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Aggregate Planning
Aggregate planning, which might also be called Macro Production Planning, address the problem of deciding :
how many employees the firm should retain, and for a manufacturing firm,
The quantity and the mix of products to be produced. Macro production planning is not limited to manufacturing firms. Macro production planning strategies are a fundamental part of the firmss overall business strategy.
Bina Nusantara University
Source : Production and Operations Analysis 4th Edition, Steven Nahmias McGraw Hill International Edition
Aggregate Planning
The methodology of aggregate planning in this topic requires the assumption that
Demand is deterministic , or known in advance.
This assumption is made to simplify the analysis and allow us to focus on the systematic or predictable changes in the demand pattern, rather than on the unsystematic or random changes. The goal of the analysis is to determine the number of workers that should be employed each period and the number of aggregate units that should be produced each period.
Bina Nusantara University
Source : Production and Operations Analysis 4th Edition, Steven Nahmias McGraw Hill International Edition
Aggregate Planning
The objective is to minimize costs of production, payroll, holding and changing size of the workforce. The cost of making changes are generally referred to as smoothing costs. Most of the aggregate planning models discuss in this topic assume that all costs are linear functions. This means that the cost of hiring an additional worker is the same as the cost of hiring the previous worker, and the cost of holding and additional unit of inventory is the same as the cost of holding the previous unit of inventory.
Source : Production and Operations Analysis 4th Edition, Steven Nahmias McGraw Hill International Edition
Planning Horizon
Aggregate planning: Intermediate-range capacity
planning, usually covering 2 to 12 months.
Long range
Intermediate range
2 months
1 Year
Should inventories be used to absorb changes in demand during planning period? Should demand changes be accommodated by varying the size of the workforce? Should part-timers be used, or should overtime and/or machine idle time be used to absorb fluctuations? Should subcontractors be used on fluctuating orders so a stable workforce can be maintained? Should prices or other factors be changed to influence demand?
Fully load facilities and minimize overloading and underloading Make sure enough capacity available to satisfy expected demand Plan for the orderly and systematic change of production capacity to meet the peaks and valleys of expected customer demand Get the most output for the amount of resources available
Aggregation Method Suggested by Hax and Meal They suggest grouping products into three categories:
items, families, and types. Items are the finest level in the product structure and correspond to individual stock-keeping units. For example, a firm selling refrigerators would distinguish white from almond in the same refrigerator as different items. A family in this context would be refrigerators in general. Types are natural groupings of families; kitchen appliances might be one type.
Steps in Aggregate Planning Prepare the sales forecast (Note that all producting planning
activities begin with sales forecast) Total all the individual product or service forecasts into one aggregate demand (if not homogeneous use labor-hours, machinehours or sales dollars) Transform the aggregate demand into worker, material and machine requirements Develop alternative capacity plans Select a capacity plan which satisfies aggregate demand and best meets the objectives of the organization.
Suppose that D1, D2, . . . , DT are the forecasts of demand for aggregate units over the planning horizon (T periods.) The problem is to determine both work force levels (Wt) and production levels (Pt ) to minimize total costs over the T period planning horizon.
Planning Horizon. The planning horizon is the number of periods of demand forecast used to generate the aggregate plan. If the horizon is too short, there may be insufficient time to build inventories to meet future demand surges and if it is too long the reliability of the demand forecasts is likely to be low. (n practice, rolling schedules are used) Treatment of Demand. Assume demand is known. Ignores uncertainty to focus on the predictable/systematic variations in demand, such as seasonality.
Relevant Costs
Smoothing Costs changing size of the work force changing number of units produced Holding Costs primary component: opportunity cost of investment in inventory Shortage Costs Cost of demand exceeding stock on hand.
Fig. 3-2
Fig. 3-3
$ Cost
Slope = Ci
Slope = CP
Back-orders Inventory
Positive inventory
Aggregate Units units. They The method is based on notion of aggregate may be Actual units of production Weight (tons of steel) Volume (gallons of gasoline) Dollars (Value of sales) Fictitious aggregate units(See example 3.1)
Notice: Price is not necessarily proportional to worker hours (i.e., cost): why? One method for defining an aggregate unit: requires: .32(4.2) + .21(4.9) + . . . + .06(5.8) = 4.8644 worker hours. This approach for this example is reasonable since products produced are similar. When products produced are heterogeneous, a natural aggregate unit is sales dollars.
Example continued
Prototype Aggregate Planning Example (this example is not in the text) The washing machine plant is interested in determining work force and production levels for the next 8 months. Forecasted demands for Jan-Aug. are: 420, 280, 460, 190, 310, 145, 110, 125. Starting inventory at the end of December is 200 and the company would like to have 100 units on hand at the end of August. Find monthly production levels.
Step 1: Determine net demand. (subtract starting inventory from period 1 forecast and add ending inventory to period 8 forecast.)
Month Net Predicted Cum. Net Demand Demand 1(Jan) 220 2(Feb) 280 3(Mar) 460 4(Apr) 190 5(May) 310 6(June) 145 7(July) 110 8(Aug) 225
Basic Strategies
Constant Workforce (Level Capacity) strategy: Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options.
Disadvantages
Greater inventory costs Increased overtime and idle time Resource utilizations vary over time
Disadvantages
The cost of adjusting output rates and/or workforce levels
Suppose that we are interested in determining a production plan that doesnt change the size of the workforce over the planning horizon. How would we do that? One method: In previous picture, draw a straight line from origin to 1940 units in month 8: The slope of the line is the number of units to produce each month.
Monthly Production = 1940/8 = 242.2 or rounded to 243/month. But: there are stockouts.
Month Cum. Net. Dem. 1(Jan) 220 2(Feb) 500 3(Mar) 960 4(Apr.) 1150 5(May) 1460 6(June) 1605 7(July) 1715 8(Aug) 1940
From the previous graph, we see that cum. net demand curve is crossed at period 3, so that monthly production is 960/3 = 320. Ending inventory each month is found from:
Cum. Prod.
Invent. 320 100 640 140 960 0 1280 130 1600 140 1920 315 2240 525 2560 620
But - may not be realistic for several reasons: It may not be possible to achieve the production level of 320 unit/mo with an integer number of workers Since all months do not have the same number of workdays, a constant production level may not translate to the same number of workers each month.
Assume number of workdays per month is given (reasonable!) Compute a K factor given by:
K = number of aggregate units produced by one worker in one day
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Suppose that we are told that over a period of 40 days, the plant had 38 workers who produced 520 units. It follows that: K= 520/(38*40) = .3421 = average number of units produced by one worker in one day.
Finding K
Cum. net demand thru March = 960. Cum # working days = 22+16+23 = 61. We find that:
960/61 = 15.7377 units/day 15.7377/.3421 = 46 workers required Actually 46.003 here we truncate because we are set to build inventory so the low number should work (check for March stock out) however we must use care and typically round up any fractional worker calculations thus building more inventory
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Examining the graph we see that that was the Trigger point where our constant production line intersected the cumulative demand line assuring NO STOCKOUTS! Can we prove this is best?
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Jan
22.00
7.53
220.00
29.23
220.00
7.53
29.23
Feb
16.00
5.47
280.00
51.15
500.00
13.00
38.46
Mar
23.00
7.87
460.00
58.46
960.00
20.87
46.00
Apr
20.00
6.84
190.00
27.77
1150.00
27.71
41.50
May
21.00
7.18
310.00
43.15
1460.00
34.89
41.84
Jun
22.00
7.53
145.00
19.27
1605.00
42.42
37.84
Jul
21.00
7.18
110.00
15.31
1715.00
49.60
34.57
Aug
22.00
7.53
225.00
29.90
1940.00
57.13
33.96
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Cumulative Demand says March needs most workers but will mean building inventories in Jan + Feb to fulfill the greater March demand If we keep this number of workers we will continue to build inventory through the rest of the plan!
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Holding Cost (per unit per month): $8.50 Hiring Cost per worker: $800 Firing Cost per worker: $1,250 Payroll Cost: $75/worker/day Shortage Cost: $50 unit short/month
Addition of Costs
Cost Evaluation of end Constant Work Assume that the work force at the of Dec was Force 40. Plan Cost to hire 6 workers: 6*800 = $4800 Inventory Cost: accumulate ending inventory: (126+98+0+. . .+687) = 2093. Add in 100 units netted out in Aug = 2193. Hence Inv. Cost = 2193*8.5=$18,640.50 Payroll cost: ($75/worker/day)(46 workers )(167days) = $576,150 Cost of plan: $576,150 + $18,640.50 + $4800 = $599,590.50
Here the idea is to change the workforce each month in order to reduce ending inventory to nearly zero by matching the workforce with monthly demand as closely as possible. This is accomplished by computing the # of units produced by one worker each month (by multiplying K by #days per mo.) and then taking net demand each month and dividing by this quantity. The resulting ratio is rounded up to avoid shortages.
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So we hire or Fire (lay-off) monthly Jan (starts with 40 workers): Fire 10 (cost $8000) Feb: Hire 21 (cost $16800) Mar: Hire 8 (cost $6400) Apr: Fire 31 (cost $38750) May: Hire 15 (cost $12000) Jun: Fire 23 (cost $28750) Jul: Fire 5 (cost $6250) Aug: Hire 15 (cost $12000) Total Personnel Costs: $128950
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Period 1 2 3 4 5 6 7 8
15
Inventory cost is essentially 165*8.5 = $1402.50 Employment costs: $428325 Chase Plan Total: $558677.50 Betters the Constant Workforce Plan by: 599590.50 558677.50 = 40913 But will this be good for your image? Can we find a better plan?
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Disaggregation of aggregate plans mean converting an aggregate plan to a detailed master production schedule for each individual item (remember the hierarchical product structure given earlier: items, families, types). Keep in mind that unless the results of the aggregate plan can be linked to the master production schedule, the aggregate planning methodology could have little value.
Disaggregation
Master Schedule
Linear Programming provides a means of solving aggregate planning problems optimally. The LP formulation is fairly complex requiring 8T decision variables(1.workforce level, 2. production level, 3. inventory level, 4. # of workers hired, 5. # of workres fired, 6. overtime production, 7. idletime, 8. subcontracting) and 3T constraints (1. workforce, 2. production, 3. inventory), where T is the length of the planning horizon. (See section 3.5, pg.125)
Optimal Solutions to Aggregate Planning Problems Via Linear Programming Clearly, this can be a formidable linear program. The LP formulation shows that the modified plan we considered with two months of layoffs is in fact optimal for the prototype problem. Refer to the latter part of Chapter 3 and the Appendix following the chapter for details.
c
t 1
N H cF N F cI IT cR PR co OT cu UT cS ST
Here the cis are cost for hiring, firing, inventory, production, etc HT and FT are number of workers hired and fired IT, PT, OT, ST AND UT are numbers units inventoried, produced on regular time, on overtime, by sub-contract or the number of units that could be produced on idled worker hours respectively
I t I t 1 P t St Dt
P t k nt Wt Ot U t
Where: nt * k is the number of units produced by a worker in a given period of nt days
Employee Constraints:
Wt Wt 1 H t Ft 0 W1 W0 H1 F1 0
Inventory Constraints:
Pt I t I t 1 St Dt
specifically:
P 1 I1 I 0 S1 D1
P t k nt Wt Ot U t 0
specifically:
P 1 k n1 W 1 O 1 U1 0
Real Constraint Equations (rewritten for L.P.): Finally, we need constraints defining:
Initial Workforce size Starting Inventory Final Desired Inventory And, of course, the general constraint forcing all variables to be 0