2 Contents 1- What is aggregation? 2- What is aggregate production planning?3- Importance of aggregate planning4- Aggregate planning inputs+ outputs5- Aggregate planning in services6- Matching capacity and demand7- Aggregate planning strategies8- Example of aggregate planning
4 What is aggregation?Aggregation refers to the idea of focusing on overall capacity, rather than on individual products or services, or bringing together under one plan, groupings of related products or services.For services :For services, aggregate planning refers to determining a staffing plan based on the following:The scheduling of staff to meet or exceed customer service needsCapacity requirements (machines, facility)For manufacturing:aggregate planning refers to determining a production plan based on the following:Work force levels - the number of workers required for productionProduction rates - the number of units produced per time periodInventory levels - the balance of unused units carried forward from the previous period.
5 What is aggregation?Aggregation is done according to: products, labour, & time:ProductsA product family (or product archetype) is a group of products that are manufactured similarlyHave common labor and material requirementsDo not focus on details, but on broad product familiesLaborUsually a specific plant is devoted to a given product familyTimeHow often should an aggregate plan be updated?Disruption versus sudden demand changes and/or seasonality
7 What is the aggregate production planning? 1- A “big picture” approach that does not focus on individual products or services. Instead, the focus is on groups of similar products of an entire product line. (Examples:- total number of bikes produced, and total number of customers served).2- Medium-term capacity planning over a two to eighteen month planning horizon. It involves determining the lowest-cost method of providing the adjustable capacity for meeting production requirements.3- An intermediate planning method used to determine the necessary resource capacity a firm will need in order to meet its expected demand4- Process by which a company determines levels of capacity, production, subcontracting, inventory, stockouts, and pricing over a specified time horizon.5- Process that translates annual business & marketing plans & demand forecasts into a production plan for all products in a plant or facility.Focus on quantity and timing of expected demand (forecast)Start with multiple plans and choose the most appropriate one depending on revenue, market share, and Inventory targets
10 Why aggregate planning is necessary? Operations and supply chain managementTo ensure that Operations is prepared to meet customer needsShould make-buy decisions be changed?Contracts for raw materials and partsLabor requirementsInventory levelsMarketingTo ensure that the company's capacity will be used in the most profitable way, considering market constraintsIf there is not enough capacity, which products or customers will have priority?If there is more capacity than needed, how can the firm sell more?The aggregate operations plan and the sales Plan must be consistentAccounting and FinanceTo have an accurate budget for operationsTo ensure adequate cash flow for operationsYear-end inventory levels affect earnings forecastsHuman resources managementIf more workers will be needed, plan for hiring and trainingIf fewer workers are needed, plan for layoffs
12 Aggregate planning inputs A forecast of aggregate demandcovering the selected planning horizon (6-18 months)Constraints:limits on overtime, layoffs, capital available, stockouts or backlogs, company policy, financial constraints, capacity constraintsThe alternative means availableto adjust short- to medium-term capacity, to what extent each alternative could impact capacity and the related costsProduction costs:-labor costs, regular time ($/hr) and overtime ($/hr)subcontracting costs ($/hr or $/unit)cost of changing capacity: hiring or layoff ($/worker) and cost of adding or reducing machine capacity ($/machine)Stockout or backlog cost ($/unit/period)
13 Aggregate planning outputs Total cost of a planProduction quantity from regular time, overtime, and subcontracted time: used to determine number of workers and supplier purchase levelsInventory held: used to determine how much warehouse space and working capital is neededBacklog/stockout quantity: used to determine what customer service levels will beMachine capacity increase/decrease: used to determine if new production equipment needs to be purchasedIn brief outputs are the projected levels of :Monthly productioninventoryEmployment (size of work force)SubcontractingBackordering, and the costs of all these components
15 Aggregate planning in services -Intangible products can’t be inventoriedPossible approaches:-Try to proactively shift demand away from peaksUse overtime or subcontracting to handle peaksAllow lost salesCross train people to increase effective capacityDifficultiesServices can not be inventoriedDemand is difficult to predictCapacity is difficult to predictService capacity must be provided at appropriate time and placeLabor is most constraining resourceDemand is perishableInput is highly variable
19 Strategies for modifying capacity After existing and future capacity requirements are assessed, alternative ways of modifying capacity must be identified.Short-term Responses:For short-term periods of up to one year, fundamental capacity is fixed.Major facilities are seldom opened or closed on a regular monthly or yearly basis.Many short-term adjustments for increasing or decreasing capacity are possible,
20 Temporary capacity changes TypeActionInventoriesStock pile finished goods during slack periods to meet later demand.BacklogsDuring peak demand periods, ask willing customers to wait some time before receiving their product. File their order and fulfill it after the peak demand periodEmployment levelsHire additional employees or layoff employees as demand for output increases and decreases.Work force utilizationHave employees work overtime during peaks and be idle or work fewer hours during slack demand periodsEmployees trainingInstead of having each employee specialize in one task, train each in several tasks. Then, as skill requirements change, rotate employees among different tasks. This is an alternative to hiring and layoffs for getting needed skills.Process designChange the job content at each workstation to increase productivity~ Use work methods analysis to redesign-jobs.SubcontractingDuring peak periods, hire other firms temporarily to make the product or some of its subcomponents
21 Capacity (aggregate) options - advantages & disadvantages Some CommentsChanging inventory levelsChanges in human resources are gradual, not abrupt productionchangesInventoryholding costs; Shortages may result in lost salesApplies mainly to production , not serviceoperationsVaryingworkforce size by hiring or layoffsAvoids use of other alternativesHiring, layoff and training costsUsed where size of labor pool is largeproduction rates through overtime or idle timeMatches seasonal fluctuations without hiring/training costsOvertime premiums, tired, workers, may not meet demandAllows flexibility withinthe aggregate planSubcontractingPermits flexibility and smoothing of the firm's outputLoss of quality control; reduced profits; loss of future businessApplies mainly in production settings
22 Capacity (aggregate) options - advantages & disadvantages Some CommentsUsing part-time workersLess costly and more flexible than full-time workersHigh turnover/training costs; quality suffers; scheduling difficultGood forunskilled jobs in areas with large temporary labor poolsInfluencingDemandTries to use excess capacity. Discounts draw new customersUncertainty indemand. Hard to match demand to supply exactlyCreates marketing ideas.Overbooking used in some businesses.Back ordering during high- demand periodsMay avoid overtime. Keeps capacity constantCustomer must be willing to wait, but goodwill is lostMany companies backlog.Counterseasonal products and service mixingFully utilizesresources; allows stable workforceMay require skills or equipmentoutside a firm's areas of expertiseRisky finding products or services with opposite demand patterns.
23 STRATGIES FOR MODIFYING CAPACITY Long-term Responses:The costs, benefits, and risks of expansion pose an interesting decision problem.By building the entire addition now, the company avoids higher building costs, the risk of accelerated inflation (and even higher future construction costs), and the risk of losing additional future business because of inadequate capacity.But there may also be disadvantages to this alternative:-First: the organization may not be able to muster the financial investment.Second: if the organization expands now, it may find later that its demand forecasts were incorrect; if ultimate demand is lower than expected, the organization has overbuilt.Finally, even if forecasted demand is accurate, it may not fully materialize until the end of the planning horizon. If so, the organization will have invested in an excess-capacity facility on which no return is realized for several years. Since funds could have been invested in other ways, the organization has forgone the opportunity of earning returns elsewhere on its investment
25 DEMAND STRATEGIES 1- Development of countercyclic but similar products Regardless of the capacity expansion strategy used, a company will almost always benefit if it can satisfy the same total demand using less investment in capacity.A primary cause of underutilized capacity is short-term fluctuations in demand. Some products are highly seasonal, so that demand is very large during certain months of the yea days of the week, or even times of the day.If the capacity of the production system is designed to meet the maximum demand rates, a substantial amount of the capacity is unused during low-demand periods. Here we present strategic actions that can reduce a company's investment in production capacity without harming its ability to satisfy customer demand .Here we will discuss some the following strategies:1- Development of countercyclic but similar products2- Differential pricing and product promotion3- Capacity sharing
27 Aggregate Planning Strategies – main questions Should inventories be used to absorb changes in demand during planning period?Should demand changes be accommodated by varying the size of the workforce?Should part-timers be used, or should overtime and/or machine idle time be used to absorb fluctuations?Should subcontractors be used on fluctuating orders so a stable workforce can be maintained?Should prices or other factors be changed to influence demand?
28 Aggregate Planning Strategies Three basic production strategies :- chase strategy,- level strategy, and- mixed production strategy
29 Extremes strategies Level Strategy Chase Strategy Production equals demandProduction rate is constant
30 Aggregate planning pure strategy Level ProductionProductionDemandUnitsTimeChase DemandProductionDemandUnitsTime
31 Chase Strategy - Works well for make-to-order firms - Adjusts capacity to match the demand pattern. Firm hires & lays off workers to match production to demand. Workforce fluctuates but finished goods inventory remains constant.- Works well for make-to-order firmsProduces exactly what is needed each periodSets labor/equipment capacity to satisfy period demands
32 Level strategy . Works well for make-to-stock manufacturing firms. Relies on a constant output rate & capacity (Workforce levels )while varying inventory & backlog levels according to fluctuating demand pattern.. Works well for make-to-stock manufacturing firms.Sets capacity to accommodate average demandProduce same amount alwaysKeep work force level constantVary non-work force capacity or demandOften results in lowest production costsMaintaining a steady rate of regular-time output while meeting variations in demand by a combination of options.
33 Production planning techniques Linear ProgrammingLinear Decision RuleComputer SimulationSearch Decision (Computer heuristic model)Tableau Method (transportation method)Trial and ErrorCosting out the production alternatives and choosing the one with the lowest cost.33
34 Developing the Aggregate Plan Step 1- Choose strategy: level, chase, or hybridStep 2- Determine the aggregate production rateStep 3- Calculate the size of the workforceStep 4- Test the plan as follows:Calculate Inventory, expected hiring/firing, overtime needsCalculate total cost of planStep 5- Evaluate performance: cost, service, human resources, and operations