1. 1 Introduction to Operations Management Aggregate Planning CHAPTE R 12

2. 2 Introduction to Operations Management Planning Horizon Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months. (Also called Macro planning) Short range Intermediate range Long range Now2 months1 Year Personnel assignment, machine loading, etc Employment level, output capacity, etc Location, process and service selection, capacity (facility size), etc

3. 3 Introduction to Operations Management Objective of Aggregate Planning u To develop a feasible production plan on an aggregate level that achieves a balance of expected demand and supply –usually demand and supply are converted to aggregate units such as labour-hours, working days, general product units, etc.

4. 4 Introduction to Operations Management 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

5. 5 Introduction to Operations Management Basic approaches 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.

6. 6 Introduction to Operations Management Aggregate Planning Approaches u Maintain a level workforce u Maintain a steady output rate u Match demand period by period u Use a combination of decision variables

7. 7 Introduction to Operations Management Level and Chase Strategies Quantity Output less than demand Output exceeds demand Output above normal Output below normal Normal capacity Output level Normal capacity Demand Level Output Strategy Chase Demand Strategy Demand

8. 8 Introduction to Operations Management Cumulative Graph 12345 67 8910 Cumulative production Cumulative demand Cumulative output/demand

9. 9 Introduction to Operations Management Example - a personal plan u A HKUST UG student –One year expenses »tuition 40,000 »transportation1000 x 12 = 12000 »food and meal2000 x 10 = 20000 »summer5000 x 2 = 10000 »others 500 x 12 = 6000 –Total88,000

10. 10 Introduction to Operations Management Example - a personal plan u A HKUST UG student –plan income »Government loan, etc40000 »private tutoring2000 x 12 = 24000 »part time job2000 x 10 = 20000 »summer job6500 x 2 = 13000 »family money1000 x 10 = 10000 –Total107000 »saving107000 - 88000 = 19000 u Objective: income meets expenses; maximize saving; etc. (What do you call this?)

11. 11 Introduction to Operations Management General steps in aggregate planning 1.Forecast demand in the period 2.Develop plan(s) to meet the demand by setting levels on output, employment, inventory, etc. 3. The plans are refined or reworked until a feasible and satisfactory plan is uncovered.

12. 12 Introduction to Operations Management Options to affect demand level u Pricing –e.g., shift demands from peak periods to off-peak periods. The more the elasticity, the more effective pricing will be on the demand pattern. u Promotion u Backorders (depend on customers’ willingness) u Develop new demand (market) during off-peak period

13. 13 Introduction to Operations Management Options to affect capacity u Hire and fire workers - depends on the intensity of labour used, the strength of the union, corporate culture, labour laws, etc. u Overtime/slack time - to keep a skilled workforce and allows employee to increase earnings u Partime workers - depend on nature of work u Inventories - smooth production and buffer against demand surge; could be costly u Subcontracting - capacity increase in a short time without heavy investment; less control

14. 14 Introduction to Operations Management Average Inventory Average inventory Beginning Inventory + Ending Inventory 2 =

15. 15 Introduction to Operations Management 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.

16. 16 Introduction to Operations Management Summary of Planning Techniques

17. 17 Introduction to Operations Management Example (p.602) The VP of Operations is about to prepare the aggregate plan that will cover six periods in the horizon. The company has forecasted the following demand: The output cost is $2 per unit at regular time; $3 per unit at overtime; $6 per unit if subcontracted. Average inventory cost is $1 per unit per period. Back orders are possible, however, the Company estimated the cost to be $5 per unit per period. The initial inventory is zero. There are 15 workers and each worker is able to produce 20 units of the product per period. Can you help the VP to develop an aggregate plan?

18. 18 Introduction to Operations Management Example - solution Suppose the VP wants to use a leveling (capacity) approach, I.e., maintaining a steady rate of output. The total output by the workers at the regular time is 20 x 15 x 6 = 1800 which equals to the forecast demand.

20. 20 Introduction to Operations Management Example (p.604) u Chase demand –The VP learned that a regular worker is retiring. Rather than hiring new worker, the VP decides to use overtime. However, the maximum amount of overtime output is 40 units per period. Suggest an aggregate plan for the VP –Regular worker produce 14 x 20 units = 280 units per period. The total deficiency is 120 units. These 120 units can be satisfied in 3 periods by overtime and can be produced during the periods of high demand (for cost consideration. Of course, you can put them in other periods too.)

22. 22 Introduction to Operations Management Quantitative approach Suppose the VP wants to use a more quantitative approach that use overtime only and have in mind that the cost be minimized. Can you help him? Let us define the following notation: P t = No. of units produced via regular time at period t, t=1, …, 6 D t = Demand (in No. of units) at period t, t=1, …, 6 O t = No. of units produced at period t in overtime, t=1, …, 6 I t = Inventory level (in No. of units) at the end of period t, t=1, …, 6

23. For ease of handling, we introduce the concept of back order B t at period t. The following is a kind of “conservation law” I t = I t-1 + P t - D t, t = 1, …, 6. The Objective function is given by: Notice that I 0 = 0 and B 0 = 0, (D 1, …, D 6 ) = (200,200,300,400,500,200)

24. 24 Introduction to Operations Management Disaggregating the aggregate plan u The aggregate plan gives the level of demand and supply in aggregate units at the macro level. In order for the company to execute the plan, it needs to disaggregate the plan into appropriate units for implementation and monitoring. The output of this process is a master schedule and a master production schedule.

25. 25 Introduction to Operations Management Master Scheduling Process Master scheduling Beginning inventory Forecast Customer orders Inputs Outputs Projected inventory Master production schedule Uncommitted inventory

26. 26 Introduction to Operations Management Master schedule u A master schedule is a schedule (usually in the form of a table) indicating the quantity and timing (I.e., delivery times) for individual products or a group of individual products.

27. 27 Introduction to Operations Management Master Production Schedule (MPS) u A MPS is a schedule (usually in the form of a table) indicating the quantity and timing of planned production. In creating the MPS, the on-hand inventory is taken into account.

28. 28 Introduction to Operations Management Example

29. 29 Introduction to Operations Management Solution to MPS example

30. 30 Introduction to Operations Management Solution to MPS Example

31. 31 Introduction to Operations Management Solution to MPS Example