Aggregate Planning Learning Objectives Explain what aggregate planning

Aggregate Planning

Learning Objectives § § Explain what aggregate planning is and how it is useful. Identify the variables decision makers have to work with in aggregate planning and some of the possible strategies they can use. Describe some of the graphical and quantitative techniques planners use. Prepare aggregate plans and compute their costs. 2

Planning Horizon Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months. Long range Short range Now Intermediate range 2 months 1 Year 3

Overview of Planning Levels § Short-range plans (Detailed plans) § Machine loading § Job assignments § Intermediate plans (General levels) § Employment § Output § Long-range plans § Long term capacity § Location / layout 4

Planning Sequence Corporate strategies and policies Economic, competitive, and political conditions Business Plan Aggregate demand forecasts Establishes operations and capacity strategies Aggregate plan Establishes operations capacity Master schedule Establishes schedules for specific products 5

Aggregate Planning § Begin with forecast of aggregate demand § Forecast intermediate range § General plan to meet demand by setting § Output levels § Employment § Finished goods inventory level § Production plan is the output of aggregate planning § Update plan periodically – rolling planning horizon always covers the next 12 – 18 months 6

Aggregate Planning Inputs § Resources § Workforce § Facilities § Demand forecast § Policies § § Subcontracting Overtime Inventory levels Back orders/Backlog § Costs § § § Inventory carrying Back orders Hiring/firing Overtime Inventory changes Subcontracting 7

Aggregate Planning Outputs § Total cost of a plan § Projected levels of § § § Inventory Output Employment Subcontracting Backordering 8

Aggregate Planning Strategies § Proactive § Alter demand to match capacity § Reactive § Alter capacity to match demand § Mixed § Some of each 9

Demand Options § Pricing § Promotion § Back orders § New demand 10

Capacity Options § Hire and layoff workers § Overtime/slack time § Part-time workers § Inventories § Subcontracting 11

Aggregate Planning Strategies § Maintain a level of workforce § Maintain a steady output rate § Match demand period by period § Use a combination of decision variables 12

Basic Strategies § Level capacity strategy: § Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options. § Chase demand strategy: § Matching capacity to demand; the planned output for a period is set at the expected demand for that period. 13

Level Approach § Advantages § Stable output rates and workforce § Disadvantages § Greater inventory costs § Increased overtime and idle time § Resource utilizations vary over time 14

Chase Approach § Advantages § Investment in inventory is low § Labor utilization in high § Disadvantages § The cost of adjusting output rates and/or workforce levels 15

Techniques for Aggregate Planning 1. Determine demand for each period 2. Determine capacities for each period 3. Identify policies that are pertinent 4. Determine units costs 5. Develop alternative plans and costs 6. Select the best plan that satisfies objectives. Otherwise return to step 5. 16

Planning Example 1 Month Jan Expected Demand 900 Production Days 22 Feb Mar Apr May June 700 800 1, 200 1, 500 1, 100 18 21 21 22 20 6, 200 124 Demand Per Day (computed) 41 39 38 57 68 55 Total expected demand Average requirement = Number of production days = 6, 200 = 50 units per day 124 17

Production rate per working day Planning Example 1 Forecast demand 70 – 60 – Level production using average monthly forecast demand 50 – 40 – 30 – Jan Feb Mar Apr May June 22 18 21 21 22 20 = Month = Number of working days 18

Planning Example 1 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1. 6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit 19

Planning Example 1 Cost Information Production at Inventory Month carry 50 cost Units per Day Subcontracting cost per unit Jan 1, 100 Monthly Demand Inventory Ending per unit per month Forecast $ 5 Change Inventory 900 $10 +200 per unit 900 700 $ 5 per hour ($40 per 400 day) +200 Mar pay rate 1, 050 Overtime 800 $ 7 per hour +250 650 (above 8 hours per day) Average Feb pay rate Apr 1, 050 1, 200 May 1, 100 1, 500 Labor-hours to produce a unit Cost of increasing daily production rate June and training) 1, 000 1, 100 (hiring 200 -150 500 -400 100 -100 0 1. 6 hours per unit $300 per unit Cost of decreasing daily production rate $600 per unit (layoffs) Total units of inventory carried over from one 1, 850 month to the next = 1, 850 units Workforce required to produce 50 units per day = 10 workers Table 13. 3 20

Planning Example 1 Monthly Calculations Demand Inventory Ending $ 5 Change perunits unit per month Inventory carrying (= 1, 850 carried x $5 Month carry 50 cost Units per Day $9, 250 Forecast Inventory unit) $10 per unit Subcontracting cost per unit Jan 1, 100 900 per +200 Regular-time labor 900 49, 600 x $40 per day $ 5 workers per hour ($40 day) Average Feb pay rate 700 (= 10 +200 400 x 124 days) $ 7 per hour Mar pay rate 1, 050 800 +250 650 Overtime (above 8 hours per day) Other costs (overtime, Apr layoffs, 1, 050 1, 200 -150 500 hiring, 1. 6 hours per unit Labor-hours to produce a unit May 1, 100 1, 500 -400 100 subcontracting) 0 Costs. Information Production at Cost of increasing daily production rate Junecost 1, 000 1, 100 Total $58, 850 (hiring and training) $300 per unit -100 Cost of decreasing daily production rate $600 per unit (layoffs) Total units of inventory carried over from one 0 1, 850 month to the next = 1, 850 units Workforce required to produce 50 units per day = 10 workers Table 13. 3 21

Planning Example 1 Cumulative demand units 7, 000 – 6, 000 – 5, 000 – 4, 000 – Reduction of inventory Cumulative level production using average monthly forecast requirements 3, 000 – 2, 000 – Cumulative forecast requirements 1, 000 – – Excess inventory Jan Feb Mar Apr May June 22

Planning Example 2 Month Jan Expected Demand 900 Production Days 22 Feb Mar Apr May June 700 800 1, 200 1, 500 1, 100 18 21 21 22 20 6, 200 124 Demand Per Day (computed) 41 39 38 57 68 55 Minimum requirement = 38 units per day 23

Production rate per working day Planning Example 2 Forecast demand 70 – Level production using lowest monthly forecast demand 60 – 50 – 40 – 30 – Jan Feb Mar Apr May June 22 18 21 21 22 20 = Month = Number of working days 24

Planning Example 2 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1. 6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit 25

Planning Example 2 Cost Information Inventory carry cost $ 5 per unit per month In-house production = 38$10 units per day per unit x $124 5 perdays hour ($40 per day) Average pay rate = 4, 712 $ 7 perunits hour Overtime pay rate Subcontracting cost per unit Subcontract Labor-hours to produce a unit (above 8 hours per day) units = 6, 200 - 4, 712 1. 6 hours per units Cost of increasing daily production rate = 1, 488 $300 per unit (hiring and training) Cost of decreasing daily production rate (layoffs) $600 per unit 26

Planning Example 2 Cost Information $ 5 per unit per month Inventory carry cost In-house production = 38$10 units per day per unit x $124 5 perdays hour ($40 per day) Average pay rate = 4, 712 $ 7 perunits hour Overtime pay rate Subcontracting cost per unit (above 8 hours per day) Costs Subcontract Labor-hours to produce a units = Calculations 6, 200 - 4, 712 1. 6 hours per unit Regular-time labor $37, 696 7. 6 workers 1, 488 units Cost of increasing daily production rate = (= $300 per unit x $40 per day x 124 days) (hiring and training) Cost of decreasing daily production rate Subcontracting 14, 880 (layoffs) unitx $10 per (= $600 1, 488 per units unit) Table 13. 3 Total cost $52, 576 27

Planning Example 3 Month Jan Expected Demand 900 Production Days 22 Feb Mar Apr May June 700 800 1, 200 1, 500 1, 100 18 21 21 22 20 6, 200 124 Demand Per Day (computed) 41 39 38 57 68 55 Production = Expected Demand 28

Production rate per working day Planning Example 3 Forecast demand monthly production 70 – 60 – 50 – 40 – 30 – Jan Feb Mar Apr May June 22 18 21 21 22 20 = Month = Number of working days 29

Planning Example 3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1. 6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit 30

Planning Example 3 Cost Information Inventory carrying. Daily cost Forecast Month (units) Subcontracting Prod Rate cost per Jan 900 Average pay rate Basic Production Cost (demand x 1. 6 hrs/unitx $5/hr) Extra Cost of Increasing $ 5 per Decreasing unit per month Production (hiring cost) Total Cost $10 per(layoff unit cost) 41 $ 7, 200 — — ($40 per $day) 7, 200 $ 5 per hour 6, 800 $ 7 per(=hour 2 x $600) (above 8$600 hours per day) Feb 700 39 5, 600 — Mar 800 38 6, 400 — Overtime pay rate Labor-hours to produce a unit Apr Cost 1, 200 57 increasing daily of (hiring and training) May 1, 500 68 9, 600 production 12, 000 $49, 600 1. 6 (= 1 per x $600) hours unit $5, 700 rate(= 19 x $300) $300 — per unit $3, 300 rate(= 11 x $300) $600 per unit Cost of decreasing daily production (layoffs) June 1, 100 55 8, 800 Table 13. 3 $1, 200 7, 000 15, 300 — $7, 800 (= 13 x $600) 16, 600 $9, 000 $9, 600 $68, 200 31

Comparison of Three Plans Cost Plan 1 Plan 2 Inventory carrying $ 9, 250 $ Regular labor 49, 600 37, 696 49, 600 Overtime labor 0 0 0 Hiring 0 0 9, 000 Layoffs 0 0 9, 600 Subcontracting 0 0 0 $58, 850 $52, 576 $68, 200 Total cost 0 Plan 3 $ 0 Plan 2 is the lowest cost option 32

Cumulative output/demand Cumulative Graph Cumulative production Cumulative demand 1 2 3 4 5 6 7 8 9 10 33

Average Inventory Average Beginning Inventory + Ending Inventory = inventory 2 34

Aggregate Plan to Master Schedule Aggregate Planning Dis-aggregation Master Schedule 35

Disaggregating the Aggregate Plan § Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon. § Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule. 36

Master Scheduling § Master schedule § Determines quantities needed to meet demand § Interfaces with § Marketing § Capacity planning § Production planning § Distribution planning 37

Master Scheduler § Evaluates impact of new orders § Provides delivery dates for orders § Deals with problems § Production delays § Revising master schedule § Insufficient capacity 38

Master Scheduling Process Inputs Outputs Beginning inventory Forecast Customer orders Projected inventory Master Scheduling Master production schedule Uncommitted inventory 39

Projected On-hand Inventory Projected on-hand = inventory Inventory from previous week - Current week’s requirements 40

Projected On-hand Inventory Beginning Inventory Forecast is larger than Customer orders in week 3 Customer orders are larger than forecast in week 1 Forecast is larger than Customer orders in week 2 41

Time Fences in MPS Time Fences – points in time that separate phases of a master schedule planning horizon. Period 1 2 “frozen” (firm or fixed) 3 4 5 “slushy” somewhat firm 6 7 8 9 “liquid” (open) 42

Solved Problems: Problem 1 43