Production and Inventory Modeling

1.
a. Significance of Aggregate planning and Material Requirement
Planning

Aggregate planning is a platform that binds all operations of the production

company by managing its capacity and demand thereby help in achieving
and maintaining a balance between operational, financial goal as well as
staying in line with the strategic objective of the company. Therefore,
aggregate planning helps to attain the set financial goals by reducing overall
variable cost of production, meet customers' demand and reduce wait time.
Aggregate planning and material requirement planning helps to control the
inventory investment by reducing unnecessary stocking while maintaining
minimum inventory level. With these minimum inventory levels, cost of
material requirement is well planned to reduce costs, tracking the materials
in inventory becomes easy and further ensures the right quantity is ordered
at the right time through all lot orders. Material planning helps to smoothens
utilization of capacity while allocating correct time that matches demand
forecast. MRP helps in scheduling purchases (order quantity) of necessary
materials and also determine cash flow requirement based on these
materials needed, determine their delivery date based on the final dispatch
schedules.
Fig 1.1: Aggregate planning process

b. Challenges of MRP

1. Master schedule are used to drive the input for most MRP system. The
master schedule is developed from forecast (which based on its
characteristics, is always in inaccurate) through interactive process of the
sales and operation departments, in which the end item requirement is at its
best, a guess. When this end requirement is used, it create a push - based
system and error and conflicts results in constant tension between a
demand- driven and push-based techniques that create misalignment.

2. Integrity of data used as inputs in MRP leads to MRP's shortcoming and

/or poor implementation thereby creating chronic and frequent shortages at
various stages of production, purchase and material schedules. This situation
causes poor inventory performances where there exist excess wrong
material, too little right material, high obsolescence and low inventory
returns which degenerate into poor service level when customer's demand
cannot be met correctly and promptly, this makes the customer to price such
product low or stop patronizing. since the wrong material are many in the
inventory, waste and high expedite-related expenses occurs.

3. Complexity of supply chain and product structure as well as non flexibility

of MRP to respond to actual market requirements and consumption lead to
compromise such as attempt to create better forecasting algorithms,
overflattening the bill of materials by removing certain levels originally
defined for the product and process, and dumbing down of the MRP system
through the removal of some of the integrated nature of the planning
thereby altering the interrelationships within the system, this leads to losing
the precise timing attribute of the system.

References.
1. http://www.managementstudyguide.com/aggregate-planning.htm

2. http://searchmanufacturingerp.techtarget.com