Chapter 13 Aggregate Planning Operations Management by R

Chapter 13 – Aggregate Planning Operations Management by R. Dan Reid & Nada R. Sanders 4 th Edition © Wiley 2010 Power. Point Presentation by R. B. Clough – UNH M. E. Henrie - UAA © Wiley 2010

The Role of Aggregate Planning n n n Integral to part of the business planning process Supports the strategic plan Also known as the production plan Identifies resources required for operations for the next 6 -18 months Details the aggregate production rate and size of work force required © Wiley 2010

The Role of the Aggregate Plan © Wiley 2010

Planning Links to MPS © Wiley 2010

Types of Aggregate Plans n Level Aggregate Plans n n n Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products like appliances Disadvantage- builds inventory and/or uses back orders Chase Aggregate Plans n n n Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage- constantly changing short term capacity © Wiley 2010

Types of Aggregate Plans n (Cont. ) Hybrid Aggregate Plans n Uses a combination of options n Options should be limited to facilitate execution n May use a level workforce with overtime & temps n May allow inventory buildup and some backordering n May use short term sourcing n Best way to develop a hybrid plan is by Linear Programming or Integer Linear Programming, see notes given in class and http: //bcs. wiley. com/he-bcs/Books? action=mininav&bcs. Id=3598&item. Id=0471794481&asset. Id=112492&resource. Id=10280&newwindow=true © Wiley 2010

Aggregate Planning Options n Demand based options n n n Reactive: uses finished goods inventories and backorders for fluctuations Proactive: shifts the demand patterns to minimize fluctuations e. g. early bird dinner prices at a restaurant Capacity based options n n Changes output capacity to meet demand Uses overtime, under time, subcontracting, hiring, firing, and part-timers – cost and operational implications © Wiley 2010

Developing the Aggregate Plan n n Step 1234 - Choose strategy: level, chase, or Hybrid Determine the aggregate production rate Calculate the size of the workforce Test the plan as follows: n n n Calculate Inventory, expected hiring/firing, overtime needs Calculate total cost of plan Step 5 - Evaluate performance: cost, service, human resources, and operations © Wiley 2010

Aggregate Planning Bottom Line n n n The Aggregate plan must balance several perspectives Costs are important but so are: n Customer service n Operational effectiveness n Workforce morale A successful AP considers each of these factors © Wiley 2010

Master Production Scheduling n n n Master production schedule (MPS) is the anticipated build schedule MPS is often stated in produce or service specifications rather than dollars MPS is often built, managed, reviewed and maintained by the master scheduler © Wiley 2010

Planning Links to MPS © Wiley 2010

Role of the MPS n Aggregate plan: n n Specifies the resources available (e. g. : regular workforce, overtime, subcontracting, allowable inventory levels & shortages) Master production schedule: n n Specifies the number & when to produce each end item (the anticipated build schedule) Disaggregates the aggregate plan © Wiley 2010

Objectives of Master Schedule n The Master Scheduler must: n n Maintain the desired customer service level Utilize resources efficiently Maintain desired inventory levels The Master Schedule must: n n n Satisfy customer demand Not exceed Operation’s capacity Work within the constraints of the Aggregate Plan © Wiley 2010

MPS as a Basis of Communication n n MPS is a basis for communication between operations and other functional areas Demand management and master scheduler is communication is ongoing to incorporate n n Forecasts, order-entry, order-promising, and physical distribution activities Authorized MPS is critical input to the material requirements planning (MRP) © Wiley 2010

Developing an MPS n The Master Scheduler: n Develops a proposed MPS Checks the schedule for feasibility with available capacity Modifies as needed n Authorizes the MPS n n n Consider the following example: n n n Make-to-stock environment with fixed orders of 125 units There are 110 in inventory to start When are new order quantities needed to satisfy the forecasted demand? © Wiley 2010

The MPS Record n n Projected Available = beginning inventory + MPS shipments forecasted demand The MPS row shows when replenishment shipments need to arrive to avoid a stock out (negative projected available) © Wiley 2010

Revised and Completed MPS Record © Wiley 2010

Evaluating the MPS n Rough-cut capacity planning: n n n An estimate of the plan’s feasibility Given the demonstrated capacity of critical resources (e. g. : direct labor & machine time), have we overloaded the system? Customer service issues: n Does “available-to-promise” inventory satisfy customer orders? If not, can future MPS quantities be pulled in to satisfy new orders? © Wiley 2010

Stabilizing the MPS © Wiley 2010

Aggregate Planning Across the Organization n Aggregate planning, MPS, and rough-cut capacity affection functional areas throughout the organization n Accounting is affected because aggregate plan details the resources needed by operations Marketing as the aggregate plan supports the marketing plan Information systems maintains the databases that support demand forecasts and other such information © Wiley 2010

Chapter 13 Highlights n n Planning begins with the development of the strategic business plan that provides your company’s direction and objectives for the next two to ten years. Sales and operations planning integrates plans from the other functional areas and regularly evaluates company performance. The level aggregate plan maintains the same size workforce and produces the same output each period. Inventories and backorders absorb fluctuations in demand. The chase aggregate plan changes the capacity each period to match the demand Demand patterns can be smoothed through pricing incentives, reduced prices for out-of-season purchases, or nonprime service times. © Wiley 2010

Chapter 13 Highlights n n n (continued) The difference in aggregate planning for companies that do not provide a tangible product is that the option to use inventories is not available The MPS shows how the resources authorized by the AP will be used to satisfy the organizational objectives. The MPS specifies the products to be built in each time period. MPS is checked for feasibility using a rough-cut capacity planning technique. The objectives of master scheduling are to satisfy customer service objectives, use resources effectively, and minimize costs. An MPS is developed by looking at individual MPS records and calculating when replenishment quantities are needed. The MPS records are summed together to show the © Wiley 2010 total proposed workload.

Chapter 13 Highlights n n (continued) Available-to-promise logic is used when promising order delivery dates to customers, ATP logic allows the company to make viable delivery promises Time fence policies stabilize the MPS. The demand time fence and the planning time fence divide the MPS into three portions: frozen, slushy, and liquid. © Wiley 2010

The End n Copyright © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. © Wiley 2010

Aggregate Production Planning Extra Credit: Linear Programming Formulation n Parameters: found in or computed from the data n Decision variables: unknowns to be determined n Objective function: the bottom line n n Constraints: Satisfy demands and state relationships among variables Single Product model here; can be generalized

Parameters: find these in the data! n dt = amount of product demanded in period t n pt = productivity per worker in period t n Lt = unit labor cost per worker in period t n ht = unit hiring cost per worker in period t n ft = unit firing cost per worker in period t

Parameters: find these in the data! n n ct = inventory holding cost per unit period in period t at = backorder cost per item period in period t

Decision Variables: find values by solving the model n wt = number of workers employed in period t n ut = number of workers hired between periods t-1 and t n vt = number of workers fired between periods t-1 and t n it = amount of product in inventory at the end of period t n bt = amount backordered at the end of period t

Initial values: “fixed variables”; find in data n io = initial inventory level n wo = initial workforce level n bo = initial backorder, i. e. , left over from previous period.

The LP Model Minimize t (Ltwt + htut + ftvt + ctit + atbt) s. t. ut - vt = wt – wt-1 for each period t : workforce change ptwt + it-1 - it + bt – bt-1 = dt for each period t: demand balance i. T==0, b. T = 0 for last period T; closing out wt, ut, vt, it, bt 0 for each time period t: nonnegativity © Wiley 2007

The LP model for the example Minimize 1280 w 1+1280 w 2 +…+ 500 u 1+500 u 2 +…+ 1000 v 1+1000 v 2+…+10 i 1 + 10 i 2 +…+ 100 b 1 + 100 b 2+… s. t. u 1 – v 1 = w 1 – 210 (period 1) … 26. 67 w 1 + io – i 1 + b 1 – bo = 6000 (period 1) 26. 67 w 1 + io – i 1 + b 1 – bo = 4800 (period 2) … All variables nonnegative © Wiley 2007

Some loose ends: SCM n n Supply Chain Strategy http: //money. cnn. com/2008/05/28/magazines/fortun e/kapner_walmart. fortune/index. htm Wal-Mart puts the squeeze on food costs The retailer is using its clout with vendors to hold onto its everyday low prices A company’s supply chain strategydetermines the nature of procurement and transportation of materials as well as manufacture and distribution of the product. © Wiley 2007

Some loose ends: SQC n the primary reason for abandonment of the inspection system and the adoption of the Statistical Process Control system for achieving quality in the was that customer expectations were raised by Japanese quality during the late 70 s. © Wiley 2007

Heuristic #1: Choose the Cheapest Warehouse to Source Demand D = 50, 000 $2 x 50, 000 $5 x 140, 000 Cap = 60, 000 $2 x 60, 000 D = 100, 000 $1 x 100, 000 $2 x 50, 000 D = 50, 000 Total Costs = $1, 120, 000 Source: Simchi-Levi, Kaminsky & Simchi-Levi, Designing and Managing the Supply Chain 3/e © Wiley 2007

Heuristic #2: Choose the warehouse where the total delivery costs to and from the warehouse are the lowest [Consider inbound and outbound distribution costs] $0 x 50, 000 D = 50, 000 $3 x 50, 000 Cap = 200, 000 P 1 to WH 1 P 1 to WH 2 P 2 to WH 1 P 2 to WH 2 $5 x 90, 000 D = 100, 000 P 1 to WH 1 P 1 to WH 2 P 2 to WH 1 P 2 to WH 2 $1 x 100, 000 Cap = 60, 000 $3 $7 $7 $4 $2 x 60, 000 $2 x 50, 000 D = 50, 000 Total Cost = $920, 000 Source: Simchi-Levi, Kaminsky & Simchi-Levi, Designing and Managing the Supply Chain 3/e © Wiley 2007 $4 $6 $8 $3 P 1 to WH 1 P 1 to WH 2 P 2 to WH 1 P 2 to WH 2 $5 $7 $9 $4