1IES 371 Engineering Management Chapter 14: Aggregate Planning Week 13August 31, 2005Learning Objectives:Understand the concepts and methods of aggregate planningFormulate and solve capacity planning problem
2Aggregate PlanAggregate Plan: A statement of a company’s production rates, workforce levels, and inventory holding based on estimates of customer requirements and capacity limitationsService IndustryStaffing PlanRegarding staffs and labor related factorsManufacturing IndustryProduction PlanRegarding production rates and inventory
3Aggregate Production Planning (APP) Determines resource capacity to meet demandFor intermediate time horizon, 6-12 monthsNot feasible to build new facilityMay be feasible to hire/lay off workers, overtime, or subcontractAdjusting capacity OR managing demand
4How should an aggregate plan fit with other plans? Businessor annualplanProductionor staffingPlan (Aggregate Plan)MPS orworkforcescheduleFigure 14.1
5Aggregate Plan – Managerial Inputs Current machine capacitiesPlans for future capacitiesWorkforce capacitiesCurrent staffing levelOperationsCustomer needsDemand forecastsCompetition behaviorDistribution and marketingAggregateplanSupplier capabilitiesStorage capacityMaterials availabilityMaterialsCost dataFinancial conditionof firmAccounting and financeNew productsProduct design changesMachine standardsEngineeringLabor-market conditionsTraining capacityHuman resources
6Aggregate Plan – Outputs Aggressive AlternativesComplementaryProductsCompetitive PricingReactive AlternativesAggregateplanSize ofWorkforce andWorkforce AdjustmentUnits or dollarsOf Backlogs, backorders , or stockoutInventoryLevelsProductionper month(in units or $)Units or dollarssubcontracted
7Aggregate Planning Objectives Minimize Costs/Maximize ProfitsMaximize Customer ServiceMinimize Inventory InvestmentMinimize Changes in Production RatesMinimize Changes in Workforce LevelsMaximize Utilization of Plant and Equipment
8Examples of Capacity Adjustment to Meet Demand UnitsTimeProducing at a constant rate and using inventory to absorb fluctuations in demandHiring and firing workers to match demandMaintaining resources for high demand levelsIncrease or decrease working hours (overtime and undertime)Subcontracting work to other firmsUsing part-time workersProviding the service or product at a later time period (backordering)
9Planning Strategies Chase Strategies Level Strategies Mixed Strategies Match demand during the planning horizon by eitherVary workforce or vary output rateLevel StrategiesMaintain a constant workforce level or constant output rate during the planning horizonConstant workforce or constant output rateMixed StrategiesCombined several strategiesPURE STRATEGIES
10Pure Strategy Level Production Chase Demand UnitsTimeChase DemandProductionDemandUnitsTimeWhat are pros / cons of these strategies?
11TABLE 14.1 PLANNING STRATEGIES FOR AGGREGATE PLANS Possible Alternatives Possible AlternativesStrategy during Slack Season during Peak Season1. Chase #1: vary workforce Layoffs Hiring level to match demand2. Chase #2: vary output Layoffs, undertime, Hiring, overtime, rate to match demand vacations subcontracting3. Level #1: constant No layoffs, building No hiring, depleting workforce level anticipation inventory, anticipation inventory, undertime, vacations overtime, subcontracting, backorders, stockouts4. Level #2: constant Layoffs, building antici- Hiring, depleting antici- output rate pation inventory, pation inventory, over- undertime, vacations time, subcontracting, backorders, stockouts
12Aggregate Planning Costs Regular-Time CostsOvertime CostsHiring and Layoff CostsInventory Holding CostsBackorder and Stockout Costs
13Ex 1 Candy CompanyGiven the following costs and quarterly sales forecasts of a candy company, compare the two strategies:Strategy 1: Level production with constant workforce levelStrategy 2: Chase production by varying workforce levelQuarterSale Forecast (LB)SpringSummerFallWinter80,00050,000120,000150,000Hiring costFiring costInventory carrying costProduction rate per employeeBeginning workforce$100 per worker$500 per worker$0.50 per pound per quarter1000 pounds per quarter100 workers
14Transportation Method A method of LPGather all cost info into one matrixTry to obtain the lowest cost alternative
15NotationsIt = inventory at the end of period t (I0 = beginning inventory)h = holding cost per unit per period,r = regular production cost per unit,o = overtime cost per unit,u = undertime cost per units = subcontracting cost per unit,b = backordering cost per unit per periodRt = regular-time capacity in period tOt = overtime capacity in period tSt = subcontracting capacity in period tDt = forecasted demand for period tU = total unused capacities
16Tableau MethodStep 1: Put all capacities from the total capacity column into the unused capacity column. Next, put unit costs in each of the small boxesStep 2: In column 1 (period 1), allocate as much production as you can to the cell with the lowest cost but do not exceed the unused capacity in that row or the demand in that column.Step 3: Subtract your allocation from the unused capacity for the row. This quantity must never be negative.
17Tableau Method (Cont’d) Step 4: If there is still some demand left, repeat step 2, allocating as much production as possible to the cell with the next-to-lowest cost. Repeat until the demand is satisfied.Step 5: Repeat steps 2 through 4 for periods 2 and beyond. Take each column separately before proceeding to the next. Be sure to check all cells with unused capacity for the cell with the lowest cost in a column.
18Ex 2: Transportation Method Given the following costs and quarterly sales forecasts, use the transportation method to design a production plan.What is the total cost of the plan?Inventory carrying cost = $3 per unit per quarterProduction/worker = 1000 units/quarterRegular workforce = 50 workersOvertime capacity = 50,000 unitsSubcontracting capacity = 40,000 unitsRegular production cost = $50/unitOvertime production cost = $75/unitSubcontracting cost = $85/unitQuarterSale Forecast(unit)123450,000150,000200,00052,000
19Linear Programming Model (LP) Pure/Mixed Strategy: not guarantee optimal solutionLP: can get optimal solutionLP: Excel, LINGO, CPLEX, …LP Formulation**Objective functionConstraintsEx 2: Formulate LP model for Ex 1 Candy Company and Ex 2