OM Chapter 4

Chapter 4
Production Planning and Control

Chapter Outline
4.1Aggregate Production Planning

4.2 Material Requirement Planning
4.3 Material Resource Planning
4.4 Enterprise Resource Planning
4.5 Production Activity Control (PAC)
4.6 Production Reports
4.7 Project management
Aggregate Production Planning (APP)
• is essentially a "big picture" approach to planning.
• Planners usually try to avoid focusing on individual products or
services –unless
– they focus on a group of similar products or sometimes an entire product
line.
• It permits planners to make general decisions about intermediate-
range capacity without having to deal with highly specific details.
• concern on overall decisions on levels of
– outputs,
– employment, and
– inventories.
• begins with a forecast of aggregate demand and production capacity

decision made by top-level management.
• It links long-range and short-range planning activities.
• frees planners to make general decisions about the use of resources
without having to get into the complexities of individual product or
service requirements.
• Master Production Schedule (MPS) follows APP and
– expresses the overall plan in terms of specific end items or models that can be
assigned priorities.
– It is the major control over production activities.
• APP
– simply expresses the end product such as bicycle,
• MPS
– specifies precisely of which types and styles of bikes will be produced.
• Meaning of Aggregate Production Planning

– is the process of selecting the optimal combination of
• production rate,
• the workforce level, and
• inventory on hand
– which can mostly efficiently satisfy the anticipated demand for
production output over the intermediate time horizon (usually 6 to 18
months).
Key Terms in APP

• Production rate:
– refers to the number of units completed per unit of time (such as per
hour or per day)
• Workforce level:
– is the number of workers needed for production.
• Inventory on hand:
– is the balance of unused inventory carried over from the previous
period.
• Thus, the formal statement of aggregate planning problem is:

– given
• the demand forecast 𝐹𝑡 , for each period𝑡 in the planning horizon that extends
over 𝑇 periods,
– determine
• the production level 𝑃𝑡
• Inventory level 𝐼𝑡 , and
• Workforce level 𝑊𝑡 ,
for periods 𝑡 = 1,2,3, … , 𝑇 that minimize the relevant costs over the planning
horizon.
Objectives of Aggregate Production Planning

• Minimize cost/Maximize profits:
– if customer demand is not affected by the plan, minimizing costs will also
maximize profits.
• Maximize customer service:
– improving delivery-time and on-time delivery may require additional work-
force, machine capacity, or inventory resources.
• Minimize inventory investment:
– inventory accumulations are expensive because the money could be used for
more productive investments.
Objectives of Aggregate Production Planning
• Minimize changes in production rates:
– frequent changes in production rates can cause difficulties in coordinating the
supplying of materials and require production line rebalancing.
• Minimize changes in workforce levels:
– fluctuating workforce levels may cause lower productivity because new employees
typically need time to become fully productive.
• Maximize utilization of plant and equipment:
– processes based on a line flow strategy require uniformly high utilization of plant
and equipment
Note: These objectives conflict among themselves.

Inputs to APP
• Resources available
Costs
– Workforce • Basic production costs
– Facilities – Straight/regular time
– Equipment
– Overtime
– Materials
– Energy • Hiring/firing
• Forecasted Demand • Subcontracting
• Policies statements on
• Inventory carrying
– Workforce changes
– Subcontracting • Back orders and Stock out
– Overtime costs
– Inventory levels
– Back orders
• Demand and Capacity
– Aggregate planners are concerned with the quantity
and the timing of expected demand.
– 𝐷𝑒𝑚𝑎𝑛𝑑 ≠ 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦
• Increase demand if demand is less than capacity
• Increase capacity if demand is greater than capacity
• Demand Options.
– They may include changing
• prices,
• promotion,
• backlogging orders, or
• new demands most related to seasonality of the product.
• Capacity Option
– that could include:
• hire-and-layoff workers;
• using overtime/slack time;
• part-time workers;
• subcontracting; or
• stockpiling/holding inventory.
Basic Strategies for Meeting Uneven Demand

– Maintain a level workforce
– Maintain a steady output rate
– Match demand period by period
– Use a combination of decision variables.
Basic Strategies for Meeting Uneven Demand

– Level Capacity Strategy
• Maintain a level workforce
• Maintain a steady output rate
– Chase demand strategy
i.e. Match demand period by period
• Varying the workforce level
• Varying the output rate
– Use a combination of decision variables.
Level Capacity Strategy:

– refers to maintaining a steady rate of regular-time output while meeting
variation in demand by a combination of options.
• it maintains either
– a constant workforce level or
– constant output rate during the planning horizon.
• Advantages
• Stable output rates and workforce
• Disadvantages
• Greater inventory costs
• Increased overtime and idle time
• Resource utilizations vary over time
Maintaining a constant workforce level:

• it consists of:
– Not hiring or laying-off workers;
– Using under-time and scheduling vacation during slack periods;
– Using overtime up to contracted limits for peak period; and
– Using subcontractors for additional needs, as necessary.
• Maintaining a constant output rate:

– it consists of:
• A backlog
• A backorder
• A stockout
• Chase demand strategy:

– refers to matching capacity to demand;
• the planned output for a period is set at the expected demand for that period.
– There are two sub-strategies:
• Varying the workforce level
• Varying the output rate
– Stable workforce -variable work hours
• Advantages
• Investment in inventory is low
• Labor utilization in high
• Disadvantages
• The cost of adjusting output rates and/or workforce levels
Varying the workforce level:

– matches the production rate to the rate by hiring and laying-off employees as
the order rates vary.
• Advantages
– no inventory investment,
– no overtime or under-time.
• Disadvantage
– the expense of continually adjusting workforce levels,
– the potential separation of the workforce, and
– the loss of productivity and quality because of constant changes in the
workforce.
Varying the output rate

– Stable workforce -variable work hours
– vary the output by varying the number of hours worked through
• flexible work schedules,
• overtime,
• under-time,
• vacation and
• subcontracting
• Pure strategy
– When just one of these planning strategies is used to absorb demand
fluctuations
• Mixed strategy
– when used in combination
• Techniques for Preparing APP

– Informal trial and error
– Mathematical models
• Stevenson Approach
• Chase, Aquilano and Jacobs Approach
Technique Solution Characteristics
Graphical/charting Trial & error Intuitively appealing,

easy to understand;
solution not necessarily optimal.
Linear Optimizing Computerized;
programming linear assumptions not always valid.
Linear Optimizing Complex, requires considerable effort
to obtain pertinent cost information
decision rule
and to construct model;
cost assumptions not always valid.
Simulation Trial and error Computerized models can be examined
under a variety of conditions.
Stevenson Approach
– William J. Stevenson developed the following general procedure for
preparing APP
• Informal trial and error
Stevenson Approach
• The steps are:
1. Determine demand for each period,
2. Determine capacities for each period.
• regular time (RT),
• overtime (OT),
• subcontracting, and
• part-time
3. Identify company or departmental polices that are pertinent e.g.,
• maintaining a safety stock of 5 percent of demand,
• maintain a reasonable stable workforce.
Stevenson Approach
4. Determine the unit costs for
• regular time (RT),
• overtime (OT),
• subcontracting,
• holding inventories,
• backorders,
• hire/layoffs, and
• other relevant costs.
Stevenson Approach
5. Develop alternative plans
• i.e., determine which one of the alternative plans accommodates the stated
policy) and
• compute the cost of each.
6. If dissatisfactory plans emerge, select the one that best satisfies
objectives, otherwise, return to step 5.
Informal Approaches
– Trial and error
– alternatives selected based on cost
– No optimal aggregate plan
Period 1 2 3 … Total
Forecast Demand
Output Capacity
• Regular time
• Overt Time
• Subcontract
Output -Forecast
• Beginning
• Ending
• Average
Backlog
Costs
Output
• Regular
• Overt Time
• Subcontract
Hire/Layoff
Inventory Holding Cost
Back Orders
Total
Major Relationships
• to determine the number of workers
Number of workers Number of Number of laid

Number of Workers =
at the end of the + workers at start of - off workers at
in a period
previous period the period start of the period
Major Relationships
• The amount inventory at the end of a given period
Inventory at the end Amount used to

Inventory at the end = Production in the
of the previous + - satisfy demand in
of the period current period
period the current period
𝐵𝑒𝑔𝑖𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑟𝑜𝑟𝑦+𝐸𝑛𝑑𝑖𝑛𝑔 𝐸𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Average Inventory=
2
Major Relationships
• Cost of a particular plan for a given period can
be determined
Inventory
Cost for a = Output cost Hire/layoff Holding + Backorder
+ +
period i.e. RT+OT+SU Cost Cost Cost
Plan I: Maintaining a Level Workforce Level
• Aggregate Planners want to evaluate a plan that calls for a steady rate of
regular-time output, mainly using inventory to absorb the uneven demand but
allowing some backlog.
• They intend to start with zero inventory on hand in the first period.
• Prepare an aggregate plan and determine its cost using the preceding
information.
• Assume a level output rate of 300 units (tractors) per period with regular time
(i.e., 1800/6 = 300).
• Note that the planned ending inventory is zero.
• There are 15 workers.
Period 1 2 3 4 5 6 Total
Forecast Demand 200 200 300 400 500 200 1800
Output Capacity
• Regular time 300 300 300 300 300 300 1800
• Overt Time
• Subcontract
Output -Forecast 100 100 0 (100) (200) 100 0
• Beginning 0 100 200 200 100 0
• Ending 100 200 200 100 0 0
• Average 50 150 200 150 50 0 600
Backlog 0 0 0 0 100 0 100
Costs
Output
• Regular 600 600 600 600 600 600 3600
• Overt Time
• Subcontract
Hire/Layoff
Inventory Ho. Cost 50 150 200 150 50 0 600
Back Orders 500 500
Total 650 750 800 750 1150 600 4700
• Plan II. Varying the Output

– After reviewing the plan developed in the preceding plan, planners have
decided to develop an alternative plan. They have learned that one
person is about to retire from the company. Rather than replace that
person, they 'would like to stay with the smaller workforce and use
overtime to ' make up for the lost output. The reduced regular-time
output is 20 units per period. The maximum amount of overtime output
per period is 40 units. Develop a plan and compare it to the previous
one.
• Plan III. Varying the Workforce Level
– After reviewing the plan developed in the preceding plan, planners have decided to
develop an alternative plan. They have learned that one person is about to retire
from the company. They plan to replace that person by temporary worker.
– Suppose that it costs an additional $100 to hire and train a temporary worker, and
that a temporary worker can produce at the rate of 15 units per period (* compared
with 20 units per period for regular workers),
– Dividing the number of units needed (120) by the output rate of 15 per temporary
worker, you find that eight worker-periods are needed (e.g., two workers for four
months each, four workers for two months).
– Noting that periods 4 and 5 have the heaviest demand, using four temporary workers
for two months each (i.e., period 4 and 5) seems to be reasonable.
– The results are summarized in the following plan.
• Chase, Aquilano and Jacobs Approach

• A Cut-and-Try Example
– A firm with pronounced seasonal variation normally plans
production for a full year to capture the extremes in
demand during the busiest and slowest months. But we can
illustrate the general principles involved with a shorter
horizon. Suppose we wish to set up a production plan for the
JC Company for the next six months. We are given the
following information:
• Inventory at the beginning of the first period is 400

units.
• Safety stock
– Because the demand forecast is imperfect, the JC Company
has determined that a safety stock(buffer inventory)
should be established to reduce the likelihood of stockouts.
– For this example, assume the safety stock should be 25% of
the demand forecast.
• Production requirements
– Before investigating alternative production plans, it is often
useful to convert demand forecasts into production
requirements,
• which take into account the safety stock estimates.
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 = 𝐷𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 + 𝑆𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘 − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

• Ending Inventory
= 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 − 𝐷𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡
– the ending inventory each month equals the safety stock for
that month.
• b/c requirements implicitly assume that the safety stock is never
actually used,
– the January safety stock of 450 (25 percent of January
demand of 1,800) becomes the inventory at the end of
January. The production requirement for January is demand
plus safety stock minus beginning inventory
(1,800+450−400=1,850).
• Formulate alternative production plans

– Four different plans
– Objective
• Finding the one with the lowest total cost
– Plan 1. Produce to exact monthly production requirements
using
• a regular eight-hour day by varying workforce size.
– Plan 2. Produce to meet expected average demand over the
next six months by
• maintaining a constant workforce.
• Formulate alternative production plans

– Four different plans
– Plan 3. Produce to meet the minimum expected demand
(April) using
• a constant workforce on regular time.
– Plan 4. Produce to meet expected demand for all but the
first two months using a
• constant workforce on regular time.
• Plan 1. Produce to exact monthly production

requirements
• using
– a regular eight-hour day
• by
– varying workforce size.
• Plan 2. Produce to meet expected average demand over

the next six months by
– maintaining a constant workforce.
– The constant number of workers is calculated by finding the
average number of workers required each day over the
horizon.

• Take the total production requirements and multiply by the time
required for each unit.
– T𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡𝑠 = 8000
– 𝑇𝑖𝑚𝑒 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑓𝑜𝑟 𝑒𝑎𝑐ℎ 𝑢𝑛𝑖𝑡 = 5 ℎ𝑟/𝑢𝑛𝑖𝑡
• Then divide by the total time that one person works over the
horizon
– i.e125 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 × 8 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦
8,000 × 5 40,000
= = = 40
125 × 8 1000
– Inventory is allowed to accumulate, with shortages filled from
next month’s production by backordering.
– Negative beginning inventory balances indicate that demand is
backordered.
– In some cases, sales may be lost if demand is not met.
– The lost sales can be shown with a negative ending inventory
balance followed by a zero beginning inventory balance in the
next period.
– Notice that in this plan we use our safety stock in January,
February, March, and June to meet expected demand.
• Plan 3. Produce to meet the minimum expected demand (April)
using
– a constant workforce on regular time.
– Subcontract to meet additional output requirements.
– The number of workers is calculated by
• locating the minimum monthly production requirement and
– = 𝑓𝑜𝑟 𝐴𝑝𝑟𝑖𝑙 𝑖. 𝑒. 850 × 5 = 4,250
• determining how many workers would be needed for that month
– = 21 × 8 = 168
4250
– ∴ = 25 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
168
• and subcontracting any monthly difference between requirements and
production.
– =
• Plan 4. Produce to meet expected demand for all but

the first two months using a
– constant workforce on regular time.
– Use overtime to meet additional output requirements.
– The number of workers is more difficult to compute for
this plan, but the goal is to finish June with an ending
inventory as close as possible to the June safety stock.
– By trial and error it can be shown that a constant workforce
of 38 workers is the closest approximation.
• The next step is to calculate the cost of each plan.

• Note that the headings in each row are different for
each plan because each is a different problem
requiring its own data and calculations.
Material Requirements Planning (MRP)
• is a technique for determining the Quantity and Timing for the
requisition of dependent demand items needed to satisfy Master
Production Schedule (MPS).
• is a procedure that generates specific schedules for component parts
and subassemblies given the MPS.
• getting the right materials to tile right place at the right time
• is based on dependent demand.
– Dependent demand is that demand caused by the demand for a
higher-level items.
– Tires, wheels, and engines are dependent demand items that depend
on the demand for automobiles.
• begins with a schedule for finished goods

• then converted into a schedule of requirements for
– subassemblies,
– component parts, and
– raw materials needed to produce the finished items in the
specified time frame.
• is designed to answer three questions:
– What is needed?
– How much is needed? and
– When is it needed?
• The primary inputs of MRP are

– Bill of Materials (BOM),
• which tells the composition of a finished product;
– Master Production Schedule (MPS),
• which tells how much finished product is desired and when: and
– Inventory Records File,
• which tells how much inventory is on hand or on order.
• The planner processes this information to determine the
Net Requirements for each period of the planning horizon.
The Mater Production Schedule (MPS)
• also referred as the Master Schedule, states
– which end items are to be produced,
– when they are needed, and
– in what quantities.
• The quantities in MPS come from a number of different sources, including
– Customer orders,
– Forecasts,
– Orders from warehouses to build up seasonal inventories, and
– External demand.
• Separates the planning horizon into a series of time periods or time
buckets, which are often expressed in weeks.
Months January February
Aggregate Production Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(Shows the specific type and
quantity of amplifier to be
produced
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100
The Bill of Materials (BOM) File
• contains a listing of all of the assemblies, subassemblies,
parts, and raw materials that are needed to produce one unit
of a finished product.
• each finished product has its own BOM.
• the listing of BOM file is hierarchical;
• it shows the quantity of each item needed to complete one
unit of the following level assembly.
• often called the Product Structure File or Products Tree
– because it shows how a product is put together.
Illustration 1.
Speaker kits, Inc., packages high-fidelity components for mail order.
Components for the top-of the-line speaker kit, "Awesome" (A),
include 2 standard 12-inch speaker kits (B's) and 3 speaker kits with
amp-boosters (C's).
Each "B" consists of 2 speakers (D's) and 2 shipping boxes each with
an installation kit (E's). Each of the three 300-watt stereo kits (C's) has
2 speaker boosters (F's) installation kits (E'S). Each speaker booster (F)
includes 2 speakers (D's) and 1 amp-booster (G). As we can see, the
demand for B, C, D, E, F, and G is completely dependent on the MPS
for A: the Awesome speaker kits. Given this information, we can
construct product tree/structure for end item "A" as indicated below:
BOM Example
Level Product structure for “Awesome” (A)
0 A
1 B(2) Std. 12” Speaker kit C(3) Std. 12” Speaker kit w/
amp-booster
2 E(2) E(2) F(2) Std. 12” Speaker

booster assembly
Packing box and

3 D(2) installation kit of wire, G(1) D(2)
bolts, and screws
Amp-booster
12” Speaker 12” Speaker
© 2008 Prentice Hall, Inc. 14 – 74

• Levels
– This structure has four levels 0, 1, 2, and 3.
• Parents
– There are four parents: "A","B", "C", and "F".
– Each parent item has at least one level below it.
• Components
– Items "B", "C", "D", "E", F, and "G" are components
– because each item has at least one level above it.
• In this structure, "B", "C", and "F" are both parents and
components.
• The number in the parentheses indicates how

many units of the particular item are needed to
make the item immediately above it.
• Thus,
– B(2) means that it takes 2 units of "B" for every unit
of "A", and
– F(2) means that it takes 2 units of "F" for every unit
of "C", and so on.
• If the Marketing Department reported that 50 orders are received from

customers to be delivered at the start of week 8.
• The report helps us to prepare MPS for the end item "A" as it is presented
below:
Week № 1 2 3 4 5 6 7 8
Quantity 50
• In addition, once we have developed the product structure, we can also
determine the number of units of each item required to satisfy demand
for a new order of 50
Part B: 2 x number of As =(2)(50) =100

Part C: 3 x number of As =(3)(50) =150
Part D: 2 x number of Bs + 2 x number of Fs =(2)(100) + (2)(300) =800
Part E: 2 x number of Bs + 2 x number of Cs =(2)(100) + (2)(150) =500
Part F: 2 x number of Cs =(2)(150) =300
Part G: 1 x number of Fs =(1)(300) =300
The Inventory-Records File

• is used to store information on the status of each item by time period.
• This includes
– Gross Requirements,
– Scheduled Receipts, and
– Expected Amount on Hand
– details for each item, such as
• Name of Supplier,
• Lead Time (LT), and Lot size.
• Changes due to stock receipts and withdrawals,
• Cancelled orders, and similar events
• Like the BOM, the Inventory Records File must be accurate.

• Erroneous information on requirements or Lead Times (LT) can
have a detrimental impact on MRP and create turmoil/disorder
when incorrect quantities are on hand or expected delivery
times are not met.
• Generally MRP systems require 99% accuracy
• Outstanding purchase orders must accurately reflect quantities
and scheduled receipts
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
Time-Phased Product
Structure
Must have D and E
Start production of D completed here so
production can
begin on B
1 week
2 weeks to
D produce
B
2 weeks
E
A
2 weeks 1 week
E
2 weeks 1 week
G C
3 weeks
F
1 week
D
| | | | | | | |
1 2 3 4 5 6 7 8
© 2008 Prentice Hall, Inc.
Time in weeks 14 – 83
• Illustration 2
Each Awesome speaker kit (item “A" of illustration 1)
requires all the items in the product structure for "A". The
Inventory Record File indicates the respective Lead Time
(LT) related to purchasing or assembly and the on-hand
inventory which also includes the Schedule Receipt in the
following table. It is also noted that there is no as such safety
stock policy for respective items and order size is lot-for-lot.
Time-Phased Product
Structure
Must have D and E
production can
begin on B
1 week
2 weeks to
D produce
B
2 weeks
E
A
2 weeks 1 week
E
2 weeks 1 week
G C
3 weeks
F
1 week
D
| | | | | | | |
1 2 3 4 5 6 7 8
• Net Requirement Plan
– When there is inventory on hand
– Gross Requirement for Awesome speaker kits (A's) is 50 and there
are 10 of those speakers on-hand, “
• the Net Requirement of Awesome speaker kits (A's) is 40 (i.e., 50 -10).
– However, each Awesome speaker kit on-hand contains 2 B's. As a
result, the requirement for B's drops by 20 B's (10 "A's" on hand x
2 "B's" per "A").
– Therefore, if inventory is on-hand for a parent item, the
requirements for the parent item and all its components decrease
because each Awesome kit contains the components for lower-level
items.
• Outputs from the MRP process include

– Primary reports …..main reports
• Planned-order schedules,
• Planned-order releases,
• Changes of Planned ordered,
– Secondary reports ….optional reports
• Performance-control reports,
• Planning reports, and
• Exception reports.
• Primary Reports:
– production and inventory planning and control are part of primary
reports.
• Includes
– Planned orders:
• a schedule indicating the amount and timing of future orders.
– Order releases:
• authorizing the execution of planned orders.
– Changes to planned orders:
• revisions of due dates or order quantities, or cancellations of orders.
• Secondary Reports:
– performance control, planning, and exceptions belong to secondary reports.
• Includes
– Performance-control reports:
• evaluate system operation.
• They aid managers by
– measuring deviations from plans, including missed deliveries and stock-outs, and
– providing information that can be used to assess cost performance.
– 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.
– Exception reports:
• call attention to major discrepancies such as
– late and overdue orders,
– excessive scrap rates,
– reporting errors, and
– requirements for nonexistent parts.
The main purposes of basic MRP systems are

• Control Inventory Level:
– Order the right part,
– Order in the right quantity, and
– Order at the right time.
• Determine Priorities for Items:
– Order with the right due date and
– Keep the due date valid.
• Plan Capacity to Load the Production System:
– Plan for complete load,
– Plan an accurate load, and
– Plan for an adequate time to view future load.
• Benefits of MRP System

– Ability to price more competitively,
– Reduced sales price,
– Reduced inventory,
– Better customer service,
– Better response to market demands,
– Ability to change the master schedule,
– Reduced setup and tear-down costs,
– Reduced idle time and
– a fairly broad range of outputs.
MRP Processing
• MRP processing takes the end item requirements specified by
the MPS and "explodes" them into time-phased requirements
for assembles, parts, and raw materials using BOM offset by
Lead Time.
• The core part will be determination of the Net Material
Requirements (netting)
𝑁𝑒𝑡 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑

𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 = 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡𝑠 𝑖𝑛 - 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑖𝑛 + 𝑠𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘
𝑝𝑒𝑟𝑖𝑜𝑑 𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
𝑁𝑒𝑡 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡𝑠 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡 = 𝐺𝑟𝑜𝑠𝑠 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡𝑠 𝑖𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡 − 𝑝𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑖𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡 + 𝑠𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘
Important Terminologies in MRP
1. Gross requirements:
– the total expected demand for an item or raw materials
during each time period without regard to the amount on hand.
– For end items,
• these quantities are shown in the MPS;
– for components,
• these quantities are derived from the planned-order releases of their
immediate "parents".
2. Scheduled receipts:
– open orders scheduled to arrive from vendors or elsewhere
in the pipeline by the beginning of a period.
3. Projected on hand:
– the expected amount of inventory that will be on hand at the
beginning of each time period:
= 𝑆𝑐ℎ𝑒𝑑𝑢𝑙𝑒𝑑 𝑟𝑒𝑐𝑒𝑖𝑝𝑡𝑠 + 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑓𝑟𝑜𝑚 𝑙𝑎𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑.
4. Net requirements:
– the actual amount needed in each time period.
5. Planned-order receipts:
– the quantity expected to be received by the beginning of the
period in which it is shown.
– It depends on the ordering policy.
• Under lot-for-lot ordering,
– this quantity will equal Net Requirements.
• Under lot-size ordering,
– this quantity may exceed Net Requirements.
– Any excess is added to available inventory in the next time
period for simplicity, although in reality, it would be available in
that period.
6. Planned-order releases:
– indicates a planned amount to order in each time period;
– equals planned-order receipts offset by Lead Time [LT]
– This amount generates Gross Requirements at the next level
in the assembly or production chain.
– When an order is executed, it is removed from "Planned-order
releases" and entered under "Scheduled receipt."
7. Parent and component items:

– a parent is an assembly made up of basic parts, or
components.
– The parent of one subgroup may be a component of a higher-
level parent.
8. Dependent demand:
– demand for components that is derived from the demand for
independent demand (i.e., demand for finished item).
9. Lot size:
– the quantity of items required for an order.
– The order may be either purchased from a vendor or produced
in-house.
– Lot sizing is the process of specifying the order size.
10.Lead-time offset:
– the supply time, or number of time buckets between releasing an
order and receiving the materials.
11. Loading:
– refers to the assignment of jobs to processing (work) centers.
– Loading decisions involve assigning specific jobs to work centers
and to various machines in the work centers.
Illustration 3.
• Given the information related to both BOM and
Inventory Records File, now we can develop the MRP.
• Net Materials 'Requirement Plan (NMRP) includes
– Gross Requirements,
– On-hand inventory,
– Net requirements,
– Planned Order Receipt, and
– Planned Order Release for each item.
• For “A”
– Gross Requirements=50
– On-hand inventory=10
– Net requirements=40
– Planned Order Receipt=40
– Planned Order Release =40*1 week lead time
Time-Phased Product
Structure
Must have D and E
production can
begin on B
1 week
2 weeks to
D produce
B
2 weeks
E
A
2 weeks 1 week
E
2 weeks 1 week
G C
3 weeks
F
1 week
D
| | | | | | | |
1 2 3 4 5 6 7 8
MRP Planning Sheet
© 2008 Prentice Hall, Inc. 14 – 103

1 50
W
e 10 0 0 A
10
10 10 10 10 10 10 10 10
40
E 40
k 40
Times 2
80
2
We 15 0 1 B
15
15 15 15 15 15 15 15
65
ek 65
65
Times 3
1 120
W
e 20 0 1 C
20
20 20 20 20 20 20 20
E
k 40
Times 2
80
2
We 10 0 2 B
15
15 15 15 15 15 15 15
65
ek 65
65
Illustration:
 Speaker Kits, Inc., Packages high-fidelity components for mail order.

Components for the top-of the line speaker kit, “Awesome” (A), includes 2
standard 12-inch speaker kits(B) and 3 speaker kits with amp-boosters (C).
 Each B consists of 2 speakers (D’s) and 2 shipping boxes (E’s). Each C’s
has 2 speaker boosters (F’s) and 2 installation kit (E’s). Each F includes 2
speakers (D’s) and 1 amp-booster (G).
………
 Inventory record file indicates the respective lead-time
(LT) related to purchasing and assembly and on the
hand inventory in the following table.
Item Lead Time Inventory-on-hand
A 1 week 10
B 2 weeks 15
C 1 week 20
D 1 week 10
E 2 week 10
F 3 week 5
G 2 week 0
……
 The marketing department reported that 50 orders are received from
customers to be delivered at the start of week 8.
 Based on this information determine the Net Materials Requirement Plan

includes Gross Requirements, On-hand inventory, Net requirements,
Planned order release for each item under each of these conditions.
…….
I. Lot-for-lot ordering
II. Lot-size ordering with a lot size of multiple of 100 units for D and
multiple of 80 units for G.
 Demand for B, C, D, E, F, and G is completely dependent on the MPS

for A. let us construct the product structure tree.
Product structure tree
B (2) C(3)
D(2) E(2) E(2) F(2)
G(1) D(2)
MPS
Week 1 2 3 4 5 6 7 8
number
Quantity 50
MRP format
Week number 1 2 3 4 5 6 7 8
Items: A LT= 1
Gross requirements 50
Scheduled receipts
Projected on hand 10 10 10 10 10 10 10 10
Net requirements 40
Planned-order receipts 40
Planned-order releases 40
Cont’d
Week number 1 2 3 4 5 6 7 8
Items: B LT = 2
Scheduled receipts
Projected on hand 15 15 15 15 15 15 15
Net requirements 65
Cont’d
Week number 1 2 3 4 5 6 7 8
Items: C LT = 1
Scheduled receipts
Net requirements 100
Cont’d
Week number 1 2 3 4 5 6 7 8
Items: E LT = 2
Gross requirements 130B 200C
Scheduled receipts
Projected on hand 10 10 10 10 10
Net requirements 10 200
Planned-order receipts 120 200

Planned-order releases 120 200
Cont’d
Week number 1 2 3 4 5 6 7 8
Items: F LT= 3
Scheduled receipts
Projected on hand 5 5 5 5 5 5

Cont’d
Week number 1 2 3 4 5 6 7 8
Items: D LT = 1
Gross requirements 390F 130B
Scheduled receipts
Projected on hand 10 10 10
Cont’d
Week number 1 2 3 4 5 6 7 8
Items: G LT=2
Scheduled receipts
Projected on hand
Lot-size ordering
II. Lot-size ordering with a lot size of multiple of 100

units for D and multiple of 80 units for G.
Lot size ordering
Week number 1 2 3 4 5 6 7 8
Items: A LT= 1
Scheduled receipts
Net requirements 40
Cont’d
Week number 1 2 3 4 5 6 7 8
Items: B LT = 2
Scheduled receipts
Net requirements 65
Cont’d
Week number 1 2 3 4 5 6 7 8
Items: C LT = 1
Scheduled receipts
Cont’d
Week number 1 2 3 4 5 6 7 8
Items: E LT = 2
Gross requirements 130B 200C
Scheduled receipts
Projected on hand 10 10 10 10 10
Cont’d
Week number 1 2 3 4 5 6 7 8
Items: F LT= 3
Scheduled receipts
Projected on hand 5 5 5 5 5 5
Cont’d
Week number 1 2 3 4 5 6 7 8
Items: D LT = 1
Gross requirements 390F 130B
Scheduled receipts
Cont’d
Week number 1 2 3 4 5 6 7 8
Items: G LT=2
Scheduled receipts
Projected on hand 45 45 45 45
Manufacturing Resource Planning (MRP II)
• It doesn’t replace MRP, it is an improved version of MRP. Rather, it has
expand the scope of production resource planning and to involve other
functional areas of the firm (marketing, finance, production, engineering,
purchasing, personnel and so on) in the planning process.
Cont’d
• In order for the plan to work, the firm must have all of the necessary
resources:
 Manufacturing resources
 Financing resources
 Marketing resource
Cont’d
• An extension of MRP II is Enterprise Resource Planning (ERP). It is
intended to improve resource planning by extending the scope of planning
to include all members of an enterprise.

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Chapter 4

Production Planning and Control

4.1Aggregate Production Planning

• begins with a forecast of aggregate demand and production capacity

• Meaning of Aggregate Production Planning

Key Terms in APP

• Thus, the formal statement of aggregate planning problem is:

Objectives of Aggregate Production Planning

Note: These objectives conflict among themselves.

Basic Strategies for Meeting Uneven Demand

Basic Strategies for Meeting Uneven Demand

Level Capacity Strategy:

Maintaining a constant workforce level:

• Maintaining a constant output rate:

• Chase demand strategy:

Varying the workforce level:

Varying the output rate

• Techniques for Preparing APP

Technique Solution Characteristics

Graphical/charting Trial & error Intuitively appealing,

Number of workers Number of Number of laid

Inventory at the end Amount used to

𝐵𝑒𝑔𝑖𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑟𝑜𝑟𝑦+𝐸𝑛𝑑𝑖𝑛𝑔 𝐸𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

• Plan II. Varying the Output

• Chase, Aquilano and Jacobs Approach

• Inventory at the beginning of the first period is 400

𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 = 𝐷𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 + 𝑆𝑎𝑓𝑒𝑡𝑦 𝑠𝑡𝑜𝑐𝑘 − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

• Formulate alternative production plans

• Formulate alternative production plans

• Plan 1. Produce to exact monthly production

• Plan 2. Produce to meet expected average demand over

• Plan 2. Produce to meet expected average demand over

• Plan 4. Produce to meet expected demand for all but

• The next step is to calculate the cost of each plan.

• begins with a schedule for finished goods

• The primary inputs of MRP are

2 E(2) E(2) F(2) Std. 12” Speaker

Packing box and

12” Speaker 12” Speaker

© 2008 Prentice Hall, Inc. 14 – 74

• The number in the parentheses indicates how

• If the Marketing Department reported that 50 orders are received from

Part B: 2 x number of As =(2)(50) =100

The Inventory-Records File

• Like the BOM, the Inventory Records File must be accurate.

• Outputs from the MRP process include

The main purposes of basic MRP systems are

• Benefits of MRP System

𝑁𝑒𝑡 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑

7. Parent and component items:

© 2008 Prentice Hall, Inc. 14 – 103

 Speaker Kits, Inc., Packages high-fidelity components for mail order.

 Based on this information determine the Net Materials Requirement Plan

 Demand for B, C, D, E, F, and G is completely dependent on the MPS

D(2) E(2) E(2) F(2)

Gross requirements 130B 200C

Net requirements 10 200

Planned-order receipts 120 200

Gross requirements 200

Net requirements 195

Planned-order receipts 195

II. Lot-size ordering with a lot size of multiple of 100

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