[PPT]Aggregate Planning - The University of Tennessee at …web2.utc.edu/~Dileepan/Operations/Notes/07-Ch13-Agg... · Web viewAggregate Planning A logical overall unit for measuring

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Operations ManagementChapter 13 – Aggregate Planning

PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7eOperations Management, 9e

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Aggregate Planning

Objective is to minimize cost over the planning period by adjusting Production rates Labor levels Inventory levels Overtime work Subcontracting rates

Determine the quantity and timing of production for the immediate future

© 2008 Prentice Hall, Inc. 13 – 3

Aggregate Planning

A logical overall unit for measuring sales and output

A forecast of demand for an intermediate planning period in these aggregate terms

A method for determining costs A model that combines forecasts and

costs so that scheduling decisions can be made for the planning period

Required for aggregate planning

© 2008 Prentice Hall, Inc. 13 – 4

Aggregate Planning

Quarter 1Jan Feb Mar

150,000 120,000 110,000

Quarter 2Apr May Jun

100,000 130,000 150,000

Quarter 3Jul Aug Sep

180,000 150,000 140,000

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Aggregate Planning

Part of a larger production planning system

Disaggregation breaks the plan down into greater detail

Disaggregation results in a master production schedule

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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

© 2008 Prentice Hall, Inc. 13 – 7

Demand Options Back ordering during high-

demand periodsRequires 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

© 2008 Prentice Hall, Inc. 13 – 8

Demand Options Counterseasonal product and

service mixingDevelop a product mix of

counterseasonal itemsMay lead to products or services

outside the company’s areas of expertise

© 2008 Prentice Hall, Inc. 13 – 9

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 15% to 40%

Shortages can mean lost sales due to long lead times and poor customer service

© 2008 Prentice Hall, Inc. 13 – 10

Capacity Options Varying workforce size by hiring

or layoffsMatch production rate to demandTraining and separation costs for

hiring and laying off workers New workers may have lower

productivityLaying off workers may lower

morale and productivity

© 2008 Prentice Hall, Inc. 13 – 11

Capacity Options Varying production rate through

overtime or idle timeAllows constant workforceMay be difficult to meet large

increases in demandOvertime can be costly and may

drive down productivityAbsorbing idle time may be

difficult

© 2008 Prentice Hall, Inc. 13 – 12

Capacity Options Subcontracting

Temporary measure during periods of peak demand

May be costlyAssuring quality and timely

delivery may be difficultExposes your customers to a

possible competitor

© 2008 Prentice Hall, Inc. 13 – 13

Capacity Options Using part-time workers

Useful for filling unskilled or low skilled positions, especially in services

© 2008 Prentice Hall, Inc. 13 – 14

Develop a Plan: Strategies

Chase strategyMatch output rates to demand

forecast for each periodVary workforce levels or vary

production rateFavored by many service

organizations

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Develop a Plan: Strategies

Level strategyDaily production is uniformUse inventory or idle time as bufferStable production leads to better

quality and productivity

© 2008 Prentice Hall, Inc. 13 – 16

Develop a Plan: Strategies

Mixed strategyKeep daily production uniformDon’t build inventoryUse overtime and subcontracting to

meet demand fluctuations

© 2008 Prentice Hall, Inc. 13 – 17

Aggregate Planning Options

Table 13.1

Option Advantages Disadvantages Some CommentsChase strategy

Avoids inventory costs

Hiring, layoff, and training costs may be significant.

Used where size of labor pool is large.

Level strategy

Changes in human resources are gradual or none; no abrupt production changes.

Inventory holding cost may increase. Shortages may result in lost sales.

Applies mainly to production, not service, operations.

© 2008 Prentice Hall, Inc. 13 – 18

Aggregate Planning Options

Table 13.1

Option Advantages Disadvantages Some CommentsVarying production rates through overtime or idle time

Matches seasonal fluctuations without hiring/ training costs.

Overtime premiums; tired workers; may not meet demand.

Allows flexibility within the aggregate plan.

Sub-contracting

Permits flexibility and smoothing of the firm’s output.

Loss of quality control; reduced profits; loss of future business.

Applies mainly in production settings.

Mixed strategy options

© 2008 Prentice Hall, Inc. 13 – 19

Cost of a plan

Cost summaryLabor cost Regular wages

OT wages Only for mixed strategySC cost Only for mixed strategy

Hiring/firing Hiring cost Based on worker hired/fired or change in production rateFiring cost

Inventory Carrying costTotal cost

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Example Given data

Cost dataWage/hour $15.00OT pay rate/hour $18.75Subcontracting rate/unit $35.00Carrying cost $10.00Hiring cost/unit $200.00Firing cost/unit $400.00

Other dataLabor-hours/unit 1.6Hours/day 8OT Limit 25%

Initial conditionWorkers on roll 8Current inventory 25Safety stock 20

Demand forecastMonth Demand DaysJan 900 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20

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Example Given dataCost dataWage/hour $15.00OT pay rate $18.75Subcontracting rate/unit $35.00Carrying cost $10.00Hiring cost/unit $200.00Firing cost/unit $400.00

Other dataLabor-hours/unit 1.6Hours/day 8OT Limit 25%

Initial conditionWorkers on roll 8Current production rate 40Current inventory 25Safety stock 20

Demand forecastMonth Demand DaysJan 900 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20

Compute from input data:

Production rate/worker/day:

Wage rate per day per worker:= 8 hours x $15/hour = $120

56.1

8unitper hours-Labor

dayper Hours

© 2008 Prentice Hall, Inc. 13 – 22

Example : Chase Plan

Month Demand Production

Jan 900 895Feb 700 700Mar 800 800Apr 1200 1200May 1500 1500June 1100 1100

Production for Jan = Demand – (Initial inventory – Safety stock) i.e. for Jan: 900 – (25 – 20) = 895

Production for all other months = Demand

© 2008 Prentice Hall, Inc. 13 – 23

Example : Chase Plan

Month Demand Production

Jan 900 895Feb 700 700Mar 800 800Apr 1200 1200May 1500 1500June 1100 1100

DaysProduction

rate40

22 4118 3921 3821 5722 6820 55

Workers = Production rate/Rate per workere.g. for Jan: 41/5 = 8.2 rounded up to 9

Workers 

988

121411

Wages 

$23,760$17,280$20,160$30,240$36,960$26,400

$154,800

Wages = Worker x Days x Wage per daye.g. for Jan: 9 workers x 22 days x $120/day = $23,760

© 2008 Prentice Hall, Inc. 13 – 24

Example : Chase Plan

Month Demand Production

Jan 900 895Feb 700 700Mar 800 800Apr 1200 1200May 1500 1500June 1100 1100

DaysProduction

rate40

22 4118 3921 3821 5722 6820 55

Production rate = Production/Dayse.g. for Jan: 895/22 = 40.7 or 41

“Hire” “Fire”   

1 00 20 1

19 011 00 13

31 16

Hiring cost = 31 x 200 = $6,200Firing cost = 16 x 400 = $6,400

© 2008 Prentice Hall, Inc. 13 – 25

Cost of Chase plan

Cost summaryLabor cost Regular wages $154,800

OT wagesSC cost

Hiring/firing Hiring cost $6,200Firing cost $6,400

Inventory Carrying cost $1,200Total cost $168,600

Carrying cost = 20 units safety stock x 6 months x $10 = $1,200

© 2008 Prentice Hall, Inc. 13 – 26

Example : Level Plan

Net demand rate = (Total demand-(Initial inv. – Safety stock))/Total daysi.e. = (6200 – (25 – 20))/124 = 49.96 or 50 = Production rate per day

Month Demand Days     Jan 900 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20

6200 124

Production each month = Production rate x No. of dayse.g. for Jan: 50 x 22 days = 1100

Production 

1100900

1050105011001000

E.I.25

225425675525125

252000

E.I = Ending inventory = Previous E.I. + Production - Demande.g. for Jan: 25 + 1100 – 900 = 225

Inventory carrying cost = Total E.I. x Carrying cost

i.e. = 2000 x $10 = $20,000

© 2008 Prentice Hall, Inc. 13 – 27

Cost of Level planCost summaryLabor cost Regular wages $148,800

OT wagesSC cost

No. of workers = Production rate/Rate per worker = 50/5 = 10Wages = 10 workers x 124 days x $120/day = $148,800

Hiring/firing Hiring cost $2,000Firing cost

Inventory Carrying cost $20,000Total cost $170,800

Hiring cost = (New production rate – old rate) x $200 i.e. = (50 – 40) x 200 = $2,000

Firing cost = 0

© 2008 Prentice Hall, Inc. 13 – 28

Cost of the two plans

Cost summary Chase LevelLabor cost Regular wages $154,800 $148,800

OT wagesSC cost

Hiring/firing Hiring cost $6,200 $2,000Firing cost $6,400 $0

Inventory Carrying cost $1,200 $20,000Total cost $168,600 $170,800

© 2008 Prentice Hall, Inc. 13 – 29

Example : Mixed PlanPlan description● Use 10 workers,

i.e., production capacity = 5 x 10 = 50 units/day● Produce what is demanded● If capacity is insufficient use overtime first and then sub-

contracting as needed● Do not accumulate inventory,

i.e. E.I. = Safety stock for all months

© 2008 Prentice Hall, Inc. 13 – 30

Example : Mixed Plan

Month Req. Days

Jan 895 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20

Production rate capacity = 50 /day

Capacity

1100900

1050105011001000

Capacity = Rate x days, e.g. for Jan: 50 x 22 = 1100

Production

895700800

105011001000

Production = Min{Demand,Capacity}, e.g. for Jan: Min{895,1100} = 895

Shortage

000

150400100

Shortage = Req. – Production, e.g. for Apr. = 1200 – 1050 = 150

© 2008 Prentice Hall, Inc. 13 – 31

Example : Mixed Plan

Month Req. Days

Jan 895 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20

Production rate capacity = 50 /day

Capacity

1100900

1050105011001000

O.T. Capacity = Capacity x OT Limit %, e.g. for Apr. = 1050 x 25% = 262.5 round

down

Production

895700800

105011001000

Shortage

000

150400100

O.T. production = Min{Shortage, OT Capacity)e.g. for Apr. = Min{150, 262} = 150

OT Capacity 

275225262262275250

OT 

000

150275100525

© 2008 Prentice Hall, Inc. 13 – 32

Example : Mixed Plan

Month Req. Days

Jan 895 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20

Production rate capacity = 50 /day

Capacity

1100900

1050105011001000

Subcontracting = Shortage – O.T. productione.g. for May = 400 – 275 = 125

Production

895700800

105011001000

Shortage

000

150400100

OT Capacity 

275225262262275250

OT 

000

150275100525

SC 

0000

1250

125

© 2008 Prentice Hall, Inc. 13 – 33

Cost of Mixed planCost summaryLabor cost Regular wages $148,800

OT wages $15,750SC cost $4,375

Wages = 10 workers x 124 days x $120/day = $148,800 OT Wages = OT production 525 x 1.6 hours/unit x $18.75/hour = $15,750SC cost = SC quantity 125 x $35 per unit = $4,375

© 2008 Prentice Hall, Inc. 13 – 34

Cost of Mixed planCost summaryLabor cost Regular wages $148,800

OT wages $15,750SC cost $4,375

Hiring/firing Hiring cost $2,000Firing cost

Hiring cost = (New production rate – old rate) x $200 i.e. = (50 – 40) x 200 = $2,000

Firing cost = 0

© 2008 Prentice Hall, Inc. 13 – 35

Cost of Mixed planCost summaryLabor cost Regular wages $148,800

OT wages $15,750SC cost $4,375

Hiring/firing Hiring cost $2,000Firing cost

Inventory Carrying cost $1,200Total cost $172,125

Carrying cost = 20 units safety stock x 6 months x $10 = $1,200

© 2008 Prentice Hall, Inc. 13 – 36

Cost of the three plans

Cost summary Chase Level MixedLabor cost Regular wages $154,800 $148,800 $148,800

OT wages $15,750SC cost $4,375

Hiring/firing Hiring cost $6,200 $2,000 $2,000Firing cost $6,400 $0 $0

Inventory Carrying cost $1,200 $20,000 $1,200Total cost $168,600 $170,800 $172,125

© 2008 Prentice Hall, Inc. 13 – 37

Transportation Method

Skip

Use Excel Solver

© 2008 Prentice Hall, Inc. 13 – 38

Solver Method

E F G H I J K L74 Month Begin Hire Fire Rate Days Production Workers75 Jan 40     40 22 880 876 Feb 40     40 18 720 877 Mar 40     40 21 840 878 Apr 40     40 21 840 879 May 40     40 22 880 880 June 40     40 20 800 881 Sum = 0 0

Production rate table

Cell F75 = GivenCell range: G75:H80 = Solver changing cellsColumn I = New production rate, Cell I75 = F75 + G75 – H75Column K = Production, Cell K75 = I75*J75Column L = No. of workers, Cell L75 = I75/Rate per worker cellCell F76 = I75

© 2008 Prentice Hall, Inc. 13 – 39

Solver MethodInventory table

Cell F85 = GivenCell range: G85:G90 = K75:K80Cell range: H85:I90 = Solver changing cellsColumn K = Ending inventory, Cell K85 = SUM(F85:I85) – J85Column L = O.T. Limit = RT * OT Limit %, Cell L85 = G85 x $B$16Cell F86 = K85

E F G H I J K L84 Month BI RT OT SC Demand EI OT Limit85 Jan 25 880     900 5 22086 Feb 5 720     700 25 18087 Mar 25 840     800 65 21088 Apr 65 840     1200 -295 21089 May -295 880     1500 -915 22090 June -915 800     1100 -1215 20091 Sum = 0 0 -2330

© 2008 Prentice Hall, Inc. 13 – 40

Solver MethodCost summary

Cell I95 = SUMPRODUCT(L75:L80,J75:J80)*B35 (B35 = wage rate/day)Cell I96 = H91*B7*B14 (B7 = OT pay rate, B14 = Hours/unit)Cell I97 = I91*B8 (B8 = SC cost/unit)Cell I98 = G81*B10 (B10 = Hiring cost/unit)Cell I99 = H81*B11 (B11 = Firing cost/unit)Cell I100 = K91*B9 (B9 = Inventory carrying cost/unit/month)

H I95 Regular wages $119,04096 OT wages $097 SC cost $098 Hiring cost $099 Firing cost $0100 Carrying cost -$23,300101 Total cost $95,740

© 2008 Prentice Hall, Inc. 13 – 41

Solver MethodSolver Parameters

Set Target cell = Total costChanging cells = Hire & Fire and OT & SCConstraints

OT Production <= OT Limit ($H$85:$H$90 <= $L$85:$L$90)E.I. >= Safety stock ($K$85:$K$90 >= $B$31)OT and SC must be integer ($H$85:$I$90 = Int)

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Solver SolutionInventory tableMonth Begin Hire Fire Rate Days

Production Workers

Jan 40 0 0 40 22 880 8.00Feb 40 0 0 40 18 720 8.00Mar 40 0 0 40 21 840 8.00Apr 40 14 0 54 21 1140 10.86May 54 1 0 55 22 1210 11.00June 55 0 0 55 20 1100 11.00

15 0

Month BI RT OT SC Demand EI OT LimitJan 25 880 15 0 900 20 220Feb 20 720 0 0 700 40 180Mar 40 840 0 0 800 80 210Apr 80 1140 0 0 1200 20 285May 20 1210 290 0 1500 20 302.5June 20 1100 0 0 1100 20 275

305 0 200

Cost summary Regular wages $141,360OT wages $9,150SC cost $0Hiring cost $3,000Firing cost $0Carrying cost $2,000Total cost $155,510

© 2008 Prentice Hall, Inc. 13 – 43

Cost of the all four plans

Cost summary Chase Level Mixed SolverLabor cost Regular wages $154,800 $148,800 $148,800 $141,360

OT wages $12,600 $9,150SC cost $4,375 $0

Hiring/firing Hiring cost $6,200 $2,000 $2,000 $3,000Firing cost $6,400 $0 $0 $0

Inventory Carrying cost $1,200 $20,000 $1,200 $2,000Total cost $168,600 $170,800 $168,975 $155,510