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Aggregate Planning

• Nature of Aggregate Planning• Costs• Decision Processes

Nature of Aggregate Planning

• Macro Planning– Bypass the details of individual products– No need for individual scheduling of facilities and

personnel

• Logical overall unit for measuring output– Gallons, Cases, Pallets, Machine hours, Beds, etc

• Forecast for the planning period• Measure all relevant costs

– To permit near optimal decision making

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Nature of Aggregate Planning

• Increases the range of alternatives for capacity use (Pure Strategies)– Use of inventory– Varying size of work force– Varying work hours– Subcontract the fluctuations– Decide not to meet demand

• Companies seek to balance the effect of these strategies by combining the pure strategies into Mixed Strategies

Costs

• Aggregate Planning is influenced by several relevant costs:– Payroll Costs– Cost of Overtime, Second shifts, and

Subcontracting– Cost of hiring and laying off workers– Cost of excess inventory and backlog– Cost of production rate changes

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Cost Behavior Patterns

Decision Processing

• The Aggregate Planning problem is the production planning problem of an organization seeking to meet a varying pattern of demand over an intermediate span of time

• The problem is to set aggregate production rates and workforce levels for each planning period

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Problem

Note• Demand peaks at 11, 000 and has a minimum of

4,000• The production days of each month varies• Production rates varies from 591/day to 174/day• Normal plant capacity is 350 units per day• Overtime can yield a maximum of 410 units/day• Overtime units cost an additional $10 each• Buffer stock, to compensate for fluctuations in

demand

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Plan 1: Level Production

• The simplest production plan is to establish the production output which will meet the annual requirements (76,500/244 = 314/day)

• The strategy is to accumulate inventory during the slow periods and use them during peak requirement periods

Plan 1: Level Production

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Plan 1: Level Production

• The plan calls for dipping into the buffer stock in August

• Buffer stock is actually exceeded in September• Results in a shortfall of 7738 units at the end of

the year• If we decide not to use the buffer stock, we must

increase the beginning inventory by the most negative inventory

• Average seasonal inventory will increase

Plan 1: Level Production

• Assuming:– Inventory holding cost =$50/unit/year– Shortage cost = $25/unit/year

Total Costs

Shortage Costs

Holding Costs

$334,980$350,8300$193,450$334,980$157,380

Stock3552 Units

Buffer2800 Units

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Plan 1: Level Production

• Advantages– Does not require hiring or firing of personnel– Scheduling is simple

• Disadvantages– Fails to consider the economic advantages of

trading off large seasonal inventory and shortage cost for overtime and hiring/firing costs

Plan 2: Hiring, Layoff, and Overtime

• Normal Plant capacity = 350 units/day• Overtime increase = 60 units/day• Cost of overtime = $10/unit• Cost of Hiring/Layoff = $200/person

– Hiring, training, severance, insurance

• 1 person hired, results in 1 unit capacity increase per day

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Plan 2: Hiring, Layoff, and Overtime

• Involves:– 0 to 65 days – Produce at 230 units/day– 66 to 171 days – Produce at 406 units/day

• Hire 120 workers (230 � 350) and produce 56 units/day overtime

– 172 to 182 days – Produce 350 units/day– 183 to 226 days – Produce 230 units/day

• Layoff 120 workers (350 � 230)

– 227 to 244 days – Produce 253 units/day• 23 units/day overtime

Plan 2: Hiring, Layoff and Overtime

• Results:– Seasonal Inventory reduced by 75% of Plan 1

with shortages and 35% of Plan 1 without shortages

– Hiring and layoff Costs = $48, 000– Overtime Costs = $63, 500– Total Cost = $339, 320 which is 65% Plan 1

with shortages and 68% Plan 1 without shortages

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Plan 2: Hiring, Layoff and Overtime

Plan 2: Hiring, layoff and Overtime

• Advantages– Highly economical

• Disadvantage– Hiring and firing practices may affect social

and employee relations

• Some other plan with smaller fluctuations in employment may be sought

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Comparing Plans 1 & 2

Plan 3: Subcontracting as a source

• Reduces fluctuations in workforce• Uses overtime, seasonal inventories and

subcontracting to absorb demand fluctuations

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Plan 3: Subcontracting as a source

• Involves:– 0 to 84 days – Produce 250 units/day– 85 to 128 days – Produce 350 units/day

• Hire 100 workers (250 � 350)

– 129 to 148 days – Produce 410 units/day• 60 units/day overtime• 1700 units subcontracted

– 149 to 171 days – Produce 370 units/day• 20 units/day overtime

Plan 3: Subcontracting as a source

– 172 to 182 days – Produce 410 units/day• 60 units/day overtime• 1380 units subcontracted

– 183 to 204 days – Produce 173 units/day• 23 units/day overtime• Layoff 100 workers (350 � 350)

– 205 to 244 days – Produce 250 units/day

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Plan 3: Subcontracting as a source

• Seasonal Inventories reduced to 1301– $65, 070

• Employment fluctuations are modest– $40, 000

• Only 2826 units are produced on overtime– $28, 260

• 3080 units are subcontracted at $15/unit– $46,200

• Total Cost = $179, 530

Plan 3: Subcontracting as a source

• Even though Plan 3 has less employee fluctuations, it may still be considered severe, and other plans can be sough to reduce this even further

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Summary

Cumulative Graphs• Sequence of Plots

– 1 � Cumulative Production requirements– 2 � Cumulative Maximum requirements

• Production requirements + Buffer Stock

• Any feasible production program (meeting demand and inventory requirements), must fall completely above the maximum requirements line

• The vertical distance between the program proposed curves and the cumulative max. requirements curve represents the seasonal inventory at each period

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Cumulative Graphs• Advantage

– Alternative programs can be visualized over a broad planning horizon

• Disadvantage– Is static, and does not seek to optimize cost or

profit

• Should be used only to compare different types of programs

Cumulative Graphs