(KMBN OM02) Unit 3: Aggregate Planning

Aggregate Planning

Aggregate planning is a strategy businesses use to plan how much product to make or services to provide over a future period, usually 3 to 18 months. Think of it as a way of balancing the company's resources (like workers, equipment, and raw materials) with customer demand. The goal is to ensure the company can meet customer needs without overproducing or wasting resources.

• Forecast Demand: Estimate how many products or services customers will need.
• Plan Resources: Decide how many workers, materials, and other resources are needed to meet this demand.
• Set a Schedule: Determine the schedule to make sure production aligns with the demand.
• Adjust if Needed: If demand changes, the plan can be adjusted, for example, by hiring more workers, working overtime, or using stock from inventory.

In short, aggregate planning helps companies make efficient use of resources, avoid shortages or surpluses, and keep production steady so they can meet customer demand without wasting time or money.

Meaning

In simple terms, aggregate planning is like creating a big-picture plan for a company’s production. It helps the company figure out how much of its products it needs to make in the coming months, so it can match what customers want without making too much or too little.

This planning process looks at the company’s resources, like workers, equipment, and materials, and then makes a schedule that balances them with customer demand. This way, the company can keep production smooth, avoid shortages or waste, and make sure they’re ready to meet customer needs efficiently.

Let’s say a company makes jackets. As winter approaches, they know people will want more jackets, so they use aggregate planning to prepare.

• Forecast Demand: They estimate that they’ll need to produce 50,000 jackets over the next three months.
• Plan Resources: The company checks its resources. They have enough sewing machines, but they’ll need more fabric and workers to reach this goal.
• Set a Schedule: To keep production steady, they decide to make about 4,000 jackets per week. They plan to bring in more fabric each month and hire extra workers to help for the season.
• Adjust if Needed: If demand goes up (say, a sudden cold wave hits), they might need to schedule some overtime for workers or make more jackets than planned.

By using aggregate planning, the company avoids having too much fabric lying around or too few workers when demand peaks, ensuring they meet customer needs efficiently.

Strategies and Cost

In aggregate planning, companies use different strategies and try to manage costs to make sure they produce the right amount at the right time without wasting resources.

Strategies

• Chase Strategy: Here, the company adjusts production to match demand exactly. If demand is high, they increase production (hire more workers, add shifts). If demand is low, they reduce production (lay off temporary workers, cut shifts). This avoids having extra products lying around but can be costly because of hiring/firing or scheduling changes.
• Level Strategy: In this approach, the company keeps production steady regardless of demand changes. If demand goes up, they rely on inventory (extra products stored in advance) to meet it. If demand goes down, they store the extra products for future sales. This keeps costs predictable and avoids hiring or firing, but it requires storage space and money for inventory.
• Hybrid Strategy: This is a mix of chase and level strategies. The company adjusts production somewhat, but not as much as in the chase strategy. For example, they might keep production steady most of the time but add overtime during high-demand periods. It provides a balance between flexibility and cost control.

Costs

Each strategy has different costs that companies try to balance, such as:

• Labor Costs: Paying workers for regular hours, overtime, or hiring/firing costs.
• Inventory Costs: Money spent on storing extra products or raw materials when demand is low.
• Production Costs: The costs associated with producing products, which might include materials, machinery wear-and-tear, and energy costs.
• Backorder Costs: If they can’t meet demand, they might need to take backorders (late deliveries), which can lead to extra costs or lost sales.

By choosing the right strategy and managing these costs, companies can stay efficient and profitable while meeting customer demand.

Let's go through an example using a toy company that makes action figures.

Chase Strategy Example

The toy company knows that demand is much higher around the holiday season and lower in the summer. With the chase strategy, the company:

• Hires seasonal workers in October and November to boost production.
• Increases shifts temporarily during this busy season.
• Lays off seasonal workers after the holiday season.

This approach means they don’t have to store extra action figures in the summer but do have extra labor costs for hiring and firing temporary workers.

Level Strategy Example

The company decides to keep production steady at 2,000 action figures every month, all year round. With the level strategy:

• In summer, they build up inventory by producing more than is immediately needed, storing the extra figures.
• During the holiday season, they use the stored inventory to meet high demand.

This avoids the need for hiring or firing workers, but they have storage costs for the extra action figures produced in the off-season.

Hybrid Strategy Example

The company decides on a hybrid strategy. They:

• Keep a steady production of 1,800 figures per month.
• During the holiday season, they schedule overtime instead of hiring many seasonal workers.
• This way, they build some inventory in advance but also adjust production slightly during peak demand.

This strategy balances the need for flexibility with the cost of extra storage, allowing them to adjust without big changes in hiring or production.

By choosing a strategy that matches demand patterns, the toy company can manage costs better and ensure they’re prepared for high-demand seasons without overspending on resources.

Concept of Aggregate Planning

Aggregate planning differs a bit depending on the industry, especially between capital-intensive, labor-intensive, and fashion industries. Let’s break down these concepts.

Aggregate Planning Concept

At its core, aggregate planning is about planning production in advance to meet demand in an efficient way. It helps businesses determine how much to produce, what resources they need (like workers or machines), and when to adjust their production levels. By doing this, they avoid overproducing or underproducing and control their costs.

Capital-Intensive Industries

In capital-intensive industries, companies rely more on machinery, equipment, and technology than on people. Examples include car manufacturing, steel production, or power plants. For these companies:

• Planning must consider the high cost of machines and facilities. It’s costly to stop and start these machines, so they try to keep production steady to avoid downtime.
• The focus is often on maintaining equipment efficiency and balancing production to match demand.

Example: A car manufacturer will use aggregate planning to decide how many cars to produce each month. They’ll ensure their expensive assembly lines keep running smoothly without big pauses, as starting and stopping the machines can be costly.

Labor-Intensive Industries

Labor-intensive industries depend more on human workers than machines. Examples include restaurants, construction, or some types of manufacturing where hand work is involved. For these companies:

• Planning focuses on staffing needs because their biggest expense is labor.
• They might adjust the number of workers or shifts based on demand, making it easier to increase or reduce production without much cost.

Example: A restaurant uses aggregate planning to decide how many staff members are needed during busy times like weekends. They might hire extra servers for peak hours and cut down staff when it’s slow to avoid unnecessary labor costs.

Fashion Industries

Fashion is unique because demand can be unpredictable and changes quickly with trends. Companies need to produce the right amount of products quickly to avoid ending up with outdated stock. For fashion industries:

• Planning has to be flexible to handle quick changes in demand and trends.
• They often use a mix of strategies to meet demand, keeping some products in stock and rapidly increasing production if a trend spikes.
• Fashion companies might also produce in small batches to avoid large amounts of leftover stock if a trend dies out.

Example: A clothing brand might use aggregate planning to prepare for a seasonal collection. They’ll estimate demand based on trends and produce in smaller quantities. If a particular style becomes popular, they’ll increase production quickly. This keeps them from wasting resources on clothes that might not sell if the trend changes.

In each industry, aggregate planning adjusts to match the main resource (machines, people, or fast-changing trends) so the company can meet demand efficiently and control costs.

Materials requirement planning (MRP I)

Materials Requirement Planning (MRP I) is a way for companies to make sure they have the right materials, in the right amounts, at the right time, to produce their products without running out or wasting materials. It’s like creating a grocery list and shopping plan for a big meal, so you’re prepared to cook without missing ingredients.

Here’s how it works:

• Know What’s Needed: First, the company knows what they want to make (for example, 1,000 bicycles). They look at each part that’s needed, like wheels, seats, handlebars, and chains.
• Check Inventory: Next, they see what they already have in stock. If they already have 500 wheels but need 1,000, they know they need to order 500 more.
• Plan When to Order: The company also considers how long it will take to get each part. If it takes two weeks to get wheels and four weeks to get chains, they plan to order each item at the right time so everything arrives when they need it.
• Avoid Running Out or Overstocking: By planning carefully, MRP helps avoid situations where production stops because they’re missing a part or where they order too much and have materials sitting around unused.

In short, MRP is a tool that helps companies manage their materials effectively, so they can keep production going smoothly, avoid delays, and keep costs down by only ordering what’s needed, when it’s needed.

Let’s say a company makes wooden tables. They use MRP to make sure they have all the parts and materials ready for production. Here’s how it works in a simple example.

1. Know What’s Needed

The company plans to make 500 tables over the next month. Each table requires:

• 1 tabletop
• 4 table legs
• 8 screws

So, to make 500 tables, they’ll need:

• 500 tabletops
• 2,000 table legs (500 tables × 4 legs each)
• 4,000 screws (500 tables × 8 screws each)

2. Check Inventory

They check their current stock and find:

• 200 tabletops in storage
• 1,000 table legs in storage
• 3,000 screws in storage

3. Calculate What to Order

Based on the inventory check, they know they need to order:

• 300 more tabletops (500 needed - 200 in stock)
• 1,000 more table legs (2,000 needed - 1,000 in stock)
• 1,000 more screws (4,000 needed - 3,000 in stock)

4. Plan When to Order

The company also considers the delivery time for each part:

• Tabletops take 1 week to arrive.
• Table legs take 2 weeks.
• Screws take 3 days.

So, they’ll place the orders according to when they need each part to ensure everything arrives on time for production to start.

5. Avoiding Delays or Extra Inventory

Thanks to MRP, the company has a clear plan. They’ll receive only what’s needed and won’t have extra materials taking up space. When production begins, they’ll have exactly the right amount of tabletops, table legs, and screws to complete all 500 tables without delays.

This way, MRP keeps the production process efficient by managing materials and ensuring everything arrives just when it’s needed, preventing both shortages and excess inventory.

MRP-Manufacturing resource planning (MRP II)

Manufacturing Resource Planning (MRP II) is like an upgraded version of the basic MRP (Materials Requirement Planning). While MRP I focuses only on planning the materials needed for production, MRP II looks at the bigger picture by planning not just materials, but also people, machines, money, and the overall production schedule. Think of it as a full "blueprint" that helps a company manage everything it needs to manufacture its products efficiently.

Here’s how MRP II works in simple terms:

• Plan Materials: Like MRP I, it calculates what materials are needed and when they’re needed, so the company can order the right amount without running out or having too much extra.
• Plan People and Machines: MRP II also figures out how many workers are needed and which machines will be used. It checks to make sure there are enough workers and that the machines are available, so production doesn’t get delayed.
• Manage Costs and Budgets: MRP II helps track costs and budgets for the entire production process. It helps the company see how much they’ll spend on materials, labor, and other expenses, which helps with setting prices and planning for profits.
• Set Schedules: MRP II creates a detailed schedule for the whole production process, so everyone knows when materials should arrive, when workers are needed, and when machines will be in use. This keeps production on track and avoids downtime or bottlenecks.
• Check Performance: MRP II monitors how well production is going and compares it to the plan. If there are issues, like a delay in materials or machines breaking down, MRP II can help adjust the schedule or resources to keep things running smoothly.

Example: Imagine a company that makes smartphones. To keep production efficient, they use MRP II to plan everything:

• They calculate the materials needed (like screens, batteries, and chips).
• They check how many workers they need for assembly and ensure the production line has enough space and machines.
• They estimate costs for materials, labor, and equipment to create a budget.
• They set a schedule so materials arrive on time, workers are scheduled correctly, and machines are used efficiently.
• If a part is delayed, MRP II helps them shift tasks or reschedule to minimize downtime.

By managing all these factors, MRP II ensures the company can produce smartphones smoothly and cost-effectively, keeping everything organized from start to finish. It’s a complete system for running production in the most efficient way possible.

Master production scheduling

Master Production Scheduling (MPS) is a detailed plan that tells a company exactly what to produce, how much to produce, and when to produce it, for a specific period (like the next few weeks or months). It’s like a roadmap for production, guiding the company on what needs to be made to meet customer demand without overproducing or underproducing.

How MPS Works:

• Set Production Goals: MPS starts with the overall goals, like how many products need to be made based on customer orders and demand forecasts.
• Plan Timing and Quantities: MPS breaks down the production goals into specific time periods (weeks or months) and decides exactly how much of each product should be made in each period.
• Organize Resources: MPS checks to ensure that all the needed resources (materials, workers, machines) are ready and available to meet these production goals.
• Adjust for Changes: If customer demand changes or if there’s a delay in materials, MPS helps the company adjust the production schedule, so they can stay on track without major disruptions.

Example: Let’s say a furniture company uses MPS to plan production for their best-selling items: chairs and tables.

• They forecast that they’ll need 1,000 chairs and 500 tables over the next month to meet customer orders.
• MPS sets a schedule to produce 250 chairs and 125 tables each week, so production stays steady.
• The plan also checks to ensure there’s enough wood, screws, and workers to make the items.
• If a big order for tables comes in unexpectedly, MPS can adjust the schedule to produce more tables that week and fewer chairs if needed.

In short, MPS is a guide that helps companies produce the right products at the right time, so they can meet customer demand without delays, shortages, or excess stock. It’s a practical tool to keep production organized and efficient.

Enterprise Resource Planning (ERP)

Enterprise Resource Planning (ERP) is like a giant, smart notebook that helps a company manage all its important activities in one place. It’s a software system that connects different parts of a business—like sales, finance, inventory, production, and human resources—so they can all work together smoothly.

How ERP Works:

• Centralized Information: ERP collects all the data from different departments into one system. This way, everyone in the company (whether they are in accounting, sales, or production) can access the same updated information.
• Streamlined Processes: With ERP, tasks like ordering materials, tracking inventory, paying employees, and managing customer orders can be automated and simplified. This reduces mistakes and saves time.
• Better Communication: Since all departments are using the same system, communication between them becomes easier. For example, if the sales department gets a big order, the production team will instantly know they need to make more products.
• Real-Time Updates: When something changes—like a new order comes in, or materials are delivered—everyone in the company gets updated immediately. This keeps everything on track and avoids confusion.

Example: Imagine a company that makes and sells shoes. Here's how ERP helps:

• Sales: The sales team gets an order for 500 pairs of shoes.
• Inventory: The ERP system checks if they have enough materials (like leather, soles, etc.) in stock.
• Production: If materials are available, the ERP sends the order details to the production team to make the shoes.
• Finance: At the same time, the finance team uses the ERP to invoice the customer and track the payment.
• HR: The HR department knows how many workers are needed for production and uses the ERP to schedule shifts.

Instead of each department working separately and needing to ask others for information, the ERP system keeps everything connected, so everyone knows what’s going on and can work more efficiently.

In Simple Terms: ERP is like a company’s brain. It makes sure everyone has the right information, so everything runs smoothly, from ordering raw materials to delivering finished products. It saves time, reduces errors, and helps different parts of the company work together seamlessly.

Global Practices

Global practices in aggregate planning refer to the strategies and techniques that companies use to manage production and resources across different countries or regions. Since businesses today often operate on a global scale, they need to plan their resources, production, and distribution to meet demand not just locally, but around the world.

Key Points of Global Practices in Aggregate Planning:

• Global Demand Forecasting: Companies must predict how much of their product will be needed in different parts of the world. For example, a toy company might know that toys are in high demand in the U.S. during Christmas, but in other countries, demand peaks at different times. They adjust their production plan based on these forecasts.

• Global Resource Management: Global companies need to plan how to use resources (like raw materials, workers, and machines) efficiently across different countries. They might have factories in multiple countries, and the challenge is to ensure that each factory has what it needs to meet demand.

• Transportation and Distribution: Companies need to plan how to move goods between countries. For example, if a company is making products in India and selling them in Europe, they must plan how much to produce in India and how to ship it to Europe on time.

• Flexible Production Plans: Because markets and demand can change quickly across the globe, companies must be flexible with their production plans. If there’s an unexpected demand for a product in one country, they need to adjust production schedules or shift resources quickly to meet the new demand.

• Cost Considerations: Global aggregate planning also takes into account the costs of producing and shipping products in different regions. Some countries may have cheaper labor, while others may have lower shipping costs, so the company must decide where and when to produce the goods to keep costs low.

Example: Imagine a clothing company that sells its products all over the world:

• Demand Forecasting: They know that winter coats will be needed in the northern hemisphere during colder months, but in the southern hemisphere, the demand for coats is much lower during the same time.
• Resource Management: They might produce coats in factories located in countries with cheaper labor, like Vietnam, and use materials from nearby suppliers to save on shipping costs.
• Shipping and Distribution: The company plans how to ship finished coats from the Vietnam factory to both Europe and the U.S., making sure the products arrive on time for the cold season in each region.
• Adjusting Production: If the U.S. suddenly experiences an unusually cold winter, the company can increase production at their Vietnam plant and ship more coats to the U.S. to meet the unexpected demand.

In short, global practices in aggregate planning are about coordinating resources, production, and distribution across multiple countries to meet worldwide demand efficiently and cost-effectively. It requires flexibility, good forecasting, and careful management of global resources.

Unit 2: Process of Production Planning and Control | Unit -1 Introduction of Operation Planning & Control | Unit 4: Waste Management