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Aggregate Planning Topic 2 Prof. Upendra Kachru.

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1 Aggregate Planning Topic 2 Prof. Upendra Kachru

2 Planning Hierarchy Level Customer Business Activity Strategic
Corporate/Senior OM Executives Competitive Strategy Product Innovation Supply Chain Structuring Capital Budget Process Functional Regional/Plant Level Marketing Strategy Plant Utilization Strategy Capacity Budgeting Aggregate Planning Organizational Control Operational Operations Level CRM Procurement Logistics MPS and MRP Managing Workforce Prof. Upendra Kachru

3 Planning Hierarchy Types of Decision Short term Current Plans
Long term Planning Medium term Time horizon in years Current Plans Aggregate Plans Strategies & Facilities Prof. Upendra Kachru

The aggregate plan links strategic goals and objectives of the organization with the plans for individual products , services and their various components. Prof. Upendra Kachru

5 Nature of Aggregate Planning
It determines the course the organization takes in the medium term, with the following in mind: Market Inputs (demand forecasts and/or actual orders); Capability Specifications and Performance Metrics; and Resource Availability Aggregate Planning has to firstly link strategic goals and objectives with the plans for individual products by transforming its understanding of the market into a set of capability specifications. i.e. what business processes must do to meet the needs and expectations of customers. Prof. Upendra Kachru

6 The business processes that are involved are as follows:
Prof. Upendra Kachru

7 Objectives of Aggregate Planning Maximize Minimize profits
customer service utilization of plant and equipment Minimize inventory investment changes in production rates changes in workforce levels Prof. Upendra Kachru

8 The Aggregate Planning Process
Distribution and marketing Customers needs Demand forecasts Competition behavior Operations Current machine capacities Plans for future capacities Workforce capacities Current staffing level Accounting and Finance Cost data Financial condition of firm Aggregate plan Materials Supplier capabilities Storage capability Materials availability Human Resources Labor-market conditions Training capacity Engineering New Products Product design changes Machine standards Prof. Upendra Kachru

9 Aggregate Planning System - Inputs
Competitors’ behavior Raw material availability Market demand External to firm External capacity Economic conditions Planning for production Current physical capacity Activities required for production Current workforce Inventory levels Internal to firm Prof. Upendra Kachru 11 11 9

10 Business Environment Market Orientation Time Focused Environment
Product Flexibility Focused Environment Prof. Upendra Kachru

11 Market Orientation Make-To-Stock (MTS): Produce to buildup inventory and then use that inventory later to meet demand. This makes the aggregate plan critical to the business. Make-To-Order (MTO): Service organizations and job shops provide such Products. Assemble-to-Order (ATO), Engineer-to-Order (ETO): Aggregate planning has to use actual or projected orders to plan production activities. Prof. Upendra Kachru

12 Time Focused Environment
Right inventory stocking decisions Efficient, timely feedback Excellence in collecting and analyzing data Sufficient resources Sufficient resources at the right location Prof. Upendra Kachru

13 Product Flexibility Focused Environment
Sufficient Goods at convenient place Good Forecast Short change over times Reduction in manufacturing lead time Prof. Upendra Kachru

14 Aggregate Demand and Aggregate Capacity
10000 Suppose the figure to the right represents forecast demand in units 10000 8000 8000 7000 6000 5500 6000 4500 4000 Now suppose this lower figure represents the aggregate capacity of the company to meet demand 2000 Jan Feb Mar Apr May Jun 10000 9000 8000 8000 What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up 6000 6000 4500 4000 4000 4000 2000 Jan Feb Mar Apr May Jun 14 Prof. Upendra Kachru 9 9 14

15 Chase Strategy A Chase Strategy is a strategy aimed at adjusting capacity in anticipation of demand. You are "chasing demand" by regulating capacity to the demand doing it as dynamically and quickly as you can. Prof. Upendra Kachru

16 Chase Strategy Using part-time employees
Varying production rates through overtime or idle time Maximizing efficiency through training, work scheduling, cross-training, use of technology, etc. Increasing involvement of consumer in delivery of service Keeping Bottleneck Resources Busy Sharing capacity with other divisions/firms Outsourcing Chase Strategy Prof. Upendra Kachru

17 Level Strategy Level Strategy is a strategy where you maintain a constant capacity over a period of time, irrespective of fluctuations in demand. This strategy is used when skill level, the training required, or the cost of hiring people and terminating them is high. Prof. Upendra Kachru

18 Level Strategy Changing Product Mix Increasing Machine Product Rate
Improving Quality Increasing Product Yield Increasing Motivation Increasing Employee Involvement Changing Inventory Levels Planning for future expansion Prof. Upendra Kachru

19 Mixed Strategy Mixed Strategy
In a “mixed” strategy, the organization combines strategies, in view of its specific and unique requirements. Mixed Strategy Prof. Upendra Kachru

20 Impact of Different Options
ADVANTAGES DISADVANTAGES COMMENTS Changing inventory level Changes in human resources are gradual or none; no abrupt production changes. Inventory holding costs. Shortages, resulting in lost sales, may occur if demand increases. This applies mainly to production, not service, settings. Varying work-force size by hiring or layoffs Avoids the costs of other alternatives Hiring, layoff, and training costs may be significant Used where many unskilled people seek extra income. Varying production rates through over time or idle time Matches seasonal fluctuations without Hiring / training costs Overtime premiums; tired workers; may Not meet demand. Allows flexibility within the Aggregate plan. Subcontracting Permits flexibility and smoothing of the firm's output. Loss of quality control; reduced profits; loss of future business. Applies mainly in production settings. Prof. Upendra Kachru

21 Using part-time workers
OPTION ADVANTAGES DISADVANTAGES COMMENTS Using part-time workers Is less costly and more flexible than full-time workers. High turnover / training costs; quality suffers; scheduling difficult. Good for unskilled jobs in areas with large temporary labor pools. Influencing demand. Tries to use excess capacity. Discounts draw new customers. Uncertainty in demand. Hard to exactly match demand to supply. Creates marketing ideas. Overbooking used in some businesses. Back-ordering. May avoid overtime. Keeps capacity constant. Customer must be willing to wait, but goodwill is lost. Many companies backlog. Counter seasonal product and service mixing. Fully utilizes resources; allows stable work force. May require skills or equipment outside firm's areas of expertise. Risky finding products or services with opposite demand patterns. Prof. Upendra Kachru

22 Methods for Aggregate Planning
Graphical and charting procedure. Linear programming. Mathematical modeling using Linear Decision Rules Management Coefficient Models Production Switching Heuristics Simulation Methods for Aggregate Planning Prof. Upendra Kachru

23 Graphical & Charting Method
This is a trial-and-error method, assisted by spreadsheets. In general, the graphical and charting method follows five steps: Determine the demand in each period. Determine what the capacity is for regular time, overtime, and subcontracting each period. Find the labor costs, hiring and layoff costs, and inventory holding costs. Consider company policy that may apply to the workers or to stock levels. Develop alternative plans and examine their total costs. Graphical & Charting Method Prof. Upendra Kachru

24 Graphical & Charting Method
The method requires the planner to specify a planning horizon and secure aggregate demand forecasts Second, the decision variable such as size of workforce, output rate, overtime or idle time, inventory level, sub-contracting, etc., have to be explicitly identified. Third, all models require the relevant costs, including costs of wages, hiring/layoff, overtime, inventory, etc., to be specified Graphical & Charting Method Prof. Upendra Kachru

25 Chase and Level Strategy Costs
Suppose we have the following unit demand and cost information: Demand/mo Jan Feb Mar Apr May Jun Production Cost Rs. 350/unit Lost Sales Rs. 1000/unit per mo. Inventory Carrying Cost Rs. 10/unit per mo. Subcontracting Costs Rs. 600/unit Layoff costs Rs. 7000/worker Hiring Cost Rs. 3500/worker Beginning Workforce Level 20 workers Capacity per Worker 50 units/mo. Beginning inventory units Closing Inventory units 25 Prof. Upendra Kachru 11 25 11

26 Chase Strategy 50x(20+4+6)=1500 700x10 1000x350=Rs. 350000
Given is the demand information below: Demand Jan Feb Mar Apr May Jun Production/mo Inventory Hire/Fire 50x(20+4+6)=1500 700x10 1000x350=Rs Cumulative cost information is given in ‘000 below: Jan Feb Mar Apr May Jun Production Inventory Hire/Fire Total 7000x2= 14000 Prof. Upendra Kachru

27 Level Strategy Given is the demand information below: =1200 Demand Jan Feb Mar Apr May Jun Production/mo Inventory Hire/Fire 1100x10 Cumulative cost information is given in ‘000 below: Jan Feb Mar Apr May Jun Production Inventory Hire/Fire Total Chase Strategy costs Rs.3,297,000 Prof. Upendra Kachru

28 Problem: Ramson & Co. Ramson & Company, a Delhi company, manufactures designer furniture for offices. Mr. Ram has developed monthly forecasts for executive chairs and presented the period January – June in the table below. Month Expected demand Production days Demand per day January 1000 22 45 Feb 800 18 44 March 1200 21 57 April May 1500 68 June 1100 20 55 Prof. Upendra Kachru

29 Cost Information for Manufacture of Executive Chairs
Inventory carrying cost Rs. 10 unit/month Subcontracting cost (marginal cost per unit above in-house manufacturing cost) Rs. 100/unit Average pay rate Rs. 20/hour (Rs. 160/day) Overtime pay rate Rs. 40/hour (above 8 hours) Labor-hours to produce a unit 6 hours/unit Cost of increasing production rate (hiring) Cost of decreasing production rate (layoffs) Rs. 150/unit Prof. Upendra Kachru

30 Forecast vs. Demand 6800/124 = Prof. Upendra Kachru

31 Plan 1: Level Strategy - Production is equal to Average Demand
Month Production at 55 units/day Demand forecast Ending inventory January 1,210 1000 210 February 990 800 400 March 1,155 1200 355 April 1,200 310 May 1,500 20 June 1,100 Total 6,820 6800 1,315 COSTS CALCULATIONS Inventory carrying Rs. 13,150 = 1,315 units carried x Rs. 10 / unit Regular time labor Rs. 833,280 = 42 workers x Rs. 160 / day x 124 days Other costs Total cost Rs. 846,430 Prof. Upendra Kachru

32 To produce 44 units/day in-house, 33 workers are needed.
Plan 2: Mixed Strategy- Constant Workforce at lowest demand level and meet additional demand through Outsourcing To produce 44 units/day in-house, 33 workers are needed. All other demand is met by subcontracting, which is thus required in every month. No inventory costs are incurred. In-house production = 44 units/day x 124 production days = 5,456 units Subcontract units = 6, ,456 = 1,344 units COSTS CALCULATIONS Regular-time labor Rs. 654,720 = 33 workers x Rs. 160 per day x 124 days Subcontracting Rs. 134,400 = 1,344 units x Rs. 100 per unit Total cost Rs. 789,120 Prof. Upendra Kachru

33 Plan 3: Chase Strategy – Hire and layoff workers to meet the exact demand each month.
44 x 6 x Rs.20 x 18 = Rs. 95,040 Month Forecast (units) Prod Rate Production Cost) Hiring cost Layoff cost Total Cost Jan 1000 45 Rs. 118,800 Feb 800 44 Rs. 95,040 Rs. 2,700 Rs. 97,740 Mar 1200 57 Rs. 143,640 Rs. 170,940 Apr 1,200 Rs. 27,300 May 1,500 68 Rs. 179,520 Rs. 24,200 Rs. 203,720 June 1,100 55 Rs. 139,200 Rs. 3,900 Rs. 143,100 6800 Rs. 819,840 Rs. 51,500 Rs. 6,600 Rs. 877,940 Rs. 100 x 13 x 21= Rs. 27,300 Rs. 150 x 13 x 20 = Rs. 3,900 Prof. Upendra Kachru

34 Comparison of Different Plans Cost Plan 1 Plan 2 Plan 3
Inventory carrying Rs. 13,150 Regular labor Rs. 833,280 Rs. 654,720 Rs. 819,840 Overtime labor Hiring Rs. 51,500 Layoffs Rs. 6,600 Subcontracting Rs. 134,400 Total cost Rs. 846,430 Rs. 789,120 Rs. 877,940 Plan 2 is the lowest cost option Prof. Upendra Kachru

35 Hierarchical Production Planning (HPP)
In large companies with several divisions or plants, HPP is used so decide which product groups to produce where. Planning is then carried out at the appropriate organizational level. HPP is the starting point for decisions about production quantities, inventory levels, and workforce levels for each plant. This planning process can continue plans for individual products being developed by departmental managers. Prof. Upendra Kachru

36 Aggregate Planning For Services
The typical service operation is Make-To-Order rather than Make-To-Stock. The aggregate planning process, therefore, is different for services in the following ways: Most services can not be inventoried. Demand for services is difficult to predict. Capacity is also difficult to predict. Service capacity must be provided at the appropriate place and time. Labor is usually the most constraining resource for service. Prof. Upendra Kachru

37 Proactive Strategies Fixed Service Schedules/Variable Hours Strategy
Appointment for Service Times Customer Involvement Planning with order Backlogs Differential Pricing Develop Complementary Products or Services to address imbalance Coordination with other Organizations Proactive Strategies Prof. Upendra Kachru

38 Scheduling Customer Demand
Backlogs: For example, your tailor shop will not tell you exactly when service will commence. You give your measurements (service request) to a tailor (order taker), who adds it to the waiting line of orders already in the system and he gives you a date for trying out the outfit. Prof. Upendra Kachru

39 Reservations: In many industries like in the hospitality and travel trades, reservations have become a norm. Reservations systems, although quite similar to appointment systems, are used when the customer actually occupies or use facilities associated with the service. Prof. Upendra Kachru

40 Cont. Appointments: An appointment system assign specific times for service to customers. The advantages of this method are: Timely customer service High utilization of servers Hospitals are examples of service providers that use appointment systems Prof. Upendra Kachru

41 Aggregate Planning For Services
Where this is not the case, service organizations also use aggregate planning, some in exactly the same way with a manufacturing firm. Aggregate planning in the case of a high-volume-product output business is very similar to manufacturing. In such high-volume tangible services, traditional aggregate planning methods may be applied. Aggregate Planning For Services Prof. Upendra Kachru

42 In a restaurant, for example, inventory is perishable.
In addition, in fast-food restaurants, peak and slack periods may be measured in hours. The ’product’ may be inventoried for only as long as 10 minutes. This brings in complexity in aggregate planning. Prof. Upendra Kachru

43 Aggregate Planning for Services
Yield Management Aggregate Planning for Services Most service organizations have limited capacity. Their product is perishable e.g. airlines, and hotels, etc. In yield management, pricing relates to addressing specific capacity problems. The objective is to sell as much of the service at full price as possible, but to offer discounts if necessary to avoid the service to elapse. Prof. Upendra Kachru

44 From an operational perspective, yield management is most effective when
Demand can be segmented by customer. Fixed costs are high and variable costs are low. Inventory is perishable. Product can be sold in advance. Demand is highly variable. Yield Management Prof. Upendra Kachru

45 Yield Management Formula
In yield management, service providers seek to minimize the cost of overbooking. The probability of ‘no-shows’ is given by the formula: P(n < x)  Cu/ ( Cu + Co) Where: n = number of no-shows x = number of rooms or seats overbooked Cu = cost of under-booking; i.e., lost sale Co = cost of overbooking; i.e., replacement cost P = probability Prof. Upendra Kachru

46 Problem – Great Eastern Hotel
The Great Eastern Hotel at Jaipur had on the basis of historical data calculated the probability of ‘no-shows’ in a particular season. The cost of under booking was estimated at Rs. 1750; and the cost of overbooking at Rs The statistical data is shown below: No-Shows Probability P(N < X) Prof. Upendra Kachru

47 Solution Expected number of no shows = 1.75
0*(.15) + 1*(.25) + 2*(.30) + 3*(.30) = 1.75 Solution [2(.15) + 1(.25)]*Rs = Rs 1750 / ( ) = 0.593 Expected number of no shows = 1.75 Optimal probability of no-shows = 0.593 As you expect 1.75 ‘no shows’ and rooms have to be integer numbers, you overbook 2 rooms. The cost of overbooking the rooms is as follows: Cost of Refusing Rooms = Rs Lost revenue from no-shows = Rs Total cost of overbooking by 2 rooms = Rs Expected savings = Rs a night Therefore, it is worth overbooking 2 rooms to maximize profits and capacity utilization. (.30)* Rs = Rs. 525 [(Rs. 1750* 1.75) - Rs ] = Rs Prof. Upendra Kachru

48 Graphical Problem & Solution
The hotel sells its first 30 rooms at Rs and the next 30 rooms at Rs The variable cost per room is Rs By selling rooms at differential prices, the hotel expects to improve its operations. Does it do so? Prof. Upendra Kachru

49 Solution The result is that it sells an additional 30 per cent of its rooms and improves profitability to Rs. 96,000 per day. Prof. Upendra Kachru

50 Desegregating the Aggregate Plan
In the real world, a manufacturing system with only a fair degree of complexity might process components through seven or eight manufacturing stages. The process would probably be integrated with parts purchased from outside vendors. The final-assembly plan would combine numerous internally manufactured components, purchased components, and subassemblies into end products for the customers. Desegregating the Aggregate Plan Prof. Upendra Kachru

51 Desegregating the Aggregate Plan
The operations manager would like to know: How should aggregate output be subdivided among each of the products that are to be produced? What mix of these products should comprise the aggregate inventories? This process of translating aggregate plans into plans for individual products is called desegregation. Prof. Upendra Kachru

52 Rough-cut Capacity Plan
The upper portion of shows that the aggregate production plan anticipates making 1,200, 800, and liter bottles of soda over the 3-month planning horizon. The production schedule shown in the bottom half of the figure above provides a week-by-week schedule. Prof. Upendra Kachru

53 Rough-cut Capacity Plan
The rough-cut capacity plan is necessary to generate the necessary detail, for planners to transform them into the Master Production Schedule (MPS). Planners use this to determine the firm’s resource needs over the planning horizon. In our next session, we will discuss MPS and MRP. Rough-cut Capacity Plan Prof. Upendra Kachru

54 Read at Home Forecast control What is Inventory management?
This is given as an Appendix to the Chapter on Supply Chain Management in your text book. Read at Home Prof. Upendra Kachru

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