Aggregate Production Planning Strategies for Optimal Production Efficiency

1. Production Planning and Control

2. The Objectives of Operations Planning • Allocate the company’s ressources • Taking into account : • Strategic and operational objectives (quantity, quality, lead time, costs) • Existing constraints • Forecasted demand

3. Long term Aggregate Plan Determine production capacity Master Production Schedule (MPS) Determine the production schedule for specific products Intermetiate term DifferentLevels of Planning Strategies and policies External environment Forecast of demand Short term Business Plan Determine the long-term strategies for production and capacity Aggregate planning Master scheduling Material Requirements Planning (MRP) Determine the needs for components and raw materials Detailed planning of orders Scheduling Source : Stevenson W., Benedetti, (2001), p 426

4. Aggregate production planning is medium-term capacity planning over a two to eighteen month planning horizon. It involves determining the lowest-cost method of providing the adjustable capacity for meeting production requirements.

5. Capacity Decisions Hierarchy Linkages Facilities Planning Aggregate Planning Scheduling Time Frame Facilities Planning Aggregate Planning Scheduling Time

6. Aggregation refers to the idea of focusing on overall capacity, rather than individual products or services. Aggregation???????? Aggregation is done according to: • Products • Labor • Time

7. Production Planning • Long Range Planning • Strategic planning (1-5 years) • Medium Range Planning • Employment, output, and inventory levels (2-18 months) • Short Range Planning • Job scheduling, machine loading, and job sequencing (0-2 months)

8. What is an aggregate plan?

9. What is an aggregate plan?

10. What is an aggregate plan?

11. Operations Distribution and marketing Current machine capacities Customer needs Plans for future capacities Demand forecasts Workforce capacities Competition behavior Current staffing level Materials Accounting and finance Aggregate Supplier capabilities Cost data plan Storage capacity Financial condition Materials availability of firm Engineering Human resources New products Labor-market conditions Product design changes Training capacity Machine standards Managerial Inputs

12. Aggregate Planning Objectives • Minimize Costs/Maximize Profits • Maximize Customer Service • Minimize Inventory Investment • Minimize Changes in Production Rates • Minimize Changes in Workforce Levels • Maximize Utilization of Plant and Equipment

13. Aggregate production planning involves managing... • Work force levels- the number of workers required for production. • Production rates - the number of units produced per time period. • Inventory levels - the balance of unused units carried forward from the previous period.

14. Common objectives of production planning... MINIMIZE:cost, inventory levels, changes in work force levels, use of overtime, use of subcontracting, changes in production rates, changes in production rates, plant/personnel idle time MAXIMIZE:profits, customer service

15. Methods of Influencing Demand • Price Incentives • Reservations • Backlogs • Complementary Products or Services • Advertising/promotion

16. Methods of Influencing Supply • Hiring/firing workers • Overtime/slack time • Part time/temporary labor • Subcontracting • Cooperative arrangements • Inventories

17. Aggregate Production Planning Variable Costs • Hiring/firing costs • Overtime/slack time costs • Part time/temporary labor costs • Subcontracting costs • Cooperative arrangements costs • Inventory carrying costs • Backorder or stock out costs

18. Computing the Aggregate Unit Production Requirements Aggregate unit labor time = (.32)(4.2)+(.21)(4.9)+(.17)(5.1)+(.14)(5.2)+ (.10)(5.4)+(.06)(5.8) = 4.856 hrs

19. PC WC HC FC D(t) P(t) = D(t) W(t) Pure Aggregate Planning Strategies 1.Demand Chasing: Vary the Workforce Level • D(t): Aggregate demand series • P(t): Aggregate production levels • W(t): Required Workforce levels • Costs Involved: • PC: Production Costs • fixed (setup, overhead) • variable (materials, consumables, etc.) • WC: Regular labor costs • HC: Hiring costs: e.g., advertising, interviewing, training • FC: Firing costs: e.g., compensation, social cost

20. Pure Aggregate Planning Strategies 2.Varying Production Capacity with Constant Workforce: PC SC WC OC UC D(t) P(t) S(t) O(t) U(t) W = constant • S(t): Subcontracted quantities • O(t): Overtime levels • U(t): Undertime levels • Costs involved: • PC, WC: as before • SC: subcontracting costs: e.g., purchasing, transport, quality, etc. • OC: overtime costs: incremental cost of producing one unit in overtime • (UC: undertime costs: this is hidden in WC)

21. PC WC IC D(t) P(t) I(t) W(t), O(t), U(t), S(t) = constant Pure Aggregate Planning Strategies 3.Accumulating (Seasonal) Inventories: • I(t):Accumulated Inventory levels • Costs involved: • PC, WC:as before • IC:inventory holding costs: e.g., interest lost, storage space, pilferage, obsolescence, etc.

22. Pure Aggregate Planning Strategies 4.Backlogging: PC WC BC D(t) P(t) B(t) W(t), O(t), U(t), S(t) = constant • B(t):Accumulated Backlog levels • Costs involved: • PC, WC:as before • BC:backlog (handling) costs: e.g., expediting costs, penalties, lost sales (eventually), customer dissatisfaction

23. Typical Aggregate Planning Strategy A “mixture” of the previously discussed pure options: PC WC HC FC OC UC SC IC BC P W D H F O Io U S I Wo B + • Additional constraints arising from the company strategy; e.g., • maximal allowed subcontracting • maximal allowed workforce variation in two consecutive periods • maximal allowed overtime • safety stocks • etc.

24. Aggregate Production Planning Techniques • Trial-and-error method • Mathematical techniques

25. Aggregate Planning Examples: Unit Demand and Cost Data Suppose we have the following unit demand and cost information: Demand/mo Jan Feb Mar Apr May Jun 4500 5500 7000 10000 8000 6000 Materials $5/unit Holding costs $1/unit per mo. Marginal cost of stock-out $1.25/unit per mo. Hiring and training cost $200/worker Layoff costs $250/worker Labor hours required .15 hrs/unit Straight time labor cost $8/hour Beginning inventory 250 units Productive hours/worker/day 7.25 Paid straight hrs/day 8

26. Cut-and-Try Example: Determining Straight Labor Costs and Output Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker? Demand/mo Jan Feb Mar Apr May Jun 4500 5500 7000 10000 8000 6000 Productive hours/worker/day 7.25 Paid straight hrs/day 8

27. Cut-and-Try Example: Determining Straight Labor Costs and Output Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker? 7.25x22 Demand/mo Jan Feb Mar Apr May Jun 4500 5500 7000 10000 8000 6000 Productive hours/worker/day 7.25 Paid straight hrs/day 8 7.25/0.15=48.33 & 48.33x22=1063.33 22x8hrsx$8=$1408

28. Chase Strategy(Hiring & Firing to meet demand) Lets assume our current workforce is 7 workers. First, calculate net requirements for production, or Demand-Begin Inv. Then, calculate number of workers needed to produce the net requirements, or Net req/Units per worker or # workers Finally, determine the number of workers to hire/fire. Current Workers-Required = (-) hire or (+) fire

29. Chase Strategy(Hiring & Firing to meet demand) Lets assume our current workforce is 7 workers. First, calculate net requirements for production, or 4500-250=4250 units Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers **Round-up Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired.

30. Below are the complete calculations for the remaining months in the six month planning horizon.

31. Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included.

32. Level Workforce Strategy (Surplus and Shortage Allowed) Lets take the same problem as before but this time use the Level Workforce strategy. This time we will seek to use a workforce level of 6 workers.

33. Below are the complete calculations for the remaining months in the six month planning horizon. Note, if we recalculate this sheet with 7 workers we would have a surplus.

34. Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included. Labor Material Storage Stock-out Note, the total costs under this strategy are less than under Chase.

35. 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

36. 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

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

38. Graphical 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

39. Total expected demand Number of production days Average requirement = 6,200 124 = = 50 units per day Roofing Supplier Example 1

40. 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 Roofing Supplier Example 1 Figure 13.3

41. Roofing Supplier Example 2 Plan 1 – constant workforce

42. Roofing Supplier Example 2 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 Plan 1 – constant workforce Table 13.3

43. Roofing Supplier Example 2 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

44. 7,000 – 6,000 – 5,000 – 4,000 – 3,000 – 2,000 – 1,000 – – Reduction of inventory 6,200 units Cumulative level production using average monthly forecast requirements Cumulative demand units Cumulative forecast requirements Excess inventory Jan Feb Mar Apr May June Roofing Supplier Example 2

45. Roofing Supplier Example 3 Plan 2 – subcontracting Minimum requirement = 38 units per day

46. 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 Roofing Supplier Example 3

47. Roofing Supplier Example 3 Table 13.3

48. Roofing Supplier Example 3 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

49. Roofing Supplier Example 3 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

50. Roofing Supplier Example 4 Plan 3 – hiring and firing Production = Expected Demand