Ch13 - Aggregate Planning

© Wiley 2007

Chapter 13 – Aggregate Planning

Operations Managementby

R. Dan Reid & Nada R. Sanders3rd Edition © Wiley 2007

PowerPoint Presentation by R.B. Clough – UNHM. E. Henrie - UAA

© Wiley 2007

The Role of Aggregate Planning Integral to part of the business

planning process Supports the strategic plan Also known as the production plan Identifies resources required for

operations for the next 6 -18 months Details the aggregate production

rate and size of work force required

© Wiley 2007

The Role of the Aggregate Plan

© Wiley 2007

Planning Links to MPS

© Wiley 2007

Types of Aggregate Plans Level Aggregate Plans

Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products like appliances Disadvantage- builds inventory and/or uses back orders

Chase Aggregate Plans Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage- constantly changing short term capacity

© Wiley 2007

Types of Aggregate Plans (Cont.)

Hybrid Aggregate Plans Uses a combination of options Options should be limited to facilitate execution May use a level workforce with overtime & temps May allow inventory buildup and some backordering May use short term sourcing Best way to develop a hybrid plan is by Linear Programming

or Integer Linear Programming, see notes given in class andhttp://bcs.wiley.com/he-bcs/Books?action=mininav&bcsId=3598&itemId=0471794481&assetId=112492&resourceId=10280&newwindow=true

© Wiley 2007

Aggregate Planning Options

Demand based options Reactive: uses finished goods inventories and backorders for fluctuations Proactive: shifts the demand patterns to minimize

fluctuations e.g. early bird dinner prices at a restaurant Capacity based options

Changes output capacity to meet demand Uses overtime, under time, subcontracting, hiring,

firing, and part-timers – cost and operational implications

© Wiley 2007

Developing the Aggregate Plan

Step 1- Choose strategy: level, chase, or Hybrid Step 2- Determine the aggregate production rate Step 3- Calculate the size of the workforce Step 4- Test the plan as follows:

Calculate Inventory, expected hiring/firing, overtime needs Calculate total cost of plan

Step 5- Evaluate performance: cost, service, human resources, and operations

© Wiley 2007

Aggregate Planning Bottom Line

The Aggregate plan must balance several perspectives

Costs are important but so are: Customer service Operational effectiveness Workforce morale

A successful AP considers each of these factors

© Wiley 2007

Master Production Scheduling

Master production schedule (MPS) is the anticipated build schedule

MPS is often stated in produce or service specifications rather than dollars

MPS is often built, managed, reviewed and maintained by the master scheduler

© Wiley 2007

Planning Links to MPS

© Wiley 2007

Role of the MPS

Aggregate plan: Specifies the resources available (e.g.:

regular workforce, overtime, subcontracting, allowable inventory levels & shortages)

Master production schedule: Specifies the number & when to produce

each end item (the anticipated build schedule)

Disaggregates the aggregate plan

© Wiley 2007

Objectives of Master Schedule The Master Scheduler must:

Maintain the desired customer service level Utilize resources efficiently Maintain desired inventory levels

The Master Schedule must: Satisfy customer demand Not exceed Operation’s capacity Work within the constraints of the

Aggregate Plan

© Wiley 2007

MPS as a Basis of Communication MPS is a basis for communication between

operations and other functional areas Demand management and master

scheduler is communication is ongoing to incorporate Forecasts, order-entry, order-promising, and

physical distribution activities Authorized MPS is critical input to the

material requirements planning (MRP)

© Wiley 2007

Developing an MPS The Master Scheduler:

Develops a proposed MPS Checks the schedule for feasibility with available

capacity Modifies as needed Authorizes the MPS

Consider the following example: Make-to-stock environment with fixed orders of 125

units There are 110 in inventory to start When are new order quantities needed to

satisfy the forecasted demand?

© Wiley 2007

The MPS Record

Projected Available = beginning inventory + MPS shipments - forecasted demand

The MPS row shows when replenishment shipments need to arrive to avoid a stock out (negative projected available)

Week BI 1 2 3 4 5 6 7 8 9 10 11 12

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 -40

MPS

Week BI 1 2 3 4 5 6 7 8 9 10 11 12

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 85 35 -40

MPS 125

© Wiley 2007

Revised and Completed MPS Record

Week BI 1 2 3 4 5 6 7 8 9 10 11 12

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 85 35 85 10 -65

MPS 125 125

Week BI 1 2 3 4 5 6 7 8 9 10 11 12

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 85 35 85 10 60 110 60 10 85 35

MPS 125 125 125 125 125

© Wiley 2007

Evaluating the MPS Rough-cut capacity planning:

An estimate of the plan’s feasibility Given the demonstrated capacity of critical

resources (e.g.: direct labor & machine time), have we overloaded the system?

Customer service issues: Does “available-to-promise” inventory

satisfy customer orders? If not, can future MPS quantities be pulled in to satisfy new orders?

© Wiley 2007

Stabilizing the MPS

© Wiley 2007

Aggregate Planning Across the Organization Aggregate planning, MPS, and rough-cut

capacity affection functional areas throughout the organization Accounting is affected because aggregate

plan details the resources needed by operations

Marketing as the aggregate plan supports the marketing plan

Information systems maintains the databases that support demand forecasts and other such information

© Wiley 2007

Chapter 13 Highlights Planning begins with the development of the strategic

business plan that provides your company’s direction and objectives for the next two to ten years.

Sales and operations planning integrates plans from the other functional areas and regularly evaluates company performance.

The level aggregate plan maintains the same size workforce and produces the same output each period. Inventories and backorders absorb fluctuations in demand. The chase aggregate plan changes the capacity each period to match the demand

Demand patterns can be smoothed through pricing incentives, reduced prices for out-of-season purchases, or nonprime service times.

© Wiley 2007

Chapter 13 Highlights (continued)

The difference in aggregate planning for companies that do not provide a tangible product is that the option to use inventories is not available

The MPS shows how the resources authorized by the AP will be used to satisfy the organizational objectives. The MPS specifies the products to be built in each time period. MPS is checked for feasibility using a rough-cut capacity planning technique.

The objectives of master scheduling are to satisfy customer service objectives, use resources effectively, and minimize costs. An MPS is developed by looking at individual MPS records and calculating when replenishment quantities are needed. The MPS records are summed together to show the total proposed workload.

© Wiley 2007

Chapter 13 Highlights (continued)

Available-to-promise logic is used when promising order delivery dates to customers, ATP logic allows the company to make viable delivery promises

Time fence policies stabilize the MPS. The demand time fence and the planning time fence divide the MPS into three portions: frozen, slushy, and liquid.

© Wiley 2007

The End Copyright © 2007 John Wiley & Sons, Inc. All rights

reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

© Wiley 2007

Parameters: found in or computed from the data

Decision variables: unknowns to be determined

Objective function: the bottom line

Constraints: Satisfy demands and state relationships among variables

Single Product model here; can be generalized

Aggregate Production Planning Extra Credit: Linear Programming

Formulation

© Wiley 2007

dt = amount of product demanded in period t

pt = productivity per worker in period t

Lt = unit labor cost per worker in period t

ht = unit hiring cost per worker in period t

ft = unit firing cost per worker in period t

Parameters: find these in the data!

© Wiley 2007

ct = inventory holding cost per unit per period in period t

at = backorder cost per item per period in period t

Parameters: find these in the data!

© Wiley 2007

wt = number of workers employed in period t

ut = number of workers hired between periods t-1 and t

vt = number of workers fired between periods t-1 and t

it = amount of product in inventory at the end of period t

bt = amount backordered at the end of period t

Decision Variables: find values by solving the

model

© Wiley 2007

io = initial inventory level

wo = initial workforce level

bo = initial backorder, i.e., left over from previous period.

Initial values: “fixed variables”; find in

data

© Wiley 2007

The LP ModelMinimize t (Ltwt + htut + ftvt + ctit + atbt)

s.t.

ut - vt = wt – wt-1 for each period t : workforce change

ptwt + it-1 - it + bt – bt-1 = dt for each period t: demand balance

iT==0, bT = 0 for last period T; closing out

wt, ut, vt, it, bt 0 for each time period t: nonnegativity

© Wiley 2007

The LP model for the exampleMinimize 1280w1+1280w2 +…+

500u1+500u2 +…+ 1000v1+1000v2+…+10 i1 + 10 i2 +…+ 100 b1 + 100 b2+…

s.t.u1 – v1 = w1 – 210 (period 1) …26.67w1 + io – i1 + b1 – bo = 6000 (period 1)

26.67w1 + io – i1 + b1 – bo = 4800 (period 2)…All variables nonnegative

© Wiley 2007

Sec 03: June 5, 2008

Ch 16: Project Management Video Case: PM at NASA Break Aggregate Planning LP Model (extra-

credit) Review for final exam