Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
Topic: Aggregate Planning, Material Requirement Planning, and Capacity
Planning
Slide 1
Welcome to Workshop Eight presentation: Aggregate planning, material
requirement planning, and capacity planning.
Slide 2
Outline for Workshop Eight.
 Aggregate Planning Process
 What is Aggregate Planning?
 Strategies for Aggregate Planning
 Material Requirement Planning (MRP)
 What is MRP?
 Dependent Inventory Model Requirements
 MRP Structure
 Lot-Sizing Techniques
 MRP II Closed Loop and Capacity Planning
 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 Planning (MRP II) and the closed loop.
6. Define Capacity Planning (CP), Capacity Requirement Planning (CRP),
design capacity, effective capacity, utilization and efficiency.
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
7. Identify and compute break even.
Slide 4
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.
Slide 5
Aggregate planning objectives
The objective of aggregate planning is to meet forecasted demand while minimizing
cost over the planning period.
 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
Slide 6
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?
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
All these questions involve the manipulation of inventory, production rates, labor
levels, capacity, and other controllable variables.
Slide 7
Aggregate Planning 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
Changes in HR are
gradual or none.
Applies mainly to production
not service, operations.
Varying workforce
size by hiring or
layoffs
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.
Varying production
rates through
overtime or idle
time
Subcontracting
Matches seasonal
fluctuations without
hiring/training costs.
Overtime premiums; tired
workers; may not meet
demand.
Allows flexibility within the
aggregate plan.
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.
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.
Used where changing
inventory size of labor pool is
large.
Demand Option:
advantages and disadvantages as well and stated in the table.
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
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 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.
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.
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
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
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
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 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.
Slide 13
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.
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
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:
 Better response to customer orders
 Faster response to market changes
 Improved utilization of facilities and labor
 Reduced inventory levels
Slide 15
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
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
5. Lead times
Slide 16
 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.
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
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.
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
availability of the item for production
Slide 20
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”
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
 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 = 50 – 10
 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 .9th 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.
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
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
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
 Effective, but computationally burdensome
Slide 25
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
© Ana G. Méndez University System, 2012. All rights reserved.
Universidad del Turabo
MANA 705 DL–Workshop Eight
W8_8_3
Aggregate Planning, Material Requirement Planning, and Capacity
Planning
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.
© Ana G. Méndez University System, 2012. All rights reserved.