14 – Aggregate Planning Responsibility Planning tasks and horizon Determining the quantity and timing of production for the intermediate future (3 – 18 months)
14 – Relationships of the Aggregate Plan Aggregate Plan for Production Demand Forecasts, orders Master Production Schedule, and MRP systems Detailed Work Schedules External Capacity Subcontractors Inventory On Hand Raw Materials Available Work Force Marketplace and Demand Research and Technology Product Decisions Process Planning & Capacity Decisions
14 – Aggregate Planning Requires Logical overall unit for measuring sales and outputs Forecast of demand for intermediate planning period in these aggregate units Management policy constraints Method for determining costs* Model that combines forecasts and costs so that planning decisions can be made* * Discussed in more detail in our next class.
14 – Aggregation Clustering goods or services that have similar demand requirements and common processing, labor, and materials requirements: Individual 1040’s Trust returns Small business returns Tax planning Estate planning # returns – or – # forms – or – # hours # clients – or – # consultations – or – # hours $
14 – Aggregate Planning Strategies Level Strategy Chase Strategy Production capacity varies to equal demand Inventory is reduced to zero or safety stock Level – inventory Level– utilization Mixed Strategy Production capacity remains constant (level) Production Output + Inventory equals demand
14 – Chase Strategy Often called Hiring/Firing Strategy Production or Service Level = Demand Minimal inventory = zero or Safety Stock No increase in inventory beyond minimal level Use up any excess inventory first Full-time employees do not build more than needed per period
14 – Level-Inventory Strategy Requires a manufacturing situation (inventory!) Constant workforce during plan Lays off excess workforce or hires additional workforce at beginning of plan to achieve the required level for the plan Production or Service Level Average Demand Anticipation inventory used to satisfy difference when peak demand exceeds regular workforce capacity. Inventory level built up during low demand periods Minimal inventory level = zero or Safety Stock (except when needed to avoid backlog) Full-time employees do not build more than needed for the plan.
14 – Level-Utilization Strategy Required for services (no inventory!), but can also be effective for manufacturing situations Constant workforce during plan Lays off excess workforce or hires additional workforce at beginning of plan to achieve the required level for the plan Overtime used when peak demand exceeds regular workforce capacity Significant undertime when demand is low Minimal inventory level = zero or Safety Stock (except when needed to avoid backlog) No production to increase inventory beyond minimal level Use up any excess inventory first Full-time employees do not build more than needed
14 – Constraints and Costs Regular-Time Costs Overtime/Undertime* Costs Hiring and Layoff Costs Includes costs of advertising jobs, interviews, training, exit interviews, severance pay, and lost productivity Inventory Holding Costs Backorder and Stockout Costs Material Costs Capacity/inventory limitations Unit production costs (cost of plan/units produced) *Be sure to not add undertime costs to regular-time costs since they are a part of regular-time costs.
14 – Basic Steps for Aggregate Planning Forecast the demand for each period Determine the capacity required for regular time, overtime, and subcontracting, for each period Determine the labor costs, hiring and firing costs, and inventory holding costs Consider company policies (constraints) which may apply to the workers, production volume, or stock levels Develop alternative plans, and compare their total costs
14 – Determining Production Capacity for a Level Strategy Depends on: Demand pattern Backlog/Stockout strategy Minimal inventory level (safety stock) Operating constraints (max capacity and/or max inventory) Simple average method Lower average inventory, may need overtime during peak demand Cumulative average demand method Higher inventory levels required, can avoid need for overtime
14 – Graphical Approach Production rate per working day Jan Feb Mar Apr May Jun Forecast Demand Level-inventory = production using average monthly forecast demand
14 – But what if demand pattern is reversed? Production rate per working day Jan Feb Mar Apr May Jun Forecast Demand Level-inventory = production using cumulative average monthly forecast demand