Aggregate Planning:

Aggregate planning is an intermediate term planning decision. It is the process of planning the quantity and
timing of output over the intermediate time horizon (3 months to one year). Within this range, the physical facilities
are assumed to be fixed for the planning period. Therefore, fluctuations in demand must be met by varying labour
and inventory schedule. Aggregate planning seeks the best combination to minimise costs.
Production planning in the intermediate range of time is termed as ‘Aggregate Planning’. It is thus called because
the demand on facilities and available capacities is specified in aggregate quantities. For example aggregate
quantities of number of Automobile vehicles, Aggregate number of soaps etc.

The planning process is normally divided in three categories.

(i) Long range Planning which deals with strategic decisions such as purchase of facilities, introduction of new
products, processes etc.
(ii) Short term planning which deals with day-to-day work, scheduling and sometimes inventory problems.
(iii) Intermediate Planning or Aggregate Planning, which is in between long range and short term planning, which
is concerned in generally acceptable planning taking the load on hand and the facilities available into
considerations. In aggregate planning the management formulates a general strategy by which capacity
can be made to satisfy demand in a most economical way during a specific moderate time period, say for one
year

Aggregate Planning Strategies:

Vary the size of the workforce:

Vary the hoursworked:

Vary inventory levels:
Subcontract

Aggregate planning guidelines:

1. Determine corporate policy regarding controllable variables.
2. Use a good forecast as a basis for planning.
3. Plan in proper units of capacity.
4. Maintain the stable workforce.
5. Maintain needed control over inventories.
6. Maintain flexibility to change.
7. Respond to demand in a controlled manner.
8. Evaluate planning on a regular basis.
Properties of Aggregate Planning:
To facilitate the production manager the aggregate planning must have the following characteristics:

(i) Both out put and sales should be expressed in a logical overall unit of measuring

Acceptable forecast for some reasonable planning period, say one year.
A method of identification and fixing the relevant costs associated with the plant. Availability of alternatives
(ii) for meeting the objective of the organization.
(iii) Ability to construct a model that will permit to take optimal or near optimal decisions for the sequence of
planning periods in the planning horizon.

(iv) Facilities that are considered fixed to carry out the objective.
 MATERIAL REQUIREMENTS PLANNING

Material requirement planning (MRP) refers to the basic calculations used to determine component requirements
from end item requirements. It also refers to a broader information system that uses the dependence relationship
to plan and control manufacturing operations.

MRP is a technique of working backward from the scheduled quantities and needs dates for end items specified
in a master production schedule to determine the requirements for components needed to meet the master
production schedule.

“Materials Requirement Planning (MRP) is a technique for determining the quantity and timing for the acquisition
of dependent demand items needed to satisfy master production schedule requirements.”

MRP Objectives:
1. Inventoryreduction
2. Reductioninthe manufacturing and delivery lead times:
3. Realistic delivery commitments
4. Increased efficiency:
Functions served by MRP

1. Order planning and control: When to release orders and for what quantities of materials.
2. Priority planning and control: How the expected date of availability is compared to the need date for each
component.

3. Provision of a basis for planning capacity requirements and developing a broad business plans.
Advantages and Disadvantages of MRP
Advantages :

(i) Reduced inventory,

(ii) Reduced idle time,

(iii) Reduced set up time,
(iv) Ability to change the master production schedule,
(v) Ability to price more competitively,
(vi) Better customer service,
In addition the MRP system enables the following:

(i) Aids capacity planning,

(ii) Helps managers to use the planned schedule before actual release orders,

(iii) Tells when to expedite or deexpedite,

(iv) Delays or cancels orders,

(v) Changes order quantities,

(vi) Advances or delays order due dates.

Disadvantages :

(i) Lack of top management commitment.

(ii) MRP was presented and perceived as a complete and stand-alone system to run a firm, rather than as part of
the total system.

(iii) The issue of how MRP can be made to function with just-in-time production system.
MRP also needs a high degree of accuracy for operation, which often requires (i) changing how the firm operates
and (ii) updating files.

The major complaint by users of MRP is that MRP is too rigid because when MRP develops a schedule, it is quite
difficult to deviate from the schedule if need arises.

2.8 MANUFACTURING RESOURCES PLANNING

MRP IIis a management process for taking the business plan and breaking it down into specific, detailed tasks that
people evaluate, agree upon and are held accountable for. It involves all departments viz., materials department,
engineering department that must maintain bill of materials, sales/marketing department that must keep sales
plan upto date, purchasing and manufacturing departments that must meet due dates for bought out items and
in-house manufactured items respectively.
From MRP I to MRP II : Manufacturing resource planning (MRP II) is a natural outgrowth of Materials Requirement
Planning (MRP I) Whereas MRP Ifocuses upon priorities of materials, CRP is concerned with time. Both material and
time requirement are integrated within the MRP system [i.e., MRP I).
 The earlier resource requirement planning systems were quite simple and unsophisticated. The MRP technique
was used for its most limited capability to determine what materials and components are needed, how many
are needed and when they are needed and when they should be ordered so that they are likely to be available
when needed. In other words, MRP simply exploded the MPS into the required materials and was conceived as an
inventory control tool or a requirements calculator

2.9 ENTERPRISERESOURCES PLANNING

What is ERP?
ERP is a business process management software package developed for optimum use of resources of an enterprise
in a planned manner. ERP integrates the entire enterprise starting from the supplier to the customer, covering
logistics, financial and human resources. This will enable the enterprise to increase productivity by reducing costs.
ERP is a package for cost saving. Once the ERP is Implemented, a single solution addresses the information needs
of the whole organisation.

2.10 ECONOMIC BATCH QUANTITY

Production managers often have to decide what quantity of output must be produced in a batch (known as lot
size or batch size).
Determination of Economic Lot Size for Manufacturing:

The factors to be considered in arriving at the economic lot size are:

(i) Usage rate: The rate of production of parts should match with the rate of usage of these parts in the assembly
line.

(ii) Manufacturing cost: Higher the lot size, lower will be the cost per unit produced because of distribution of
set up costs for setting up production or machines and preparing paper work (production orders). But the
carrying cost (handling and storing costs) will increase with increase in lot size.

(iii) Cost of deterioration and obsolescence: Higher the lot size, higher will be the possibility of loss due to
deterioration (items deteriorating after shelf life) or obsolescence (due to change in technology or change in
product design).

Economic Run Length: When a firm is producing an item and keeping it in inventory for later use, instead of
buying it, the formula used to calculate economic order quantity (EOQ) can be used to calculate the economic
production quantity referred to as Economic Run Length (ERL).

If ‘p’ is the production rate and ‘d’ is the demand rate (or consumption rate), A is the annual demand for the item
in units, Iis the inventory carrying charges (percentage), C is the production cost per unit, then,
 Question 1
M/s. Tubes Ltd. are the manufacturers of picture tubes of T.V. The following are the
details of their operation during 2001:
Average monthly market demand 2,000 tube
Ordering cost ₹ 100 per order
Inventory carrying cost 20% per annum
Cost of tubes ₹ 500 per tube

Normal usage 100 tubes per week

Minimum usage 50 tubes per week
Maximum usage 200 tubes per week

Lead time to supply 6 – 8 weeks

Compute from the above:

(1)Economic order quantity. If the supplier is willing to supply quarterly 1,500 units
at a discount of 5%, is it worth accepting?
(2) Maximum level of stock.
(3) Minimum level of stock.
(4) Re-order level of stock.

Answer :
(1) Economic Order Quantity:
Annual usage of tubes (A)
= Normal usage per week × 52 weeks
= 100 tubes × 52 weeks
= 5,200 tubes.

Ordering cost per order (S)

= ₹ 100. Inventory carrying cost per unit per annum (C)
= 20% of ₹ 500
= ₹ 100

= 102 units(approx.)

(A) Evaluation of order size of 1,500 units at 5% discount

No. of orders =
5200 units
1500 units
= 3.46 or 4 (in case of a fraction, the next whole number is considered).

Ordering cost (No. of order per year at ₹ 100 per order) ₹ 400
Carrying cost of average inventory:

₹ 71,250

Total annual cost (excluding item cost) ₹ 71,650

(B) Annual cost if EOQ (102 units) is adopted
Ordering cost: 5,200 ÷ 102 or 51 orders per year at ₹100 per order ₹ 5,100
Carrying cost of average inventory

₹ 5,100
Total annual cost (excluding item cost) ₹ 10,200

Increase in annual cost by adopting (A) above : ₹ (71,650 – 10,200) = ₹ 61,450

Amount of quantity discount: 5% × ₹ 500 × 5,200, units = ₹ 1,30,000.
Since the amount of quantity discount (₹ 1,30,000) is more than the increase in total
annual cost (₹ 61,450), it is advisable to accept the offer. This will result in a saving of
₹ (1,30,000 - 61,450) or ₹ 68,550 p.a. in inventory cost.

(2) Maximum Level of Stock:

= Re-order level + Re-order quantity – (Minimum usage × Minimum delivery period)
= 1,600 units + 102 units – (50 units × 6 weeks)
= 1,402 units.

[Assume that the Reorder quantity is supplied as soon as the Reorder level is reached]

(3) Minimum Level of Stock:

= Re-order level – (Normal usage × Normal delivery period)
= 1,600 units – (100 units × 7 weeks)
= 900 units.
Note: Normal delivery period is taken to be the average delivery period.

(4) Re-order Level of Stock:

= Maximum usage × Maximum delivery period
= 200 units × 8 weeks
= 1,600 units.

Question 2.
M/s Kobo Bearings Ltd., is committed to supply 24,000 bearings per annum to M/s
Deluxe Fans on a steady daily basis. It is estimated that it costs 10 paisa as inventory
holding cost per bearing per month and that the setup cost per run of bearing
manufacture is ₹ 324.
(a) What is the optimum run size for bearing manufacture?
(b) What should be the interval between the consecutive optimum runs?
(c) Find out the minimum inventory holding cost

Answer :
(a) Optimum run size or Economic Batch Quantity (EBQ)

= 3600 units.
(b) Interval between two consecutive optimum runs
= FBQ * 30
MONTHLY OUTPUT
= 3600 *30
24000/12

= 54 calendar days.

(c) Minimum inventory holding cost

= Average inventory × Annual carrying cost of one unit of inventory
= (3600 ÷ 2) × 0.10×12
= ₹ 2,160