BMT1009

Production and Operations

Management
Unit-VI

Dr. I.S.Stephan Thangaiah

Professor, VIT Business School
VIT University
Vellore 632014

Cabin: SJT 611C

Aggregate Planning
Aggregate planning begins with a forecast of
aggregate demand for the intermediate range. This is
followed by a general plan to meet demand
requirements by setting output, employment, and
finished-goods inventory levels or service capacities.
Managers might consider a number of plans, each of
which must be examined in light of feasibility and
cost. If a plan is reasonably good but has minor
difficulties, it may be reworked. Conversely, a poor
plan should be discarded and alternative plans
considered until an acceptable one is uncovered. The
production plan is essentially the output of aggregate
planning.
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Aggregate Planning (contd.)

Aggregate plans are updated periodically, often monthly, to
take into account updated forecasts and other changes.
This results in a rolling planning horizon (i.e., the aggregate
plan always covers the next 12 to 18 months). Aggregate
planning inputs and outputs are:
Inputs:
Resources
Workforce/production rates
Facilities and equipment

Demand forecast
Policies on workforce changes
Subcontracting
Overtime
Inventory levels/changes
Back orders
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Aggregate Planning (contd.)

Inputs (contd.):
Costs

Inventory carrying cost

Back orders
Hiring/firing
Overtime
Inventory changes

Outputs:
Total cost of a plan
Projected levels of
Inventory
Output
Employment
Subcontracting
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Aggregate Planning Strategies

Aggregate planning strategies can be described as
proactive, reactive, or mixed.

Proactive strategies involve demand options: They

attempt to alter demand so that it matches
capacity.
Reactive strategies involve capacity options: They
attempt to alter capacity so that it matches
demand.
Mixed strategies involve an element of each of
these approaches.

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Aggregate Planning Strategies (contd.)

Demand Options (Proactive strategy):
Pricing
Promotions
Back orders (delaying order filling), and
New demand.
Supply Options (Reactive strategy):
Hiring/laying off workers
Overtime/slack time
Part-time or temporary workers,
Inventories, and
Subcontractors.
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Aggregate Planning Strategies (contd.)

The first two strategies are pure strategies
because each has a single focal point; the last
strategy is mixed because it lacks the single
focus.
Under a level capacity strategy, variations in
demand are met by using some combination of
inventories, overtime, part-time workers,
subcontracting, and back orders while maintaining a
steady rate of output.
Matching capacity to demand implies a chase
demand strategy; the planned output for any period
would be equal to expected demand for that period.

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Procedure for Aggregate Planning

A general procedure for aggregate planning consists of
the following steps:
1)Determine demand for each period.
2)Determine capacities (regular time, overtime, subcontracting)
for each period.
3)Identify company or department policies that are pertinent
(e.g., maintain a safety stock of 5 percent of demand, and
maintain a reasonably stable workforce).
4)Determine unit costs for regular time, overtime,
subcontracting, holding inventories, back orders, layoffs, and
other relevant costs.
5)Develop alternative plans and compute the cost for each.
6)If satisfactory plans emerge, select the one that best satisfies
objectives. Otherwise, return to step 5.

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Dependent Demand
When demand for items is derived from plans to make
certain products, as it is with raw materials, parts, and
assemblies used in producing a finished product, those
items are said to have dependent demand.
The parts and materials that go into the production of
an automobile are examples of dependent demand
because the total quantity of parts and raw materials
needed during any time period is a function of the
number of cars that will be produced.
Conversely, demand for the finished cars is independent
- a car is not a component of another item.

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Independent Demand
Independent demand is fairly stable once allowances are
made for seasonal variations, but dependent demand can be
sporadic or lumpy; large quantities are used at specific
points in time with little or no usage at other times. Thus,
demand is lumpy.
Lumpy demand also can be the result of customer ordering
rules (e.g., economic order quantity [EOQ] ordering).
Because of these tendencies, independent-demand items
must be carried on a continual basis, but dependent-demand
items need only be stocked just prior to the time they will
be needed in the production process. Moreover, the
predictability of usage of dependent-demand items means
that there is little or no need for safety stock.

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Material requirements planning (MRP)

Material requirements planning (MRP) is a computerbased information system that translates the finished
product requirements of the master schedule into
time-phased
requirements
for
subassemblies,
component parts, and raw materials, working backward
from the due date using lead times and other
information to determine when and how much to order.
Hence, requirements for end items generate
requirements for lower-level components, which are
broken down by planning periods (e.g., weeks) so that
ordering, fabrication, and assembly can be scheduled
for timely completion of end items while inventory
levels are kept reasonably low.

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MRP Inputs
Material requirements planning is as much a
philosophy as it is a technique, and as much an
approach to scheduling as it is to inventory
control.
An MRP system has three major sources of
information:
a master schedule,
a bill-of-materials file, and
an inventory records file

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MRP Information Flows

MPS
Item
Master
file

MRP
Program

Pegging
report
Exception
report

BOM File
MRP report

Production and Operations Management

Master Schedule
The master schedule, also referred to as the
master production schedule, states which end
items are to be produced, when they are needed,
and in what quantities.
The quantities in a master schedule come from a
number of different sources, including customer
orders, forecasts, and orders from warehouses to
build up seasonal inventories.
The master schedule separates the planning
horizon into a series of time periods or time
buckets, which are often expressed in weeks.
However, the time buckets need not be of equal
length.
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Bill-of-Materials
A bill of materials (BOM) contains a listing of all
of the assemblies, subassemblies, parts, and raw
materials that are needed to produce one unit of
a finished product. Thus, each finished product
has its own bill of materials.
The listing in the bill of materials is hierarchical;
it shows the quantity of each item needed to
complete one unit of its parent item. The nature
of this aspect of a bill of materials is clear when
you consider a product structure tree, which
provides a visual depiction of the subassemblies
and components needed to assemble a product.
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Inventory Records
Inventory records refer to stored information on the
status of each item by time period, called time
buckets. This includes gross requirements, scheduled
receipts, and expected amount on hand. It also
includes other details for each item, such as supplier,
lead time, and lot size policy. Changes due to stock
receipts and withdrawals, cancelled orders, and similar
events also are recorded in this file.
Like the bill of materials, inventory records must be
accurate. Erroneous information on requirements or
lead times can have a detrimental impact on MRP and
create turmoil when incorrect quantities are on hand
or expected delivery times are not met.

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MRP Outputs
MRP systems have the ability to provide management with a
fairly broad range of outputs. These are often classified
as primary reports, which are the main reports, and
secondary reports, which are optional outputs.
Primary Reports: Production and inventory planning and
control are part of primary reports. These reports normally
include the following:
1. Planned orders, a schedule indicating the amount and
timing of future orders.
2. Order releases, authorizing the execution of planned
orders.
3. Changes to planned orders, including revisions of due
dates or order quantities and cancellations of orders.

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MRP Outputs (contd.)

Secondary Reports: Performance control, planning, and
exceptions belong to secondary reports.
1. Performance-control reports evaluate system operation.
They aid managers by measuring deviations from plans,
including missed deliveries and stock-outs, and by providing
information that can be used to assess cost performance.
2. Planning reports are useful in forecasting future
inventory requirements. They include purchase commitments
and other data that can be used to assess future material
requirements.
3. Exception reports call attention to major discrepancies
such as late and overdue orders, excessive scrap rates,
reporting errors, and requirements for non-existent parts.

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Benefits of MRP
MRP enables managers to easily determine the
quantities of every component for a given order size,
to know when to release orders for each component,
and to be alerted when items need attention. Still
other benefits include the following:
1)Low levels of in-process inventories, due to an exact
matching of supply to demand.
2)The ability to keep track of material requirements.
3)The ability to evaluate capacity requirements
generated by a given master schedule.
4)A means of allocating production time.
5)The ability to easily determine inventory usage by
backflushing.

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Requirements of MRP
In order to implement and operate an effective
MRP system, it is necessary to have
1)A computer and the necessary software
programs to handle computations and maintain
records.
2)Accurate and up-to-date
a) Master schedules.
b) Bills of materials.
c) Inventory records.

3)Integrity of file data.

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MRP - II
MRP was developed as a way for manufacturing
companies to calculate more precisely what
materials were needed to produce a product, and
when and how much of those materials were
needed. Manufacturing Resources Planning (MRP II)
evolved from MRP in the 1980s because
manufacturers recognized additional needs.
MRP II did not replace or improve MRP. Rather, it
expanded the scope of materials planning to include
capacity requirements planning, and to involve other
functional areas of the organization such as
marketing and finance in the planning process.

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The MRP II System

Business Planning
Top

Demand
Management
Management
Planning
Forecasting
Distribution
Requirements
Planning
Order entry

Marketing Planning
Production Planning

Resource
Planning

Master Production
Scheduling

Rough cut
Capacity
Planning

Master Requirement
Planning

Capacity
Requiremen
ts planning

Operation

Final Assembly
Management
Scheduling
Planning

Production Activity
Control
Order release
Operation scheduling
Dispatching
Expediting
Operation
Production reporting

Purchasing
Vendor selection
Order Placement
Vendor Scheduling
Order follow-up

Management
Execution

Performance
measurement

Production and Operations Management

Benefits of MRP - II
Increased sales resulting from improved
customer service
Improved productivity of direct labour
Reduced expediting
Reduced cost of purchased materials
Reduced Inventory

Materials Management

Forecasting
Forecasts are a basic input in the decision processes
of operations management because they provide
information on future demand. The importance of
forecasting to operations management cannot be
overstated.
The
primary
goal
of
operations
management is to match supply to demand.
Having a forecast of demand is essential for
determining how much capacity or supply will be
needed to meet demand. For instance, operations
needs to know what capacity will be needed to make
staffing and equipment decisions, budgets must be
prepared, purchasing needs information for ordering
from suppliers, and supply chain partners need to
make their plans.
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Steps in the Forecasting Process

There are six basic steps in the forecasting
process:
1)Determine the purpose of the forecast.
2)Establish a time horizon.
3)Obtain, clean, and analyse appropriate data.
4)Select a forecasting technique.
5)Make the forecast.
6)Monitor the forecast.

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Demand Forecasting
A forecast is a detailed estimate of the future event
during a specified time frame. Demand forecast is
the estimate of level of demand (amount or quantity)
to be expected for goods or services for some period
of time in the future.
Accurate demand forecasting is essential for a
business firm to enable it to produce the required
quantity at the right time. Further, it enable the
firm to acquire their inputs labour, machine,
material, money organize production, advertise the
product and organize sales channels.

Types of Forecasts
Based on the period under forecast, demand forecast
can be of two types: a) short-run forecasts (1 year)
and b) long-run forecasts ( 1 to 20 years).
Based on the level, the forecasting may be at the
firm level, industry level, national level or at the
global level.
Based on degree of orientation, demand forecasts can
be worked out on total sales or product/service-wise
sales for a given time period. Forecasts in terms of
total sales can be viewed as general forecast whereas
product/service-wise or region or customer segmentwise forecast is referred to as specific forecast.

Scientific approach to Forecasting

a) Identify and state the objectives of forecasting clearly
b) Select appropriate method of forecasting, in the light of (a)
c) Identify the variables affecting the demand for the given product
or service
d) Express these variables in appropriate forms
e) Collect the relevant data to represent the variables
f) Determine the most probable relationship between the dependent
variable and independent variable, using the appropriate statistical
techniques
g) Make appropriate assumptions to forecast and interpret results in
terms of market share, turnover in terms of value and volume,
product groups, individual products, sizes and brands of each
individual products and so on.
h) Let there be alternative forecasts to make the forecasting
exercise more meaningful.

Methods of Demand Forecasting

Survey Method
a) Survey of Buyers Intentions method, the buyers are
contacted either directly or by post with a
questionnaire to elicit their opinions about a particular
product or service. Where all the buyers, in the
population, are contacted, it is called census method or
total enumeration method; where a limited number of
buyers chosen by sample are contacted, it is called
sample method.
a) Survey of Sales Force method: In sales force opinion
method, the company elicits the opinion of its sales
force regarding the future demand for the product
given an outline of its features and price. The sales
people may be contacted by a teleconference or invited
for a special get-together for this purpose.

Advantages & Disadvantages of Survey Method

Advantages:
i)Where the product is new on the market for which no data
previously exists
ii)When the buyers are few and they are accessible
iii)When the cost of reaching them is not significant
iv)When the consumers stick to their intentions
v)When they are willing to disclose what they intend to do

Disadvantages:
i)Survey may be expensive
ii)Sample size and timing of survey
iii)Methods of sampling
iv)Inconsistent buying behaviour

Statistical Method
i) Trend projection methods:

a)Trend line by observation: By observation, trend

line can be fitted based on the past data,
considering that the same past trend will continue in
future also.
a)Least Square method: In this method, certain
statistical formulae are used to find the trend line
which best fits the available data. The trend line
is the basis to extrapolate the line for future
demand for the given product or service on graph.
The trend line may be in the linear or non-linear
form.

Contd.

The estimating linear trend equation of sales is written as S = x + y(T). State and
solve the normal equation to determine the value of x and y in the trend equation,
S = Nx + yT
ST = xT + yT2
Where S is the sales, T is the year number and n is number of years
By substituting the values from table in the normal equations, we get
5x + 25y = 437
25x + 165y = 2265
By solving these equations, we get x = 77.4 and y = 2
Years 2016 and 2018 take on the year numbers 11 and 13 respectively; By
substituting these values in the trend equation, S = x + y(T)
Thus the forecast sales for year 2016 and 2018 are
S2016 = 77.4 + (2 x 11) = 99.4 Lakhs units
S2018 = 77.4 + (2 x 13) = 103.4 Lakhs units

Example 5.1

Year
2006
2008
2010
Sales
(Rs. In Lakhs)
75
84
92
Estimate the sales for the years 2016 and 2018.

2012

2014

98

88

Year

Year
Number (T)

Sales (S)

ST
(Rs. in Lakhs)

T2

2006

75

75

2008

84

252

2010

92

460

25

2012

98

686

49

2014

88

792

81

25

437

2265

165

Contd.

c) Time series analysis considers significantly large amount of past

data for the product to speak about different components of
trend such as: long-term trend, cyclic trend, seasonal trend and
irregular trend. One of the important limitation of time series
analysis is that it ceases to be valuable when there is a
breakdown in the trend projection as a result of a turning point
or significant change in the policies or procedures.
d) Moving average method considers that the average of past
events determine the future events. Here, the average keeps on
moving depending upon the number of years selected. Selection
of the number of years is the influential factor in this method.
All the years are given equal weight, which is not fair.
e) In Exponential smoothing method, the short run forecasts are
made. Different weights are given to the years of data
depending upon how close they are to the present. It is assumed
that the future is more based on the recent present rather than
distant past.

Example 5.2 Compute 3-day moving average from the following sales data

Date and Month

Daily Sales
(Lakhs of Tonnes)

3-day
Moving Average

Oct 1

40

44

48

45

44

53

45.7

To calculate 3-day moving average,

S4 = (40+44+48)/3 = 44
S5 = (44+48+45)/3 = 45.7

Example 5.3 Predict the sales forecast by using the concept of

exponential smoothing
Time period

Actual Sales
(Units in Lakhs)

Predicted sales
(Units in Lakhs)

5.0

5.6

6.7

5.8

6.9

5.775

5.1

5.887

8.1

5.808

Contd.

Let us take four period average as the initial forecast; year 5 while
smoothing constant of c=0.1
S5 = (S1+S2+S3+S4)/4
= (5.0+5.6+6.7+5.8)/4
= 5.775
Sales for S5 = 6.9, S6 is calculated as
St+1 =cSt + (1-c)Smt
S6 =cS5 + (1-c)Smt
= 0.1(6.9) + (1-0.1) 5.775
= 5.887
S7 = 0.1(5.1) + (1-0.1) 5,887
= 5.808
Where,
St+1 = exponentially smoothed average for new year
St

= actual data in the most recent past

Smt = most recent smoothed forecast

c = smoothing constant

Contd.
ii) Barometric Techniques:
Under the barometric technique, one set of data is used to predict another
set. In other words, a relevant indicator is used as a barometer of future
demand. Compiled statistical data comes handy very much here. The utility
of this method gets restricted where it is difficult to determine the time
lag between the change in one variable and the change in the forecast
variable.
iii) Simultaneous Equation Method:
In this method, all variables are simultaneously considered as it is
assumed that every variables influences the other variables in an economic
environment. Hence, the set of equations equals the number of dependent
variables. The computation may be difficult where the number of equations
is larger.
iv) Correlation and regression method:
These methods are statistical techniques which speak about the
nature of relationship and extent of relationship respectively between two
given variables, one is dependent and the other one is independent.

Other Methods
1) In Expert Opinion method, an expert, who is
associated with the insights of the industry as a
whole, is invited to suggest about the future of a
particular product or service.
1) Test Marketing means releasing the product on a
test basis in well chosen, limited, but representative
market. Based on the results of test marketing, the
manufacturer can assess the rate of success for
this product, if launched in the wider market. If
the results of test market are not encouraging, the
reasons for poor performance can be studied in
detail and necessary corrections can be before it is
launched again.

Contd.
3) Controlled Experiments, as the name itself suggests,
the company can experiment different homogeneous
markets releasing its product with different types of
appeal such as different prices, packaging, models and
so on. It is not only a costly exercise, but also time
consuming.
4) In the Judgemental approach where none of the above
methods are suitable to assess demand for a
particular product or service, the only alternative is to
use ones judgement. Also that different methods have
different assumptions and criteria, it is desirable that
management should supplement its judgement to the
results of every method of demand forecasting.

Forecast Accuracy
Accuracy and control of forecasts is a vital aspect of
forecasting, so forecasters want to minimize forecast
errors. However, the complex nature of most real-world
variables makes it almost impossible to correctly predict
future values of those variables on a regular basis.
Decision makers will want to include accuracy as a factor
when choosing among different techniques, along with cost.
Accurate forecasts are necessary for the success of daily
activities of every business organization. Forecasts are the
basis for an organizations schedules, and unless the
forecasts are accurate, schedules will be generated that
may provide for too few or too many resources, too little
or too much output, the wrong output, or the wrong timing
of output, all of which can lead to additional costs,
dissatisfied customers, and headaches for managers.

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Forecast Error
Some forecasting applications involve a series of
forecasts

(e.g.,

weekly

revenues),

whereas

others involve a single forecast that will be used

for a one-time decision (e.g., the size of a
power plant). When making periodic forecasts, it
is

important

to

monitor

forecast

errors

to

determine if the errors are within reasonable

bounds. If they are not, it will be necessary to
take corrective action.

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Thank You and All the

Very Best!