1. utdallas.edu/~metin 1 Aggregate Planning Chapter 12

2. utdallas.edu/~metin 2 Learning Objectives u Review of forecasting u Forecast errors u Aggregate planning

3. utdallas.edu/~metin 3 Phases of Decisions u Strategy or design:Forecast u Planning:Forecast u OperationActual demand u Since actual demands differs from forecasts so does the execution from the plans. –E.g. Supply Chain concentration plans 40 students per year whereas the actual is ??.

4. utdallas.edu/~metin 4 Characteristics of forecasts u Forecasts are always wrong. Should include expected value and measure of error. u Long-term forecasts are less accurate than short-term forecasts. Too long term forecasts are useless: Forecast horizon –Forecasting to determine »Raw material purchases for the next week »Annual electricity generation capacity in TX for the next 30 years u Aggregate forecasts are more accurate than disaggregate forecasts –Variance of aggregate is smaller because extremes cancel out »Two samples: {3,5} and {2,6}. Averages of samples: 4 and 4. »Variance of sample averages=0 »Variance of {3,5,2,6}=5/2 u Several ways to aggregate –Products into product groups –Demand by location –Demand by time

5. utdallas.edu/~metin 5 Forecast Variability implies time zones Frozen and Flexible zones

6. utdallas.edu/~metin 6 Time Fences in MPS Period “frozen” (firm or fixed) “slushy” somewhat firm “liquid” (open) 123456789 Time Fences divide a scheduling time horizon into three sections or phases, referred as frozen, slushy, and liquid. Strict adherence to time fence policies and rules.

7. utdallas.edu/~metin 7 Planning Horizon Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months. In other words, it is matching the capacity and the demand. Short range Intermediate range Long range Now2 months1 Year

8. utdallas.edu/~metin 8 u Short-range plans (Detailed plans) –Machine loading –Job assignments u Intermediate plans (General levels) –Employment –Output u Long-range plans –Long term capacity –Location / layout –Product/Process design Overview of Planning Levels

9. utdallas.edu/~metin 9 Listen to Tom Thumb’s manager - Need more space in 2005 to expand the store - Allocate 25% of the floor space to fresh produce - During the winter months employ 6 cashiers during rush hours - On Wed before Thanksgiving, employ 12 cashiers throughout the day - In the next two weeks, no Italian parsley will be delivered. Shelve Dill instead of parsley

10. utdallas.edu/~metin 10 Why aggregate planning u Details are hard to gather for longer horizons –Demand for Christmas turkeys at Tom Thumb’s vs Thanksgiving turkeys u Details carry a lot of uncertainty: aggregation reduces variability –Demand for meat during Christmas has less variability than the total variability in the demand for chicken, turkey, beef, etc. u If there is variability why bother making detailed plans, inputs will change anyway –Instead make plans that carry a lot of flexibility –Flexibility and aggregation go hand in hand

11. utdallas.edu/~metin 11 Aggregate Planning u Aggregate planning: General plan –Combined products = aggregate product »Short and long sleeve shirts = shirt u Single product –Pooled capacities = aggregated capacity »Dedicated machine and general machine = machine u Single capacity –Time periods = time buckets »Consider all the demand and production of a given month together u Quite a few time buckets u When does the demand or production take place in a time bucket?

12. utdallas.edu/~metin 12 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

13. utdallas.edu/~metin 13 u Resources –Workforce –Facilities u Demand forecast u Policy statements –Subcontracting –Overtime –Inventory levels –Back orders u Costs –Inventory carrying –Back orders –Hiring/firing –Overtime –Inventory changes –subcontracting Aggregate Planning Inputs

14. utdallas.edu/~metin 14 u Total cost of a plan u Projected levels of inventory –Inventory –Output –Employment –Subcontracting –Backordering Aggregate Planning Outputs

15. utdallas.edu/~metin 15 Strategies u Proactive –Alter demand to match capacity u Reactive –Alter capacity to match demand u Mixed –Some of each

16. utdallas.edu/~metin 16 u Pricing –Price reduction leads to higher demand u Promotion –Not necessarily via pricing –Free delivery, free after sale service »Some Puerto Rico hotels pay for your flight u Back orders –Short selling: Sell now, deliver later u New demand –Finding alternative uses for the product Demand Options to Match Demand and Capacity

17. utdallas.edu/~metin 17 u Hire and layoff workers, unions are pivotal –Layoff: Emotional stress »Fired Moulinex (appliances producer in France) workers start fire at the plant –Hire: Availability of qualified work force »Operators at semiconductor plants u Overtime/slack time –How too use slack time constructively? Training. –Overtime is expensive, low quality, prone to accidents u Part-time workers –35 hour work week of Europe u Inventories, To smooth demands u Subcontracting. Low quality. Reveals technological secrets Capacity Options to Match demand and Capacity

18. utdallas.edu/~metin 18 Fundamental tradeoffs in Aggregate Planning u Capacity (regular time, over time, subcontract) u Inventory u Backlog / lost sales: Customer patience? Basic Strategies u Chase (the demand) strategy; Matching capacity to demand; the planned output for a period is the expected demand for that period –fast food restaurants u Time flexibility from high levels of workforce or capacity; –machining shops, army u Level strategy; Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options. –swim wear

19. utdallas.edu/~metin 19 Matching the Demand with Level or Time flexibility strategies Use inventory Use delivery time Use capacity Demand

20. utdallas.edu/~metin 20 Chase vs. Level Chase Approach u Advantages –Investment in inventory is low –Labor utilization in high u Disadvantages –The cost of adjusting output rates and/or workforce levels Level Approach u Advantages –Stable output rates and workforce u Disadvantages –Greater inventory costs –Increased overtime and idle time –Resource utilizations vary over time

21. utdallas.edu/~metin 21 u Inputs: –Determine demand for each period –Determine capacities for each period –Identify policies that are pertinent –Determine units costs u Analysis –Develop alternative plans and costs –Select the best plan that satisfies objectives Techniques for Aggregate Planning

22. utdallas.edu/~metin 22 Technique 1: Cumulative Graph 12345 67 8910 Cumulative production Cumulative demand Cumulative output/demand

23. utdallas.edu/~metin 23 Technique 2: Mathematical Techniques Linear programming: Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization. Minimize Costs Subject to: Demand, capacity, initial inventory requirements

24. utdallas.edu/~metin 24 Summary of Planning Techniques Linear decision rule???

25. utdallas.edu/~metin 25 Example - Relationships Basic Relationships Workforce Number of workers in a period= Number of workers at end of previous period+ Number of new workers at start of the period - Number of laid off workers at start of the period Inventory Inventory at the end of a period= Inventory at end of the previous period+ Production in current period- Amount used to satisfy demand in current period Cost Cost for a period= Output Cost (Reg+OT+Sub)+ Hire/Lay Off Cost+Inventory Cost+ Back-order Cost

26. utdallas.edu/~metin 26 Technique 3: Simulation Example Level Output Period123456Total Forecast200 3004005002001800 Policy:Level Output Rate of 300 per period Output Cost Regular300 1800$2 Overtime $3 Subcontract $6 Output-Forecast100 0-100-2001000 Inventory Beginning0100200 1000 Ending100200 10000 Average50150200150500600$1 Backlog00001000 $5 Costs Regular$600 $3,600 Inventory$50$150$200$150$50$0$600 Back Orders$0 $500$0$500 Total Cost of Plan$650$750$800$750$1,150$600$4,700 Average Inventory= (Beginning Inventory + Ending Inventory)/2

27. utdallas.edu/~metin 27 Technique 3: Simulation Example Level Output + Overtime Period123456Total Forecast200 3004005002001800 Policy:Level Output Rate+Overtime Output Cost Regular280 1680$2 Overtime 40 0120$3 Subcontract $6 Output-Forecast80 20-80-200-1800 Inventory Beginning0801601801000 Ending8016018010000 Average40120170140500520$1 Backlog0000800 $5 Costs Regular$560 $3,360 Overtime$0 $120 $0$360 Inventory$40$120$170$50$0 $520 Back Orders$0 $400$0$400 Total Cost of Plan$600$680$850$730$1,080$560$4,640

28. utdallas.edu/~metin 28 u Services occur when they are rendered –Limited time-wise aggregation u Services occur where they are rendered –Limited location-wise aggregation u Demand for service can be difficult to predict –Personalization of service u Capacity availability can be difficult to predict u Labor flexibility can be an advantage in services –Human is more flexible than a machine, well at the expense of low efficiency. Aggregate Planning in Services

29. utdallas.edu/~metin 29 Aggregate Plan to Master Schedule Aggregate Planning Disaggregation Master Schedule For a short planning range 2-4 months: u Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon. u Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.

30. utdallas.edu/~metin 30 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

31. utdallas.edu/~metin 31 Master Scheduling Process Master Scheduling Beginning inventory Forecast Committed Customer orders Inputs Outputs Projected inventory Master production schedule ATP: Uncommitted inventory

32. utdallas.edu/~metin 32 Preview of Materials Requirement Planning Terminology Net Inventory After Production Requirements=Forecast Assuming that the forecasts include committed orders Net inventory before production= Projected on hand inventory in the previous period - Requirements Produce in lots if Net inventory is less than zero Net inventory after production= Net inventory before production+ Production

33. utdallas.edu/~metin 33 Projected On-hand Inventory Beginning Inventory

34. utdallas.edu/~metin 34 Example: Find ATP with lot size of 70 JuneJuly 6412345678 Forecast30 40 Customer Orders (Committed)33201042 Projected on Hand Inventory ++ - + - + -- MPS: Production 70 Projected on Hand Inventory31141114113161 Available to promise Inventory until next production (uncommitted)11 57 79 71???

35. utdallas.edu/~metin 35 Summary u Aggregate planning: conception, demand and capacity option u Basic strategy: level capacity strategy, chase demand strategy u Techniques: Trial and Error, mathematical techniques u Master scheduling

36. utdallas.edu/~metin 36 Practice Questions u 1. The goal of aggregate planning is to achieve a production plan that attempts to balance the organization's resources and meet expected demand. Answer: True Page: 541 u 2. A “chase” strategy in aggregate planning would attempt to match capacity and demand. Answer: True Page: 548 u 3. Ultimately the overriding factor in choosing a strategy in aggregate planning is overall cost. Answer: True Page: 550

37. utdallas.edu/~metin 37 Practice Questions 1. Which of the following best describes aggregate planning? A)the link between intermediate term planning and short term operating decisions B)a collection of objective planning tools C)make or buy decisions D)an attempt to respond to predicted demand within the constraints set by product, process and location decisions E)manpower planning Answer: D Page: 541

38. utdallas.edu/~metin 38 Practice Questions 2.Which of the following is an input to aggregate planning? A)beginning inventory B)forecasts for each period of the schedule C)customer orders D)all of the above E)none of the above Answer: D Page: 561

39. utdallas.edu/~metin 39 Practice Questions 3.Which of the following is not an input to the aggregate planning process: A)resources B)demand forecast C)policies on work force changes D)master production schedules E)cost information Answer: D Page: 545

40. utdallas.edu/~metin 40 Practice Questions 4. Which one of the following is not a basic option for altering demand? A)promotion B)backordering C)pricing D)subcontracting E)All are demand options. Answer: D Page: 545

41. utdallas.edu/~metin 41 Practice Questions 5. Which of the following would not be a strategy associated with adjusting aggregate capacity to meet expected demand? A)subcontract B)vary the size of the workforce C)vary the intensity of workforce utilization D)allow inventory levels to vary E)use backorders Answer: E Page: 546-547

42. utdallas.edu/~metin 42 Practice Questions 6. Moving from the aggregate plan to a master production schedule requires: A)rough cut capacity planning B)disaggregation C)sub-optimization D)strategy formulation E)chase strategies Answer: B Page: 559