The 1 st activity in Production Planning is the determination of the requirements for the planning horizon. Demand forecasting plays an important role in the conduct of these three tasks. Managers thus need to be aware of the various factors that would affect the accuracy of the demand and sales forecast.

Activity 1 involves the conduct of the following tasks:

ACTIVITY 1

Tasks

Description

1 Draw up the sales forecast for each product or service over the appropriate planning period

2 Combine the individual product / service demands into one aggregate demand

3 Transform the aggregate demand for each time period into staff, process, and other elements of productive capacity

There are company factors that could influence the level of demand for the firm's products. These internal factors include the company's marketing effort; the product design itself; the strategies to improve customer service; and the quality and price of the product.

There are also external factors or marketplace factors that significantly affect demand such as the level of competition or possible reaction by competitors to a firm's business strategy; the perception of consumers about the products and the consumer behavior as affected by their socio-demographic profile. Lastly, there are random factors that could affect the accuracy of demand forecasts such as the overall condition of the economy and the occurrence of business cycle.

Activity 2 How to Meet the Requirements

The next major activity involves the identification of the alternatives that the firm may employ to meet production forecasts as well as the constraints and costs involved. Specifically, this activity involves the following tasks:

ACTIVITY 2

Tasks

Description

1 Develop alternative resource schemes to meet the cumulative capacity requirements

2 Identify the most appropriate plan that meets aggregate demand at the lowest operating cost

Once the most appropriate plan has been selected, then the firm evaluates the plan and later on finalizes it for implementation. For more efficient and effective planning process, the formation of a production planning team composed of managers from manufacturing, marketing, purchasing and finance, is recommended.

What are the inputs to the production planning process?

To be able to perform the aggregate planning process, the following information should be available to this production planning team. These data include the following:

• Materials / purchasing Information

• Operations / manufacturing Information

• Engineering / process Designs

• Sales, marketing and distribution Information

• Financial and accounting information

• Human resources information

How do you address the demand fluctuations?

There are three basic production planning strategies that the company can choose from to address demand fluctuations. These are the (1) Chase Demand strategy, (2) Level Production strategy, and the (3) Mixed Strategy.

Strategy Description

Demand Chase Strategy Matches the production rate to the order or demand rate through the hiring and firing of employees as the order rate varies

Level Production Strategy Maintains a stable workforce working at a constant production rate with the shortages and surpluses being absorbed by any of the following: • Changing the inventory levels • Allow order backlogs (commit to the customer that you will deliver the product (s) at a much later date) • Employ marketing strategies (e.g. promotional activities)

Mixed Strategy The strategies here could include combination of any of the following: • Having a stable workforce but employ variable work hours (e.g., increase no. of shifts, flexible work schedules or overtime) • Subcontracting / outsourcing

• Changing inventory levels

Source: Dilworth, James B. Production and Operations Management: Manufacturing and Services . Fifth Edition. McGraw-Hill, Inc. 1993

What are the important considerations in selecting the production planning strategy?

Demand Chase Strategy

Specific Methods Costs Remarks

Hire additional workers as demand increases Employment costs for advertising, travel, interviewing, training, and others

Shift premium costs if additional shift is added Skilled workers may not be available when needed

Layoff workers as demand decreases Cost of severance pay & increases in unemployment insurance costs The company must have adequate capital investment in equipment for the peak work force