Aggregate Planning

1
Aggregate Planning
Chapter 14
2
Operations Planning Hierarchy
3

• Aggregate planning (AP) Developing an
  intermediate-range plan that effectively uses
  company resources to meet future projected
  demand.

• Determine overall levels of
• Production
• Workforce
• Inventory
• to meet future demand at minimum cost.
• Critical to business success

4
Dealing with Fluctuations in Future Demand

• Influencing Future Demand
• Pricing
• Promotion
• Better Service
• Creating new demand
• Alter production capacity to balance supply and
  demand. ? AP !
• Aggregate Planning Intermediate range capacity
  planning to satisfy future demand

5
Time Horizon of AP

• AP is done within the boundaries of long-range
  plans decisions (e.g. facility size, layout,
  process selection, capacity etc.)
• AP sets boundaries for short-range planning
  decisions (e.g. operations scheduling, worker
  assignment etc.)

6
Why Aggregate Planning?

• AP is a big picture approach to planning
• Does not focus on individual products or services
  (e.g. 22, 27, 37 TV models)
• Focuses on groups of products or a line of
  products (e.g. TVs)
• Avoids additional planning complexities that
  may be caused by individual prods
• Detailed plans on how much and when to produce
  individual items are done for a shorter time
  horizon (Master Production Scheduling)

7
Primary Issues in Aggregate Planning

• Smoothing Costs resulting from changing
  production and/or workforce levels
• Planning Horizon - Rolling schedules are normally
  used
• Demand Pattern - Time varying deterministic
  demand - to some extent reasonable since we are
  considering aggregate items

8
Inputs to AP

• A forecast of aggregate demand over planning
  horizon
• Available Resources (current workforce, inventory
  levels, production rates, available capital
  etc.)
• Alternative means available to adjust capacity
  and associated costs

Outputs

• A production plan aggregate decisions concerning
  workforce,production, inventory levels Cost of
  the plan

9
Capacity Options

• Workforce level
• Hire/layoff full-time workers
• Hire/layoff part-time workers
• Use of Overtime/Slack time
• Inventory level
• Hold finished goods inventory
• Backorder demand
• Subcontracting (buy temporary capacity)
• EACH OPTION ADDS TO THE COST !

10
Costs in Aggregate Planning

• Smoothing costs (i.e., hiring/firing costs)
• Holding costs
• Backordering costs
• Regular time costs
• Overtime costs
• Subcontracting costs
• Idle time costs

11
Techniques for AP

• Informal or Trial-and-Error techniques
• most commonly used in practice
• Mathematical Techniques
• Linear Programming
• Simulation

12
Strategies for Meeting Demand

• Pure Strategies Focused strategies
• Level capacity constant level of production,
  variations in demand absorbed by some combination
  of capacity options
• Chase demand match production to the demand for
  every period
• Mixed Strategies Some combination of pure
  strategies.
• Choice of strategy depends on
• company policy
• costs

13
LEVEL CAPACITY STRATEGY

• Maintaining a steady rate of regular-time
  production output while meeting variations in
  demand by
• Holding inventory/backordering demand
• Occasionally using overtime and subcontracting
• Under this strategy
• Inventory Holding/Backorder costs are primary
  costs
• Cost of hiring/training/firing regular time
  workers is minimized
• Overtime and subcontracting costs are low

14
LEVEL CAPACITY STRATEGY

• Amount of inventory/backorder at the end of a
  time period t is determined by the inventory
  balance equation

• If EIt gt 0 ? Positive ending inventory
• If EIt lt 0 ? Backorders

15
LEVEL CAPACITY STRATEGY

• Accounting for inventory costs
• charge costs proportional to average inventory of
  the period. Convention

(When there are backorders, Ending inventory is
taken as zero)

• Accounting for backordering costs
• charge costs proportional to the number of
  backorders at the end of the period.

16
CHASE DEMAND STRATEGY

• Production output varied to match the demand for
  every period by
• Typically varying the workforce size
• Occasionally using overtime and part-time labor
  and subcontracting
• Under this strategy
• Inventory Holding/Backorder costs are zero
• Hiring/training/firing are the primary costs may
  cause morale to go down

17
Simple Example

• Good and Rich Candy Demand Data

• Average Demand 100,000 per quarter
• Current of Workers 100
• Production Rate 1000 lbs / quarter/ worker
• Beginning Inventory 0
• Inventory Cost 0.5/ unit on average inventory
• Backorder Cost 5/ unit backordered
• Hiring Cost 500 Firing Cost 1000 / worker
• No Overtime, Subcontracting

18
Level Strategy

• Regular Production/Worker 100 x 1000 100,000
  /quarter ? No hiring/firing

19
Chase Strategy

• Change Workforce Levels by hiring/firing
  Workers needed Production/1000
• No inventory or backorders

20

• Note In this example we ignored production costs
  since we had to meet all the demand in future and
  we had only one source of production - regular
  time production
• Q How to determine the best combination of all
  available capacity options?
• Trial and error approaches based on pure or mixed
  strategies gives us workable plans only
• Optimal (minimum cost) plan can be found using a
  mathematical approach Linear Programming

21
Master Scheduling Process

• Master Schedule Result of disaggregating the AP.
  It shows the quantity and timing of individual
  products over a shorter horizon

• This schedule is used to determine material and
  inventory requirements for all the parts in the
  product (MRP, Chapter 15)

22
Master Scheduling Process

• Done on an ongoing basis using time fences