Aggregate Planning Lect Give

11

Aggregate PlanningAggregate Planning

22

Planning Tasks and ResponsibilitiesPlanning Tasks and Responsibilities

33

Types of Planning Over a Types of Planning Over a Time HorizonTime Horizon

Add FacilitiesAdd long lead time equipment

Schedule JobsSchedule PersonnelAllocate Machinery

Sub-ContractAdd EquipmentAdd Shifts

Add PersonnelBuild or Use Inventory

Long Range Planning

Intermediate Range Planning

Short Range Planning

Modify Capacity Use Capacity

*

*

*Limited options exist

44

The Production Planning ProcessThe Production Planning Process

Master Scheduling

Materials Planning

Capacity Planning

Production Planning

Sales Planning

Business Planning

Purchasing

Shop Floor control

Performance Measurement

yes

Resource OK?

PlanningOK?

no

yes

no

FEED

BAC

K

Objectives

Demands

Resources

Products

Materials

Capacity

Parts

Hours

Accountability

Bill of Materials

Inventory status

Routings

Top Management Planning

Operations management Planning

Operations Management Execution

55

Relationships of the Aggregate PlanRelationships of the Aggregate Plan

AggregatePlan for

Production

DemandForecasts,

orders

MasterProduction

Schedule, and MRP systems

Detailed WorkSchedules

ExternalCapacity

Subcontractors

Inventory OnHand

Raw MaterialsAvailable

Work Force

Marketplaceand Demand

Research andTechnology

ProductDecisions

ProcessPlanning & Capacity

Decisions

66

Meet demandMeet demandUse capacity Use capacity efficientlyefficientlyMatch capacity to Match capacity to demanddemandMeet inventory policyMeet inventory policyMinimize costMinimize cost

LaborLaborInventoryInventoryPlant & equipmentPlant & equipment

SubcontracSubcontractt

Aggregate Planning GoalsAggregate Planning Goals

77

Inputs and Outputs to APPInputs and Outputs to APP

CompanyPolicies

CompanyPolicies

StrategicObjectivesStrategic

ObjectivesCapacity

ConstraintsCapacity

Constraints

Units or dollarssubcontracted,

backordered, or lost

Units or dollarssubcontracted,

backordered, or lost

Size ofWorkforce

Size ofWorkforce

Productionper month

(in units or $)

Productionper month

(in units or $)

InventoryLevels

InventoryLevels

FinancialConstraintsFinancial

ConstraintsDemand

ForecastsDemand

ForecastsAggregateProductionPlanning

AggregateProductionPlanning

88

Production planning processProduction planning process

Corporate strategies

and policies

Business Plan

Aggregate Plan

Master Production Schedule

Aggregate demand forecast

EconomicPolitical

Competitive conditions

Establishes Operations and capacity strategy

Establishes Operations capacity

Establishes schedule for specific products

Required Inputs to the Production Required Inputs to the Production Planning SystemPlanning 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

1010

Pure Strategies Pure Strategies -- The ExtremesThe Extremes

Level Strategy

Chase Strategy

Production equals

demand

Production rate is constant

Level production - produce at constant rate & use inventory as needed to meet demand

Chase demand - change workforce levels so that production matches demand

1111

Level ProductionLevel Production

ProductionProduction

DemandDemandU

nits

Uni

ts

TimeTime

1212

Chase DemandChase Demand

ProductionProduction

DemandDemand

Uni

tsU

nits

TimeTime

1313

Aggregate Planning StrategiesAggregate Planning StrategiesPure StrategiesPure Strategies

Capacity Options Capacity Options —— change capacity:change capacity:changing inventory levelschanging inventory levelsvarying work force size by hiring or varying work force size by hiring or layoffslayoffsvarying production capacity through varying production capacity through overtime or idle timeovertime or idle timesubcontractingsubcontractingusing partusing part--time workerstime workers

1414

Aggregate Planning StrategiesAggregate Planning StrategiesPure StrategiesPure Strategies

Demand Options Demand Options —— change demandchange demand::

influencing demand influencing demand –– pricing, promotionpricing, promotion

backordering during high demand backordering during high demand periodsperiods

counterseasonal product mixingcounterseasonal product mixing

Balancing Aggregate DemandBalancing Aggregate Demandand Aggregate Production Capacityand Aggregate Production Capacity

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

45005500

7000

10000

8000

6000

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

4500 4000

90008000

4000

6000

Suppose the figure to the right represents forecast demand in units

Suppose the figure to the right represents forecast demand in units

Now suppose this lower figure represents the aggregate capacity of the company to meet demand

Now suppose this lower figure represents the aggregate capacity of the company to meet demand

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

1616

Examples from Indian industryExamples from Indian industry

Automobiles Automobiles -- Mahindra _different Mahindra _different strategiesstrategiesTwo wheelers Two wheelers –– LML Ltd (flow)LML Ltd (flow)Process Process –– ACC refractoriesACC refractoriesHotels, RestaurantsHotels, RestaurantsServices Services ––

Banking , Credit cardsBanking , Credit cardsAirports _ flexi Airports _ flexi -- counterscounters

1717

APP Using Pure StrategiesAPP Using Pure Strategies

Hiring cost = $100 per workerFiring cost = $500 per worker

Inventory carrying cost = $0.50 pound per quarterProduction per employee = 1,000 pounds per quarter

Beginning work force = 100 workers

QUARTER SALES FORECAST (LB)

Spring 80,000Summer 50,000Fall 120,000Winter 150,000

Solved example:Solved example:

1818

APP Using Pure StrategiesAPP Using Pure Strategies

Hiring costHiring cost = $100 per worker= $100 per workerFiring costFiring cost = $500 per worker= $500 per worker

Inventory carrying costInventory carrying cost = $0.50 pound per quarter= $0.50 pound per quarterProduction per employeeProduction per employee = 1,000 pounds per quarter= 1,000 pounds per quarter

Beginning work forceBeginning work force = 100 workers= 100 workers

QUARTER SALES FORECAST (LB)

Spring 80,000Summer 50,000Fall 120,000Winter 150,000

Level production

= 100,000 pounds

(50,000 + 120,000 + 150,000 + 80,000)4

1919

Level Production StrategyLevel Production Strategy

Spring 80,000 100,000 20,000Summer 50,000 100,000 70,000Fall 120,000 100,000 50,000Winter 150,000 100,000 0

400,000 140,000

Cost = 140,000 pounds x 0.50 per pound = $70,000

SALES PRODUCTIONQUARTER FORECAST PLAN INVENTORY

2020

Spring 80,000 80,000 80 0 20Summer 50,000 50,000 50 0 30

Fall 120,000 120,000 120 70 0Winter 150,000 150,000 150 30 0

100 50

SALES PRODUCTION WORKERS WORKERS WORKERSQUARTER FORECAST PLAN NEEDED HIRED FIRED

Cost = (100 workers hired x $100) + (50 workers fired x $500)= $10,000 + 25,000 = $35,000

Chase Demand StrategyChase Demand Strategy

2121

APP Using Mixed StrategiesAPP Using Mixed Strategies

Production per employee= 100 cases per monthWage rate = $10 per case for regular production

= $15 per case for overtime= $25 for subcontracting

Hiring cost = $1000 per workerFiring cost = $500 per worker

Inventory carrying cost = $1.00 case per monthBeginning work force = 10 workers

January 1000 July 500February 400 August 500March 400 September 1000April 400 October 1500May 400 November 2500June 400 December 3000

MONTH DEMAND (CASES) MONTH DEMAND (CASES)

Summary: The Aggregate Operations PlanSummary: The Aggregate Operations Plan

Main purpose: Specify the optimal combination Main purpose: Specify the optimal combination ofof

production rate (units completed per unit of production rate (units completed per unit of time)time)workforce level (number of workers)workforce level (number of workers)inventory on hand (inventory carried from inventory on hand (inventory carried from previous period)previous period)

Product group or broad category (Aggregation)Product group or broad category (Aggregation)This planning is done over an intermediateThis planning is done over an intermediate--range planning period of 6 to18 months range planning period of 6 to18 months

Aggregate Planning Examples: Unit Aggregate Planning Examples: Unit Demand and Cost DataDemand and Cost Data

Materials $5/unitHolding costs $1/unit per mo.Marginal cost of stockout $1.25/unit per mo.Hiring and training cost $200/workerLayoff costs $250/workerLabor hours required .15 hrs/unitStraight time labor cost $8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8

Suppose we have the following unit demand and cost information:

Suppose we have the following unit demand and cost information:

Demand/mo Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000

2424

Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Productive hours/worker/day 7.25Paid straight hrs/day 8

Demand/mo Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000

Given the demand and cost information below, whatare the aggregate hours/worker/month, units/worker, and dollars/worker?

Given the demand and cost information below, whatare the aggregate hours/worker/month, units/worker, and dollars/worker?

7.25x22

159.5/0.15 =1063.322x8hrsx$8=$14

08

CutCut--andand--Try Example: Determining Try Example: Determining Straight Labor Costs and OutputStraight Labor Costs and Output

Chase StrategyChase Strategy(Hiring & Firing to meet demand)(Hiring & Firing to meet demand)

JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408

JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0

Lets assume our current workforce is 7 workers.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

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.

Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1,063 918 1,015 1,015 1,063 967$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

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

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

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

Jan Feb Mar Apr May Jun CostsMaterial $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62Hiring cost 400.00 200.00 600.00 1,200.00Firing cost 750.00 500.00 250.00 1,500.00

$260,408.62

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

Level Workforce Strategy (Surplus and Level Workforce Strategy (Surplus and Shortage Allowed)Shortage Allowed)

JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6Production 6,380Ending inventory 2,130Surplus 2,130Shortage

Lets take the same problem as before but this time use the Level Workforce strategy

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

This time we will seek to use a workforce level of 6 workers

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300Net req. 4,250 3,370 4,860 8,770 10,680 7,300Workers 6 6 6 6 6 6Production 6,380 5,510 6,090 6,090 6,380 5,800Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500Surplus 2,130 2,140 1,230Shortage 2,680 1,300 1,500

Note, if we recalculate this sheet with 7 workers we would have a surplusNote, if we recalculate this sheet with 7 workers we would have a surplus

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

Jan Feb Mar Apr May Jun4,500 5,500 7,000 10,000 8,000 6,000

250 2,130 10 -910 -3,910 -1,6204,250 3,370 4,860 8,770 10,680 7,300

6 6 6 6 6 66,380 5,510 6,090 6,090 6,380 5,8002,130 2,140 1,230 -2,680 -1,300 -1,5002,130 2,140 1,230

2,680 1,300 1,500

Jan Feb Mar Apr May Jun$8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.0031,900 27,550 30,450 30,450 31,900 29,000 181,250.002,130 2,140 1,230 5,500.00

3,350 1,625 1,875 6,850.00

$241,600.00

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

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

Note, total costs under this strategy are less than Chase at $260.408.62

Note, total costs under this strategy are less than Chase at $260.408.62

LaborMaterialStorageStockout

Quantitative Techniques For AP

Pure StrategiesMixed StrategiesLinear ProgrammingTransportation Method

1414--3232

Pure Strategies – Chase & Level Production

Hiring costHiring cost = $100 per worker= $100 per workerFiring costFiring cost = $500 per worker= $500 per worker

Inventory carrying costInventory carrying cost = $0.50 pound per = $0.50 pound per quarterquarter

Regular production cost per poundRegular production cost per pound = $2.00= $2.00Production per employeeProduction per employee = 1,000 pounds per = 1,000 pounds per

quarterquarterBeginning work forceBeginning work force = 100 workers= 100 workers

QUARTERQUARTER SALES FORECAST (LB)SALES FORECAST (LB)

SpringSpring 80,00080,000SummerSummer 50,00050,000FallFall 120,000120,000WinterWinter 150,000150,000

Example:Example:

Level Production StrategyLevel Production Strategy

Level production

= 100,000 pounds(50,000 + 120,000 + 150,000 + 80,000)

4

Spring 80,000 100,000 20,000Summer 50,000 100,000 70,000Fall 120,000 100,000 50,000Winter 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

SALES PRODUCTIONQUARTER FORECAST PLAN INVENTORY

Chase Demand StrategyChase Demand Strategy

SpringSpring 80,00080,000 80,00080,000 8080 00 2020SummerSummer 50,00050,000 50,00050,000 5050 00 3030FallFall 120,000120,000 120,000120,000 120120 7070 00WinterWinter 150,000150,000 150,000150,000 150150 3030 00

100100 5050

SALESSALES PRODUCTIONPRODUCTION WORKERSWORKERS WORKERSWORKERS WORKERSWORKERSQUARTERQUARTER FORECASTFORECAST PLANPLAN NEEDEDNEEDED HIREDHIRED FIREDFIRED

Cost of Chase Demand Strategy(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

Mixed StrategyMixed Strategy

Combination of Level Production and Chase Demand strategiesExamples of management policies

no more than x% of the workforce can be laid off in one quarterinventory levels cannot exceed x dollars

Many industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time

General Linear Programming (LP) Model

LP gives an optimal solution, but demand and costs must be linearLet

Wt = workforce size for period tPt =units produced in period tIt =units in inventory at the end of period tFt =number of workers fired for period tHt = number of workers hired for period t

LP MODELMinimize Z = $100 (H1 + H2 + H3 + H4)

+ $500 (F1 + F2 + F3 + F4)+ $0.50 (I1 + I2 + I3 + I4)+ $2 (P1 + P2 + P3 + P4)

Subject toP1 - 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)

Transportation method for Aggregate Planning

Used if no change in manpower Used if no change in manpower –– i.e. no hiring and i.e. no hiring and firing costsfiring costsh = holding costs per unith = holding costs per unitr = regular production cost / unitr = regular production cost / unito = overtime costs per unito = overtime costs per units = subcontracting costs per unit s = subcontracting costs per unit b = backordering costs per unitb = backordering costs per unitI = beginning InventoryI = beginning InventoryR = regular capacityR = regular capacityO = overtime capacityO = overtime capacityS = subcontracting capacity S = subcontracting capacity

3838

Transportation Table for Agg. PlanTransportation Table for Agg. PlanPeriod 1Period 1 Period 2Period 2 Period 3Period 3

Unused Unused CapacityCapacity(Dummy)(Dummy)

Total Capacity Total Capacity AvailableAvailable(Supply)(Supply)

Beginning Beginning InventoryInventory

00 hh 2h2h II

RegularRegular rr r+hr+h r+2hr+2hRR11

OvertimeOvertime oo o+ho+h o+2ho+2hOO11

SubcontraSubcontractct

ss s+h+h s+2hs+2hSS11

RegularRegular r+br+b rr r+hr+hRR22

OvertimeOvertime o+bo+b oo o+ho+hOO22

SubcontraSubcontractct

s+bs+b ss s+h+hSS22

RegularRegular r+2br+2b r+br+b rrRR33

OvertimeOvertime o+2bo+2b o+bo+b ooOO33

SubcontraSubcontractct

s+2bs+2b s+bs+b ssSS33

Total Total DemandDemand

DD11 DD22 DD33

Perio

d 3

P

eriod

2

P

eriod

1

Aggregate Planning Aggregate Planning –– assumptions madeassumptions madeRegular capacity same in all periods (No Regular capacity same in all periods (No holidays , festivals etc)holidays , festivals etc)Cost is a linear function of unit cost and Cost is a linear function of unit cost and number of units. (cost actually step a number of units. (cost actually step a function) function) Plans are feasible Plans are feasible –– sufficient capacity / sufficient capacity / inventory holding availableinventory holding availableAll costs associated with a decision are All costs associated with a decision are represented by a lump sum or per unit cost represented by a lump sum or per unit cost (Actually step function)(Actually step function)Cost figures can be reasonably estimatedCost figures can be reasonably estimatedInventory build up and withdrawal at Inventory build up and withdrawal at constant rate. Backlogs for entire period.constant rate. Backlogs for entire period.

ItemsItems

Product lines Product lines or familiesor families

Individual Individual productsproducts

ComponentsComponents

Manufacturing Manufacturing operationsoperations

Resource Resource LevelLevel

PlantsPlants

Individual Individual machinesmachines

Critical Critical work work

centerscenters

Production Production PlanningPlanning

Capacity Capacity PlanningPlanning

Resource requirements

plan

Rough-cut capacity

plan

Capacity requirements

plan

Input/ output control

Sales and Operations

Plan

Master production schedule

Material requirements

plan

Shop floor

schedule

All All work work

centerscenters

Hierarchical Nature of Planning

Disaggregation: process of breaking an aggregate plan into more Disaggregation: process of breaking an aggregate plan into more detailed plansdetailed plans

Collaborative PlanningCollaborative Planning

Sharing information and synchronizing Sharing information and synchronizing production across supply chainproduction across supply chain

Part of CPFR (collaborative planning, Part of CPFR (collaborative planning, forecasting, and replenishment)forecasting, and replenishment)

involves selecting products to be jointly involves selecting products to be jointly managed, creating a single forecast of managed, creating a single forecast of customer demand, and synchronizing customer demand, and synchronizing production across supply chainproduction across supply chain

Available-to-Promise (ATP)

Quantity of items that can be promised to customerDifference between planned production and customer orders already received

Capable-to-promisequantity of items that can be produced and made available at a later date

*CO= customer order

ATP in period 1 = (On-hand quantity + MPS in period 1) –(CO* until the next period of planned production)

ATP in period n = (MPS in period n) –(CO until the next period of planned production)

ATP: ExampleATP: Example

ATP: Example (cont.)ATP: Example (cont.)

ATP: Example (cont.)ATP: Example (cont.)

ATP in April = (10+100) ATP in April = (10+100) –– 70 = 4070 = 40ATP in May = 100 ATP in May = 100 –– 110 = 110 = --1010ATP in June = 100 ATP in June = 100 –– 50 = 5050 = 50

= 30= 30= 0= 0

Take excess units from April

1414--4747

Rule Based ATPRule Based ATPProduct Request

Is the product

available at this location?

Is an alternative product

available at an alternate location?

Is an alternative product

available at this location?

Is this product available at a

different location?

Available-to-promise

Allocate inventory

Capable-to-promise date

Is the customer willing to wait for

the product?

Available-to-promise

Allocate inventory

Revise master

schedule

Trigger production

Lose sale

YesYes

NoNo

YesYes

NoNo

YesYes

NoNo

YesYes

NoNo

YesYes

NoNo

4848

Aggregate Planning Aggregate Planning Steps and techniques for aggregate planningSteps and techniques for aggregate planning

1.1. Determine demand for each periodDetermine demand for each period2.2. Determine capacities for each period (regular, Determine capacities for each period (regular,

OT, subOT, sub--contracting etc) contracting etc) 3.3. Identify company / departmental policies that Identify company / departmental policies that

are pertinent (safety stock, level workforce)are pertinent (safety stock, level workforce)4.4. Determine unit costs Determine unit costs -- for regular time, OT, subfor regular time, OT, sub--

contracting, holding inventories, backorders, layoffs etccontracting, holding inventories, backorders, layoffs etc5.5. Develop alternative plans and compute cost for eachDevelop alternative plans and compute cost for each6.6. If satisfactory plan emerges, select one that best If satisfactory plan emerges, select one that best

satisfies objectivessatisfies objectives-- else repeat step 5. else repeat step 5.

4949

Aggregate Planning Aggregate Planning –– assumptions madeassumptions madeRegular capacity same in all periods (No Regular capacity same in all periods (No holidays , festivals etc)holidays , festivals etc)Cost is a linear function of unit cost and Cost is a linear function of unit cost and number of units. (cost actually step a number of units. (cost actually step a function) function) Plans are feasible Plans are feasible –– sufficient capacity / sufficient capacity / inventory holding availableinventory holding availableAll costs associated with a decision are All costs associated with a decision are represented by a lump sum or per unit represented by a lump sum or per unit cost (Actually step function)cost (Actually step function)Cost figures can be reasonably estimatedCost figures can be reasonably estimatedInventory build up and withdrawal at Inventory build up and withdrawal at constant rate. Backlogs for entire period.constant rate. Backlogs for entire period.

5050

Next _ MPS and MRPNext _ MPS and MRP