OM4-1Aggregate Planning Chapter 14

OM4-2Aggregate Planning Planning Horizon Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months. Short range Intermediate range Long range Now2 months1 Year

OM4-3Aggregate Planning Short-range plans (Detailed plans) –Machine loading –Job assignments Intermediate plans (General levels) –Employment –Output Long-range plans –Long term capacity –Location / layout Overview of Planning Levels

OM4-4Aggregate Planning Planning Sequence Corporate strategies and policies Economic, competitive, and political conditions Aggregate demand forecasts Business Plan Production plan Master schedule Establishes production and capacity strategies Establishes production capacity Establishes schedules for specific products

OM4-5Aggregate Planning Resources –Workforce –Facilities Demand forecast Policy statements –Subcontracting –Overtime –Inventory levels –Back orders Costs –Inventory carrying –Back orders –Hiring/firing –Overtime –Inventory changes –subcontracting Aggregate Planning Inputs

OM4-6Aggregate Planning Total cost of a plan Projected levels of inventory –Inventory –Output –Employment –Subcontracting –Backordering Aggregate Planning Outputs

OM4-7Aggregate Planning Pricing Promotion Back orders New demand Demand Options

OM4-8Aggregate Planning Hire and layoff workers Overtime/slack time Part-time workers Inventories Subcontracting Capacity Options

OM4-9Aggregate Planning Aggregate Planning Strategies Maintain a level workforce Maintain a steady output rate Match demand period by period Use a combination of decision variables

OM4-10Aggregate Planning Basic Strategies Level capacity: –Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options. Chase demand: –Matching capacity to demand; the planned output for a period is the expected demand for that period.

OM4-11Aggregate 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 Techniques for Aggregate Planning

OM4-12Aggregate Planning Cumulative Graph Cumulative production Cumulative demand Cumulative output/demand Figure 14-3

OM4-13Aggregate Planning Average Inventory Average inventory Beginning Inventory + Ending Inventory 2 =

OM4-14Aggregate Planning The Sherman-Brown Chemical Company is about to finalize its aggregate capacity plan for next year. The company produces three paint products: latex interior, latex enamel, and latex stain, on a produce-to-stock basis. The production plant is located in Cleveland, Ohio, where there is an abundance of workers who perform the duties of material preparation, mixing, and canning; the principal operations of the production line. The latex carrier, pigments, cans, boxes, and other materials required to produce Sherman-Brown's products are also readily available from tried and proven suppliers in abundant quantities. The processing equipment in the production department is operated on only one shift because Sherman-Brown's management bought out a competitor last year, and so an excess of machine capacity is available. Similarly, ample warehouse space for holding finished-goods inventory is available. Aggregate Planning: Problem 1

OM4-15Aggregate Planning The capacity situation at Sherman-Brown is this: Because the only limiting factor in capacity planning is the size of the work force, the only production capacity issue to be resolved is determining the number of workers to be employed during each time period to support the sales forecasts of the three paint products. Two plans for providing production capacity are currently being considered by Sherman-Brown's plant manager: (1) level production and (2) matching capacity with demand. These two alternatives must be evaluated in terms of which plan results in the lowest total annual cost while considering three elements of cost: (1) cost of hiring workers from time period to time period over the entire year, (2) cost of laying off workers over the same period, (3) cost of carrying the finished- goods inventory for the entire year. Aggregate Planning: Problem 1 (cont.)

OM4-16Aggregate Planning The pertinent data for this analysis are: working days per quarter: 65; labor standard per gallon for all types of paint: worker-hours per gallon; working hours per shift: 8 hours per shift per worker; maximum machine capacity on one shift: 100,000 gallons per quarter for all types of paint; annual hiring cost per worker: $250; annual layoff cost per worker: $300; annual inventory carrying cost: $5 per gallon per year. Assume that the pattern of quarterly demand repeats from year to year and that the beginning inventory is zero. Aggregate Planning: Problem 1 (cont.)

OM4-17Aggregate Planning The key analyses that must be performed by Sherman-Brown in developing an aggregate capacity plan are: 1. Develop an aggregate demand forecast from the three individual product forecasts. 2. Compare the two alternatives for providing production capacity in the number of workers hired, the number of workers laid off, and the average finished-goods inventory levels for the entire year. 3. Develop an analysis of the two alternatives for providing production capacity in terms of their impact on worker employment levels and finished-goods inventories. 4. Select the capacity plan alternative with the lowest annual cost. Aggregate Planning: Problem 1 (cont.)

OM4-18Aggregate Planning Aggregate Planning: Problem 1

OM4-19Aggregate Planning Working Days per Quarter per Worker: 65 Number of Hours per day: 8 Labor Standard: Number of workers = Output per Quarter * Labor Standard_________ Working Days per Quarter per Worker * Number of Hours per Day Aggregate Planning: Problem 1 Solution

OM4-20Aggregate Planning Aggregate Planning: Problem 1 Solution

OM4-21Aggregate Planning Aggregate Planning: Problem 1 Solution

OM4-22Aggregate Planning Carrying Cost: $5 per gallon per year Hiring Cost: $250 per worker Layoff Cost: $300 per worker Aggregate Planning: Problem 1 Solution

OM4-23Aggregate Planning Aggregate Planning: Problem 1 Solution

OM4-24Aggregate Planning T he Sherman-Brown Chemical Company has been considering keeping only enough workers employed on straight time per quarter to produce 40,000 gallons. Either subcontracting or overtime would be used to supply the difference between the straight-time production capacity of 40,000 gallons per quarter and the highly variable quarterly demand. Sherman-Brown will finish the materials and has a quote from a subcontractor for a price of $19.50 per gallon for each gallon supplied, and the subcontractor has guaranteed that it could supply up to 20,000 gallons a quarter. Sherman-Brown's labor union is willing to work as much overtime as necessary to avoid the use of the subcontractor. The cost of overtime pay is $9.50 per hour of overtime worked. Compute the overtime cost and the subcontracting cost per quarter for the two aggregate plans. Aggregate Planning: Problem 2

OM4-25Aggregate Planning Cost of Overtime Pay: $9.50 per hour of overtime Cost of Subcontracting: $19.50 per gallon Labor Standard: worker hours per gallon Aggregate Planning: Problem 2 Solution

OM4-26Aggregate Planning Aggregate Planning: Problem 2 Solution

OM4-27Aggregate Planning Mathematical Techniques Linear programming: Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization. Linear decision rule: Optimizing technique that seeks to minimize combined costs, using a set of cost-approximating functions to obtain a single quadratic equation.

OM4-28Aggregate Planning Summary of Planning Techniques

OM4-29Aggregate Planning Services occur when they are rendered Demand for service can be difficult to predict Capacity availability can be difficult to predict Labor flexibility can be an advantage in services Aggregate Planning in Services

OM4-30Aggregate Planning 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. Disaggregating

OM4-31Aggregate Planning Master Scheduling Process Master Scheduling Beginning inventory Forecast Customer orders Inputs Outputs Projected inventory Master production schedule Uncommitted inventory Figure 14-5

OM4-32Aggregate Planning Projected On-hand Inventory Beginning Inventory Customer orders are larger than forecast in week 1 Forecast is larger than Customer orders in week 2 Forecast is larger than Customer orders in week 3 Figure 14-8

OM4-33Aggregate Planning Time Fences in MPS Period frozenfirmfullopen Figure