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Supply Chain Management (SCM) Aggregate Planning Dr. Husam Arman 1.

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Presentation on theme: "Supply Chain Management (SCM) Aggregate Planning Dr. Husam Arman 1."— Presentation transcript:

1 Supply Chain Management (SCM) Aggregate Planning Dr. Husam Arman 1

2 Today’s Outline  Introduction  Hierarchy of production planning decisions  Overview of the Aggregate Planning Problem  Planning relationship  Prototype example:  Chase strategy / Constant workforce plan / mix strategies / LP 2

3 Aggregate Planning: introduction  Macro and micro planning decisions  Macro: planning workforce, production levels  Micro: what job do we work on today  Aggregate planning addresses the problem of determining the workforce levels to meet certain production requirements (produce what, when and how much forecast demand)  Competing objectives  React quickly to changes: hire & fire workers (smoothing)  Stability (stable workforce) build up of inventory during low demand periods minimize inventory  Maximize profit, under capacity restrictions  Key concept: manage groups of items rather than single items – aggregate units of production 3

4 Hierarchy of production planning decisions 4 Forecast of aggregate demand for t period horizon Aggregate Production Plan Determination of aggregate production and workforce levels for t period planning horizon Master Production Schedule Production levels by item by time period Materials Requirements Planning System Detailed timetable for production and assembly of components and subassemblies

5 Aggregate units of production  Aggregate planning assumes the existence of aggregate units of production ‘Average unit’ (in case types of items are similar) Aggregate units in terms of weights (tons of steel), volume, amount of work required sales ₤ volume …for different types of items Families: Group of items that share a common manufacturing setup cost; i.e., they have similar production requirements. Aggregate Unit: A fictitious item representing an entire product family. Aggregate Unit Production Requirements: The amount of (labor) time required for the production of one aggregate unit. 5

6 Computing the Aggregate Unit Production Requirements - example Aggregate unit labor time = (.32)(4.2)+(.21)(4.9)+(.17)(5.1)+(.14)(5.2)+ (.10)(5.4)+(.06)(5.8) = hrs

7 Overview of the aggregate planning problem  What do we need?  Demand (aggregate forecasts): assumption ‘known’  Aggregate units: considered ‘available’  Planning horizon (6-12 months)  Costs  Constraints (e.g. bottlenecks, max capacity etc) 7

8 Planning RelationshipsBusiness or annual plan

9 Planning RelationshipsBusiness or annual plan Production or staffing plan

10 Planning Relationships MPS or workforce scheduleBusiness or annual plan Production or staffing plan

11 Planning Relationships MPS or workforce schedule Business or annual plan Production or staffing plan

12 Planning Relationships MPS or workforce schedule Business or annual plan Production or staffing plan

13 Managerial Inputs Supplier capabilities Storage capacity Materials availability Materials Current machine capacities Plans for future capacities Workforce capacities Current staffing level Operations New products Product design changes Machine standards Engineering Labor-market conditions Training capacity Human resources Cost data Financial condition of firm Accounting and finance Aggregate plan Customer needs Demand forecasts Competition behavior Distribution and marketing

14 Aggregate Planning Objectives Minimize Costs/Maximize Profits Maximize Customer Service Minimize Inventory Investment Minimize Changes in Production Rates Minimize Changes in Workforce Levels Maximize Utilization of Plant and Equipment

15 Why Aggregate Planning Is Necessary Fully load facilities & minimize overloading and underloading Make sure enough capacity is available to satisfy expected demand Plan for orderly & systematic change of production capacity to meet peaks & valleys of expected customer demand Get most output for amount of resources available

16 Given the demand forecast for each period in the planning horizon, we can determine the production level, inventory level, and the capacity level for each period that maximizes the firm’s (supply chain’s) profit over the planning horizon All supply chain stages should work together on an aggregate plan that will optimize supply chain performance Role of Aggregate Planning in a Supply Chain

17 Inputs A forecast of aggregate demand covering selected planning horizon (6-18 months) Alternative means available to adjust short- to medium-term capacity, to what extent each alternative could impact capacity & related costs Current status of system in terms of workforce level, inventory level & production rate

18 Outputs Production plan: aggregate decisions for each period in planning horizon about – workforce level – inventory level – production rate Projected costs if production plan was implemented

19 Pure Strategies for Informal Approach Matching Demand (Chase Strategy) Level Capacity – Buffering With Inventory – Buffering With Backlog – Buffering With Overtime or Subcontracting

20 Matching Demand Strategy Capacity (production) in each time period is varied to exactly match forecasted aggregate demand in that time period Capacity is varied by changing workforce level Finished-goods inventories are minimal Labor & materials costs tend to be high due to frequent changes

21 Chase Demand Demand Units Time Production

22 Developing & Evaluating the Matching Production Plan Production rate is dictated by forecasted aggregate demand Convert forecasted aggregate demand into required workforce level using production time information Primary costs of this strategy are costs of changing workforce levels from period to period, i.e.., hirings & layoffs

23 Level Capacity Strategy Capacity (production rate) is held level (constant) over planning horizon Difference between constant production rate & demand rate is made up (buffered) by inventory, backlog, overtime, part-time labor and/or subcontracting

24 Level Production Demand Units Time Production

25 Developing & Evaluating Level Production Plan Assume that amount produced each period is constant, no hiring or layoffs Gap between amount planned to be produced & forecasted demand is filled with either inventory or backorders, i.e., no overtime, no idle time, no subcontracting Primary costs of this strategy are inventory carrying & backlogging costs

26 Aggregate Planning Strategies Possible Alternatives Strategyduring Slack Seasonduring Peak Season 1.Chase #1: vary workforceLayoffsHiring level to match demand 2.Chase #2: vary output Layoffs, undertime,Hiring, overtime, rate to match demand vacations subcontracting 3.Level #1: constant No layoffs, buildingNo hiring, depleting workforce level anticipation inventory, anticipation inventory, undertime, vacations overtime, subcontracting, backorders, stockouts 4.Level #2: constantLayoffs, building antici-Hiring, depleting antici- output rate pation inventory, pation inventory, over- undertime, vacations time, subcontracting, backorders, stockouts

27 Aggregate Planning Process Figure 14.3 Determine requirements for planning horizon Identify alternatives, constraints, and costs Prepare prospective plan for planning horizon Move ahead to next planning session Implement and update the plan Is the plan acceptable? No Yes

28 Aggregate Planning Costs  Regular-time Costs  Overtime Costs  Hiring and Layoff Costs  Inventory Holding Costs  Backorder and Stockout Costs

29 Pure Strategies Hiring cost= $100 per worker Firing cost= $500 per worker Inventory carrying cost= $0.50 pound per quarter Inventory carrying cost= $0.50 pound per quarter Regular production cost per pound= $2.00 Regular production cost per pound= $2.00 Production per employee= 1,000 pounds per quarter Production per employee= 1,000 pounds per quarter Beginning work force= 100 workers Beginning work force= 100 workers QUARTERSALES FORECAST (LB) Spring80,000 Summer50,000 Fall120,000 Winter150,000 Example:

30 Level Production Strategy Level production = 100,000 pounds (50, , , ,000) 4 Spring80,000100,00020,000 Summer50,000100,00070,000 Fall120,000100,00050,000 Winter150,000100, ,000140,000 Cost of Level Production Strategy (400,000 X $2.00) + (140,00 X $.50) = $870,000 SALESPRODUCTION QUARTERFORECASTPLANINVENTORY

31 Chase Demand Strategy Spring80,00080, Summer50,00050, Fall120,000120, Winter150,000150, SALESPRODUCTIONWORKERSWORKERSWORKERS SALESPRODUCTIONWORKERSWORKERSWORKERS QUARTERFORECASTPLANNEEDEDHIREDFIRED Cost of Chase Demand Strategy (400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

32 Mixed Strategy Combination of level production and chase demand strategies Examples of management policies – no more than x% of the workforce can be laid off in one quarter – inventory levels cannot exceed x dollars Many industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time

33 General Linear Programming (LP) Model LP gives an optimal solution, but demand and costs must be linear Let – Wt = workforce size for period t – Pt =units produced in period t – It =units in inventory at the end of period t – Ft =number of workers fired for period t – Ht = number of workers hired for period t

34 LP MODEL Minimize Z =$100 (H 1 + H 2 + H 3 + H 4 ) + $500 (F 1 + F 2 + F 3 + F 4 ) + $0.50 (I 1 + I 2 + I 3 + I 4 ) + $2 (P 1 + P 2 + P 3 + P 4 ) Subject to P 1 - I 1 = 80,000(1) DemandI 1 + P 2 - I 2 = 50,000(2) constraintsI 2 + P 3 - I 3 = 120,000(3) I 3 + P 4 - I 4 = 150,000(4) Production1000 W 1 = P 1 (5) constraints1000 W 2 = P 2 (6) 1000 W 3 = P 3 (7) 1000 W 4 = P 4 (8) H 1 - F 1 = W 1 (9) Work forceW 1 + H 2 - F 2 = W 2 (10) constraintsW 2 + H 3 - F 3 = W 3 (11) W 3 + H 4 - F 4 = W 4 (12)

35 Other Quantitative Techniques Linear decision rule (LDR) Search decision rule (SDR) Management coefficients model

36 Hierarchical Nature of Planning Disaggregation: process of breaking an aggregate plan into more detailed plans Items Product lines or families Individual products Components Manufacturing operations Resource Level Plants Individual machines Critical work centers Production Planning Capacity Planning Resource requirements plan Rough-cut capacity plan Capacity requirements plan Input/ output control Sales and Operations Plan Master production schedule Material requirements plan Shop floor schedule All work centers

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