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 to 12 months. Short range Intermediate range Long range Now 2 months 1 Year

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

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

Aggregate Planning Begin with forecast of aggregate demand Forecast intermediate range General plan to meet demand by setting Output levels Employment Finished goods inventory level Production plan is the output of aggregate planning Update plan periodically – rolling planning horizon always covers the next 12 – 18 months

Aggregate Planning Inputs Resources Workforce Facilities Demand forecast Policies Subcontracting Overtime Inventory levels Back orders/Backlog Costs Inventory carrying Back orders Hiring/firing Overtime Inventory changes Subcontracting

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

Aggregate Planning Strategies Proactive Alter demand to match capacity Reactive Alter capacity to match demand Mixed Some of each

Demand Options Pricing Promotion Back orders New demand

Capacity Options Hire and layoff workers Overtime/slack time Part-time workers Inventories Subcontracting

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

Basic Strategies Level capacity strategy: Chase demand 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 Approach Advantages Disadvantages Stable output rates and workforce Disadvantages Greater inventory costs Increased overtime and idle time Resource utilizations vary over time

Chase Approach Advantages Disadvantages Investment in inventory is low Labor utilization in high Disadvantages The cost of adjusting output rates and/or workforce levels

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.

Number of production days Planning Example 1 Month Expected Demand Production Days Demand Per Day (computed) Jan 900 22 41 Feb 700 18 39 Mar 800 21 38 Apr 1,200 57 May 1,500 68 June 1,100 20 55 6,200 124 Average requirement = Total expected demand Number of production days = = 50 units per day 6,200 124

Level production using average monthly forecast demand Planning Example 1 Forecast demand 70 – 60 – 50 – 40 – 30 – 0 – Jan Feb Mar Apr May June = Month       22 18 21 21 22 20 = Number of working days Production rate per working day Level production using average monthly forecast demand

Planning Example 1 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit

Planning Example 1 Month Production at 50 Units per Day Demand Forecast Monthly Inventory Change Ending Inventory Jan 1,100 900 +200 200 Feb 700 400 Mar 1,050 800 +250 650 Apr 1,200 -150 500 May 1,500 -400 100 June 1,000 -100 1,850 Cost Information Inventory carry cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Total units of inventory carried over from one month to the next = 1,850 units Workforce required to produce 50 units per day = 10 workers Table 13.3

Planning Example 1 Month Production at 50 Units per Day Demand Forecast Monthly Inventory Change Ending Inventory Jan 1,100 900 +200 200 Feb 700 400 Mar 1,050 800 +250 650 Apr 1,200 -150 500 May 1,500 -400 100 June 1,000 -100 1,850 Costs Calculations Inventory carrying $9,250 (= 1,850 units carried x $5 per unit) Regular-time labor 49,600 (= 10 workers x $40 per day x 124 days) Other costs (overtime, hiring, layoffs, subcontracting) Total cost $58,850 Cost Information Inventory carry cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Total units of inventory carried over from one month to the next = 1,850 units Workforce required to produce 50 units per day = 10 workers Table 13.3

Reduction of inventory Planning Example 1 Cumulative demand units 7,000 – 6,000 – 5,000 – 4,000 – 3,000 – 2,000 – 1,000 – – Jan Feb Mar Apr May June Reduction of inventory Cumulative level production using average monthly forecast requirements Cumulative forecast requirements Excess inventory

Demand Per Day (computed) Planning Example 2 Month Expected Demand Production Days Demand Per Day (computed) Jan 900 22 41 Feb 700 18 39 Mar 800 21 38 Apr 1,200 57 May 1,500 68 June 1,100 20 55 6,200 124 Minimum requirement = 38 units per day

Level production using lowest monthly forecast demand Planning Example 2 Forecast demand 70 – 60 – 50 – 40 – 30 – 0 – Jan Feb Mar Apr May June = Month       22 18 21 21 22 20 = Number of working days Production rate per working day Level production using lowest monthly forecast demand

Planning Example 2 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit

Planning Example 2 In-house production = 38 units per day x 124 days Cost Information Inventory carry cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit In-house production = 38 units per day x 124 days = 4,712 units Subcontract units = 6,200 - 4,712 = 1,488 units

Planning Example 2 In-house production = 38 units per day x 124 days Cost Information Inventory carry cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit In-house production = 38 units per day x 124 days = 4,712 units Subcontract units = 6,200 - 4,712 = 1,488 units Costs Calculations Regular-time labor $37,696 (= 7.6 workers x $40 per day x 124 days) Subcontracting 14,880 (= 1,488 units x $10 per unit) Total cost $52,576 Table 13.3

Demand Per Day (computed) Planning Example 3 Month Expected Demand Production Days Demand Per Day (computed) Jan 900 22 41 Feb 700 18 39 Mar 800 21 38 Apr 1,200 57 May 1,500 68 June 1,100 20 55 6,200 124 Production = Expected Demand

Forecast demand and monthly production Planning Example 3 70 – 60 – 50 – 40 – 30 – 0 – Jan Feb Mar Apr May June = Month       22 18 21 21 22 20 = Number of working days Production rate per working day Forecast demand and monthly production

Planning Example 3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit

Planning Example 3 Cost Information Inventory carrying cost Month Forecast (units) Daily Prod Rate Basic Production Cost (demand x 1.6 hrs/unit x $5/hr) Extra Cost of Increasing Production (hiring cost) Extra Cost of Decreasing Production (layoff cost) Total Cost Jan 900 41 $ 7,200 — Feb 700 39 5,600 $1,200 (= 2 x $600) 6,800 Mar 800 38 6,400 $600 (= 1 x $600) 7,000 Apr 1,200 57 9,600 $5,700 (= 19 x $300) 15,300 May 1,500 68 12,000 $3,300 (= 11 x $300) June 1,100 55 8,800 $7,800 (= 13 x $600) 16,600 $49,600 $9,000 $9,600 $68,200 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Table 13.3

Comparison of Three Plans Cost Plan 1 Plan 2 Plan 3 Inventory carrying $ 9,250 $ 0 Regular labor 49,600 37,696 Overtime labor Hiring 9,000 Layoffs 9,600 Subcontracting Total cost $58,850 $52,576 $68,200 Plan 2 is the lowest cost option

Cumulative Graph 1 2 3 4 5 6 7 8 9 10 Cumulative production demand Cumulative output/demand

Average Inventory Average Beginning Inventory + Ending Inventory 2 =

Aggregate Plan to Master Schedule Aggregate Planning Dis-aggregation Master Schedule

Disaggregating the Aggregate Plan 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 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

Projected On-hand Inventory Inventory from previous week Current week’s requirements - =

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

“slushy” somewhat firm Time Fences in MPS Time Fences – points in time that separate phases of a master schedule planning horizon. Period “frozen” (firm or fixed) “slushy” somewhat firm “liquid” (open) 1 2 3 4 5 6 7 8 9

Solved Problems: Problem 1