Unit IV

Planning and Control of Operations II

An Overview of Operations
 Intermediate Planning in Perspective

• Organizations often manage demand during peak

times by shifting the demand to a non-peak period as
capacity is far in excess of demand during non-peak
periods. This is why hotel rates are high during peak
season and special off-season discounts are offered
for summer resorts and hill stations….
 Overview of Planning Levels
Long Range Plans Intermediate Plans Short-Range Plans
• Long-term capacity • General levels of • Order Quantities
• Location employment • Machine Loading
• Product Design • Output • Job Assignment
• Work System Design • Finished-goods inventories • Job Scheduling
• Back orders • Work Schedule

Figure 1. Overview of Planning Levels

Corporate Economic, Aggregate

Strategy Political Demand
Condition Forecast

Business Plan

Aggregate Plan
Figure 2. Planning
Master Schedule Sequence
 AGGREGATE PRODUCTION PLANNING

• A planning exercise done

for operations using data
at an aggregate level.

• Translating the business

plans to operational
decisions.

• Using APP exercise, firms

arrive at the quantity and
timing of resources to be
committed to ensure
continuous flow of
goods/services to
customers.
 Aggregate Production Planning
Decision Variables: An illustration

• The decisions involve

– Amount of resources (productive capacity and labour hours) to be committed
– Rate at which goods and services needs to be produced during a period
– Inventory to be carried forward from one period to the next
• An example from Garment Manufacturing
– Produce at the rate of 9000 metres of cloth everyday during the months of January to
March
– Increase it to 11,000 metres during April to August
– Change the production rate to 10,000 metres during September to December
– Carry 10% of monthly production as inventory during the first 9 months of production.
– Work on a one-shift basis throughout the year with 20% over time during July to
October
 Aggregate Production Planning
Why is it necessary?

• Demand fluctuations

• Capacity fluctuations

• Difficulty level in altering

production rates

– Production systems are

complex and varying the rate
of production requires prior
planning and co-ordination
with supplier and distributor

• Benefits of multi-period planning

Aggregate Production Planning is done in an organisation to match the demand with the
supply on a period-by-period basis in a cost effective manner
Aggregate Planning in Service Sector
Overview of Aggregate Planning
Overview of Aggregate Planning
Steps in Aggregate Planning
 Aggregate Production Planning
Two generic strategies

 In level strategy, the emphasis is not to disturb the existing production rate at all
 In chase strategy, no effort is made to carry inventory from one period to another;
the supply – demand mismatch is addressed during each period by employing
capacity related alternatives
MASTER PRODUCTION SCHEDULE

▶ Specifies what is to be made

and when Aggregate Plan
▶ Must be in accordance with
Aggregate Planning the aggregate production Month Jan Feb March
Planned 200 300 400
plan Output
▶ Inputs from financial plans,
Disaggregate customer demand, Disaggregating the aggregate plan
engineering, labor
availability, inventory
Master Schedule fluctuations, supplier Master Schedule
performance
▶ As the process moves from Month Jan Feb March
planning to execution, each Planned
Output
step must be tested for
feasibility Model A 100 100 100
Model B 75 150 200
Model C 25 50 100
Total Units 200 300 400
MASTER PRODUCTION SCHEDULE
▶ MPS is established in
terms of specific
products, it
disaggregates the
aggregate plan
▶ Schedule must be
followed for a
reasonable length of
time
▶ The MPS is quite often
fixed or frozen in the
near-term part of the
plan
▶ The MPS is a rolling
schedule
▶ The MPS is a statement
of what is to be
produced, not a forecast
of demand
Master Production Scheduling Linkages with
APP & Forecasting

Aggregate
Order
Inflow Production Forecasting
Planning
Market

Master
Capacity Plan Production Materials Plan
Scheduling

Labour & Actual

Vendors
Resources Production
Resource Material
availability Inflow
 Enterprise Resource Planning (ERP)

▶ An extension of the MRP system

to tie in customers and suppliers
1. Allows automation and
integration of many
business processes
2. Shares common data bases
and business practices
3. Produces information in real
time
▶ Coordinates business from
supplier evaluation to customer
invoicing
 Enterprise Resource Planning (ERP)
▶ ERP systems have the
potential to
▶ Reduce transaction costs
▶ Increase the speed and
accuracy of information
▶ Facilitates a strategic
emphasis on JIT systems and
supply chain integration
▶ Can be expensive and time-
consuming to install
 ERP in the Service Sector
▶ ERP systems have been developed for
health care, government, retail stores,
hotels, and financial services
▶ Also called efficient consumer response
(ECR) systems in the grocery industry
▶ Objective is to tie sales to buying,
inventory, logistics, and production
Enterprise Resources Planning (ERP): A tool
for Inter-functional integration

Purchase
Purchase
Order

Accounts Accounts
Invoice Payment
Payable Statement

Cash Management Cash Management

Treasury Forecast Current Position

Accounts Cash Accounts

Invoice Statement
Receivable Receipt

Sales
Sales Order
 Modules in Enterprise Resource Planning (ERP)

▶ ERP modules include

▶ Basic MRP
▶ Finance
▶ Human resources
▶ Supply-chain
management (SCM)
▶ Customer relationship
management (CRM)
ERP and MRP
 Material Requirements Planning (MRP)

• Material Requirements Planning (MRP)

– Is a computerised information system that aids in the planning of
materials in organisation
– MRP systems exploit certain unique characteristics of the production
items
– Utilize information on lead time, inventory status and master
production schedule to make material available exactly at the time of
requirement
• The logic applied to plan materials could be extended to other
resources required in any operations system. Therefore, these
planning methodologies can be broadly defined as resources
planning
 Material Requirements Planning (MRP)

• The logic that ties production functions

together from a material planning and control
view
• A logical, easily understood approach to the
problem of managing the parts, components,
and materials needed to produce end items
– How much of each part to obtain?
– When to order or produce the parts?
• Dependent demand drives the MRP system
• Materials requirements planning
(MRP) is a forward-looking, demand-
based approach for planning the
production of manufactured goods and
ordering materials and components to
minimize unnecessary inventories and
reduce costs.
 Master Schedule
Quantity and Completion Time of an end Item

Material Requirements Planning

Quantitates and timing of subassemblies, components, and raw
materials required to achieve the master schedule
MRP Input and Output
MRP Input and Output
 Developing MRP Logic
Basic Building Blocks

• Existence of multiple levels of dependency

• Product Structure – Bill of Materials (BOM)
• Time phasing the requirement
• Determining Lot Size
• Incorporating lead time information
• Establishing the planning premises
 Bill of Materials
• A Bill of Material (BOM) is
a list of all materials needed
to assemble or put together
one unit of the final product.
• Bill of Materials (BOM) is a
key ERP application for
manufacturers, allowing
them to outline the structural
composition of products
they sell, assemble, cost or
plan.
• BOM exists in various
formats
– Single level BOM
– Indented BOM
– Modular BOM
Lot Sizing Rules
 What is Inventory??
• Inventory is the stock of any ▶
One of the most expensive
item or resource used in an assets of many companies
organization and can representing as much as 50%
include: of total invested capital.
– Raw materials, finished ▶ Less inventory lowers costs
products, component but increases chances of
parts, supplies, and running out.
work-in-process
• It refers to any idle resource
that can be put to some
future use.

29
 Inventory Planning
Independent demand items
• Finished goods and spare parts typically belong to
independent demand items in manufacturing organisations
• Two attributes characterise and distinguish independent
demand items:
– Timing of demand: Independent demand items have a
continuous demand
– Uncertainty of demand: There is considerable element of
uncertainty in the demand in the case of independent
demand items
• Inventory planning of independent demand items must
address the following two key questions:
– How much?
– When?
 17-31

Independent vs. Dependent Demand

Independent Demand (Demand for the final end-product or demand not related
to other items)

Next month, Demand Forecast is, 2000 each bike will have 2 tyres, 1 speedometer, 2-side indicator
motorbikes light). The company will order 4,000 tyres (2000*2), 2000
speedometer (2000*1), 4,000 lights (2000*2) to its suppliers.
Thus, demand of tyres, speedometer indicator are dependent
upon demand of motorbikes. So, the inventory of these items
is called dependent demand inventory demand. While,
Finished demand of motorbikes is determined by demand forecast,
product hence they are independent demand inventory

Dependent
Demand
(Derived
demand
items for
component
parts,
E(1) subassemb
lies,
raw
materials,
etc)
Component parts
 Functions of Inventory
1. To provide a selection of goods for
anticipated demand and to separate the
firm from fluctuations in demand
2. To decouple or separate various parts of
the production process
3. To take advantage of quantity discounts
4. To hedge against inflation
 Types of Inventory

• Seasonal Inventory: Seasonality in demand is absorbed using inventory

• Decoupling Inventory (Work-in-process): Complexity of production control is
reduced by splitting manufacturing into stages and maintaining inventory between
these stages
• Cyclic Inventory: Periodic replenishment causes cyclic inventory
• Pipeline Inventory: Exists due to lead time
• Safety/Buffer Stock: Used to absorb fluctuations in demand due to uncertainty

To provide a buffer To avoid stock

between successive out (Buffer)
operations To act as buffer between
(Decoupling) various element in the supply
chain (Pipeline/Transit)

Inventory
To minimize the total cost
Satisfy period by ordering economic
of seasonal order quantity (Cycle
demand Stock)
(Seasonal)
 Types of Inventory
▶ Raw material
▶ Purchased but not processed
▶ Work-in-process (WIP)
▶ Undergone some change but not completed
▶ A function of cycle time for a product
▶ Maintenance/repair/operating (MRO)
▶ Necessary to keep machinery and processes
productive
▶ Finished goods
▶ Completed product awaiting shipment
 Types of Cost
Ordering Cost

• Search and identification of appropriate sources

of supply
• Price negotiation, contracting and purchase
order generation
• Follow-up and receipt of material
• Eventual stocking in the stores after necessary
accounting and verification
• A larger order quantity will require less number
of orders to meet a known demand & vice versa
Cost of carrying and cost of ordering are fundamentally two opposing cost
structures in inventory planning
 Costs in Inventory Planning
Shortage Cost
• Costs arising out of pushing the order back and
rescheduling the production system to
accommodate these changes
• Rush purchases, uneven utilisation of available
resources and lower capacity utilisation
• Missed delivery schedules leading to customer
dissatisfaction and loss of good will
• The effects of shortage are vastly intangible, it is
indeed difficult to accurately estimate
Break-Even Point
Inventory Management Systems
 How much to order: Economic Order Quantity Models
• The question of how much order to order can be
determined by using an Economic Order Quantity
(EOQ) model. EOQ models identify the optimal
order quantity by minimizing the sum of certain
annual costs that vary with order size and order
frequency. 3 order size models are there
I. The basic economic order quantity model
II. The economic production quantity model
III. The quantity discount model
 Basic Economic Order Quantity Models (EOQ)
• The basic EOQ model is the simplest of
the three models. It is used to identify a
fixed order size that will minimize the sum
of the annual costs of holding inventory
and ordering inventory.

Assumptions of the basic EOQ model:

I. Only one product is involved
II. Annual demand requirement are known
III. Demand is spread evenly throughout the
year so that demand rate is reasonably
constant
IV. Lead time is known and constant
V. Each order is received in a single
delivery
VI. There are no quantity discounts
 17-41

Basic Fixed-Order Quantity Model and Reorder Point Behavior

1. You receive an order quantity Q. 4. The cycle then repeats.

Number
of units
on hand Q Q Q

R
L L
2. Your start using
them up over time. 3. When you reach down
Time to a level of inventory of
(Important, Read more about these terminology) R, you place your next Q
R = Reorder point
Q = Economic order quantity
sized order.
L = Lead time
 Minimizing Costs
Objective is to minimize total costs

Total cost of
holding and
setup (order)

Minimum
total cost
Annual cost

Holding cost

Setup (order) cost

Optimal order Order quantity

quantity (Q*)
 17-43
Basic Fixed-Order Quantity (EOQ) Model
Formula
TC=Total
TC=Totalannual
annualcost
cost
DD=Demand
=Demand
Total Annual Annual Annual CC=Cost
=Costper
perunit
unit
Annual = Purchase + Ordering + Holding QQ=Order
=Orderquantity
quantity
Cost Cost Cost Cost SS=Cost
=Costof
ofplacing
placingan
an
order
orderor
orsetup
setupcost
cost
RR=Reorder
=Reorderpoint
point
LL=Lead
=Leadtime
time
H=Annual
H=Annualholding
holdingand
and
storage
storagecost
costper
perunit
unit
of
ofinventory
inventory
ABC Analysis
ABC Analysis