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Operation Management/Administración de Operaciones 1

Universidad delTuraboMANA 705 DL – Workshop Eight

Topic: Aggregate Planning, Material Requirement Planning and Capacity PlanningIntroduction

Welcome to workshop eight of the Operations Management course. In this workshop we will discuss a mix of topics that are related directly with Supply Chain, Aggregate Planning, Material Requirement Planning (MRP) and Capacity Planning (CP). First, we will examine Aggregate Planning or Aggregate Scheduling, which is an approach to determine the quantity and timing of production for the immediate future which is usually three to eighteen months ahead. MRP, or Material Requirements Planning, is a dependent demand technique that uses a bill of material, inventory, expected receipts, and a master production schedule to determine material requirements. Finally, Capacity Planning, the throughput or number of units a facility can hold, receive, store, or produce in a period of time. Enjoy the workshop!Learning ObjectivesAt the end of the workshop, each student will be able to: Define aggregate planning. Identify strategies for developing an aggregate plan. Understand the graphical and mathematical planning of other aggregate plans. 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.

Describe Material Resource Planning (MRP II) and the closed loop. Define Capacity Planning (CP), Capacity Requirement Planning (CRP), design

capacity, effective capacity, utilization and efficiency. Identify and compute break even.Language Objectives Listen: Listen and evaluate power point discussions of the aggregate planning

process, the dependent inventory model requirements and the distribution resource planning.

Speak: Express ideas orally in a power point video discussing MRP II closed loop.

MANA 705 DL © Ana G. Méndez University System, 2012. All rights reserved.


Read: Apply a variety of reading strategies to identify the capacity planning process and have an understanding of the effective capacity and utilization.

Write: Develop a solution for a case study to develop a product structure BOM and build a gross requirement plan.

Content8.1 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 demand by adjusting production rates, labor levels, inventory levels, overtime work, subcontracting rates, and other controllable variables. Usually the objective of aggregate planning is to meet forecasted demand while minimizing costs over the planning period.

Four things are needed for aggregate planning:a. A logical overall unit for measuring sales and output.b. A forecast of demand for a reasonable intermediate planning period in

these aggregate terms. c. A method for determining the costs.d. A model that combines forecasts and costs so that scheduling decisions

can be made for the planning period. The medium-range planning begins once long-term capacity decisions are

made. This is the job of the operations manager. Scheduling decisions address the problem of matching productivity to fluctuation demands. These plans need to be consistent with top management’s long-range strategy and work within the resources allocated by earlier strategic decisions. Medium or intermediate range planning is accomplished by building an aggregate production plan. If top management does a poor or inconsistent job of long-term planning, problems may develop that make the aggregate planner’s job very difficult.

Aggregate planning is part of a larger production planning system. In a manufacturing environment, the process of breaking down the aggregate plan into greater details is called, disaggregation, resulting in the master production schedule, which provides input to material requirements planning (MRP) systems. The MPS or master production schedule addresses the purchasing or production of parts or components needed to make the final product.



8.2 Aggregate Planning StrategiesWhen 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?

All these questions involve the manipulation of inventory, production rates, labor levels, capacity, and other controllable variables.



Option Advantage Disadvantage CommentsCapacity Option: Changing inventory levels

Changes in HR are gradual or none.

Inventory holding costs may increase. Shortages may result in lost sales.

Applies mainly to production not service, operations.

Varying workforce size by hiring or layoffs

Avoids the costs of other alternatives.

Hiring, layoff, and training costs may be significant.

Used where changing inventory size of labor pool is large.

Varying production rates through overtime or idle time

Matches seasonal fluctuations without hiring/training costs.

Overtime premiums; tired workers; may not meet demand.

Allows flexibility within the aggregate plan.

Subcontracting Permits flexibility and smoothing to the firm's output

Loss of quality control; reduced profits; loss of future business.

Applies mainly in production settings.

Using part time workers

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.

Demand Option: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.

Mixing 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.

8.3 Graphical and Mathematical Strategy Options to Aggregate Planning:Other options are:

1. 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. Finding the optimal plan is not always possible and methods can vary.

a. Graphical methods in aggregate planning are techniques that work with a few variables at a time to allow planners to compare projected demand with existing capacity. It is a trial and error approach which does not guarantee optimization, but requires computations. In this approach even the clerical staff can follow the steps: (1) determine the demand in each period, (2) determine capacity for regular time, overtime and subcontracting, (3) find labor costs, hiring and layoff costs, and inventory holding costs, (4) consider company policies that may apply to workers, and (5) develop alternative plan and examine their total costs.

b. Mathematical approaches such as transportation method of linear programming produce an optimal plan for minimizing costs.

c. Management coefficients model, a formal model built around a manager’s experience and performance.

d. The linear decision rule that attempts to specify an optimum production rate and workforce level over a specific period.

e. Scheduling by simulation which uses a search procedure to look for the minimum cost combination of values for workforce size and production rate.



8.4 Material Requirement Planning (MRP), Product Structure, Gross Requirements, Net Requirement Plan and Lot Sizes

Material requirement planning (MRP) is a dependent demand technique that uses a bill of material, inventory, expected receipts, and a master production schedule to determine material requirements. Dependent demand is used because this demand is used for another item. When MRP requirements are met, dependent models are preferable to the EOQ model.

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.

1. MPS record is a time-phased record to show relationships between production output, sales forecast, and expected inventory balance.

2. Highly simplified involving an item with a beginning inventory, sales forecast per week, and MPS per week as well.

3. The MPS row states the timing for completion of units available to meet demand.

4. The details for starting production of the various components and assembly of the product are taken care of by the MRP system.

5. The available row represents the expected inventory position at the end of each week.

6. Any negative values in the available row represent expected back orders.7. Reasons for carrying positive projected inventory balance are


To view the PowerPoint presentation with audio, please click the link:

MANA705_W8_8_3 Aggregate Planning, Material Requirement Planning and Capacity Planning

To access the narrative of the presentation in Word, click on the link MANA705_W8_8_3_Narrative (Document MS Word)To access the electronic link, follow these instructions:

Place the cursor over the email address and simultaneously press CTRL + click.


a. Forecasts involve some degree of error, and the MPS is a plan for production that may not be exactly achieved.

b. Projected inventory balance provides a tolerance for errors that buffers production from sales variations.

As the planning process moves from the production plan to execution, each of the lower level plans must be feasible. When one is not, then feedback to the next higher level is used to make necessary adjustments. One of the major strengths of MRP is its ability to determine precisely the feasibility of a schedule within aggregate capacity constraints. The aggregate production plan provides the basis for development of the detailed master production schedule.

The master production schedule can be expressed in the following terms: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

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 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

items is to be produced.c. Many organizations tend to group end items into model grouping 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. As shown below:

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 –. 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.



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 multilevel 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.

8. Planning 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.

There are two kinds of materials needed for a product, the engineering bill of materials and the manufacturing bill of material. The engineering bill of materials is a list of items according to their relationships with parent products represented on assembly drawings and the manufacturing BOM is the one typically used in MRP systems.

There are several types of engineering BOM’s:1. The modular BOM, is organized around product modules. These BOM’s are

not final products to be sold but are components that can be produced and assembled into units.

2. Planning BOM’s and Phantom BOM’s, are two special kinds of BOM’s. The planning BOM’s are created in order to assign an artificial parent to the bill of material. Such bills are used in group subassemblies and also in kits to production department. The phantom bills of materials are bills for components, usually sub assemblies that exist only temporarily. These BOM’s are components that go into another component and are never inventoried.Using low level coding ensures that an item is always at the lowest level of

usage and is necessary when identical items exist at various levels of the BOM. Other important information that is needed for a good MRP is to have accurate inventory records. The company should achieve at least 99% record accuracy in order to work. Outstanding purchase orders should exist as a byproduct of well managed purchasing and inventory control. When purchase orders are executed, records of those orders and their scheduled delivery dates must be available to production personnel. Only with good purchasing data can the operations



manager prepare accurate production plans and effectively execute an MRP System.

Good lead times is another component that needs accuracy; in purchasing systems, the time between recognition of the need for an order and receiving it, in production systems. It is the order to wait, move, queue, setup, and run times for each component. When a BOM is turned on and modified by adding lead times for each component then time phased product structure is in place.

Gross material requirements plan is a schedule that shows the total demand for an item (prior to subtraction of on-hand inventory and scheduled receipts) and (1) when it must be ordered from suppliers, or (2) when production must be started to meet its demand by a particular date. Net material requirements are the result of adjusting gross requirements for inventory on hand and scheduled receipts. Planned order receipts are the quantities planned to be received at a future date and planned order releases are scheduled dates for an order to be released.

In many cases organizations plan for safety stock which is usually to remove variability in the MRP system. Some considerations for safety stock may be prudent. When safety stock is deemed absolutely necessary, the usual policy is to build it into the projected on hand inventory of the MRP logic. Distortion can be minimized when safety stock is held at the finished goods level and components or raw material level.

Other MRP dynamics are necessary to a good MRP system, such as knowing about accurate re-planning and the frequent changes in an MRP system, called system nervousness. In order to avoid this, such tools as time fences and pegging are used. Time fences are a means for allowing a segment of the master schedule to be designated as “not to be rescheduled”. There is a point in time where there are some constraints to businesses. Outside the time fence, orders and forecasts can be changed without reference to planners; however there should be authority within the management and master production scheduler where monitoring changes are necessary. The pegging tool means tracing upward in the BOM from the component to the parent item.

Just in time (JIT), adds more and better response to MRP systems. JIT moves the material in small batches, reduces work in process small buckets, balanced



flow and supermarkets. Buckets are time units in MRP systems and usually last one week.

In MRP a decision for lot sizing should be made to determine the lot size. 1. Lot-for-Lot – a lot sizing technique that generates exactly what is

required to meet the plan.2. Economic Order Quantity (EOQ) can also be used in lot sizing by using

the same approach or equation.3. Part period balancing, an inventory ordering technique that balances

setup and holding costs by changing the lot size to reflect requirements of the next lot size in the future.

4. Wagner-Whitin algorithm procedure is a technique for lot size computation that assumes a finite time horizon beyond which there is no additional net requirements to arrive at an ordering strategy.

8.5 Material Resource Planning (MRP II) and the closed loop.Material Resource Planning (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.

The closed-loop material requirement planning implies an MRP system that provides feedback to scheduling from the inventory control system. The closed-loop MRP system provides information to the capacity plan, master production schedule, and production plan so planning can be kept valid at all times. 8.6 Design Capacity, Effective Capacity, Utilization and Efficiency Capacity Planning (CP), and Capacity Requirement Planning (CRP)

Capacity is the throughput or number of units a facility can hold, receive, store, or produce in a period of time. Design capacity is the theoretical maximum output of a system in a given period under ideal conditions. For many companies designing capacity can be straightforward, effective capacity is the capacity a firm expects to achieve given its current operating constraints. It is often lower than design capacity because the facility may have been designed for an earlier version of the product or a different product mix than is currently being produced.

Capacity available is the capacity of a system or resource to produce a quantity of output in a given time period. It is affected by (1) product specifications



change, the work content (work required to make the product) will change, thus affecting the number of units that can be produced,(2) product mix where the product has its own work content measured in the time it takes to make the product. If the mix of products being produced changes the total work content (time) the mix will change, (3) plant and equipment which relates to the methods used to make the product, and (4) work effort, which relates to the speed or pace at which the work is done; if the workforce changes pace, perhaps producing more in a given time, the capacity will be altered.

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.Available time is the number of hours a work center can be used. Available time = the number of machines x the number of workers x the hours of operations. The other measures:

1. Utilization = Actual output / Design capacity, this is a percent of design capacity. Also measured as:Utilization = (Hours actually worked / available hours) x 100%

2. Efficiency = Actual output / Effective capacity, this is an actual output as a percent of effective capacity. Also measured as:Efficiency = (Actual rate of production / Standard rate of production) x 100%

These measures are important for an operations manager, but they often need to know the expected output of a facility or process. Also referred to as rated capacity:

Rated Capacity = (Available time) x (Utilization) x (Efficiency)Capacity considerations for a good capacity are:

1. Forecasts demand accurately2. Understand the technology and capacity increments3. Find the optimum operating level (volume)



4. Build for changeEven with good forecasting and facilities built in to the forecast, there may be

a poor match between the actual demand that occurs and available capacity. There are some options for managing demand:

1. Demand exceeds capacity by raising prices, or scheduling long lead times.

2. Capacity exceeds demand by price reductions or aggressive marketing.

3. Adjusting to seasonal demands or cyclical pattern of demands.4. Tactics for matching capacity to demand by

a. Making staffing changes (increasing or decreasing the number of employees or shifts)

b. Adjusting equipment (purchasing additional machinery or selling or leasing out existing equipment)

c. Improving processes to increase throughputd. Re-designing products to facilitate more throughpute. Adding process flexibility to better meet changing pr5oduct

preferences f. Closing facilities

8.7 Break-even AnalysisBreak-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, of which costs equal revenue. This is the break-even point. Fixed costs are costs that continue even if no units are produced. Examples 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. Only when total contribution exceeds total fixed cost will there be profit.

Another element is the revenue function which is the function that increases by the selling price of each unit. Based on which way you can calculate the break-even point, such as in units or in dollars; the formulas will drive you through the two different ways of calculating break-even point. Break-even point is the level of sales at which profit is zero. Sales will be equal to fixed cost and variable cost.


Forum for Doubts:

If you have any questions, access Comunicación/Communication link, and press

Workshop Eight: Doubts and Questions where we can discuss any doubts.

To participate, click on the forum title.


Equations: Break-even in units = Total Fixed Cost / Price – Variable CostBreak-even in dollars = Total Fixed Cost / 1- Variable Cost / Selling Price

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Tasks/Activities: Workshop EightTask 8.1: Power Point with audio (oral)Instructions

1. Look for the rubric Appendix F - Rubric to Evaluate Video or PowerPoint2. Presentation Individual/Group to evaluate Video or PowerPoint with audio

in the syllabus.3. Click on the e-lab button and access a tutorial on how to prepare a

PowerPoint presentation with audio.4. Prepare a presentation with a minimum of 10 slides using MS PowerPoint with

audio. 5. Your presentation will be explaining an organization process strategy from one

of the four process strategies: (1) process focus, (2) repetitive, (3) product, or (4) mass customization focus.

6. You will also pick one of the tools below and explain the tool and how it works with the company you are presenting. For example a department process as a production process, product, or service they offer.

a. Flow Diagramb. Time function mapping.c. Value stream mappingd. Process charte. Service Blueprint

7. Make sure your presentation is APA Style version six, in other words, formatting and citation information must be used. Remember to reference the source of any chart or graph used from web sites, books, journals, and so forth.

8. Save your presentation as follows: T8.1.name.last name.9. Send the document by accessing Tasks/Tareas, click Workshop Eight and

T8.1 PPT w/audio Organization Process Strategy. Value= 20 points



Task 8.2 Two problems (written)Instructions:

Locate and study Appendix H.3 Tasks 8.2: Two Problems Rubric in the Syllabus.

Problem 1: Bill of Material (BOM) and 2) Capacity Problem

Instructions1. Using the following product tree, (BOM) construct the appropriate single-level tress.

How many C’s are needed to make 50 X’s and 100 Y’s.

X

A(2) B

C(2) D E (2)

Problem 2: A Capacity problem

a) A work center consists of 4 machines, each working a 16 hour day for 5 days a week. What is the weekly available time?

b) The work center above is utilized 75% of the time. What are the hours per week actually worked?

c) If the efficiency of the work center in the above information is 115%, what is the rated capacity of the work center?

2. Save both problems in a word document as T8.2.name.lastname.3. Send your document by accessing Tasks/Tareas, and then click Workshop

Eight and identifyT8.2 Problems.


Y

B C(2)

E (2)


Value= 20 pointsTask 8.3 Discussion Forum Rubric (oral)Instructions:

1. Look for Appendix E for Discussion Forum Rubric (oral or written) (10 points) in the syllabus.

2. Please see tutorial How to record voice accessing the e-lab link.The discussion for this task is the following:The student will look for more information on Production Technology. You will pick one of the technologies discussed in the workshop. Bring to the discussion forum an organization that uses one of these

technologies. How does it work? Benefits. Explain. Your peers will ask questions or bring more information on what other

ways this technology is used and how other companies use the same technology.

3. To participate, access Tasks/Tareas link, click Workshop Eight/T8.3 Production Technology Voice Forum.

4. Please react to the posting of at least two of your classmate’s.Value = 10 points

Task 8.4 Voice Reflective Journal (written)Instructions:

1. The purpose of the reflective diary is to think, write or orally communicate about the concept, the feelings and attitudes that are generated with discussion and assignments of each workshop.

2. Look for Appendix C Reflective Journal Template, you will find the table to do your reflective diary and Appendix D is the rubric for the reflective diary.

3. Using MS Word or a compatible program, the student will describe their experiences and lessons learned in Workshop 8.

a. Save the document as:T8.4.yourname.lastname.

4. Submit the assessment through the Tareas/Tasks tab, and then click Workshop Eight/T8.4 Written Reflective Journal link.



5. Value = 10 points

Congratulations, you have completed

Workshop Eight!


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