Aggregate Planning

The Planning Process

Aggregate PlanningThe objective of aggregate planning is usually to meet forecast demand while minimizing cost over the planning period

Aggregate Planning

QUARTER 1Jan.Feb. March150,000120,000110,000

QUARTER 2AprilMayJune100,000130,000150,000

QUARTER 3JulyAug.Sept.180,000150,000140,000

Aggregate PlanningCombines appropriate resources into general termsPart of a larger production planning systemDisaggregation breaks the plan down into greater detailDisaggregation results in a master production schedule

Aggregate Planning StrategiesShould inventories be used to absorb changes in demand?Should changes be accommodated by varying the size of the workforce?Should part-timers, overtime, or idle time be used to absorb changes?Should subcontractors be used and maintain a stable workforce?Should prices or other factors be changed to influence demand?

Capacity OptionsChanging inventory levelsIncrease inventory in low demand periods to meet high demand in the futureIncreases costs associated with storage, insurance, handling, obsolescence, and capital investmentShortages may mean lost sales due to long lead times and poor customer service

Capacity OptionsVarying 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

Capacity OptionsVarying production rates 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

Capacity OptionsSubcontractingTemporary measure during periods of peak demandMay be costlyAssuring quality and timely delivery may be difficultExposes your customers to a possible competitor

Capacity OptionsUsing part-time workersUseful for filling unskilled or low skilled positions, especially in services

Demand OptionsInfluencing demandUse advertising or promotion to increase demand in low periodsAttempt to shift demand to slow periodsMay not be sufficient to balance demand and capacity

Demand OptionsBack ordering during high-demand periodsRequires customers to wait for an order without loss of goodwill or the orderMost effective when there are few if any substitutes for the product or serviceOften results in lost sales

Demand OptionsCounterseasonal product and service mixingDevelop a product mix of counterseasonal itemsMay lead to products or services outside the companys areas of expertise

Mixing Options to Develop a PlanChase strategyMatch output rates to demand forecast for each periodVary workforce levels or vary production rateFavored by many service organizations

Mixing Options to Develop a PlanLevel strategyDaily production is uniformUse inventory or idle time as bufferStable production leads to better quality and productivitySome combination of capacity options, a mixed strategy, might be the best solution

Methods for Aggregate PlanningGraphical MethodsPopular techniquesEasy to understand and useTrial-and-error approaches that do not guarantee an optimal solutionRequire only limited computations

Graphical MethodsDetermine the demand for each periodDetermine the capacity for regular time, overtime, and subcontracting each periodFind labor costs, hiring and layoff costs, and inventory holding costsConsider company policy on workers and stock levelsDevelop alternative plans and examine their total cost

Roofing Supplier Example 1

TABLE 13.2Monthly ForecastsMONTHEXPECTED DEMANDPRODUCTION DAYSDEMAND PER DAY (COMPUTED)Jan9002241Feb7001839Mar8002138Apr1,2002157May1,5002268June1,100 20556,200124

Roofing Supplier Example 1Figure 13.3

Roofing Supplier Example 2Plan 1 constant workforce

TABLE 13.3Cost InformationInventory carrying cost$ 5 per unit per monthSubcontracting cost per unit$20 per unitAverage pay rate$10 per hour ($80 per day)Overtime pay rate$17 per hour (above 8 hours per day)Labor-hours to produce a unit1.6 hours per unitCost of increasing daily production rate (hiring and training)$300 per unitCost of decreasing daily production rate (layoffs)$600 per unit

Roofing Supplier Example 2Total units of inventory carried over from onemonth to the next= 1,850 unitsWorkforce required to produce 50 units per day= 10 workers

MONTHPRODUCTION DAYSPRODUCTION AT 50 UNITS PER DAYDEMAND FORECASTMONTHLY INVENTORY CHANGEENDING INVENTORYJan221,100900+200200Feb18900700+200400Mar211,050800+250650Apr211,0501,200150500May221,1001,500400100June201,0001,10010001,850

Roofing Supplier Example 2Total units of inventory carried over from onemonth to the next= 1,850 unitsWorkforce required to produce 50 units per day= 10 workers

MONTHPRODUCTION DAYSPRODUCTION AT 50 UNITS PER DAYDEMAND FORECASTMONTHLY INVENTORY CHANGEENDING INVENTORYJan221,100900+200200Feb18900700+200400Mar211,050800+250650Apr211,0501,200150500May221,1001,500400100June201,0001,10010001,850

COSTCALCULATIONSInventory carrying$9,250(= 1,850 units carried x $5 per unit)Regular-time labor99,200(= 10 workers x $80 per day x 124 days)Other costs (overtime, hiring, layoffs, subcontracting)0Total cost$108,450

Roofing Supplier Example 3In-house production=38 units per day x 124 days=4,712 unitsSubcontract units=6,200 4,712=1,488 units

COSTCALCULATIONSRegular-time labor$75,392(= 7.6 workers x $80 per day x 124 days)Subcontracting29,760(= 1,488 units x $20 per unit)Total cost$105,152

Roofing Supplier Example 3

Roofing Supplier Example 4

TABLE 13.4Cost Computations for Plan 3MONTHFORECAST (UNITS)DAILY PROD RATEBASIC PRODUCTION COST (DEMAND X 1.6 HRS/UNIT X $10/HR)EXTRA COST OF INCREASING PRODUCTION (HIRING COST)EXTRA COST OF DECREASING PRODUCTION (LAYOFF COST)TOTAL COSTJan90041$ 14,400$ 14,400Feb7003911,200$1,200 (= 2 x $600)12,400Mar8003812,800$600 (= 1 x $600)13,400Apr1,2005719,200$5,700 (= 19 x $300)24,900May1,5006824,000$3,300 (= 11 x $300)24,300June1,1005517,600$7,800 (= 13 x $600)25,400$99,200$9,000$9,600$117,800

Roofing Supplier Example 4

Comparison of Three PlansPlan 2 is the lowest cost option

TABLE 13.5Comparison of the Three PlansCOSTPLAN 1PLAN 2PLAN 3Inventory carrying$ 9,250$ 0$ 0Regular labor99,20075,39299,200Overtime labor000Hiring009,000Layoffs009,600Subcontracting029,7600Total cost$108,450$105,152$117,800

Mathematical ApproachesUseful for generating strategiesTransportation Method of Linear ProgrammingProduces an optimal planWorks well for inventories, overtime, subcontractingDoes not work when nonlinear or negative factors are introducedOther ModelsGeneral form of linear programmingSimulation

Transportation Method

TABLE 13.6Farnsworths Production, Demand, Capacity, and Cost Data SALES PERIODMAR.APR.MAYDemand 8001,000750Capacity:Regular 700700700Overtime 505050Subcontracting 150150130Beginning inventory100tires

COSTSRegular time$40 per tireOvertime $50 per tireSubcontracting$70 per tireCarrying cost$ 2 per tire per month

Transportation ExampleImportant pointsCarrying costs are $2/tire/month. If goods are made in one period and held over to the next, holding costs are incurred.Supply must equal demand, so a dummy column called unused capacity is added.Because back ordering is not viable in this example, cells that might be used to satisfy earlier demand are not available.

Transportation ExampleQuantities in each column designate the levels of inventory needed to meet demand requirementsIn general, production should be allocated to the lowest cost cell available without exceeding unused capacity in the row or demand in the column

Transportation ExampleTable 13.7

SUPPLY FROMDEMAND FORTOTAL CAPACITY AVAILABLE(supply)Period 1(Mar)Period 2(Apr)Period 3(May)Unused Capacity(dummy)Beginning inventory0240100100Period 1Regular time4042440700700Overtime 50525405050Subcontract 7072740150150Period 2Regular time40420700XOvertime 5052050XSubcontract 70720150XPeriod 3Regular time400700XXOvertime 50050XXSubcontract 700130XXTOTAL DEMAND8001,0007502302,780

700

50

50100

700

50

130

Aggregate Planning in ServicesMost services use combination strategies and mixed plansControlling the cost of labor is criticalAccurate scheduling of labor-hours to assure quick response to customer demandAn on-call labor resource to cover unexpected demandFlexibility of individual worker skillsFlexibility in rate of output or hours of work

Revenue Management ExampleFigure 13.5

Total $ contribution = (1st price) x 30 rooms + (2nd price) x 30 rooms = ($100 - $15) x 30 + ($200 - $15) x 30 =$2,550 + $5,550 = $8,100Revenue Management ExampleFigure 13.6

Revenue Management ApproachesAirlines, hotels, rental cars, etc.Tend to have predictable duration of service and use variable pricing to control availability and revenue Movies, stadiums, performing arts centersTend to have predicable duration and fixed prices but use seating locations and times to manage revenue

Revenue Management ApproachesRestaurants, golf courses, ISPsGenerally have unpredictable duration of customer use and fixed prices, may use off-peak rates to shift demand and manage revenueHealth care businesses, etc.Tend to have unpredictable duration of service and variable pricing, often attempt to control duration of service

Aggregate Plan to Master ScheduleAggregate planMaster schedule

JanFebMar.200300400

TypeJan.Feb.Mar21 inch10010010026 inch7515020029 inch2550100total200300400

Master SchedulingMaster scheduleDetermines quantities needed to meet demandInterfaces withMarketing: it enables marketing to make valid delivery commitments to warehouse and final customers.Capacity planning: it enables production to evaluate capacity requirementsProduction planningDistribution planning

Master Scheduling Process

Master scheduleInputs:Beginning inventory; which is the actual inventory on hand from the preceding period of the scheduleForecasts for each period demandCustomer orders; which are quantities already committed to customers.OutputsProjected inventoryProduction requirementsThe resulting uncommitted inventory which is referred to as available-to-promise (ATP) inventory

Projected On-hand Inventory

Example: Master ScheduleA company that makes industrial pumps wants to prepare a master production schedule for June and July. Marketing has forecasted demand of 120 pumps for June and 160 pumps for July. These have been evenly distributed over the four weeks in each month: 30 per week in June and 40 per week in July.Now suppose that there are currently 64 pumps in inventory (i.e., beginning inventory is 64 pumps), and that there are customer orders that have been committed for the first five weeks (booked) and must be filled which are 33, 20, 10, 4, and 2 respectively. The following figure (see next slide) shows the three primary inputs to the master scheduling process: beginning inventory, the forecast, and the customer orders that have been committed. This information is necessary to determine three quantities: the projected on-hand inventory, the master production schedule (MPS) and the uncommitted (ATP) inventory. Suppose a production lot size of 70 pumps is used.Prepare the master Schedule

Solution: Master scheduleThe master schedule before MPS

Solution: The master scheduleThe first step you have to calculate the on hand inventory

WeekInventory from previous weekRequirementsNet inventory before MPSMPSProjected inventory16433313123130113130-29704144130111151140-29704164140117140-39703183140-97061

Solution: Master ScheduleThe projected on-hand inventory and MPS are added to the master schedule

Initial inventory

64JuneJuly12345678Forecast3030303040404040Customer orders (committed)33201042Projected on hand inventory31141114113161MPS70707070Available to promise inventory (uncommitted)1156687070

NotesThe requirements equals the maximum of the forecast and the customer ordersThe net inventory before MPS equals the inventory from previous week minus the requirements.The MPS = run size, will be added when the net inventory before MPS is negative ( weeks 3, 5, 7, and 8).The projected inventory equals the net inventory before MPS plus the MPS (70).

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