1.

Distinguish between Aggregate Production Planning and Material Requirement Planning

AGGREGATE PRODUCTION PLANNING

Aggregate production planning, abbreviated as APP, is useful for operation management. It is

associated with the determination of production, inventory, and personnel levels to fulfil varying
demand over a planning perspective that ranges from a period of six months to one year.
Aggregate production plans are needed to exploit workforce opportunity and represent a crucial
part of operations management. Aggregate production plans facilitate matching of supply and
demand while reducing costs. Process of Aggregate production planning applies the upper-level
predictions to lower-level, production-floor scheduling and is most successful when applied to
periods 2 to 18 months in the future. Plans generally either “chase” demand, adjusting workforce
accordingly, or are “level” plans, meaning that labor is comparatively constant with fluctuations
in demand being met by inventories and back orders.

Concept of aggregate production planning denotes to the process of determine the overall
quantities of products to be manufactured or produced in a plant or other manufacturing facility
during a medium term planning period such as a month, or a quarter. The aggregate plan output
comprises of the total quantities of each product or a group of product to be manufactured in the
plan period of going into details of scheduling of different manufacturing activities required to
attain the planned production levels. The aggregate production will also not specify details such
as the dates when material ordered against individual customer order will be ready for delivery.
The aggregate production plan is designed to establish overall production targets and as input for
planning availability of other inputs and supporting activities to meet the production targets. The
aggregate plans then form the basis of more comprehensive production such as daily and weekly
production schedules and customer delivery schedules.

Importance of Aggregate Planning

Aggregate planning plays an important part in achieving long-term objectives of the

organization. Aggregate planning helps in:

 Achieving financial goals by reducing overall variable cost and improving the bottom
line
 Maximum utilization of the available production facility
 Provide customer delight by matching demand and reducing wait time for customers
 Reduce investment in inventory stocking

Techniques of Aggregate Planning

Various techniques are used to perform the task of aggregate planning. Usually, there are two
categories: Informal trial-and-error techniques and mathematical techniques. In practice,
informal techniques are more commonly used. However, a substantial amount of research has
been done to mathematical techniques, but still, they are not as extensively used, they often serve
as a basis for comparing the effectiveness of alternative techniques for aggregate planning.
MATERIALS REQUIREMENT PLANNING

Material requirements planning (MRP) is a production planning, scheduling, and inventory

control system used to manage manufacturing processes. Most MRP systems are software-based,
but it is possible to conduct MRP by hand as well.

An MRP system is intended to simultaneously meet three objectives:

 Ensure materials are available for production and products are available for delivery to
customers.
 Maintain the lowest possible material and product levels in store
 Plan manufacturing activities, delivery schedules and purchasing activities.

 MRP INPUTS

The information input into MRP systems comes from three main sources: a bill of materials, a
master schedule, and an inventory records file. The bill of materials is a listing of all the raw
materials, component parts, subassemblies, and assemblies required to produce one unit of a
specific finished product. Each different product made by a given manufacturer will have its own
separate bill of materials. The bill of materials is arranged in a hierarchy, so that managers can
see what materials are needed to complete each level of production. MRP uses the bill of
materials to determine the quantity of each component that is needed to produce a certain
number of finished products. From this quantity, the system subtracts the quantity of that item
already in inventory to determine order requirements.

The master schedule outlines the anticipated production activities of the plant. Developed using
both internal forecasts and external orders, it states the quantity of each product that will be
manufactured and the time frame in which they will be needed. The master schedule separates
the planning horizon into time “buckets,” which are usually calendar weeks. The schedule must
cover a time frame long enough to produce the final product. This total production time is equal
to the sum of the lead times of all the related fabrication and assembly operations. It is important
to note that master schedules are often generated according to demand and without regard to
capacity. An MRP system cannot tell in advance if a schedule is not feasible, so managers may
have to run several possibilities through the system before they find one that works.

MRP PROCESSING

Using information culled from the bill of materials, master schedule, and inventory records file,
an MRP system determines the net requirements for raw materials, component parts, and
subassemblies for each period on the planning horizon. MRP processing first determines gross
material requirements, then subtracts out the inventory on hand and adds back in the safety stock
in order to compute the net requirements.

The main outputs from MRP include three primary reports and three secondary reports. The
primary reports consist of: planned order schedules, which outline the quantity and timing of
future material orders; order releases, which authorize orders to be made; and changes to planned
orders, which might include cancellations or revisions of the quantity or time frame. The
secondary reports generated by MRP include: performance control reports, which are used to
track problems like missed delivery dates and stock outs in order to evaluate system
performance; planning reports, which can be used in forecasting future inventory requirements;
and exception reports, which call managers’ attention to major problems like late orders or
excessive scrap rates.

2. Compare and Contrast Lean Production System and Traditional Production System.

Traditional: Production driven by sales forecast (Push).

Lean: Production is driven by customer demand; items are only produced when an order is
placed (Pull - one of the 5 lean principles).  
Traditional: Problems are viewed as just that, problems.
Lean: Problems are viewed as opportunities for improvement often through root cause analysis.
Traditional: Work in process (WIP) is viewed as a normal part of operations.
Lean: WIP is a sign that a process needs to improved and is considered a type of waste that
should be reduced or eliminated (the same is true for inventory).
Traditional: Improve system (disregarding all of the types of waste in the process).
Lean: Improve system by 1) Eliminating waste and 2) Improving current processes.
Traditional: Management is the primary driver of change.
Lean: Everyone is empowered, trained in the principles of lean and encouraged to look for ways
to improve processes.
Traditional: If a process is working (if it ain't broke) don't fix it.
Lean: Always look for ways to improve processes.
Traditional: Standardized work (people performing the same task the same way) only exists in
documents like SOPs, rarely in reality.
Lean: Everyone performs the same task the exact same way until a better way is discovered;
then everyone performs the task the new and improved way. 
Traditional: Focuses on training and relies on people to not make mistakes.
Lean: Focuses on building processes that are error proofed (a person cannot make a mistake or it
would be difficult to do so).
Traditional: Systems thinking (views the organization as a whole), often ignoring or unable to
see the enormous opportunities for improvement. 
Lean: Views the organization as a series of interrelated processes that can and should be
improved.

3. Discuss the theory of constraints with an appropriate example.

Definition and explanation of the concept

A constraint is a factor or an element that limits our ability to get more of what we want. We can
easily find many examples of constraints in our daily life. For example, if Karen does not have
enough time to study thoroughly for every subject of her semester syllabus and go out with her
friends on weekend, the time is the constraint of Karen.

The constraints are frequently encountered in business processes where they are usually referred
to as weak links or limiting factors. The theory of constraints (TOC) states that every process
or operation in a business consists of a series of interrelated activities and amongst those
activities lays a weak link or limiting factor that hinders the output of the whole process. Hence,
the business organizations and individuals can optimize or improve their business processes by
focusing their attention on managing, improving or optimizing the performance of those weak
links or limiting factors.

The theory of constraints refers to the fact that every process in a manufacturing or services
business consists of a sequence of interlinked activities. The optimization of the performance of
a process as a whole requires that every link in the sequence must serve its purpose as
proficiently as possible. Here, the theory of constraints postulates that amongst all those links
there is at least one weak link that acts as a limiting factor and restricts the output efficiency of
the whole process. In order to optimize or improve the performance of the process, the business
must focus its efforts to manage the limiting factor in the process.

The concept of managing constraints in business processes was first floated in 1984 by an Israeli
author Mr. Eliyahu M. Goldratt in his famous book ‘The Goal’. Basically, the idea proposed in
the theory is that if the effective management of weak links or limiting factors is undertaken, the
overall performance of any business process could be enhanced which may result in improved
production of goods and services, increased revenues and higher return on investment.

The theory of constraints is sometimes referred to as the bottleneck approach because the
limiting factor acts as a bottleneck within a process. The neck of a bottle determines the flow of
liquid from a bottle, no matter what the actual size of the bottle is. Similarly, the functioning
capabilities of a limiting factor in the process determines the production or output efficiency of
the whole process, no matter how much efficient other activities in the process are. A process is
as efficient as its weakest link. Therefore, we can say that focusing attention on performance of
the weakest link in the process would provide the greatest benefit to an organization.
Basic assumptions and tools:

The basic assumption of the theory of constraints relies upon following three variables:

1. Inventory: All the money of the business is stuck or invested in the form of inventory
and company could only make profits by selling them.
2. Expenses: These include the operational expenses that a business spends to convert the
inventory into finished products.
3. Throughput: It is the maximum possible output or production.

Throughput accounting:

The throughput accounting, contrary to orthodox accounting practices, focuses upon the
improvement of profit, return on investment and revenues by keeping in view the bottlenecks of
the system. So, it is not restricted by any emphasis on cost-cutting, rather upon the contribution
of the constraints towards profitability.

The five focusing steps

The theory of constraints presents a well established scientific method comprised of a continuous
stream of five steps that specifically focus upon the identification and elimination of the
constraints that limit a process from achieving its maximum capability:

1. Identification of the constraint: In this step constraint or bottleneck in the system is

identified.
2. Optimization of the constraint: The constraint is exploited to its maximum outcome in
its present state.
3. Subordination of other activities: All the other activities present in the system are set to
match the needs of the constraint.
4. Elevation of the constraint: This step involves the enhancement of current capacity of
the constraint. This step consumes both time as well as money resources.
5. Process Repetition: The fifth step is not actually a step in itself; rather it is a repetition
of the above mentioned four steps. This is because when a constraint is removed from a
 system, it moves somewhere else within the system (i.e., another constraint within the
process is found and eliminated using first four steps).

Theory of Constraints Thinking Process

The theory of constraints also includes a 5-step theory of constraints thinking process designed to
organize the thought process involved in approaching a bottleneck and trying to resolve the
problem relating to the constraint.

The five steps are as follows:

First, the people involved must agree on the problem. That is, they must all agree which factor is
the bottleneck.

Second, the people involved must agree on what sort of solution is required. This could be
something like increasing the output of machine number three in the production process.

The third step is to get everyone to agree that the solution will resolve the problem. That is, the
proposed solution is the correct action for eliminating the bottleneck in question.

The fourth step is to look past potential negative ramifications of the process.

Finally, the fifth step is to overcome any hindrances to the implementation of the solution to the
problem.

This process demands the user to search for three questions in a system.

 What do you need to change?

 What the change should be?
 What actions will bring the change?

Examples of the application of theory of constraints (TOC):

The theory of constraints (TOC) is a very practical theory and has its implication worldwide.
Both small and large multinational companies widely use it to recognize and rectify the
vulnerabilities of their systems or processes. One example is the Boeing Company – a multi-
national company that manufactures and sells aircrafts worldwide. Boeing implemented the
theory into its Aerospace Segment in 1996. The results they achieved were the lead time of their
supplies was improved by 75% and inventory decrease reduced by 60%.

Another example of the practical implementation of the theory of constraints is by the

manufacturers of Ford. Ford Motor Company is an American company of automobiles. They
applied the Drum Buffer Rope (DBR) system of theory of constraints in 1991, which states that
in every manufacturing plant there are some resources that are available in a limited amount due
to which the overall production of that plant is restricted. Ford used the model of just in time
(JIT) before implementing theory of constraints (TOC), which was implemented to develop on
gains already made due to JIT model. The industry segment was ‘automotive’. They got very
favorable results as the inventory decrease reduced by almost 100 million dollars (which was
50% of the overall inventory), the lead time was improved by 3 days and the return on
investments was increased by 20%.

Advantages and disadvantages

Advantages/benefits:

The main benefits or advantages that a business can derive from the application of theory of
constraints are given below:

1. The theory of constraints is simple and easy to understand. This makes it more practical
for the managers of the business.
2. The approach advocated by the theory provides a smooth pattern to follow which enables
the user to focus on an area that actually needs attention.
3. The theory is very effective in dynamic business environments as by removing or
minimizing the limiting factor in a process, quick results can be achieved.
 4. The theory of constraints results in an immediate improvement in the efficiency of the
relevant process and increase in the profits of the business. The very reason for this is that
the main focus of the theory is to optimize the constraints present in the systems, which
ultimately decreases the time to provide a service (in a service organization) and
decreases production time and lead time etc. (in a manufacturing process) which
increases the number of finished goods produced.
5. The implementation of the theory can result in reduction of many costs like labor,
overtime, inbound or outbound logistics etc. as it restructures the overall process of a
business.

Disadvantages/limitations:

Some limitations or disadvantages of the theory of constraints have been discussed below:

1. The approach provided by the theory of constraints is ongoing which may become hard to
maintain. This is because the implementation of this theory demands changes in the
processes of the business which may become challenging to sustain in the long run.
2. When the company deals with a specific constraint in a system, another constraint
develops, so it becomes difficult and sometime impossible to obtain an optimum level of
all activities.
3. The determination of the constraint in the first place is a major challenge for a business.
Even if the business pinpoints a constraint it may be the case that that specific constraint
is driven by another hidden constraint.
4. Although the theory of constraints works very effectively in the real life situations faced
by business organizations yet the effects of this theory are short-term. In some business,
the theory pays heed to improving a process in the real time but it may be the case that
the constraint upon which the business focuses its attention is a temporary one and thus
cannot produce long lasting benefits.
5. There may be many constraints that cannot be controlled by the business. For example, if
any constraint is driven by one or more market forces like supply, demand and market
share, the implementation of the theory of constraints becomes difficult or irrelevant.
 4. Assuming that there is no beginning inventory and level of output rate at regular time
with 15 employees is 100,000 units.
Regular cost of production is birr 2 per unit; overtime cost is birr 5 per unit;
subcontracting cost is birr 8 per unit; inventory cost on ending inventory is birr 0.5;
backorder cost is birr 4 per unit and hiring cost per employee is 250 birr. Prepare the APP

5. The same information with question 4: Assuming that one person is about to retire from
the company and rather than replacing the person, they would like to continue producing
with smaller workers and use over time to make up the lost output. The reduced regular
output is 20,000 units per period. The maximum amount of OT per period is 40,000.
Required: Prepare the APP.
6. Assuming the same information with question 4: but instead of using OT, the Company
wants to subcontract with the maximum amount of 80,000 units. Prepare the APP and
calculate the total cost of the plan
NB. Sub- contract can be used in a period where output can’t cover forecasted dd.
7. Assuming the same information with question 4: But, instead of using over time, the
company use temporary workers to fill in during the month of high demand. Suppose that
a temporary worker can produce at a rate of 15,000 units per period.
Required:
A. How many temporary employees are required
B. Prepare the APP

Calculate the total cost of the plan

Theory of Constraints Sources:

Wikipedia article – “Theory of Constraints”; www.wikipedia.com

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for
Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.
Cox, Jeff, Eliyahu M. Goldratt, “The Goal”, North River Press, Great Barrington MA, 2004.