Presentation on theme: "Aggregate / Production Planning"— Presentation transcript:
1 Aggregate / Production Planning Y.-H. Chen, Ph.D.International CollegeMing-Chuan University
2 Overview Introduction Demand and Supply/Capacity Options Aggregate/Production Planning TechniquesMaster Production Schedule
3 PlanningOrganizations make supply and capacity decisions on three levels.Organizations make supply and capacity decisions on three levels:Long term: Equipment, product and service selection, and facility size, location and layout.Intermediate term: Employment, output, and inventory.Short term: Scheduling of jobs, workers and equipment, and the like.
4 Aggregate/Production Planning Why do we need it?TimeLevel of accuracyWhat decisions are involved?output ratesemploymentinventoryback orderssubcontractingTwo major reasons of doing intermediate-range planning are time and level of accuracy. It takes time to develop and implement a plan. It is also not possible to predict the timing and volume of demand for individual items with any degree of accuracy.Planners must make decisions on output rates, employment levels and changes, inventory levels and changes, back orders, and subcontracting.
5 Aggregate/Production Planning A “big picture” approach to planning.Balance supply and demand by minimizing the production cost, adjustment cost, and opportunity cost of a system.Concerned with the quantity and the timing of both the supply and demand.It is essentially a "big picture" approach to planning. Planners focus on a group of similar products or services, or sometimes an entire product or service line.Intermediate-range planning or aggregate/production planning balances supply and demand by minimizing the production cost, adjustment cost, and opportunity cost of a system. The goal is to achieve a production plan that will effectively utilize an organization's resources to meet expected (forecasted) demand.Planners are concerned with the quantity and the timing of both the supply and demand.
6 Aggregate/Production Planning A rolling planning horizon covers a time horizon of 2 to 18 months.Special challenge comes from uneven demand within the planning horizon.Example: Department store space allocation.ShortrangeIntermediate rangeLong rangeNow2 months1 YearAggregate planning typically covers a time horizon of 2 to 18 months, i.e., a rolling planning horizon covering the next 2-18 months.Special challenge comes from uneven demand within the planning horizon.For example, in a department store, space allocation is often an aggregate decision. That is, the manager might decide to allocate 20 percent of the available space in the clothing department to women's sportswear, 30 percent to juniors, and so on, without regard for what brand names will be offered or how much of juniors will be slacks. The aggregate measure might be square feet of space or racks of clothing. The allocation might change over time.
7 Aggregate Planning Inputs ResourcesWorkforceFacilitiesDemand forecastPolicy statementsSubcontractingOvertimeInventory levelsBack ordersCostsInventory carryingBack ordersHiring/firingOvertimeInventory changessubcontractingInputs to aggregate planning include demand forecast, available resources, policies regarding employment levels, and so on.
8 Aggregate Planning Outputs Total cost of a planProduction/operation planProjected levels ofInventoryOutputEmploymentSubcontractingBackorderingThe output of the aggregate planning is a production plan or an operations plan with overall decisions on level of output, capacity, employment, and inventory.
9 Demand Options Pricing: Influence demand pattern. Problems: insufficient capacity and missing demand.Examples: discount rates on hotels, airlines, movies, etc.Promotion: Influence demand quantity.Problems: worse than initial intention.Back orders: Take orders in a period but deliver them later.Problems: lost sales, disappointed customers, and paperwork.New demand: Develop demand for a complementary product.Examples: trips of schools, clubs, and seniors; fast food breakfast; landscaping during snow season.Demand options can shift demand from peak periods to off-peak periods or create demand during off-peak periods so that the overall demand corresponds more closely to capacity in the planning horizon.Pricing: An important factor to consider is the degree of price elasticity; the more the elasticity, the more effective pricing will be in influencing demand patterns. Opportunity cost includes the lost profit stemming from capacity insufficient to meet demand during certain periods and the lost profit of lost demand due to the shift. Examples of pricing are: low rates for weekend stay in a hotel, low fares for night travel of an airline, "early bird special" from a restaurant, and reduced matinee rates offered by a movie theater.Promotion: The timing of promotion efforts and knowledge of response rates and response patterns will be needed to achieve the desired results. Unlike pricing, there is much less control over the timing of demand but more impact on quantity of the promoted products / services and the sales of their associated ones. There is always the risk that promotion can worsen the condition it was intended to improve.Back orders: Back orders allow orders to be taken in one period and deliveries promised for a later period. The success of this approach depends on how willing customers are to wait for delivery. The costs associated with back orders are difficult to pin down and include lost sales, annoyed or disappointed customers, and perhaps additional paperwork.New demand: Developing a demand for a complementary product (e.g., lawn mowers, garden equipment) that makes use of the same production processes achieves a more consistent use of labor, equipment, and facilities. Examples are: Creating new demand for buses at other times (e.g., trips by schools, clubs, and senior citizen groups) would make use of the excess capacity during those slack times; Opening fast food restaurants for breakfast to use their capacities more fully; Using landscaping equipment during the winter months for snow removal.
10 Capacity OptionsHire and layoff workers: union contracts, worker availability, worker morale, quality, and cost.Recruitment, screening, training, severance pay, workforce realignment.Overtime/slack timeOvertime: Seasonal demand, crew overtime, productivity, quality, accident, payroll.Slack time: training, process improvement, problem solving.Inventories: carrying, holding, insurance, obsolescence, deterioration, spoilage, breakage.Part-time workers: skill set, union, benefit.Subcontracting / outsourcing: skill set, availability, quality, cost, demand stability, confidentiality.Hire and lay off workers: The extent to which operations are labor intensive determines the impact that changes in the workforce level will have on capacity. Of the cost involved in this option, hiring cost includes recruitment, screening, and training to bring new workers "up to speed." And, quality may suffer. Some savings may occur if workers who have recently been laid off are rehired. Layoff costs include severance pay, the cost of realigning the remaining workforce, potential bad feelings toward the firm on the part of workers who have been laid off, and some loss of morale for workers who are retained (i.e., in spite of company assurance, some workers will believe that in time they too may be laid off). In addition, other factors having impacts on this option include the availability of (in particular, skilled) workers and the contracts of unions.Overtime / slack time: The use of overtime can be especially attractive in dealing seasonal demand peaks by reducing the need to hire and train people who will have to be laid off during the off-season. Moreover, in situations with crews, it is often necessary to use a full crew rather than to hire one or two additional people. It should be noted that some union contractors allow workers to refuse overtime. Some people may not appreciate having to work on short notice or the fluctuations in income. Overtime could also result in lower productivity, poor quality, more accidents, and increased payroll costs. Slack time can result in less efficient use of machines and other fixed assets. Some organizations use slack time for training. It also gives workers time for problem solving and process improvement, while retaining skilled workers.Part-time workers: The use of part-time workers depends on the nature of the work, training and skills needed, and union agreements. It costs less than regular workers in hourly wages and fringe benefits. Unions may regard such workers unfavorably because they typically do not pay union dues and may lessen the power of unions. Contract workers, also called independent contractors, have different pay scales and no benefits. They can be added or subtracted from the workforce with greater ease than regular workers, giving companies greater flexibility in adjusting the size of workforce.Inventories: Inventory can be built up during periods when production capacity exceeds demand and drawn down in periods when demand exceeds capacity. Inventory involves holding or carrying those goods as inventory until they are needed. The cost is tied up that could be invested elsewhere. Additional cost includes insurance, obsolescence, deterioration, spoilage, breakage, and so on. Although services tend not to make use of inventories to alter capacity requirements, a portion of the services can be done during slack periods (e.g., organize the workplace).Subcontracting: Subtracting enables planners to acquire temporary capacity with great flexibility. Factors to consider include availability capacity, relative expertise, quality considerations, cost, and the amount and stability of demand. As an alternative to subcontracting, an organization might consider outsourcing: contracting with another organization to supply some portion of the goods or services on a regular basis.
11 Aggregate Planning Strategies Level capacity strategy with inventories, overtime, part-time workers, subcontracting, and back orders.Chase demand strategy with overtime, part-time workers, and subcontracting.Use a combination of both strategies.Level capacity strategy: Maintain a level of workforce or maintain a steady output rate while meeting variations in demand by a combination of inventories, overtime, part-time workers, subcontracting, and back orders. Negative on employee morale, cost, paperwork, risk of insufficient skilled workers, union resistance, and possible lost sales due to back orders.Chase demand strategy: Match demand period by period. Maintain less inventory than the level capacity strategy. Negative on the similar factors as level capacity strategy due to unstable supply.Use a combination of both strategies.Example: Checkout arrangement.
13 Aggregate Planning Procedures Determine demand for each periodDetermine capacities for each periodIdentify policies that are pertinentDetermine units costsregular time, overtime, subcontracting, holding inventories, back orders, layoffs, and other relevant costs.Develop alternative plans and compute costsSelect the best plan that satisfies objectivesIdentify company or departmental policies that are pertinent (e.g., maintain a safety stock of 5% of demand, maintain a reasonable stable workforce).
15 Aggregate Planning Example: Case 1 Case 1: Use a steady rate of output and use inventory to absorb the uneven demand but allowing some backlog. Assume there are 15 workers. Each worker has an output rate of 20 units per period. Start with zero inventory and determine an aggregate plan and its cost.
17 Aggregate Planning Example: Case 2 Case 2: After Case 1, planners learned that one worker is about to retire from the company. Rather than replacing that person, they would like to stay with the smaller workforce and use overtime to make up for the lost output. With the maximum amount of overtime output per period to be 40 units, develop a plan and compare it to Case 1
19 Aggregate Planning Example: Case 3 Case 3: Another option for Case 2 is to use temporary workers to fill in during months of high demand. Suppose that it costs an additional $100 to hire and train a temporary worker, and that a temporary worker can produce at the rate of 15 units per period (compared to 20 units per period for regular workers). Develop a plan and compare it to Case 1 and Case 2.
23 Linear ProgrammingGoal: minimize the sum of costs related to regular labor time, overtime, subcontracting, inventory holding costs, and costs associated with changing the size of the workforce.Constraints: capacities of the workforce, inventories, and subcontracting.Limitationslinear relationships among variablesinability to continuously adjust output ratessingle objectiveThe goal is to minimize the sum of costs related to regular labor time, overtime, subcontracting, inventory holding costs, and costs associated with changing the size of the workforce. Constraints involve the capacities of the workforce, inventories, and subcontracting.The main limitations of LP model are the assumptions of linear relationships among variables, the inability to continuously adjust output rates, and the need to specify a single objective (e.g., minimizing costs) instead of using multiple objectives (e.g., minimize cost while stabilizing the workforce).
27 Linear Decision Rule and Simulation Minimized combined costs using a set of cost-approximating functions to obtain a single quadratic equation.Limitations:A specific type of cost function is assumed.Considerable effort needed to obtain relevant cost data and develop cost functions for each organization.Solutions may be unfeasible.Simulation ModelsDevelop and test computer models under different scenarios to identify acceptable solutions to problems. Examples: grocery checkouts, banking.Linear Decision RuleThe technique seeks to minimized combined costs using a set of cost-approximating functions to obtain a single quadratic equation.In practice, the model suffers from three limitations: (1) a specific type of cost function is assumed, (2) considerable effort must usually be expended to obtain relevant cost data and develop cost functions for each organization, and (3) the method can produce solutions that are unfeasible.Simulation ModelsDevelop and test computer models under different scenarios to identify acceptable solutions to problems.
28 Summary of Planning Techniques In the majority of organizations, aggregate planning seems to be accomplished more on the basis of experience along with trial-and-error methods. Perhaps the level of mathematical sophistication discourages greater use; the assumptions required in certain models appear unrealistic; or the model may be too narrow in scope. None of the techniques to date have captured the attention of planners on a broader scale.
29 Aggregate Planning in Services Services occur when they are rendered.Inventory may not apply to services.Demand for service can be difficult to predict.Some customers request prompt service or go elsewhere, if there is a waiting line.Capacity availability can be difficult to predict.Depend on skills details required.Labor flexibility can be an advantage in services.Can handle wide variety of service requirements.Aggregate planning for services takes into account projected customer demands, equipment capacities, and labor capacities. The resulting plan is a time-phased projection of service staff requirements.General differences of aggregate planning between manufacturing and services areServices occur when they are rendered. Most services can't be inventoried. Service capacity that goes unused is essentially wasted. It becomes important to match capacity and demand. Examples are financial planning, tax counseling, and oil change.Demand for service can be difficult to predict. Some customers may need prompt service and may go elsewhere if their needs are not met.Capacity availability can be difficult to predict. The types of variety are more pervasive than they are in manufacturing. Examples are painting and banking. The capacity availability of painting depends on the level of work details. The capacity availability of banking may change due to information inquiry during transactions.Labor flexibility can be an advantage in services. Service providers are often able to handle a fairly wide variety of service requirements and thus it makes the services flexible. For example, in self-service systems, the (customer) labor automatically adjusts to changes in demand, e.g., pumping faster, when there are cars waiting in the line.
30 DisaggregationBreaking the aggregate plan into specific product requirements in order to determinelabor requirements (skills, size of work force),materials, andinventory requirements.Disaggregating an aggregate plan translates the plan into meaningful terms for production. This involves breaking the aggregate plan into specific product requirements in order to determine labor requirements (skills, size of work force), materials, and inventory requirements. The dis-aggregation can be based on the percentages of products in a product family.
31 Disaggregation Example For example, a lawn mower manufacturer may have an aggregate plan that calls for 200 units in January, 300 in February, and 400 in March. The company produce push mowers, self-propelled mowers, and riding mowers. The aggregate plan must be translated into specific numbers of mowers of each type priori to actually purchasing the appropriate materials and parts, scheduling operations, and planning inventory requirements.
32 Disaggregation Master schedule Result of disaggregating an aggregate planShow quantity, timing, and orders of specific end items for a scheduled horizon.Shorter time horizon.Planned unit may be different.Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.Production, warehouse facilities, labor, vendors, and raw materials.The result of disaggregating the aggregate plan is a master schedule showing the quantity and timing of specific end items for a scheduled horizon. It reveals when orders are scheduled for production and when completed orders are to be shipped. It should be noted that whereas the aggregate plan covers an interval of, say, 12 months, the master schedule covers only a portion of this. In other words, the aggregate plan is disaggregated in stages or phases. The total of aggregate and disaggregated number of units may not be the same.Once a tentative master schedule has been developed, a planner can do the rough-cut capacity planning to test the feasibility of a proposed master schedule relative to available capacities. This means checking capacities of production, warehouse facilities, labor, vendors, and raw materials.
33 Master Production Schedule (MPS) Indicate the quantity and timing of planned production, taking into account desired delivery quantity and timing as well as on-hand inventory. (what, when, how much)MasterSchedulingBeginning inventoryForecastCustomer ordersInputsOutputsProjected inventoryMaster production scheduleUncommitted inventoryA master schedule indicates the quantity and timing (i.e., delivery times) for a product, or a group of products, but it does not show planned production. The master production schedule (MPS), as illustrated below, indicates the quantity and timing of planned production, taking into account desired delivery quantity and timing as well as on-hand inventory.The master schedule has three inputs: the beginning inventory, product forecasts, and customer orders. Customer order quantities may not be committed forecasts. The master schedule has three outputs: projected inventory, master production schedule, and available-to-promise (ATP).
34 MPS ExampleA 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.By evenly distributing over the four weeks in each month, we have 30 per week in June and 40 per week in July.Now, suppose that there are currently 64 pumps in inventory and there are customer orders that have been committed and must be filled. These inputs result in the following table.Production batch size is 70 units.
35 MPS Example: Step 1If no production is planed, projected inventory becomes negative from week 3. This is a signal that production is needed to replenish inventory.
37 MPS Example: Step 2As a result of the negative projected inventory, we need to have production in weeks 3, 5, 7 and 8.
38 MPS Example: Step 3After MPS is created, it is now possible to determine the amount of inventory that is uncommitted, and hence available to promise. A "look-ahead" procedure sums booked orders week by week until (but not including) a week in which there is an MPS amount. For the first week, this procedure results in summing customer orders of 33 (week 1) and 20 (week 2) to obtain 53. Then, the amount is subtracted from the beginning inventory of 64 pumps plus the MPS in the two week 1 to obtain the amount that is available to promise, i.e., (33+20) = 11. For weeks other than the first week, the beginning inventory drops out of the computation, and ATP is the look-ahead quantity subtracted from the MPS quantity. Thus, for week 3, the promised amounts are 10+4=14, and the ATP is 70-14=56. The same procedure is applied to weeks 5, 7, and 8 and we have the following table.The ATP in week 1 is not committed and it can be delivered in either week 1 or 2, or part of it can be delivered in week 1 and part of it in week 2. As additional orders are booked, these would be entered in the schedule, and the ATP amounts would be updated to reflect these orders.Marketing can use the ATP amounts to provide realistic delivery dates to customers.
39 Time Fences in MPS Period frozen firm full open 1 2 3 4 5 6 7 8 9 10 1112Changes to a master schedule can be disruptive, particularly changes to the early, or near, portions of the schedule. Therefore, master production schedules are often divided into four stages or phases. The dividing lines between phases are sometimes referred to as time fences.The frozen phase is execution phase. Only critical changes are allowed with the approval from high levels in an organization. The firm phase has all available resource allocated and schedule communicated to manufacturing departments so only exceptional changes with approval are allowed. The full phase has all capacity allocated but changes to the schedule is less dramatic so changes are allowed, if there is a good reason for doing so. The open phase does not have all capacity allocated and new orders are accepted in this phase.