Aggregate Planning

Learning Objectives Explain what aggregate planning is and how it is useful. Identify the variables decision makers have to work with in aggregate planning and some of the possible strategies they can use. Describe some of the graphical and quantitative techniques planners use. Prepare aggregate plans and compute their costs.

Planning Horizon Aggregate planning: Intermediate-range capacity planning, usually covering 2-3 to 12-18 months. Short range Intermediate range Long range Now 2 or 3 months 12 or 18 months

Aggregate Planning Goals Meet demand maximize customer service Use capacity efficiently (minimize changes in workforce Meet inventory policy minimize inventory Minimize cost maximize profit Labor Inventory Plant & equipment Subcontract Backorder / stockout costs At this point, we are making the decisions as to “how” we will meet the aggregate schedules, and “when” each major task with be performed.

Establishes schedules Planning Sequence Economic, competitive, and political conditions Corporate strategies and policies Aggregate demand forecasts Establishes operations and capacity strategies Business Plan Establishes operations capacity Aggregate plan Establishes schedules for specific products Master schedule

Linkages Marketing: Accounting and Finance: Human resources when will products be available ? Lead times ? Excess inventory (good time for a sale?) Accounting and Finance: cash flows- will we be making more than we are selling? do we have to finance inventory? when will suppliers need to be paid? Human resources timing of hiring, firing and training Information Systems what to track linkages to other supply chain members

Aggregate Planning Inputs Resources Workforce/production rates Facilities & equipment Demand forecast Policies of workforce Subcontracting Overtime Back orders Costs Inventory carrying Back orders Hiring/firing Overtime Inventory changes Subcontracting

Aggregate Planning Outputs Total cost of a plan Projected levels of inventory Inventory Output Employment Subcontracting Backordering

Aggregate Planning Strategies Level Strategy Chase Strategy Mixed Strategy Production equals demand Production rate is constant It may be helpful to stress that the extremes depicted above are the opposite ends of a continuum.

Examples of Pure Chase and Pure Level Strategies

Aggregate Planning Strategies Level capacity strategy: Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options. Chase demand strategy: Matching capacity to demand; the planned output for a period is set at the expected demand for that period.

Level Strategy Maintain stable machine capacity and workforce levels with a constant output rate Shortages and surpluses result in fluctuations in inventory levels over time Inventories that are built up in anticipation of future demand or backlogs are carried over from high to low demand periods Better for worker morale Large inventories and backlogs may accumulate Should be used when inventory holding and backlog costs are relatively low

Techniques for Aggregate Planning Determine demand for each period Determine capacities for each period Identify policies that are pertinent Determine units costs Develop alternative plans and costs Select the best plan that satisfies objectives. Otherwise return to step 5.

Mathematical Techniques Cumulative Graph Average Inventory Mathematical Techniques Linear programming Simulation models

Examples

Controlling the Cost of Labor in Service Firms Seek: Close control of labor hours to ensure quick response to customer demand On-call labor resource that can be added or deleted to meet unexpected demand Flexibility of individual worker skills to permit reallocation of available labor Flexibility of individual worker in rate of output or hours of work to meet demand Discuss how the “control of labor costs” can be linked to measures of efficiency in performance of the overall service.

Yield Management The aggregate planning process of allocating resources to customers at prices that will maximize yield (revenue) Used where businesses have: perishable inventory service or product can be sold in advance demand fluctuates capacity is relatively fixed demand can be segmented variable costs are low and fixed costs are high Examples – airlines, hotels, cruise lines, etc.

Making Yield Management Work Multiple pricing structures must be feasible and appear logical Manage forecasts of use and duration of use Manage the changes in demand.

Disaggregating the aggregate plan Aggregate Planning Disaggregation Master Schedule For a short planning range 2-4 months: Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon. Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.

Master Scheduling Master schedule: Master Scheduler: Determines quantities needed to meet demand Interfaces with Marketing Capacity planning Production planning Distribution planning Master Scheduler: Evaluates impact of new orders Provides delivery dates for orders Deals with problems Production delays Revising master schedule Insufficient capacity

Master Scheduling Process Beginning inventory Forecast Customer orders Inputs Outputs Projected inventory Master production schedule Uncommitted inventory

“slushy” somewhat firm Time Fences in MPS Period 1 2 3 4 5 6 7 8 9 “frozen” (firm or fixed) “slushy” somewhat firm “liquid” (open)

Summary Aggregate planning reconciles conflicting needs and objectives Aggregate plan specifies time-phased production rates, workforce levels and inventory holdings Aggregation: products / services are grouped into families labor may be grouped along family lines or by skills time may be aggregated (quarters, etc.) Two basic planning options: changing capacity and changing demand Aggregate planning strategies: Level – constant workforce or production level Chase – vary production to equal demand