AGGREGATE PLANNING

Aggregate planning is the process of developing, analyzing, and maintaining a

preliminary, approximate schedule of the overall operations of an organization. The
aggregate plan generally contains targeted sales forecasts, production levels, inventory
levels, and customer backlogs. This schedule is intended to satisfy the demand forecast
at a minimum cost. Properly done, aggregate planning should minimize the effects of
shortsighted, day-to-day scheduling, in which small amounts of material may be ordered
one week, with an accompanying layoff of workers, followed by ordering larger
amounts and rehiring workers the next week. This longer-term perspective on resource
use can help minimize short-term requirements changes with a resulting cost savings.
In simple terms, aggregate planning is an attempt to balance capacity and demand in
such a way that costs are minimized. The term "aggregate" is used because planning at
this level includes all resources "in the aggregate;" for example, as a product line or
family. Aggregate resources could be total number of workers, hours of machine time,
or tons of raw materials. Aggregate units of output could include gallons, feet, pounds of
output, as well as aggregate units appearing in service industries such as hours of service
delivered, number of patients seen, etc.
Aggregate planning does not distinguish among sizes, colors, features, and so forth. For
example, with automobile manufacturing, aggregate planning would consider the total
number of cars planned for not the individual models, colors, or options. When units of
aggregation are difficult to determine (for example, when the variation in output is
extreme) equivalent units are usually determined. These equivalent units could be based
on value, cost, worker hours, or some similar measure.
Aggregate planning is considered to be intermediate-term (as opposed to long- or short-
term) in nature. Hence, most aggregate plans cover a period of three to 18 months.
Aggregate plans serve as a foundation for future short-range type planning, such as
production scheduling, sequencing, and loading. The master production schedule (MPS)
used in material requirements planning (MRP) has been described as the aggregate plan
"disaggregated."
Steps taken to produce an aggregate plan begin with the determination of demand and
the determination of current capacity. Capacity is expressed as total number of units per
time period that can be produced (this requires that an average number of units be
computed since the total may include a product mix utilizing distinctly different
production times). Demand is expressed as total number of units needed. If the two are
not in balance (equal), the firm must decide whether to increase or decrease capacity to
meet demand or increase or decrease demand to meet capacity. In order to accomplish
this, a number of options are available.
Options for situations in which demand needs to be increased in order to match capacity
include:

1. Pricing. Varying pricing to increase demand in periods when demand is less

than peak. For example, matinee prices for movie theaters, off-season rates for
hotels, weekend rates for telephone service, and pricing for items that experience
seasonal demand.
2. Promotion. Advertising, direct marketing, and other forms of promotion are
used to shift demand.
3. Back ordering. By postponing delivery on current orders demand is shifted to
period when capacity is not fully utilized. This is really just a form of smoothing
 demand. Service industries are able to smooth demand by taking reservations or
by making appointments in an attempt to avoid walk-in customers. Some refer to
this as "partitioning" demand.
4. New demand creation. A new, but complementary demand is created for a
product or service. When restaurant customers have to wait, they are frequently
diverted into a complementary (but not complimentary) service, the bar. Other
examples include the addition of video arcades within movie theaters, and the
expansion of services at convenience stores.

Options which can be used to increase or decrease capacity to match current demand
include:

1. Hire/lay off. By hiring additional workers as needed or by laying off workers not
currently required to meet demand, firms can maintain a balance between
capacity and demand.
2. Overtime. By asking or requiring workers to work extra hours a day or an extra
day per week, firms can create a temporary increase in capacity without the
added expense of hiring additional workers.
3. Part-time or casual labor. By utilizing temporary workers or casual labor
(workers who are considered permanent but only work when needed, on an on-
call basis, and typically without the benefits given to full-time workers).
4. Inventory. Finished-goods inventory can be built up in periods of slack demand
and then used to fill demand during periods of high demand. In this way no new
workers have to be hired, no temporary or casual labor is needed, and no
overtime is incurred.
5. Subcontracting. Frequently firms choose to allow another manufacturer or
service provider to provide the product or service to the subcontracting firm's
customers. By subcontracting work to an alternative source, additional capacity
is temporarily obtained.
6. Cross-training. Cross-trained employees may be able to perform tasks in several
operations, creating some flexibility when scheduling capacity.
7. Other methods. While varying workforce size and utilization, inventory
buildup/backlogging, and subcontracting are well-known alternatives, there are
other, more novel ways that find use in industry. Among these options are
sharing employees with counter-cyclical companies and attempting to find
interesting and meaningful projects for employees to do during slack times.

AGGREGATE PLANNING STRATEGIES

There are two pure planning strategies available to the aggregate planner: a level
strategy and a chase strategy. Firms may choose to utilize one of the pure strategies in
isolation, or they may opt for a strategy that combines the two.

LEVEL STRATEGY.
A level strategy seeks to produce an aggregate plan that maintains a steady production
rate and/or a steady employment level. In order to satisfy changes in customer demand,
the firm must raise or lower inventory levels in anticipation of increased or decreased
levels of forecast demand. The firm maintains a level workforce and a steady rate of
output when demand is somewhat low. This allows the firm to establish higher inventory
levels than are currently needed. As demand increases, the firm is able to continue a
steady production rate/steady employment level, while allowing the inventory surplus to
absorb the increased demand.
A second alternative would be to use a backlog or backorder. A backorder is simply a
promise to deliver the product at a later date when it is more readily available, usually
when capacity begins to catch up with diminishing demand. In essence, the backorder is
a device for moving demand from one period to another, preferably one in which
demand is lower, thereby smoothing demand requirements over time.
A level strategy allows a firm to maintain a constant level of output and still meet
demand. This is desirable from an employee relations standpoint. Negative results of the
level strategy would include the cost of excess inventory, subcontracting or overtime
costs, and backorder costs, which typically are the cost of expediting orders and the loss
of customer goodwill.

TECHNIQUES FOR AGGREGATE

PLANNING
Techniques for aggregate planning range from informal trial-and-error approaches,
which usually utilize simple tables or graphs, to more formalized and advanced
mathematical techniques. William Stevenson's textbook Production/Operations
Management contains an informal but useful trial-and-error process for aggregate
planning presented in outline form. This general procedure consists of the following
steps:

1. Determine demand for each period.

2. Determine capacity for each period. This capacity should match demand, which
means it may require the inclusion of overtime or subcontracting.
3. Identify company, departmental, or union policies that are pertinent. For
example, maintaining a certain safety stock level, maintaining a reasonably
stable workforce, backorder policies, overtime policies, inventory level policies,
and other less explicit rules such as the nature of employment with the individual
industry, the possibility of a bad image, and the loss of goodwill.
4. Determine unit costs for units produced. These costs typically include the basic
production costs (fixed and variable costs as well as direct and indirect labor
costs). Also included are the costs associated with making changes in capacity.
Inventory holding costs must also be considered, as should storage, insurance,
taxes, spoilage, and obsolescence costs. Finally, backorder costs must be
computed. While difficult to measure, this generally includes expediting costs,
loss of customer goodwill, and revenue loss from cancelled orders.
5. Develop alternative plans and compute the cost for each.
6. If satisfactory plans emerge, select the one that best satisfies objectives.
Frequently, this is the plan with the least cost. Otherwise, return to step 5.

Aggregate Planning Strategies

In any organization, there are three types of aggregate planning strategies.

1. Pure Chase Strategy

 The purpose of the pure chase strategy is to match or chase demands by
minimizing final inventory. It absorbs demand fluctuations effectively for
successful aggregate planning. Organizations can either maintain workforce level
or output rate to match demand.

2. Pure Level Strategy

Pure level strategies are concerned with maintaining workforce or output rates at
all times. Production will be consistent within the same period of time for
which aggregate planning was done. Inventory and backorders help manage
demand fluctuations and market changes. Organizations may even employ
different ways to put inventory to good use—especially if there’s a change in
demand.

3. Hybrid Or Mixed Strategy

A hybrid or mixed strategy combines both inventory and workforce/output rate. It
can include maintaining additional inventory ahead of time to match demands or
even use backorders to keep up. Organizations can hire temporary workers if
needed or they may even furlough or lay off workers temporarily in case of low
demand. Job rotations may form a part of mixed strategies to make sure that
workers’ skills are being fully-applied.

Organizations react to changes in demand depending on their resources. Whether they

focus on inventory or workforce is subjective. Operations can rely on backorders and
higher inventory to tackle high demand. Alternatively, they may rely on shifting the
workforce if needed.

Aggregate planning isn’t restricted to production or operations. It may be used in

services or project management to control employee hours and scheduling tasks. It’s an
effective strategy that helps organizations stay on top of their resources and take action
without delays.

(A) Labour Intensive Technique:

In simple words labour intensive technique is that which uses comparatively larger

amount of labour and small doses of capital. It is that technique by which more of labour

and less of capital is required for the process of production. However, it can be defined

as one in which a large amount of labour is combined with a smaller amount of capital.

According to Prof. Myint, “labour intensive methods of production are those that require

a large quantity of labour with a given unit of capital.” With this method of production,

it is possible to raise output by using the same amount of capital but greater amount of

labour.
This technique fulfills two objectives of capital formation and skill. It raises agriculture

production through the use of minor irrigation, better seeds, manure, implements and the

introduction of short duration crops. Labour intensive technique has been illustrated with

the help of diagram I. In this diagramme, isoquant Q shows the initial level of output

which is being produced by using OL labour and OC amount of capital. With the

adoption of new technology a higher level of output is represented by the isoquant

Q1; can be produced by the same amount of capital i.e. OC. In this case, greater amount

of labour is OL This shows that the technique is labour intensive.

(B) Capital Intensive Techniques:

Prof. Harvey Leibenstein, Paul Baran, Rostow, Hirschamn Maurice Dobb and

Mahalanobis are the chief advocators of capital intensive technique. They consider that
this technique is indispensable for accelerating the process of growth. Prof. Paul Baran

has the strong opinion about the necessity of using the capital intensive in less developed

countries.

He observed that such countries should make use of their ability to draw upon the

scientific and technological advancement of the more developed countries if they want

to industrialize at a faster rate. Capital intensive technique refers to that technique in

which larger amount of capital is comparatively used. In such a technique the amount of

capital used per unit of output is larger than what it is in case of labour intensive

technique.
To quote Prof. Myint, “the capital intensive or labour intensive methods of producing a

particular commodity are classified by the modern factory methods of producing

consumer goods and mechanized methods of constructing roads, irrigation works and

other projects. Here, because of lower labour costs and higher productivity, the net

output per unit of capital may be comparatively higher.” Capital intensive technique has

been shown in diagram 2.

In this diagram isoquant Q represents the initial .level of output, using OL amount of

labour and OC amount of capital. With the introduction of new technique a higher level

of output is shown by labour (OL) but with greater dose of capital (OC1). Therefore,

capital intensive technique is using more capital with the same amount of labour.

What Is Material Requirements Planning (MRP)?

Material requirements planning (MRP) is a software-based integrated inventory and
supply management system designed for businesses.

Companies use MRP to estimate quantities of raw materials, maintain inventory levels,
and schedule production and deliveries.

How Material Requirements Planning (MRP) Works

MRP helps businesses and manufacturers define what is needed, how much is needed,
and when materials are needed and works backward from a production plan for finished
goods.

MRP converts a plan into a list of requirements for the subassemblies, parts, and raw
materials needed to produce a final product within the established schedule. MRP helps
manufacturers get a grasp of inventory requirements while balancing both supply and
demand.
Using MRP, managers can determine their need for labor and supplies and improve
their production efficiency by inputting data into the MRP scheme such as:

 Item Name or Nomenclature: The finished good title, sometimes called Level
"0" on BOM.
 Master Production Schedule (MPS): How much is required to meet demand?
When is it needed?
 Shelf life of stored materials.
 Inventory Status File (ISF): Materials available that are in stock and materials
on order from suppliers.
 Bills of materials (BOM): Details of materials and components required to
make each product.
 Planning data: Restraints and directions like routing, labor and machine
standards, quality and testing standards, and lot sizing techniques.
 The MRP process:

 • Estimates demand and required materials. After determining customer

demand and utilizing the bill of materials, MRP breaks down demand into
specific raw materials and components.

 • Allocates Inventory of materials. MRP allocates inventory into the exact

areas as needed.

 • Schedules Production. Time and labor requirements are calculated to

complete manufacturing and a timeline is created.

 • Monitors the process. MRP automatically alerts managers of any delays and
even suggests contingency plans to meet build deadlines.

Manufacturing resource planning is a system that is used to effectively plan the use of a
manufacturer’s resources. It enables manufacturers to develop a precise production
schedule for the future that minimizes costs and maximizes the use of the resources
available at their disposal.

Sales forecasting helps a manufacturer estimate the expected demand for a product so
that they can source the proper amount of raw materials and schedule deliveries and
quantities on time. It also provides a target production level to determine the number of
machine units and labor required during a given production cycle.

Manufacturing resource planning arrives at the optimal order quantity and frequency for
raw materials by adding the average use for a planned replenishment lead time with the
safety stock that is required to protect against stock-outs.

Thus, “When to Order” = Average Use Time + Safety Stock

What is MRP II?

The term manufacturing resource planning refers to an information system that is used
by businesses involved in manufacturing goods. The integrated information system
facilitates the decision-making process for management by centralizing, integrating, and
processing information related to the manufacturing process.
It enables management to make an accurate visualization of the scheduling and
inventory process and design engineering and to effectively employ cost-control
measures.

The MRP II was developed in 1980 after a need for a software that integrates accounting
systems while making forecasts about inventory requirements. The earlier version, MRP
I, was developed in 1964, and the first company to use it was Black and Decker.

Master Production Schedule?

As the name implies, a master production schedule determines what products are
manufactured, when they are produced, and in what quantities. The required raw
materials are identified by the finished goods BOM, the data from which is integrated
with current inventory data to create the MRP for raw materials procurement. The
master production schedule forms the basis of communication between sales and
manufacturing. The MPS becomes a contract between sales and production, allowing
sales to make promises that production can keep. A master production schedule is a
dynamic plan and can be adjusted when there are changes in demand or capacity.

So, when should you create a master production schedule? It is usually made anywhere
from three months to two years out. It takes into account the following factors for each
product:

What is the starting inventory, or inventory in stock?

How many orders are expected for the time period based on the sales forecast?

How many orders are already planned?

How much must be produced to balance supply and demand?

How much do you want to keep for safety stock to ensure you don’t run out of
inventory?

Master Production Scheduling is included in modern Advanced Planning and

Scheduling software (APS) that is part of a manufacturing ERP system. APS uses the
master production schedule to help evaluate the best options for production considering
available stock and capacity. It is a huge time saver, reducing the time it takes to manage
your production flow.

Why Master Production Scheduling Is a Crucial Planning Function?

As part of a fully integrated ERP system, master production scheduling is a crucial

planning function that uses current supply and demand data, as well as forecasts, to
deliver accurate and timely production plans that help manufacturers achieve their
production objectives and minimize procurement costs.

A master production schedule also includes manufacturing capacity in its calculations.

Once production orders have been analyzed and approved, the MRP process is initiated
and purchase orders are generated. A master production schedule also makes allowances
for shortages, unexpected master scheduling mistakes, and other unforeseen problems.

What Are the Functions of a Master Production Scheduling Software?

A master production schedule helps you form a detailed plan that fulfills the following
objectives:

Keeps production flowing smoothly

Reduces the lead time for products

Improves communication within your organization

Helps you establish priorities and adhere to them

Helps you create a manufacturing plan that makes sense

Enables you to achieve desired customer service levels

Makes the most efficient use of resources

Maintains an effective level of inventory

The MPS in operations management must balance the demand identified by sales and
marketing with the availability of resources.

What Are the Parts of a Master Production Schedule?

Before a master production schedule can be produced, you need to create a demand plan.
This uses historical data from sales to forecast customer orders over the coming months
or years. The demand plan must also include a set amount of safety stock – in case an
unexpectedly large order is generated – to protect against stock outs.

Product List – A product list consists of all the types of products you manufacture. The
products that are most frequently ordered should be at the top.

Product Sub Lists – Include a field for each product variation or SKU. For example, if
you manufacture chairs, you can separate them out by stain color, leg type, fabric, etc.

Time Frames – Have your schedule broken into months and weeks. You should
schedule at least a few months out and check to see if any changes are needed every so
often. If demand changes beforehand, you can adjust it as needed.

Production Quantities – You’ll need to determine raw material consumption based on

the quantities of each type of product, including variations or SKUs.
What Does the Master Production Schedule Help to Identify?

The master product schedule improves operations by helping to identify the following:

The quantity of each product to manufacture

The production staff needed to stay on schedule

How many of each product can be promised to customers

The projected product balance after order fulfillment

How to better control manufacturing operations

How to better tie business planning with manufacturing operations

How to increase production efficiency and minimize errors

What Are the Different Master Production Scheduling Techniques?

The master production schedule needs to be detailed, yet focused. If the plan is not
detailed enough, production will suffer. On the other hand, if the MPS covers too many
items, it will be difficult to implement the plan effectively. As a general rule, master
production scheduling works best with the smallest number of product alternatives
possible.

In make-to-stock environments, a limited number of items are assembled from a larger

number of components, for example, video recorders or computers. The MPS should in
this case be a schedule of finished goods items.

In a make-to-order environment, many different finished goods can be produced from a

relatively small number of raw materials. A great example of this process would be how
cars are manufactured. The sub assemblies for many cars will be the same but the
different models of cars manufactured differ in specific options such as color, stereo,
sunroof, and electric windows. The MPS in a make-to-order environment is a schedule
of the actual customer orders.

Assemble-to-order environments make use of raw materials to form basic components

and complete sub assemblies. These components and sub assemblies make up a variety
of finished products. The master production schedule should therefore take place at the
subassembly level.

ERP-Definition
An Enterprise resource planning system is a fully integrated business management system
covering functional areas of an enterprise like Logistics, Production, Finance, Accounting and
Human Resources. It organizes and integrates operation processes and information flows to
make optimum use of resources such as men, material, money and machine. ERP is a global,
tightly integrated closed loop business solution package and is multifaceted.
In simple words, Enterprise resource planning promises one database, one application, and one
user interface for the entire enterprise, where once disparate systems ruled manufacturing,
distribution, finance and sales. Taking information from every function it is a tool that assists
employees and managers plan, monitor and control the entire business. A modern ERP system
enhances a manufacturer ability to accurately schedule production, fully utilize capacity,
reduce inventory, and meet promised shipping dates.

3. Business Planning

1. Business Planning – Materials

New product
CENTRAL DATABASE
* Intelligent resource planning
Existing product * Human Resource Planning
Bill of Material * Organisation * Quality Management
Product Pricing
Long term forecasting
Capacity planning
* Payroll / Employee
Engineering Change Management * Job/project Management
* Cost Accounting Facilities Maintenance,
* Accounts receivable Plan- ning &
implementation
* Accounts payable
* Order management * General ledger 4. Operational Planning & Execution – resources
* Distribution * Fixed assets
management * Budgetary Recruitment
2. Operation Planning & Execution Payroll
– Materials * Inventory Job evaluation and Perfor- mance appraisal
Inventory * Logistics / Costing and Budgeting
Order processing Distribution of Quality control and planning
Supplier management Maintenance Engineering & Scheduling
Inventory /warehouse Management materials Fixed Assets
Forecasting Resource MIS
Distribution Management Cross Functionalities
Scheduling

* Multi-platform
* Multi-facility
* Multi-
mode
manufactu
ring
* Multi currency
* Multi lingual
* Imaging
* Database creation
* Electronic mail
* Workflow Automation
* Electronic
Data
Interchang
e
A general model of ERP is shown in Fig. 1.
Fig 7.1.1 : General Model of ERP
 An Overview of Enterprise Resource Planning (ERP) 7.3

7.1.1 Evolution of ERP : In the ever-growing business environment, the following demands are placed
on the industry:

 Aggressive cost control initiatives

 Need to analyse costs/revenues on a product or customer basis
 Flexibility to respond to changing business requirements
 More informed management decision making
 Changes in ways of doing business.
The difficulty in getting accurate data, timely information and proper interface of complex business
functions have been identified as the hurdles in the growth of any business. Time and again,
depending on the velocity of the growing business needs, one or the other applications and planning
systems have been introduced into the business world for crossing these hurdles and achieving growth.
They are:
 Management Information Systems (MIS)
 Integrated Information Systems (IIS)
 Executive Information Systems (EIS)
 Corporate Information Systems (CIS)
 Enterprise Wide Systems (EWS)
 Material Resource Planning (MRP)
 Manufacturing Resource Planning (MRP II)
 Money Resource Planning (MRP III)
ERP has evolved from the system known as MRPII (Manufacturing Requirement planning) system with the
integration of information between Vendor, Customer and Manufacturer using networks such as LAN, WAN
and INTERNET etc.
MRPII system again evolved from MRP (Material Requirement Planning) system. MRP is a technique that
explodes the end product demands obtained from Master Production Schedule (MPS) for the given product
structure which is taken from Bill of Material (BOM) into a schedule of planned orders considering
the inventory in hand. MRP system processes this data and provides valuable guidelines to the
scheduler in the form of work orders to plan the Production Schedule. The net requirements for each item
are computed and replenishment orders are created and planned for release.
MRP system provides reports such as MRP reports, Planned Order releases for Purchase orders, Work
Orders, Reschedule open orders report, Firm planned reports, Shortages report etc. MRP is considered as
an important planning and manufacturing control activity for materials.
MRPII is a method for planning of all the resources of the manufacturing company. It involves all operational
and financial planning and has simulation capabilities to answer ‘WHAT IF’ questions. It links different functional
areas like Business Planning, Product