Aggregate Production Planning

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Aggregate Production Planning

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Section Objectives

After completing this section, you should be able to:

1. Explain what aggregate production planning is and how it can beuseful.

2. Identify the variables that decision makers have to work with in

aggregate planning and some of the possible strategies they canuse.

3. Describe some of the trial and error and quantitative techniquesplanners use.

4. Prepare aggregate plans and compute their costs.


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PRODUCTION

PLANNING

CAPACITY

WORK FORCE

PRODUCTION

INVENTORY

INTERNAL

EXTERNAL

EXTERNAL

CAPACITY

COMPETITIONRAW MATERIAL

SUPPLYDEMAND

ECONOMIC

CONDITIONS

Production Planning Environment


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PLANNING HORIZON1. LONG RANGE

- Business Forecasting- Product & Market Planning- Capacity Planning- Location & Layout- Financial Planning

5 YEARS

2. MEDIUM RANGE

- Aggregate Production Planning- Product Forecasting- Master Production Scheduling- Employment / Output / Inventory

1 YEAR

3. SHORT RANGE

- Materials & Purchasing Control- Scheduling- Machine Loading- Job Assignments

2 - 3 MONTHS

Production Planning Horizon


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Aggregate Production PlanningObjective: To develop a plan that will satisfy or meet demand within the

limits of available resources, at least cost to the organization.Includes: Optimal combination of production rate, work force level and

inventory.

Time Frame: six to eighteen months.

Strategies for Adjusting the Output (Production) Rate1. Vary the work force level.

2. Vary the inventory level.

3. Vary the production level.

4. Vary the level of customer service (back orders).

5. Sub-contract some of the production requirements.

6. Alter the peak output capacity.


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STRATEGYINCREASE

DECREASE1. Work Force

(WF)

2. Production Rate(PR)

3. Inventory Level(INV)

4. Back Order(BO)

5. Subcontracting(SUB)

InterviewHiring

Training

Overtime & Shift DifferentialsLower ProductivityDecreased Quality

Warehousing CostsObsolescence / Shrinkage

Opportunity Cost

Lost SalesReduced Level of Service

Decreased QualityLoss of Control

Higher Unit Costs

Severance PaymentsLoss of Morale

Labour Market & Public Image

Idle ManpowerLower Output

Worker Attrition

StockoutsLost Sales

Idle Warehouse Space

Higher Carrying Costs

Increased InvestmentReduced Flexibility

6. Design for Peak Demand Rate:- Large Capital Investment- Underutilization of Resources

- Opportunity Costs

Relevant Costs for Aggregate Production Planning


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Forecast / KnownDemand in T+1

Decision Process

1. Output Rate2. Resource Mix

State ofSystem (T)

WFtPR

t

INVtBOt

SUBt

State ofSystem (T+1)

WFt+1

PRt+1INVt+1BOt+1

SUBt+1

Incremental CostsPayroll

Hire / FireShift Premium

Overtime / UndertimeInventory Holding

StockoutBackorder

Subcontract

Minimize

Single-Stage Aggregate Production Planning


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Given: WFt= 20 assemblers (1 assembler produces 10 units per period)

INVt = 100 units of finished goods

Ft= 200 units demand forecast for t + 1

Cw= $800 wage cost per assembler per period

Cf= $400 fire (layoff) cost per assembler

Ch= $300 hire cost per assembler

Forecast: Ft = 200 units demand forecast for period t + 1, then DECt+1= fire 10assemblers and build 100 units

Ft+1= 300 units demand forecast for period t + 2, then DECt+2= hire 20assemblers and build 300 units.

Units ofOutput

WageCost

FireCost

HireCost

TotalCost

BeginningInventory

Number ofAssemblers

1030

1000

100300

$ 800024000

40006000

$1200030000

$42000

T + 1T + 2

Single-Stage Aggregate Production Planning


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Decision Process


State ofSystem (T)

WFtPRt

INVtBOt

SUBt


WFt+1PRt+1

INVt+1BOt+1

SUBt+1

Incremental Costs

PayrollHire / FireShift Premium


StockoutBackorder

Subcontract

Minimize

Decision Process



WFt+2PRt+2

INVt+2BOt+2

SUBt+2

Incremental Costs

PayrollHire / FireShift Premium


StockoutBackorder

Subcontract


+

Multi-Stage Aggregate Production Planning


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Given: WFt = 20 assemblers (1 assembler produces 10 units per period)

INVt = 100 units of finished goods

Ft= 200 units demand forecast for t + 1 / 300 units for t +2

Cw= $800 wage cost per assembler per period

Cf= $400 fire (layoff) cost per assembler

Ch= $300 hire cost per assembler

Forecast: Ft = 200 units demand forecast for period t + 1, then DECt+1= build200 units

Ft+1= 300 units demand forecast for period t + 2, then DECt+2= build200 units.

Units ofOutput

WageCost

FireCost

HireCost

TotalCost

BeginningInventory

Number ofAssemblers

2020

100100

200200

$1600016000

------

$1600016000

$32000

T + 1T + 2

Multi-Stage Aggregate Production Planning


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Techniques for Aggregate Production Planning1. Informal, trial and error methods. In practice, these techniques are more

commonly used.

2. Mathematical techniques - such as linear programming, linear decisionrules or simulation. Although not widely used, they serve as a basis forcomparing the effectiveness of alternative techniques for aggregateplanning.

General Procedure for Aggregate Planning1. Determine demand and production requirements for each period.

2. Determine production capacity (regular time, overtime, subcontracting)for each period.

3. Determine company or departmental policies that are pertinent.For example, maintain a safety stock of 5 percent of demand, or maintain

a reasonably stable work force.4. Determine unit costs for regular time, overtime, subcontracting, holding

inventories, back orders and other relevant costs.

5. Develop alternative plans and compute the cost of each.

6. If satisfactory plans emerge, select the one that best satisfies objectives(such as cost minimization). Otherwise, return to step 5.


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Aggregate Production Planning Illustration - Montreal Manufacturing

Given the following information:

6 month production planning period

10 labour-hours per unit required

Labour cost = $10/hour regular= $15/hour overtime

Total unit cost = $200 / unit= $228/unit subcontract

Current workforce = 20 employees

Hiring cost = $500 / employee

Layoff cost = $800 / employee

Safety stock = 20% of monthly forecast

Beginning inventory = 50 unitsInventory carrying cost = $10/unit/month

Stockout cost = $50/unit/month

Additional information available:

Sales Work Work HoursMonth Forecast Days at 8 Hrs. / DayJan. 300 22 176Feb. 500 19 152Mar. 400 21 168

Apr. 100 21 168May. 200 22 176June 300 20 160

First Step: Calculate Production Requirement

Sales Safety ProductionMonth Forecast Stock RequiredJan. 300 60 300+60-50 = 310Feb. 500 100 500+100-60 = 540Mar. 400 80 400+80-100 = 380Apr. 100 20 100+20-80 = 40May. 200 40 200+40-20 = 220June 300 60 300+60-40 = 320


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ProductionRequired

31054038040

220320

Hours

Required310054003800400

22003200

Hrs. Avail.per Worker

176152168168

176160

WorkersRequired

1836233

1320

WorkersHired

18

107

WorkersFired

2

1320

Hire/FireCosts

$16009000

1040016000

50003500

Total Cost = $45,500

Production

Required31054038040220320

HoursRequired

310054003800400

22003200

Total Hrs.

Available352030403360336035203200

Overtime

Hours

2360440

Undertime

Hours420

29601320

OT/ UT

Costs$420011800

2200148006600

0

Plan # 2 - Exact Production; Vary Production Rate


MonthJan.Feb.Mar.Apr.

MayJune

MonthJan.Feb.Mar.Apr.MayJune

Plan # 1 - Exact Production; Vary Work Force



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Cum. Prod.Required

310850

1230

127014901810

TotalProduction

352304336

336352320

CumulativeProduction

352656992

132816802000

InventoryLevel

42

58190190

StockoutLevel

194238

Inv. / SOCosts$4209700

11900

58019001900


HoursAvailable

352030403360

336035203200

Total Cost = $7,160 + $ 21,000 = $28,160

Cum. Prod.

Required310850

1230127014901810

Hours

Available3520(20)4560(30)5040(30)1680(10)1760(10)1600(10)

Total

Production352456504168176160

Cumulative

Production352808

1312148016561816

Inv. / (SO)

Level42

(42)822101666

Inv. / SO

Costs$4202100820

21001660

60

Hire/Fire

Costs

5000

16000

$7,160 $21,000

MonthJan.Feb.Mar.

Apr.MayJune

MonthJan.Feb.Mar.Apr.MayJune

Plan # 3 - Exact Production; Vary Inventory Level With 20 Employees


Plan # 4 - Exact Production; Vary Workforce Level; Vary Inventory Level


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PlanCosts45,500

61,00026,40028,160

Plan1

234

ProductionCosts

362,000

362,000400,000363,200

TotalCosts

407,500

446,500426,400391,360

UnitsProduced

1810

181020001816

Costper Unit$225.14

$233.70$213.20$215.51

Final Cost Analysis:

Decision: Go with Plan # 3 on the basis of lowest cost per unit.



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Aggregate Production Planning - Additional Illustration # 1

The item demand forecasts for a product for October, November, and December are 2000, 3000, and 2500units, respectively. Safety stock policy, as determined by management, is 25 percent of the forecast forthat month. There is no beginning inventory. Additional information for this product is as follows:

Manufacturing cost $250/unitStorage costs $100/unit/monthStandard pay rate $8.00/hr., 8 hr./dayOvertime rate $12.00/hr.Cost of stockout $10.00/unit/monthCost of subcontracting $10.00/unitHiring and training cost $200/workerLay-off costs $200/workerProduction man-hours required per unit 12 hoursNumber of working days in each month 20

a) Develop a production schedule to produce the exact production requirements by varying thework force size.

b) Calculate total hiring and lay-off costs.


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Aggregate Production Planning - Additional Illustration # 2

The production manager of the Marabell Manufacturing Corporation wants to determine an productionstrategy for the first quarter of the year. Beginning inventory for the first month of the quarter period is200 units, and, for each subsequent month, the beginning inventory for that month is equal to the safetystock of the preceding month. The company's safety stock policy is 25 percent of the month's demandforecast.

The demand forecast for each month of the quarter period is 700, 900, and 875 units, respectively. Thenumber of working days in each month is 21, 22, and 20.

The following additional information was also made available:Manufacturing cost $100/unitStorage costs $1.00/unit/monthStandard pay rate $5.00/hr., 8 hr./dayOvertime pay 150% of standardMarginal cost of stockout $4.00/unit/monthHiring and training cost $150/manLay-off costs $200/man

Man-hours required per unit 4Number of workers currently employed 15

Determine the production costs if the company wants to carry out the strategy of:

a) Producing to exact production requirements by varying the work force size on regular hours.

b) Maintaining a constant work force level based on a quarterly (3-month) average. Inventory isallowed to accumulate, while shortages may be filled from next month's production.

Aggregate Production Planning

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