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Aggregate Planning

Aggregate Planning. Determine the quantity and timing of production for the immediate future. Objective is to minimize cost over the planning period by adjusting Production rates Labor levels Inventory levels Overtime work Subcontracting Other controllable variables. Aggregate Planning.

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Aggregate Planning

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  1. Aggregate Planning Determine the quantity and timing of production for the immediate future • Objective is to minimize cost over the planning period by adjusting • Production rates • Labor levels • Inventory levels • Overtime work • Subcontracting • Other controllable variables

  2. Aggregate Planning Required for aggregate planning • A logical overall unit for measuring sales and output • A forecast of demand for intermediate planning period in these aggregate units • A method for determining costs • A model that combines forecasts and costs so that scheduling decisions can be made for the planning period

  3. Product decisions Research and technology Marketplace and demand Process planning and capacity decisions Demand forecasts, orders Workforce Raw materials available Aggregate plan for production Inventory on hand External capacity (subcontractors) Master production schedule and MRP systems Detailed work schedules Aggregate Planning Figure 13.2

  4. Aggregate Planning • Combines appropriate resources into general terms • Part of a larger production planning system • Disaggregation breaks the plan down into greater detail • Disaggregation results in a master production schedule

  5. Aggregate Planning Strategies Use inventories to absorb changes in demand Accommodate changes by varying workforce size Use part-timers, overtime, or idle time to absorb changes Use subcontractors and maintain a stable workforce Change prices or other factors to influence demand

  6. Capacity Options • Changing inventory levels • Increase inventory in low demand periods to meet high demand in the future • Increases costs associated with storage, insurance, handling, obsolescence, and capital investment • Shortages can mean lost sales due to long lead times and poor customer service

  7. Capacity Options • Varying workforce size by hiring or layoffs • Match production rate to demand • Training and separation costs for hiring and laying off workers • New workers may have lower productivity • Laying off workers may lower morale and productivity

  8. Capacity Options • Varying production rate through overtime or idle time • Allows constant workforce • May be difficult to meet large increases in demand • Overtime can be costly and may drive down productivity • Absorbing idle time may be difficult

  9. Capacity Options • Subcontracting • Temporary measure during periods of peak demand • May be costly • Assuring quality and timely delivery may be difficult • Exposes your customers to a possible competitor

  10. Capacity Options • Using part-time workers • Useful for filling unskilled or low skilled positions, especially in services

  11. Demand Options • Influencing demand • Use advertising or promotion to increase demand in low periods • Attempt to shift demand to slow periods • May not be sufficient to balance demand and capacity

  12. Demand Options • Back ordering during high- demand periods • Requires customers to wait for an order without loss of goodwill or the order • Most effective when there are few if any substitutes for the product or service • Often results in lost sales

  13. Demand Options • Counterseasonal product and service mixing • Develop a product mix of counterseasonal items • May lead to products or services outside the company’s areas of expertise

  14. Aggregate Planning Options

  15. Aggregate Planning Options

  16. Aggregate Planning Options

  17. Aggregate Planning Options

  18. Quantitative Techniques For APP • Pure Strategies • Mixed Strategies • Linear Programming • Transportation Method • Other Quantitative Techniques

  19. QUARTER SALES FORECAST (LB) Spring 80,000 Summer 50,000 Fall 120,000 Winter 150,000 Pure Strategies Example: Hiring cost = $100 per worker Firing cost = $500 per worker Regular production cost per pound = $2.00 Inventory carrying cost = $0.50 pound per quarter Production per employee = 1,000 pounds per quarter Beginning work force = 100 workers

  20. Level production = 100,000 pounds SALES PRODUCTION QUARTER FORECAST PLAN INVENTORY Spring 80,000 100,000 20,000 Summer 50,000 100,000 70,000 Fall 120,000 100,000 50,000 Winter 150,000 100,000 0 400,000 140,000 Cost of Level Production Strategy (400,000 X $2.00) + (140,00 X $.50) = $870,000 (50,000 + 120,000 + 150,000 + 80,000) 4 Level Production Strategy

  21. Chase Demand Strategy SALES PRODUCTION WORKERS WORKERS WORKERS QUARTER FORECAST PLAN NEEDED HIRED FIRED Spring 80,000 80,000 80 0 20 Summer 50,000 50,000 50 0 30 Fall 120,000 120,000 120 70 0 Winter 150,000 150,000 150 30 0 100 50 Cost of Chase Demand Strategy (400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

  22. Mixed Strategy • Combination of Level Production and Chase Demand strategies • Examples of management policies • no more than x% of the workforce can be laid off in one quarter • inventory levels cannot exceed x dollars • Many industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time

  23. Mixing Options to Develop a Plan • Chase strategy • Match output rates to demand forecast for each period • Vary workforce levels or vary production rate • Favored by many service organizations

  24. Mixing Options to Develop a Plan • Level strategy • Daily production is uniform • Use inventory or idle time as buffer • Stable production leads to better quality and productivity • Some combination of capacity options, a mixed strategy, might be the best solution

  25. Graphical and Charting Methods • Popular techniques • Easy to understand and use • Trial-and-error approaches that do not guarantee an optimal solution • Require only limited computations

  26. Graphical and Charting Methods Determine the demand for each period Determine the capacity for regular time, overtime, and subcontracting each period Find labor costs, hiring and layoff costs, and inventory holding costs Consider company policy on workers and stock levels Develop alternative plans and examine their total costs

  27. Total expected demand Number of production days Average requirement = 6,200 124 = = 50 units per day Planning - Example 1

  28. Forecast demand 70 – 60 – 50 – 40 – 30 – 0 – Level production using average monthly forecast demand Production rate per working day Jan Feb Mar Apr May June = Month       22 18 21 21 22 20 = Number of working days Planning - Example 1

  29. Planning - Example 1

  30. Planning - Example 1 Total units of inventory carried over from one month to the next = 1,850 units Workforce required to produce 50 units per day = 10 workers Table 13.3

  31. Planning - Example 1 Total units of inventory carried over from one month to the next = 1,850 units Workforce required to produce 50 units per day = 10 workers Table 13.3

  32. 7,000 – 6,000 – 5,000 – 4,000 – 3,000 – 2,000 – 1,000 – – Reduction of inventory Cumulative level production using average monthly forecast requirements Cumulative demand units Cumulative forecast requirements Excess inventory Jan Feb Mar Apr May June Planning - Example 1

  33. Planning - Example 2 Minimum requirement = 38 units per day

  34. Forecast demand 70 – 60 – 50 – 40 – 30 – 0 – Level production using lowest monthly forecast demand Production rate per working day Jan Feb Mar Apr May June = Month       22 18 21 21 22 20 = Number of working days Planning - Example 2

  35. Planning - Example 2

  36. Planning - Example 2 In-house production = 38 units per day x 124 days = 4,712 units Subcontract units = 6,200 - 4,712 = 1,488 units

  37. Planning - Example 2 In-house production = 38 units per day x 124 days = 4,712 units Subcontract units = 6,200 - 4,712 = 1,488 units Table 13.3

  38. Planning - Example 3 Production = Expected Demand

  39. Forecast demand and monthly production 70 – 60 – 50 – 40 – 30 – 0 – Production rate per working day Jan Feb Mar Apr May June = Month       22 18 21 21 22 20 = Number of working days Planning - Example 3

  40. Planning - Example 3

  41. Planning - Example 3 Table 13.3

  42. Comparison of Three Plans Plan 2 is the lowest cost option

  43. Mathematical Approaches • Useful for generating strategies • Transportation Method of Linear Programming • Produces an optimal plan • Management Coefficients Model • Model built around manager’s experience and performance • Other Models • Linear Decision Rule • Simulation

  44. General Linear Programming (LP) Model • LP gives an optimal solution, but demand and costs must be linear • Let • Wt = workforce size for period t • Pt =units produced in period t • It =units in inventory at the end of period t • Ft =number of workers fired for period t • Ht = number of workers hired for period t

  45. LP MODEL Minimize Z = $100 (H1 + H2 + H3 + H4) + $500 (F1 + F2 + F3 + F4) + $0.50 (I1 + I2 + I3 + I4) Subject to P1 - I1 = 80,000 (1) Demand I1 + P2 - I2 = 50,000 (2) constraints I2 + P3 - I3 = 120,000 (3) I3 + P4 - I4 = 150,000 (4) Production 1000 W1 = P1 (5) constraints 1000 W2 = P2 (6) 1000 W3 = P3 (7) 1000 W4 = P4 (8) 100 + H1 - F1 = W1 (9) Work force W1 + H2 - F2 = W2 (10) constraints W2 + H3 - F3 = W3 (11) W3 + H4 - F4 = W4 (12)

  46. EXPECTED REGULAR OVERTIME SUBCONTRACT QUARTER DEMAND CAPACITY CAPACITY CAPACITY 1 900 1000 100 500 2 1500 1200 150 500 3 1600 1300 200 500 4 3000 1300 200 500 Regular production cost per unit $20 Overtime production cost per unit $25 Subcontracting cost per unit $28 Inventory holding cost per unit per period $3 Beginning inventory 300 units Transportation Method- Example 1

  47. PERIOD OF USE Unused PERIOD OF PRODUCTION 1 2 3 4 Capacity Capacity 1 2 3 4 Beginning 0 3 6 9 Inventory 300 — — — 300 Regular 600 300 100 — 1000 Overtime 100 100 Subcontract 500 Regular 1200 — — 1200 Overtime 150 150 Subcontract 250 250 500 Regular 1300 — 1300 Overtime 200 — 200 Subcontract 500 500 Regular 1300 1300 Overtime 200 200 Subcontract 500 500 Demand 900 1500 1600 3000 250 20 23 26 29 25 28 31 34 28 31 34 37 20 23 26 25 28 31 28 31 34 20 23 25 28 28 31 20 25 28 Transportation Tableau

  48. REGULAR SUB- ENDING PERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY 1 900 1000 100 0 500 2 1500 1200 150 250 600 3 1600 1300 200 500 1000 4 3000 1300 200 500 0 Total 7000 4800 650 1250 2100 Transportation Method- Example 1

  49. Sales Period Mar Apr May Demand 800 1,000 750 Capacity: Regular 700 700 700 Overtime 50 50 50 Subcontracting 150 150 130 Beginning inventory 100 tires Costs Regular time $40 per tire Overtime $50 per tire Subcontracting $70 per tire Carrying $ 2 per tire Transportation Method- Example 2

  50. Transportation Method- Example 2 Important points Carrying costs are $2/tire/month. If goods are made in one period and held over to the next, holding costs are incurred Supply must equal demand, so a dummy column called “unused capacity” is added Because back ordering is not viable in this example, cells that might be used to satisfy earlier demand are not available

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