Universidad del Turabo MANA 705 DL Workshop Eight W8_8_3 Aggregate Planning, Material Requirement Planning, and Capacity Planning

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1 Aggregate, Material Requirement, and Capacity Topic: Aggregate, Material Requirement, and Capacity Slide 1 Welcome to Workshop Eight presentation: Aggregate planning, material requirement planning, and capacity planning. Slide 2 Outline for Workshop Eight. Aggregate Process What is Aggregate? Strategies for Aggregate Material Requirement (MRP) What is MRP? Dependent Inventory Model Requirements MRP Structure Lot-Sizing Techniques MRP II Closed Loop and Capacity Breakeven Point Slide 3 Specific Objectives for Workshop Eight At the end of the workshop you should 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 for lot, and EOQ. 5. Describe Material Resource (MRP II) and the closed loop. 6. Define Capacity (CP), Capacity Requirement (CRP), design capacity, effective capacity, utilization and efficiency.

2 Slide 4 Universidad del Turabo Aggregate, Material Requirement, and Capacity 7. Identify and compute break even. Aggregate planning Aggregate planning also known as aggregate scheduling is concerned with determining the quantity and timing of production for the immediate future, often from three to eighteen months ahead. Operations managers try to determine the best way to meet forecasted Slide 5 demand by adjusting production rates, labor levels, inventory levels, overtime work, subcontracting rates, and other controllable variables. Aggregate planning objectives The objective of aggregate planning is to meet forecasted demand while minimizing cost over the planning period. Slide 6 Minimize Costs/Maximize Profits Maximize Customer Service Minimize Inventory Investment Minimize Changes in Production Rates (Setup cost) Minimize Changes in Workforce Levels Maximize Utilization of Plant and Equipment Aggregate planning strategies When generating an aggregate plan, the operations manager must answer several questions: 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?

3 Aggregate, Material Requirement, and Capacity All these questions involve the manipulation of inventory, production rates, labor levels, capacity, and other controllable variables. Slide 7 Aggregate Options with advantages and disadvantages. There are 2 options: Capacity option and Demand option. Capacity Options are options which affect the capacity of a plant. The options such as inventory levels, workforce variations size by hiring or laying off, variations in the production rates through overtime or idle time, subcontracting, or using part time employees have advantages and disadvantages as stated in table. Demand options are the ones that deal with what the customer wants. These have Option Advantage Disadvantage Comments Capacity Option: Changing inventory levels Varying workforce size by hiring or layoffs Changes in HR are gradual or none. Avoids the costs of other alternatives. Inventory holding costs may increase. Shortages may result in lost sales. Hiring, layoff, and training costs may be significant. Applies mainly to production not service, operations. Used where changing inventory size of labor pool is large. Varying production rates through overtime or idle time Subcontracting Matches seasonal fluctuations without hiring/training costs. Permits flexibility and smoothing to the firm's output Overtime premiums; tired workers; may not meet demand. Loss of quality control; reduced profits; loss of future business. Allows flexibility within the aggregate plan. Applies mainly in production settings. Using part time workers Demand Option: 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. 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. 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. advantages and disadvantages as well and stated in the table.

4 Aggregate, Material Requirement, and Capacity Slide 8 Mix options to develop a plan 1. Chase strategy is a planning strategy that sets production equal to forecasted demand. The chase strategy attempts to achieve output rates for each period that match the demand forecast for that period. For example, the operations manager can vary workforce levels by hiring or laying off, or can vary production by means of overtime, idle time, part time employees, or subcontracting. 2. Level scheduling maintains a constant output rate, production rate, or workforce level over the planning horizon. In other words, a level strategy is an aggregate plan in which production is uniform from period to period. Firms like Toyota and Nissan keep production at uniform levels and may (1) let the finished goods inventory go up or down to buffer the difference between demand and production, or (2) find alternative work for employees. This philosophy is that a stable workforce leads to a better quality product, less turnover and absenteeism, and more employee commitment to corporate goals. 3. Mixed strategy is a planning strategy that uses two or more controllable variables to set a feasible production rate. However, this strategy is very challenging for the operations manager. Slide 9 Material Resource (MRP II) is an extremely powerful technique. It is a system that allows MRP to be put in place and inventory data to be augmented by other resource variables. In this case, MRP becomes material resource planning. In other words, by utilizing the logic of MRP, resources such as labor, machine hours, and cost can be accurately determined and scheduled. Slide 10 The closed-loop MRP system provides feedback to the capacity plan, master production schedule, and production plan so planning can be kept valid at all times.

5 Aggregate, Material Requirement, and Capacity Slide 11 Master production schedule (MPS) The master production schedule specifies what is to be made and when. It must be in accordance with a production schedule. The production plan sets the overall level of output in broad terms. The plan includes inputs such as financial plans, customer demand, engineering capabilities, labor availability, inventory fluctuations, supplier performance, and other considerations. Master Production Schedule (MPS) The MPS system responds to the questions: What do we need to manufacture? When do we need to make it? When do we plan to make it? The MPS is a statement of the planned manufacturing schedule. It balances manufacturing plans to meet forecast demands, available capacity, optimal stock and effective use of resources. Operationally it carries out two tasks: It compares the orders received against the sales forecasted, and it monitors the rate of consumption of stock to signal when fresh manufacturing is required. Slide 12 Different Process Strategies 1. Make to order a. Carries no finished goods inventory and builds each customer order as needed. b. Very large number of possible production configurations. c. Small probability of anticipating a customer s exact need. d. Customers expect to wait for a large portion of the entire design and manufacturing lead time. e. MPS unit is typically defined as the particular end item or set of items comprising a customer order. 2. Assemble to order

6 Aggregate, Material Requirement, and Capacity a. Limitless number of possible end item configurations, all made from a combination of basic components and subassemblies. b. Customer delivery time often shorter than total manufacturing lead time. c. Large number of end item possibilities makes forecasting exact item configurations extremely difficult and stocking end items very risky. d. Tries to maintain flexibility by starting basic components and subassemblies into production and not starting final assembly until a customer order is received. e. The MPS unit is stated in planning bills of material. f. The MPS unit has, as its components, a set of common parts and options. 3. Make to stock Slide 13 a. Produces in batches, carry finished goods inventories for most end items. b. MPS is the production statement of how many and when each end item is to be produced. c. Many organizations tend to group end items into model groupings in the MPS preparation. d. The end item information is delayed until the latest possible time and the end item schedule is available in the final assembly schedule. e. All products so grouped, are run together in batches to achieve economical run for component parts. Product structures provide a hierarchical classification of the items which form a product. The product structure shows the material, component parts subassemblies and other items in a hierarchical structure that represents the grouping of items on an assembly. From the MPS to MRP Process The calculations that MRP performs are based on the Master Production Schedule (MPS) and a combination of firm orders-on-hand. Estimates of future orders are defined by time and required date. Typically the schedule that results will take into account such aspects as capacity constraints, spares demand, and security stock requirements.

7 Aggregate, Material Requirement, and Capacity Using the MPS, the MRP program calculates the volume and timing of assemblies, subassemblies, and materials required to meet the schedule. MRP establishes: What materials are needed to manufacture the products required by the Master Production Schedule When the materials are required to match the MPS schedule of warehouse replenishment MRP allows the sales pack to be broken back to the materials required at every stage of manufacture, ending up with a schedule of raw materials required from suppliers. Bill of Materials, stock accuracy and precise lead times are vitally important to MRP effectiveness and validity. This ensures that materials are ready on the required date, regardless of length of manufacture time which for some products can be several days. Slide 14 Material requirement planning (MRP) 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: Slide 15 Better response to customer orders Faster response to market changes Improved utilization of facilities and labor Reduced inventory levels MRP and the Dependent Demand Effective use of dependent demand inventory models requires the following: 1. Master production schedule 2. Specifications or bill of materials 3. Inventory availability 4. Outstanding purchase orders

8 Slide 16 Universidad del Turabo Aggregate, Material Requirement, and Capacity 5. Lead times Bills of material (BOM) are formally structured lists of the components, their description, and the quantity of each required to make one unit of a product. Individual drawings describe not only physical dimensions but also any special processing as well as the raw material from which each part is made. Bills of material structure refer to the overall design for the arrangement of bills of material files. Different departments in a company use bills of material for a variety of purposes. There can be several formats: 1. Product Tree similar to the one shown above. The product tree is a convenient way to think about bills of material, but is seldom used except for teaching and testing. 2. Parent component relationship, also called, single-level structures. An assembly is considered a parent and the items that comprise it are called component items. Unique part numbers are also assigned to each part. This makes identification of the part absolute. 3. Multi-levels are formed as a logical grouping of parts into subassemblies based on the way the product is assembled. 4. Multiple bills are used when companies usually make more than one product, and the same components are often used in several products. This is particularly true with families of products. Slide 17 Continued slides for BOM. 5. Single level bills of materials contain only the parent and its immediate components, which is why it is called a single level bill. 6. Indented bill, can be multi-level bills of material. The components of the parent are listed flush to the left and their components are indented. 7. Summarized parts list, is a list of all the parts needed to make one complete assembly.

9 Aggregate, Material Requirement, and Capacity 8. bills are to plan production. These bills of materials are artificial groupings of components for planning purposes. They are used to simplify forecasting, master production scheduling, and material requirements planning. Slide 18 MRP Needs Accurate Records Accuracy in the MRP: 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 Slide 19 Lead Times 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 Slide 20 availability of the item for production The process to determine gross requirements is: 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

10 Aggregate, Material Requirement, and Capacity 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 Slide 21 Starts with a production schedule for the end item Because there are 10 Items in this example, 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 = 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 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 Source: Reizer, J., Render, B. (2007). Operations Management.9 th Edition.Chapter 14. Slide 22 Equation for Logic of Net Requirements Any Gross requirement is the demand for an item prior to subtraction of on-hand inventory and scheduled receipts. Then, 1) when part must be ordered from suppliers or 2) production should start to meet demand by a particular date.

11 Aggregate, Material Requirement, and Capacity Allocations are added to the gross requirement, these are units in inventory that have been assigned to a specific future production but not yet used or issued from the stockroom. The allocated item has the effect to increase the requirement. Both item,s gross requirements and allocations, are the total requirements. On hand inventory is subtracted or reduced as this inventory is already in the stockroom and can be used for any demand. The scheduled receipts are added to the on hand inventory to then be subtracted from the total requirements. The sum of on hand inventory and scheduled receipts is called available inventory. The difference between Total Requirements less Available inventory is called Net Requirements. Slide 23 Safety Stock also called Buffer 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 Slide 24 Lot Sizing Techniques 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

12 Slide 25 Universidad del Turabo Aggregate, Material Requirement, and Capacity Effective, but computationally burdensome 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 To measure capacity we need units of output. If the variety of products produced at a work center or in a plant is not large, it is often possible to use a unit common to all products. We also need standard time which is expressed as the time required for making the product using a given method of manufacturing. Utilization is the available time that is the maximum hours we can expect from the work center; the percentage of time that the work center is active. Efficiency is how the work center is used in comparison with standard. Slide 26 Capacity and Strategy 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 Capacity Considerations Forecast demand accurately Understand the technology and capacity increments Find the optimum operating level (volume) Build for change Slide 27 Break-Even Analysis Break-even analysis is a critical tool for determining the capacity a facility must have to achieve profitability. The objective of break-even analysis is to find the point, in dollars and units, at which costs equal revenue. This is the break-even point. Fixed costs are costs that continue even if no units are produced. Examples

13 Aggregate, Material Requirement, and Capacity are; depreciation, taxes, debt, and mortgage payments. Variable costs are those that vary with the volume of units produced. The major components of variable costs are labor and materials. Contribution is the difference between selling price and variable cost. Another element is the revenue function which is the function that increases by the selling price of each unit. Slide 28 Break-Even Point 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 Slide 29 Break-Even Point Analysis These are 2 ways of calculating the break-even point: in Units and in Dollars or Price. Slide 30 End of presentation Congratulations, you have finished the presentation. Please continue with the Workshop activities.

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