented production plan and evaluates the production
performance as per the set standard
Production planning process: Controlling/Adjusting

➢ In spite of planning minutely, there may be various factors which affect the
production system and because of which there is a deviation from the actual
plan
➢ Production controlling comes into action if there is any deviation between the
planned and actual state of production performance
➢ After evaluating the production performance, if the performance was as per
the set standard then it will be either implement the same production process
or reimplement with further improvement
➢ Else it will control and adjust the production process as per the requirements
Production planning and controlling: Outcomes and
objectives
Production planning and control: Outcomes and objectives
➢ To effectively utilize the firms capacity (machine, people, space) and
enhance productivity and efficiency
➢ To schedule the uninterrupted production flow in order to match customer
demand with organization supply and deliver by timelines and satisfy
customers
➢ To reduce production cost and different wastes such as underutilization of
resources, waste of inventory, waste of overproduction etc.
➢ To maintain the predetermined level of quality of the products or service
delivery
➢ To develop flexible production schedule so that to be able to make
adjustments if there are any changes in demand and capacity (supply)
Planning horizon

A planning horizon is the length of time (i.e., the number of weeks or months or
years) into the future for which plans are made.
Production planning horizon
.

Long range/Business Plan

Intermediate
range/Aggregate
Short Planning
Range/
MPS

Now up to 3-12 months More than 1 year

3 months
Long range/business plan

➢ A statement of the organization’s overall level of business activity for the up

coming years
➢ Top level management formulates this plan and focuses its plan on new
product development, capacity expansion with huge capital investment such
as location decision etc.
Intermediate range plan: Aggregate planning
➢ Aggregate planning is concerned with matching supply and demand of output
over the medium time range of 3 months afterwards up to approximately 12
months into the future
➢ Goal of aggregate planning is to achieve a production plan that will effectively
utilize the organization’s resources and capacity to match demand and satisfy
customer requirements
Intermediate range plan: Aggregate planning
➢ The term “aggregate” implies that the planning is done for a single overall
measure of output i.e., decisions made at a product family not SKU level
(Stock Keeping Unit)

➢ In this level of planning, production planning is done for all Bajaj motorcycles
rather than for 3 SKUs namely Domainer 400, 200NS and 150
Aggregate planning strategies

Aggregate Planning
Strategies

Capacity Options Demand Options

Management Management

Chase Level
Strategy Strategy
Aggregate planning strategies: Capacity options
management (Adjust capacity)
➢ Options which can be used to increase or decrease capacity to match
current demand include
➢ Capacity can be managed by
➢ Varying staffing
➢ Hiring and lay off of employees during high demand and low demand

➢ Using over time duty hours during high demand & using under time
during low demand
➢ Subcontracting to third parties during high demand
➢ Using inventory (only in case of manufacturing companies)
Capacity options management: Subcontracting and using
inventory

➢ Subcontracting- An effective way to increase or decrease supply to meet the

customer demand by the use of similar other firms who produces outputs
similar to us. The subcontractor may supply the entire product or only some
of the components.
➢ Using inventory- In manufacturing companies, inventory can be used as a
strategy to match demand with supply. Inventories during higher production
but lower demand can be used to match demand with supply when demand
is higher than the production
Types of capacity options Management
Chase strategy: Using capacity as the adjustment tools such as varying staffs,
subcontracting etc.
Level strategy: Using inventory as the adjustment tool

Chase strategy Level strategy

Chase strategy
➢ The chase strategy refers to the notion that you are chasing the demand set
by the market by varying staffs, subcontracting etc.
➢ Production is set to match demand and doesn't carry any leftover products
i.e., inventory
➢ This is a lean production strategy i.e., waste free production strategy
Chase strategy

Advantage Disadvantage
➢ Lower inventory levels and cost ➢ Lower productivity, quality and
➢ Labor utilization is high depressed work force due to
adjustment in the workforce
Level strategy
➢ Level production focuses on producing the same number of units per product
at a consistent rate regardless of market demand
➢ Uses inventory as the adjustment tool
➢ This strategy lowers production costs and minimizes the risk of stock out i.e.
not carrying inventory
Level strategy

Advantage Disadvantage
➢ Stable output rates and cheerful ➢ Greater inventory costs
workforce due to constant level of
workforce
Differences between chase and level strategy

Chase
Differences Level Strategy
Strategy
Working conditions Sweatshop Pleasant
Labor turnover High Low
Amount of supervision required High Low
Type of budgeting and
Short-run Long - run
forecasting
Aggregate planning strategies: Demand options
management (Adjust demand)
➢ Aggregate planning strategy options for situations in which demand needs to
be adjusted i.e., increased/decreased in order to match capacity include
➢ Demand can be managed by
➢ Varying prices
➢ Varying promotion
➢ Backordering demand during high demand periods and reservation
Aggregate planning strategies: Demand options
management (Adjust demand)
➢ Varying pricing – Differential pricing is often used to reduce peak demand or
to build up demand in off-peak periods
➢ Varying promotion – Advertising, direct marketing, and other forms of
promotion are used to shift demand
➢ Backordering (Backlog) and Reservations – In some cases, demand is
influenced by asking customers to wait for their orders (backlog) or by
reserving capacity in advance (reservations)
Process of aggregate planning
Step 1- Forecast the aggregate demand, determine capacity and timelines
Step 2- Estimating outlook (Ratio of demand to capacity)
Step 3- Evaluate the various capacity or demand options management strategy
and select the optimal production plan and scheduling
Step 4- Material requirement planning (MRP)
Step 5- Implement the production plan
Step 6- Evaluate the implemented production plan
Step 7- Controlling/Adjusting
Aggregate planning in service business

➢ Services occur when they are rendered thus services can’t be inventoried
➢ Only demand options management can be applied in service business E.g.,
Pricing of airline tickets and hotel rooms
Disaggregating the aggregate plan

In aggregate planning, the production planning is done

at aggregate level

➢ However, disaggregating aggregate plan means breaking down the

aggregate plan into production plan of specific product which is known as
Master Production schedule
➢ Here, production planning of Domainer 400, 200 NS and 150 is done
Master production schedule
➢ In a manufacturing environment, the process of breaking down the aggregate
plan into greater details is called, disaggregation, resulting in the Master
Production Schedule (MPS)
➢ The master production schedule describes when each step in the production
plan will occur, as well as the workers, machinery and other specific
resources assigned to the job
➢ MPS provides input to Material Requirements Planning (MRP) systems
➢ Addresses the purchasing or production of parts or components needed to
make the final product
Material requirement planning

➢ MRP is a system of planning and scheduling the time phased material

requirements that enable the master production schedule to be implemented
➢ Materials required are planned on the basis of Bill of Material (BOM)
Calculate MRP for 50 units of car to be manufactured
Bill of material

➢ BOM is the list of materials or components required to produce one unit of

output that is produced by the organization
➢ Suppose, in order to assemble one unit of car, we need following materials

Bill of Material
Product: Car assembly
Components Qty/unit
Tire 5
Front seat 2
Back seat 1
Head light 2
Tail light 2
Steering 1
Calculate MRP for 50 units of car to be manufactured
Suppose 50 cars are to be assembled in next month, the operations manager
plans the material requirement by multiplying the components requirement with
cars to be assembled (50) and sent to storekeeper

Components Qty/unit Required Qty

Tire 5 250
Front seat 2 100
Back seat 1 50
Head light 2 100
Tail light 2 10?
Steering 1 50
Develop MRP to manufacture 100 units of M
If 100 units of M are to be manufactured, how many units of
each components are needed?
M=100 units
N=2M=2*100=200 units
P=3M=3*100=300 units
R=2N=2*200=400 units
S=4N=4*200+1*400=1200 units
T=3*400+2*300=1800 units
U=4*300=1200 units
Develop MRP to manufacture 100 units of Z

The following BOM (product structure tree) indicates the components needed to
assemble one unit of product Z. Determine the quantities of each component
needed to assemble 100 units of Z.
Determine the quantities of each component needed to
assemble 100 units of Z
Z=100 units
W=1*100=100 units
X=2*100=200 units
Y=4*100=400 units
Q=1*100+2*200=500 units
R=1*200=200 units
S=2*400=800 units
P=2*100+3*400+1*800=2200 units
 Practice
Determine the quantity of each component necessary to produce 10 units of
Alpha. The product structure tree (BOM) for each assembly are noted in
parentheses.
Benefits of aggregate plan

➢ Matching demand with supply

➢ Plan for Production quantity from regular time, overtime, and subcontracted
time and used to determine number of workers and supplier purchase levels
➢ Helps in determining how much warehouse space and working capital is
needed
➢ Helps in determining if new production equipment needs to be purchased and
informs to top level management
➢ Helps in developing the Master production schedule