Aggregate Planning

1
Aggregate Planning
2
Planning Horizon
Aggregate planning Intermediate-range capacity
planning, usually covering 6 to 18 months.
3
(No Transcript)
4
(No Transcript)
5
Operations Planning Activities

• Long-range planning
• Greater than one year planning horizon
• Usually performed in annual increments
• Medium-range planning
• Six to eighteen months
• Usually with monthly or quarterly increments
• Short-range planning
• One day to less than six months
• Usually with weekly increments

6
Planning Tasks and Responsibilities
7
Aggregate Production Planning (APP)

• Matches market demand to company resources
• Plans production 6 months to 18 months in advance
• Expresses demand, resources, and capacity in
  general terms
• Develops a strategy for economically meeting
  demand
• Establishes a company-wide game plan for
  allocating resources

8
Balancing Aggregate Demandand Aggregate
Production Capacity
10000
Suppose the figure to the right represents
forecast demand in units
10000
8000
8000
7000
6000
5500
6000
4500
4000
Now suppose this lower figure represents the
aggregate capacity of the company to meet demand
2000
0
Jan
Feb
Mar
Apr
May
Jun
9900
9500
9500
10000
9000
9000
8800
8000
What we want to do is balance out the production
rate, workforce levels, and inventory to make
these figures match up
6000
4000
2000
0
Jan
Feb
Mar
Apr
May
Jun
9
Aggregate Plan Relationships
10
Inputs and Outputs to APP
11
Aggregate Planning Inputs

• Resources
• Workforce
• Facilities
• Demand forecast
• Policies
• Subcontracting
• Overtime
• Inventory levels
• Back orders

• Common unit for measuring outputs
• Costs
• Inventory carrying
• Back orders
• Hiring/firing
• Overtime
• Inventory changes
• Subcontracting

12
Aggregate Planning Outputs

• A plan that specifies the optimal combination of
• production rate (units completed per unit of
  time)
• workforce level (number of workers)
• inventory on hand (inventory carried from
  previous period
• Subcontracting levels (if any)
• Backordering levels (if any)

13
Aggregate Planning Goals

• Meet demand
• Use capacity efficiently
• Meet inventory policy
• Minimize total cost

14
Aggregate Planning Strategies

• Proactive
• Alter demand to match capacity
• Reactive
• Alter capacity to match demand
• Mixed
• Some of each

15
Demand Management

• Shifting demand into other periods by incentives,
  promotions, advertising campaigns, pricing,
  etc.
• Offering product or services with
  counterseasonal demand
  patterns (counterseasonal product mixing)
• Backordering
• Creation of new demand
• Partnering with suppliers to reduce information
  distortion along the supply chain

16
Options of Adjusting Capacity to Meet Demand (1
of 2)

• Producing at a constant rate and using
  inventories to absorb fluctuations in demand ie.
  changing inventory levels
• Varying work force size (hiring and firing
  workers) so that production matches demand
• Varying production capacity by increasing or
  decreasing working hours (overtime or idle time)

17
Options of Adjusting Capacity to Meet Demand (2
of 2)

• Using part-time workers to change production rate
• Subcontracting work to other firms
• Providing the service or product at a later time
  period (backordering)

18
Strategy Details

• Overtime undertime - common when demand
  fluctuations are not extreme
• Subcontracting - useful if supplier meets quality
  time requirements
• Part-time workers - feasible for unskilled jobs
  or if labor pool exists
• Backordering - only works if customer is willing
  to wait for product/services

19
Capacity Options - Advantages and Disadvantages
(1 of 4)
20
Advantages/Disadvantages (2 of 4)
21
Advantages/Disadvantages (3 of 4)
Option
Advantage
Disadvantage
Some
Comments
Using part-time
Less costly and
High
Good for
workers
more flexible
turnover/training
unskilled jobs in
than full-time
costs quality
areas with large
workers
suffers
temporary labor
scheduling
pools
difficult
Influencing
Tries to use
Uncertainty in
Creates
demand
excess capacity.
demand. Hard to
marketing ideas.
Discounts draw
match demand to
Overbooking
new customers.
supply exactly.
used in some
businesses.
22
Advantages/Disadvantages (4 of 4)
23
The Extremes
Chase Strategy
Level Strategy
Production equals demand
Production rate is constant
24
Basic Aggregate Planning Strategies for Meeting
Demand

• Level capacity strategy
• Keeping work force constant and maintaining a
  steady rate of regular-time output while meeting
  variations in demand by a combination of options
  (such as using inventories subcontracting)
• Chase demand strategy
• Changing workforce levels so that production
  matches demand (the planned output for a period
  is set at the expected demand for that period.)

• Maintaining resources for high demand levels
• Ensures high levels of customer service

25
Level Production
26
Chase Demand
27
Level Strategy Forecast and Average Forecast
Demand
28
Level Strategy Cumulative Demand Graph
29
Level Approach

• Advantages
• Stable output rates and workforce
• Disadvantages
• Greater inventory costs
• Increased overtime and idle time
• Resource utilizations vary over time

30
Chase Approach

• Advantages
• Investment in inventory is low
• Labor utilization in high
• Disadvantages
• The cost of adjusting output rates and/or
  workforce levels

31
Aggregate Planning Methods

• Graphical charting techniques
• Popular easy-to-understand
• Trial error approach
• Mathematical approaches
• Linear programming
• Transportation method
• Linear decision rule (LDR)
• Search decision rule (SDR)
• Management coefficients model
• Simulation

32
Summary of Planning Techniques
33
Steps of Trial Error Method

• Forecast demand for each period
• Determine capacities (for regular time,
  overtime, subcontracting) for each period
• Identify policies that are pertinent
• Determine costs (labor, hiring/firing, holding
  etc.)
• Develop alternative plans and costs
• Select the best plan that satisfies objectives.
  Otherwise return to step 5.

34
Aggregate Planning Using Pure Strategies(Example
1)
Hiring cost 100 per worker Firing cost
500 per worker Inventory carrying cost 0.50
pound per quarter Production per employee
1,000 pounds per quarter Beginning work force
100 workers
35
Level Production Strategy(1 of 2)
36
Level Production Strategy(2 of 2)
37
Chase Demand Strategy
Cost (100 workers hired x 100) (50 workers
fired x 500) 10,000 25,000 35,000
38
APP Using Mixed Strategies
Production per employee 100 cases per
month Wage rate 10 per case for regular
production 15 per case for overtime 25
for subcontracting Hiring cost 1000 per
worker Firing cost 500 per worker Inventory
carrying cost 1.00 case per month Beginning
work force 10 workers
39
Aggregate Planning(Example 2)
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 stockout 1.25/unit per
mo. Hiring and training cost 200/worker Layoff
costs 250/worker Labor hours required 0.15
hrs/unit Straight time labor cost 8/hour Beginni
ng inventory 250 units Productive
hours/worker/day 7.25 Paid straight hrs/day 8
40
Cut-and-Try Example Determining Straight Labor
Costs and Output
41
Chase Strategy(Hiring Firing to meet demand)
Lets assume our current workforce is 7 workers.
42
Below are the complete calculations for the
remaining months in the six month planning horizon
43
Below are the complete calculations for the
remaining months in the six month planning
horizon with the other costs included
44
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
45
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
46
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
47
APP by Linear Programming
Minimize Z 100 (H1 H2 H3 H4) 500
(F1 F2 F3 F4) 0.50 (I1 I2 I3
I4) Subject to P1 - 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)
where Ht hired for period t Ft fired
for period t It inventory at end of period
t Pt units produced in period
t Wt workforce size for period t
48
APP by the Transportation Method
49
The Transportation Tableau
50
Burruss Production Plan
51
Other Quantitative Techniques

• Linear decision rule (LDR)
• Search decision rule (SDR)
• Management coefficients model

52
Hierarchical Planning Process
53
Aggregate Plan to Master Schedule
54
Disaggregating the Aggregate Plan

• Master schedule The result of disaggregating an
  aggregate plan shows quantity and timing of
  specific end items needed to meet demand for a
  scheduled horizon.
• Rough-cut capacity planning Approximate
  balancing of capacity and demand to test the
  feasibility of a master schedule.

55
Master Scheduling Process
Figure 13.6
56
Projected On-hand Inventory
57
Projected On-hand Inventory
Figure 13.8
58
Time Fences
Time Fences points in timethat separate phases
of a master schedule planning horizon.
59
Time Fences in MPS
Figure 13.12
Period
frozen(firm orfixed)
liquid(open)
slushysomewhatfirm
60
Available-to-Promise
ATP in period 1 (50 200) - (90 120)
40 ATP in period 3 200 - (130 70) 0 ATP in
period 5 200 - (20 10) 170
61
Available-to-Promise
62
Aggregate Planning for Services

• Most services cant be inventoried
• Demand for services is difficult to predict
• Capacity availability is also difficult to
  predict
• Service capacity must be provided at the
  appropriate place and time
• Labor is usually the most constraining resource
  for services
• Labor flexibility can be an advantage in services

63
Characteristics That Make Yield Management Work

• Service or product can be sold in advance of
  consumption
• Demand fluctuates
• Capacity is relatively fixed
• Demand can be segmented
• Variable costs are low and fixed costs are high

64
Hotel Single Price Level
Sales
Demand Curve
Potential customers exist who are willing to pay
more than the 15 variable cost
Passed up profit contributions
Some customers who paid 150 for the room were
actually willing to pay more
sales Net price 50 rooms 15050 7500
Money left on the table
Price
15 variable cost of room
150 Price charged for room
Sales 6,750
65
Hotel Two Price Levels
Net prices are Price 1 gt 85 Price 2 gt 175
15 variable cost of room
Sales 8,100
66
Yield Management
where n number of no-shows x number of
rooms or seats overbooked Cu cost of
underbooking i.e., lost sale Co cost of
overbooking i.e., replacement cost P
probability
67
Yield Management
NO-SHOWS PROBABILITY 0 .15 1 .25 2 .30 3
.30
68
Yield Management
69
Yield Management