Aggregate Planning Based on Chase

Bharat Kantharia

Aggregate Planning

Operations & Supply ManagementSemester-II

UnitedWorld, Ahmedabad

Aggregate Planning Definition

• Aggregate Planning is concerned with matching supply and demand of output over the medium time range, up to approximately 3 to 12 months into the future. Term aggregate implies that the planning is done for a single overall measure of output (equivalent units) or, at the most, a few aggregated product categories. Aim of aggregate planning is to set overall output levels in the near to medium future in the face of fluctuating or uncertain demands. Aggregate planning might seek to influence demand as well as supply

Aggregate Planning Definition

Aggregate planning has certain prerequired inputs which are inevitable. They include:

• Information about the resources and the facilities available.

• Demand forecast for the period for which the planning has to be done.

• Cost of various alternatives and resources. This includes cost of holding inventory, ordering cost, cost of production through various production alternatives like subcontracting, backordering and overtime.

• Organizational policies regarding the usage of above alternatives.

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Process planning

Strategic capacityplanning

Sales and operations(aggregate) planning

Sales plan

Aggregateoperationsplan

Supply networkplanning

Forecasting anddemand management

Master scheduling

Material requirementsplanning

Order scheduling

Vehicle capacityplanning

Vehicle loading

Vehicle dispatching

Warehouse receiptplanning

Weekly workforcescheduling

Daily workforcescheduling

Manufacturing Logistics Services

Longrange

Mediumrange

Shortrange

Sales & Operations Planning

Sales & Operations Planning• Long-range planning

– Greater than one year planning horizon

– Usually performed in annual increments

• Medium-range planning– Six to eighteen months – Usually with weekly, monthly or

quarterly increments

• Short-range planning– One day to less than six months– Usually with weekly or daily

increments

Required Inputs to the Production Planning System

Planning for production

External capacity

Competitors’behavior

Raw material availability

Market demand

Economic conditions

Currentphysical capacity

Current workforce

Inventory levels

Activities required for production

External to firm

Internal to firm

Key Strategies for Meeting Demand• Chase Strategy: Match production (supply)

to demand by hiring or firing workers• Level strategy: Maintain stable workforce

@ constant output. Shortages/surpluses are absorbed by fluctuating inventory, order backlog, lost sales. Service levels vary.

• Stable workforce- varying work hours: Vary output by varying no of hours worked thru’ flexible work schedules & overtime

• Mixed Strategies– Company policies– Usage of two or more control variables eg.

Combination of subcontracting & OT or Inventory & OT

Relevant Costs• Basic Production Costs: Fixed,

variable costs for producing a given product type in a given time period. Direct & indirect costs

• Costs associated with changes in production rate: Hiring, firing, training : Hiring temporaries

• Inventory Holding/Carrying Costs: Capital tied-up

• Backordering costs: cost of expediting, loss of customer goodwill, loss of sales revenues

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Analyzing CostsProduction Rate Vs Regular Time Prod. Cost

Workforce Size Vs Regular time Prod. Cost

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Analyzing CostsImpact of Cost of overtime & idle time on Prod. Cost

Incremental Cost of Prod. Vs Prod. Rate Basis Changing Workforce

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Analyzing CostsAggregate Inventory Level Inventory, Backorder

& Shortage Costs

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Aggregate Planning Strategies

• Top-down approach• Bottoms-up approach Basis

Capacity Requirements Planning

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Aggregate Planning Example : Data

  JanuaryFebruary March April May June Totals

Demand Forecast 1800 1500 1100 900 1100 1600 8000

No Of Working Days 22 19 21 21 22 20 125

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Title Per Costs /Value

Materials $/Unit 100

Inv. Holding Cost $/ Unit per Month 1.5

Marginal Cost of Stockout $ Per Unit Month 5

Hiring & Training Cost $ Per Worker 200

Layoff Costs $ Per Worker 250

Labour Hrs Reqd. Per Unit Hrs/Unit 5

Straight Time Labour Cost (8 Hrs) $ / Hr 4

Beginning Inventory Units 400

Paid Hrs / Day Hrs /Day 8Policy: Safety Stock Reqd. Of Monthly

Demand Units 25%

Marginal Cost of Subcontracting $/Unit 20

Overtime Cost /Hr : 150% $/Hr 6

Aggregate Planning : (Chase)

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Aggregate Planning Examples-Chase e12

Comparison of Four Plans

Cost Type Plan1 Chase Demand

Plan2 Constant Workforce

Plan3 Constant Workforce + SubCon

Plan4 Constant Workforce + OT

Hiring 5800 0 0 0

Layoff 7000 0 0 0

Excess Inventory

0 948 0 1281

Shortage 0 1540 0 0

Subcontract

0 0 60000 0

Overtime 0 0 0 12210

Straight Time

160000 160000 100000 152000

Totals 172800 162488 160000 165491Bharat Kantharia

Transportation MethodDemand Forecast Supply Capacity

Period Units of Demand Regular Time Overtime Subcontract

1 500 700 250 500

2 800 800 250 500

3 1700 900 250 500

4 900 500 250 500

Total 3900

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Initial Inventory Units 100

Desired Final Inventory Units 150

Regular Time Cost Cost/Unit 100

Overtime Cost Cost/Unit 125

Subcontract Cost Cost/Unit 150

Inventory Cost (period) Cost/Unit Time

20

Unused Regular Time Cost

Cost/Unit 40

Transportation Method

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Transportation Method

Comparison of Different Methods