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3. Aggregate Planning

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Aggregate Planning

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Provides the quantity and timing of production for intermediate future Usually 3 to 18 months into future Combines (‘aggregates’) production Often expressed in common units: hours, dollars, equivalents Involves capacity and demand variables

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Aggregate Planning Goals Meet demand Use capacity efficiently Meet inventory policy Minimize cost Labor Inventory Plant & equipment Subcontract

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Options to Consider Changing inventory levels (with backorders) Varying workforce size by hiring or layoffs Varying production rates through overtime or idle time Subcontracting Using part-time workers Influencing demand

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OptionAdvantagesDisadvantages Some Comments Changing inventory levels Changes in human resources are gradual or none; no abrupt production changes. Inventory holding cost may increase. Shortages may result in lost sales. Applies mainly to production, not service, operations. Varying workforce size by hiring or layoffs Avoids the costs of other alternatives. Hiring, layoff, and training costs may be significant. Used where size of labor pool is large. Options

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OptionAdvantagesDisadvantages Some Comments Changing inventory levels Changes in human resources are gradual or none; no abrupt production changes. Inventory holding cost may increase. Shortages may result in lost sales. Applies mainly to production, not service, operations. Varying workforce size by hiring or layoffs Avoids the costs of other alternatives. Hiring, layoff, and training costs may be significant. Used where size of labor pool is large.

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OptionAdvantagesDisadvantages Some Comments Varying productio n rates through overtime or idle time Matches seasonal fluctuations without hiring/ training costs. Overtime premiums; tired workers; may not meet demand. Allows flexibility within the aggregate plan. Sub contracting Permits flexibility and smoothing of the firm’s output. Loss of quality control; reduced profits; loss of future business. Applies mainly in production settings. Options

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OptionAdvantagesDisadvantages Some Comments Using part- time workers Is less costly and more flexible than full-time workers. High turnover/ training costs; quality suffers; scheduling difficult. Good for unskilled jobs in areas with large temporary labor pools. Influencing demand Tries to use excess capacity. Discounts draw new customers. Uncertainty in demand. Hard to match demand to supply exactly. Creates marketing ideas. Overbooking used in some businesses. Options

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OptionAdvantagesDisadvantages Some Comments Back ordering during high- demand periods May avoid overtime. Keeps capacity constant. Customer must be willing to wait, but goodwill is lost. Many companies back order. Counter- seasonal product and service mixing Fully utilizes resources; allows stable workforce. May require skills or equipment outside the firm’s areas of expertise. Risky finding products or services with opposite demand patterns. Options

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Aggregate Planning Strategies Chase Strategy Matching the production rate to exactly meet the demand by hiring and laying off workers. Level Strategy Maintain a stable workforce working at constant output rate; absorb demand variations with inventory, backlogs, or lost sales. Mixed Strategy A combination of chase and level strategies to match supply and demand.

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Aggregate Planning Methods Spreadsheet techniques Popular & easy-to-understand Trial & error approach Mathematical approaches Linear programming models Simulation

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Example A manufacturer of roofing supplies has monthly forecasts for the 6-month period Month Expected Demand Production Days Demand per Day Jan.9002241 Feb.7001839 Mar.8002138 Apr.12002157 May.15002268 Jun.11002055 Total6200124 50

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Continued 70 70 – 60 60 – 50 50 – 40 40 – 30 30 – 0 0 – JanFebMarAprMayJune=Month 221821212220=Number of working days Production rate per working day Level production using average monthly forecast demand Forecast demand

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Continued inventory cost: $5/unit, backorder cost: $10/unit wage: $40/day, hiring cost: $1500, layoff cost: $3000 production rate: 5 units/day

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Chase Strategy Jan.Feb.Mar.Apr.May.Jun.Total Forecast9007008001200150011006200 Working days221821 2220124 Demand per day40.938.938.157.168.255.050.0 Workers available8 Hired/Fired H/F cost Labor cost Units Produced Net inventory Inventory cost Total cost

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Level Strategy Jan.Feb.Mar.Apr.May.Jun.Total Forecast9007008001200150011006200 Working days221821 2220124 Demand per day40.938.938.157.168.255.050.0 Workers available8 Hired/Fired H/F cost Labor cost Units Produced Net inventory Inventory cost Total cost

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Mixed Strategy Jan.Feb.Mar.Apr.May.Jun.Total Forecast9007008001200150011006200 Working days221821 2220124 Demand per day40.938.938.157.168.255.050.0 Workers available8 Hired/Fired H/F cost Labor cost Units Produced Net inventory Inventory cost Total cost

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Linear Programming Models Workforce planning model Production planning model

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Workforce Planning Model Decision variables W t = number of workers available in period t H t = number of workers hired in period t L t = number of workers laid off in period t P t = number of units produced in period t I t = number of units in inventory at the end of period t B t = number of units backordered at the end of period t

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Continued Given parameters D t = demand forecast in period t n t = number of units made by one worker in period t C t W = cost of one worker in period t C t H, C t L = cost to hire or lay off one worker in period t C t P = cost to produce one unit in period t C t I, C t B = cost to hold or backorder one unit for period t

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Continued Objective function Constraints Possible extensions

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Production Planning Model MarAprMay Demand8001,000750 Capacity850850850 Beginning inventory100 Production cost404145 Inventory cost2 22

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Model 1 P t = number of units produced in period t I t = units in inventory at the end of period t

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Model 2 Let X ij be the number of items produced in month i and consumed in month j.

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Another ExampleCosts Regular time$40per tire Overtime$50per tire Subcontracting$70per tire Inventory$ 2per tire per month MarAprMay Demand8001,000750 Capacity: Regular700700700 Regular700700700 Overtime505050 Overtime505050 Subcontracting150150130 Subcontracting150150130 Beginning inventory100 tires

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Model 2 Let X ij, Y ij and Z ij be the number of items produced in month i and consumed in month j, using regular production, overtime, and subcontracting, respectively.

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