Explain aggregate production planning Give an example from two wheeler?

Answer 1

Preparing Your Production PlanWhat is a production plan?

A production plan is that portion of your intermediate-range business plan that your manufacturing / operations department is responsible for developing. The plan states in general terms the total amount of output that the manufacturing department is responsible to produce for each period in the planning horizon.

The output is usually expressed in terms of pesos or other units of measurement (e.g. tons, liters, kgs.) or units of the aggregate product (this refers to the weighted average of all the products in your company). The production plan is the authorization of your manufacturing department to produce the items at a rate consistent with your company's overall corporate plan.

This production plan needs to be translated into a master production schedule so as to schedule the items for completion promptly, according to promised delivery dates; to avoid the overloading or under loading of the production facility; and so that production capacity is efficiently utilized and low production costs result.

Why is it important to have a carefully developed production plan?

Production planning is one of the planning functions that a firm needs to perform to meet the needs of its customers. It is a medium-range planning activity that follows long-range planning in P/OM such as process planning and strategic capacity planning. Firms need to have an aggregate planning or production planning strategy to ensure that there is sufficient capacity to meet the demand forecast and to determine the best plan to meet this demand.

A carefully developed production plan will allow your company to meet the following objectives:

• Minimize costs / maximize profits

• Maximize customer service

• Minimize inventory investment

• Minimize changes in production rates

• Minimize changes in work-force levels

• Maximize the utilization of plant and equipment

How is a production plan prepared?

Activity 1 Determination of Requirements

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 level

Level Production Strategy

Specific Methods Costs Remarks

Produce in earlier period and hold until product is needed Cost of holding inventory Service operations cannot hold service inventory

Offer to deliver the product or service later, when capacity is available Delay in receipt of revenue, at minimum; company may lose customers Manufacturing companies with perishable products often use this method

Exert special marketing efforts to shift the demand to slack period Advertising costs, discounts, other promotional programs Exemplifies the inter-relationship

among functions within an organization

Mixed Strategy

Specific Methods Costs Remarks

Work additional work hours without changing the workforce size Overtime premium pay The time available for maintenance work without interrupting production is reduced

Staff for high production levels so that overtime is not necessary Excess personnel wages during period of slack demand Work force may be used for deferred maintenance during periods of low demand

Subcontract work to outside firms Continuing company overhead; subcontractor's overhead and profits The capacity of other firms can be utilized, but there is less control of schedules and quality levels

Revise make-or-buy decisions to purchase items when capacity is fully loaded Waste of company skills, tooling and equipment unutilized in slack periods These methods require capital investments sufficient for the peak production rate, that will be underutilized in slack periods

How can you monitor effectiveness of your production plans?

The important considerations in monitoring the effectiveness of your production plan are shown below:

Systems and Procedures

Consideration Present? Remarks

(if any)

Yes No

• Is there a current documentation of production planning and control systems and procedures? Has this been communicated to all concerned?

• Does production planning and control have a formal monitoring system to maintain and update master scheduling records?

• Is there a system of coordination between sales forecasts to be prepared in sufficient detail so that these maybe readily translated to specific production plans?

Production Planning

Consideration Present? Remarks

(if any)

Yes No

• Does production planning and control prepare a master production schedule with all the production assignments and time allocation?

• Do the production schedules permit adequate planning of purchases and inventory levels?

• Are there signs of significant lost time or low rate of worker productivity? Are the numbers of such orders appear to be significant?

Production Control

Consideration Present? Remarks

(if any)

Yes No

• Can the status of any order or work in progress be readily determined?

• Do actual production levels deviate significantly in comparison with planned schedules?

• Do actual shipments of orders almost always occur according to schedule?

• Are essential production control records and reports maintained to cover current and future production loads?

Two - Wheelers Annual Review January 2009

Published by: CRISIL Ltd.

Published: Jan. 30, 2009 - 84 Pages

Table of Contents

Sections

Two-wheeler growth prospects affected by weak finance scenario and nearing urban saturation

Executive summary

1.0 Demand review and outlook

2.0 Profitability - Review and outlook

Box

1.0 Demand review and outlook

01 Methodology for forecasting long-term demand for two-wheelers

Chart

1.0 Demand review and outlook

01 CRISIL Research's two-wheeler penetration methodology

Figures

1.0 Demand review and outlook

01 Two-wheeler domestic sales trend

02 Two-wheeler- Segmental growth trend

03 Two-wheeler - Segmental share

04 Scooter segment growth trend - Geared and ungeared

05 Motorcycle demand - monthly trend

06 Scooter demand - monthly trend

07 Motorcycle demand growth

08 Scooter demand growth

09 Urban and rural penetration

10 Share of rural and urban to total two-wheeler population

11 Two-wheeler demand trend

12 Motorcycle demand trend

13 Share of urban and rural to total motorcycle demand

14 Scooter demand trend

15 Mopeds demand trend

16 Country-wise estimated two wheeler penetration in 2007

17 China - Motorcycle sales and growth trend

18 Urbanisation to two-wheeler to car sales ratio

19 Two-wheeler export growth

20 Segment-wise export sales

21 Country-wise share of Indian exports - 2007-08

22 Share of India in major export markets

Figures

2.0 Profitability - Review and outlook

01 Operating profit trend

02 Product-mix trend

03 Motorcycles - Product-mix trend

04 Comparison of raw material / unit with operating margins

05 Steel price trend

06 Aluminium price trend

07 Change in basic raw material cost vis-à­¶is change in raw material cost per unit

08 Selling expenses (advertisement and distribution)

09 Selling expenses (player-wise Rs per unit sold)

10 Two-wheeler industry RoCE trend

Tables

1.0 Demand review and outlook

01 Two-wheeler demand growth

2.0 Profitability - Review and outlook

01 Trends in per unit raw material cost

Sections

1.0 Player profile

Bajaj Auto Ltd

Hero Honda Motors Ltd

TVS Motor Co Ltd

Honda Motorcycles and Scooters India Ltd

Yamaha Motor India Pvt Ltd

Kinetic Motor Co Ltd

Suzuki Motorcycle India Pvt Ltd

2.0 Demand and market position

3.0 Costs

Raw material costs

Factors affecting raw material costs

4.0 Supply

5.0 Global coverage

Global motorcycle production

Global motorcycle sales

Global two-wheeler markets

6.0 Government policy

Introduction

Investment policy

Import policy

Fiscal regulations

Excise duty

Other levies

Emission norms

Emission control laws

Safety laws

Figures

1.0 Player profile

01 Bajaj Auto - Estimated market share in the motorcycle sub-segment

02 Hero Honda - Estimated market share in the motorcycle sub-segment

03 TVS Motors - Estimated market share in motorcycle sub-segment

04 HMSI - Segment-wise market share

05 Yamaha - Estimated market share in the motorcycle sub-segment

06 Kinetic - Trends in segment-wise market share

2.0 Demand and market position

01 Competitive position of players

02 Two-wheelers - Player-wise share in domestic sales

03 Two-wheelers - Player-wise growth rates

04 Motorcycle - Player-wise share in domestic sales

05 Economy segment - Player-wise share in domestic sales

06 Economy segment - Major models

07 Executive segment - Player-wise share in domestic sales

08 Executive segment - Major models

09 Premium segment - Player-wise share in domestic sales

10 Premium segment - Major models

11 Scooters - Player-wise share in domestic sales

12 Mopeds - Player-wise share in domestic sales

3.0 Costs

01 Two-wheeler industry - Cost structure

02 Trend in steel and aluminum prices

03 Two-wheeler industry - Raw material indigenisation

04 Selling and distribution expenses - Industry aggregates

05 Player-wise selling and distribution expenses

4.0 Supply

01 Two-wheeler industry - Trend in capacity utilisation

02 Gross fixed asset turnover of two-wheeler OEM vis-à­¶is car industry

5.0 Global coverage

01 Global motorcycle production

02 Global motorcycle sales

03 China - Motorcycle sales

04 Indonesia - Motorcycles sales

05 Indonesia - Share of 4-stroke vs 2-stroke

06 Thailand - Motorcycle sales

07 Taiwan - Domestic motorcycle sales

08 Taiwan - Player market share

09 Vietnam - Motorcycle sales

10 Japan - Motorcycle sales

11 Europe - Motorcycle and moped production

12 Italy - Two-wheeler sales

13 Italy - Market share of different types of motorcycles

14 Germany - Two-wheeler sales

15 US - Company-wise market share (2007)

16 Canada - Segment-wise sales (2007)

Tables

1.0 Player profile

01 Bajaj Auto Ltd

02 Hero Honda Motors Ltd

03 TVS Motor Co Ltd

04 Honda Motorycle and Scooters India Ltd

05 Yamaha Motors Ltd

06 Kinetic Motor Co Ltd

07 Suzuki Motorcycle India Pvt Ltd

2.0 Demand and market position

01 Two-wheelers: Player comparison (2007-08)

02 Two-wheeler player-wise distribution network (March 2008)

03 Two wheelers: Major models launched (April 2006 onwards)

3.0 Costs

01 Two-wheelers - Trends in raw material cost

02 Raw material: Company-wise raw material cost break-up (2007-08)

4.0 Supply

01 Two-wheelers - Capacity and capacity utilisation of players (2007-08)

02 Two-wheelers - Capacity addition plans

5.0 Global coverage

01 Category of motorcycles

02 China - Market share by engine displacement

03 Indonesia - Segment-wise motorcycle sales

04 Thailand - Player-wise capacity share

05 Thailand - Segment-wise market share in 2007

06 Brazil - Motorcycle demand

07 Italy - Segment-wise market share 2007

6.0 Government policy

01 Two wheelers - Basic customs duty structure (2008-09)

02 Key raw materials: Import tariffs

03 Two-wheelers and key raw materials - Excise duty

04 Two wheelers: Emission norms

Sections

1.0 Industry structure

Tables

1.0 Industry structure

01 Two-wheelers - Player-wise sales volumes

02 Two-wheelers - Segment-wise sales volumes

03 Two-wheelers - Segment and player-wise sales volumes

04 Two-wheelers - Segment and player-wise market share (in per cent)

05 Two-wheelers - Segment and player-wise exports share (in per cent)

06 Two-wheelers - Player and segment-wise production

07 Two-wheelers - Player-wise operating margin trends (standalone)

08 Two-wheelers - Player-wise RoCE trends (standalone)

09 Two-wheelers - Financials of key players (2007-08)

10 Bajaj Auto Ltd - Unaudited results (standalone)

11 Hero Honda - Unaudited results

12 TVS Motors - Unaudited results (standalone)

13 Two-wheelers - Profit and loss account (standalone)

14 Two-wheelers - Aggregate industry balance sheet

Industry statistics

Abstract

This report is divided into three sections - The first section covers estimates, forecasts and elaborates on the factors, which have impacted the two-wheeler industry. It also takes a look at the key drivers of growth in the future. The second section evaluates the structural characteristics affecting the two-wheeler industry by covering player profile and reviews in order to understand their market share and hence their competitive position, future strategies, expansion plans and financial profile. Further, the second section provides a crisp coverage of cost structure in the industry, supply scenario, government policies and global market profile. The third section provides factual data on the player and segment-wise volumes, production and market share for players spread across two-wheeler segments.