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Aggregate Planning

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Production Planning Horizons

Long-Range
Long-Range Capacity Planning (years)

Medium-Range
Aggregate Planning (6-18 months)

Short-Range
Master Production Scheduling (weeks)

Very-Short-Range
Production Planning and Control Systems
(hours - days)
Production Planning: Units of Measure

Entire
Long-Range Capacity Planning Product Line

Product
Aggregate Planning Family

Specific
Master Production Scheduling Product Model

Labor, Materials,
Production Planning and Control Systems
Machines
The long term plan is defined at the corporate level. These
decisions are more strategic. This activity is often referred
to as "strategic planning". The following needs to be
addressed in a strategic plan

which market segment ?

how to reach it ?

which plant / facility ?

which prodn policy ? (make to order, make to stock etc.)

which prodn system ? (cellular, job shop, mixed etc.)


Steps in Aggregate
Planning
Define an aggregate unit

An aggregate unit, such as the labor hour or the machine


hour must be selected in order to translate the demand
for the different products into the same units. This unit
must be related to the capacity you want to plan
(machine or manpower).
Estimate aggregate demand (over 12-24 months)

Here we need the monthly forecast for all the products for
the period considered (the intermediate term). These
forecasts are translated into aggregate units.

Determine an aggregate production plan;

On the basis of this demand, we can select the best


production plan.
Aggregate Planning Objectives

• Minimize Costs/Maximize Profits


• Maximize Customer Service
• Minimize Inventory Investment
• Minimize Changes in Production Rates
• Minimize Changes in Workforce Levels
• Maximize Utilization of Plant and Equipment
Managerial Inputs

Aggregate
plan
Managerial Inputs

Demand forecasts

Aggregate
plan
Managerial Inputs

Demand forecasts

Aggregate Accounting and finance


plan Cost data
Managerial Inputs

Demand forecasts

Aggregate Accounting and finance


plan Cost data

Human resources
Labor-market conditions
Training capacity
Managerial Inputs

Demand forecasts

Aggregate Accounting and finance


plan Cost data

Engineering Human resources


New products Labor-market conditions
Product design changes Training capacity
Machine standards
Managerial Inputs

Operations
Current machine capacities
Plans for future capacities
Workforce capacities Demand forecasts
Current staffing level

Materials
Aggregate Accounting and finance
Supplier capabilities
Storage capacity plan Cost data
Materials availability

Engineering Human resources


New products Labor-market conditions
Product design changes Training capacity
Machine standards
Aggregate Planning Process

Determine
requirements for
planning horizon
Aggregate Planning Process

Determine
Identify alternatives,
requirements for
constraints, and costs
planning horizon
Aggregate Planning Process

Determine Prepare prospective


Identify alternatives,
requirements for plan for
constraints, and costs
planning horizon planning horizon
Aggregate Planning Process

Determine Prepare prospective


Identify alternatives,
requirements for plan for
constraints, and costs
planning horizon planning horizon

Is the plan
acceptable?
Aggregate Planning Process

Determine Prepare prospective


Identify alternatives,
requirements for plan for
constraints, and costs
planning horizon planning horizon

No
Is the plan
acceptable?
Aggregate Planning Process

Determine Prepare prospective


Identify alternatives,
requirements for plan for
constraints, and costs
planning horizon planning horizon

No
Is the plan
acceptable?

Yes
Implement and
update the plan
Aggregate Planning Process

Determine Prepare prospective


Identify alternatives,
requirements for plan for
constraints, and costs
planning horizon planning horizon

No
Is the plan
acceptable?

Yes
Move ahead
Implement and
to next
update the plan
planning session
Aggregate Planning Costs

• Regular-Time Costs
• Overtime Costs
• Hiring and
Layoff Costs
• Inventory
Holding Costs
• Backorder and Stockout Costs
Production Plan

1500 —

Quantity Produced during a period


1250 —
Requirements
1000 —

750 —

500 —

250 —

0—

| | | |
1 2 3 4
Quarter
Production Plan

1500 —

Quantity Produced during a period


1250 —
Requirements
1000 —
Production plan
750 —

500 —

250 —

0—

| | | |
1 2 3 4
Quarter
Production Plan
Inventory
accumulation
1500 —

Quantity Produced during a period


1250 —
Requirements
1000 —
Production plan
750 —

500 —

250 — 300

0 — 510

| | | |
1 2 3 4
Quarter
Production Plan
Inventory
accumulation
1500 —

Quantity Produced during a period


Inventory
consumption
1250 — 400
Requirements
1000 —
Production plan
750 —
110
500 —

250 — 300

0 — 510

| | | |
1 2 3 4
Quarter
Three Methods of Aggregate Planning

Level Strategy - Constant Work Force, and as demand


changes Vary Only Inventory & Stock outs

Chase Strategy - as demand changes, hire and layoff to


produce the units required. Some inventory also has to be
accounted for, because of rounding errors

Mixed Strategy - use any or all of the production variables


to determine the lowest cost plan
Production Variables

As demand changes these are the things management can


change to meet the changing demand. These variables
include:

Number of workers - More or less workers by hiring and layoff


changes the number of units one can produce

Inventory - If you have additional capacity now, produce extra


units and store them in inventory to satisfy increasing demand
in the future
Production Variables

Stock out - This is negative inventory. If demand is more than


you can produce, use a stock out and satisfy demand in the
future when capacity exceeds demand.

Attempt should be such that stock outs do not occur in the last
period of any aggregate plan.

Subcontracting - Pay some other business to produce extra


units needed.
Overtime - Ask employees to produce more units by working,
for example, more than the normal eight hours/day or 40
hours/week.
LEVEL STRATEGY
Example 1
Level Strategy for Services Dock Aisle
Level Strategy for Services Dock Aisle

TIME PERIOD
1 2 3 4 5 6 Total
Requirement* 6 12 18 15 13 14 78
Current employment = 10 part-time emp * Number of part-time employees
Level Strategy for Services Dock Aisle

TIME PERIOD
1 2 3 4 5 6 Total
Requirement* 6 12 18 15 13 14 78
Current employment = 10 part-time emp * Number of part-time employees

1. No more than 10 new hires in any period


2. No backorders are permitted
3. Overtime can not exceed 20% of regular-time capacity
4. The following costs can be assigned:
Regular-time wage 2,000/period at 20 hours/week
Overtime wages 150% of regular-time
Hiring 1,000/person
Layoffs 500/person
Level Strategy for Services Dock Aisle

TIME PERIOD
1 2 3 4 5 6 Total
Requirement* 6 12 18 15 13 14 78
Current employment = 10 part-time clerks
Peak Requirement
1. No more than 10 new hires in any period
2. No backorders are permitted
3. Overtime can not exceed 20% of regular-time capacity
4. The following costs can be assigned:
Regular-time wage 2,000/period at 20 hours/week
Overtime wages 150% of regular-time
Hiring 1,000/person
Layoffs 500/person
Level Strategy for Services Dock Aisle

TIME PERIOD
1 2 3 4 5 6 Total
Requirement* 6 12 18 15 13 14 78
Current employment = 10 part-time clerks
Peak Requirement
1. No more than 10 new hires in any period
2. No backorders are permitted
1.20w = 18 employees in peak period
3. Overtime can not exceed 20% of regular-time capacity
4. The following costs can be assigned:
Regular-time wage 2,000/period at 20 hours/week
Overtime wages 150% of regular-time
Hiring 1,000/person
Layoffs 500/person
Level Strategy for Services Dock Aisle

TIME PERIOD
1 2 3 4 5 6 Total
Requirement* 6 12 18 15 13 14 78
Current employment = 10 part-time clerks
Peak Requirement
1. No more than 10 new hires in any period
2. No backorders are permitted
1.20w = 18 employees in peak period
3. Overtime can not exceed 20% of regular-time capacity
4. 18
The following costs can be assigned:
Regular-time wage w = = 15
2,000/period at employees
20 hours/week
1.20
Overtime wages 150% of regular-time
Hiring 1,000/person
Layoffs 500/person
TIME PERIOD
Total Cost
1 2 3 4 5 6
Requirement 6 12 18 15 13 14 78
level 15 15 15 15 15 15 90 180000
undertime 9 3 0 0 2 1 15
overtime 0 0 3 0 0 0 3 9000
Hires 5 0 0 0 0 0 5 5000
Fires 0 0 0 0 0 0 0 0
194000
LEVEL STRATEGY
Example 2
Know the demand

We would have to know each forecast value for the time


period of our aggregate plan. Consider the following
forecasting information.

Month J anuary Feb. March April May J une

Forecast 1,800 1,500 1,100 900 1,100 1,700


Safety stock

Its purpose is to satisfy demand when demand is greater than


what we expect ( the forecasted value).

A very simple method based on company policy can be used to


calculate safety stock. For eg. The safety stock value could be
25% of the forecasted value for that period.

Month J anuary Feb. March April May J une

Forecast 1,800 1,500 1,100 900 1,100 1,700

Safety Stock 450 375 275 225 275 425


The beginning inventory value (in this case for Jan.) would have
to be known before we could continue. In some cases one can
assume the value is zero to continue with calculations.

The remaining beginning inventory values are determined from


the safety stock in the previous period.

Month J anuary Feb. March April May J une

Forecast 1,800 1,500 1,100 900 1,100 1,700

Safety Stock 450 375 275 225 275 425

Beginning
400
Inventory
Production Required is determined by adding the forecast plus
the safety stock and subtracting the beginning inventory for
each period:

FORECAST + SAFETY STOCK - BEGINNING INVENTORY

J anuary Feb. March April May J une

Forecast 1,800 1,500 1,100 900 1,100 1,700

Safety Stock 450 375 275 225 275 425

Beginning
400 450 375 275 225 275
Inventory
Required
1,850 1,425 1,000 850 1,150 1,850
Production
Starting Conditions

Storage or inventory holding Cost = Rs. /unit-month

Standard Pay Rate = Rs. /hour

Overtime Rate = Rs. /hour

Cost of Stockout = Rs. /unit-month

Cost of Subcontracting = Rs. /unit

Hiring and Training Cost = Rs. /person

Layoff Costs = Rs. /person

Worker-hours/unit = hrs/unit

Manufacturing Cost = Rs.

Beginning Work Force = No. of workers


Storage Cost (Inventory holding cost) = Rs. /unit-month

Each unit that is held in inventory for one month will cost us
some amount. This cost includes the costs of

storage space

administrative costs

lost income (cost of capital) from having this item sitting in


inventory
Standard Pay Rate = Rs. /hour

This is the hourly wage rate for direct labor.

Overtime Rate = Rs. /hour

Often when employees work more than the regular time, they are
paid at a higher pay rate for the addition hours. This higher pay
rate is usually 1.5 times the Standard pay rate.

Eg. If regular rate is 60/hr

1.5 times Rs. 60 = Rs. 90 /hr


Cost of Stockout (back order) = Rs. /unit-month

This is our cost if we fail to satisfy demand. This cost includes


the cost of:

Penalties

Possible loss of sale if customer buys from an other business

Possible loss in future sales

Loss of good will

Administrative cost for keeping track of back-ordered


customers.
Cost of Subcontracting = Rs. /unit

Cost of having an other business produce one unit of product to


meet the demand. This is given as a marginal cost or as a total
cost.

Marginal Cost : the cost in addition (above and beyond) our cost
to produce that same unit (the manufacturing cost).

Total Cost : the amount the other business would receive for
producing one unit.
Hiring and Training Cost = Rs. /person

This is the cost to add another employee to our work force. This
includes the cost of:

advertising

interviewing and selection training and

less than full productivity for the new employee during the training
period
Layoff Costs = Rs. /person

This includes the cost of:

Severance pay

Increases in unemployment insurance

Negative reactions by remaining workers because of


uncertainties about their futures
Worker-hours/unit

This is the direct labor content of the product being


manufactured. It can be used for cost calculations.

For eg.

If wage rate is Rs. 60/hr and it takes 5 hrs/unit

Direct labor cost/unit is 5 hours/unit X 60/hour = Rs. 300/unit

As a comparison; if we produce one unit using overtime, the


cost would be 5 hours/unit X 90/hour = Rs. 450/unit.

The difference (450 - 300) Rs. 150 is the marginal cost of


producing a unit on overtime.
Beginning Work Force

This is the number of production workers we have when we


start aggregate planning If we want to produce more units
than this work force can produce on regular time, than we
would need to hire additional workers and pay the hiring and
training costs for those new employees
The first question is “How many workers?”

J anuary Feb. March April May J une

Forecast 1,800 1,500 1,100 900 1,100 1,700

Safety Stock 450 375 275 225 275 425

Beginning
400 450 375 275 225 275
Inventory
Days in a
22 19 21 21 22 20
month
Required
1,850 1,425 1,000 850 1,150 1,850
Production
Cum Prodn 1,850 3,275 4,275 5,125 6,275 8,125
How many workers?

8,125 units need to be produced during Jan. - June

Assume that each unit requires 5 labor hours and each worker
works 8 hours/day

The 6-month period Jan. - June includes 125 work days

(8,125 units X 5 hours/unit) / (8 hours/person day X 125 days) =


40.6 persons

40.6 is rounded up (to 41), because if we round down we will not


produce the required 8125 units.
Cumulative Produced

These values are calculated from the formula:

(number of workers X hours/day X number of days) / (5


hours/unit)

For Jan.:

(41 workers X 8 hours/day X 22 days) / (5 hours/unit) = 1443.2


and rounding normally to 1443.

For Feb the only difference is 41 cumulative days in place of 22.


The result is 2689.6 and rounded to 2690
J anuary Feb. March April May J une

Forecast 1,800 1,500 1,100 900 1,100 1,700

Safety Stock 450 375 275 225 275 425

Beginning
400 450 375 275 225 275
Inventory
Days in a
22 19 21 21 22 20
month

Cum Days 22 41 62 83 105 125


Required
1,850 1,425 1,000 850 1,150 1,850
Production
Cum req
1,850 3,275 4,275 5,125 6,275 8,125
Prod
Actual Cum
1443 2690 4067 5445 6888 8200
Prod
Excess 0 0 0 320 613 75

Shortage 407 585 208 0 0 0


10,000

8,500
Cum Production

7,000

5,500

4,000

2,500

1,000
0 1 2 3 4 5 6 7
Quarter

Req cum prodn Act cum prod


Excess or (Short)

= (Cumulative Production Required) - (Cumulative Produced)

Shortage Costs

This cost is the number short in any period X the stock out cost

For Jan it is (407 units) X stock out cost

Storage Costs

This cost is the number excess in any period X the storage cost

For April it is (320 units) X shortage cost


If we have 36 workers in the beginning of the planning horizon,

Hiring Cost =
(41 required workers – 36 available workers) X hiring cost

Lay-off Cost = 0

Total Cost = storage + shortage + hiring + Lay-off


Chase Strategy
Workers Required

From the Beginning Information and Starting Conditions we


know: 1,850 units need to be produced during Jan.

Each unit requires 5 labor hours Each worker works 8 hours/day


The month of Jan. has 22 work days

(1850 units) X (5 hours/unit) / (8 hours/person-day) X (22 days) =


52.56 persons

52.56 is rounded up (to 53), because if we round down we will


not produce the required 1850 units.

Remember that a chase strategy doesn't allow stock outs


Units Produced

In Jan. if each person works 8 hours each of the 22 days, the


number of worker hours available to produce products will be:

(53 people) X (8 hours/day) X (22 days) = 9328 worker hours

The number of units that can be produced in Jan. will be the


total worker-hours available in Jan. divided by the number of
worker-hours required for each unit. For Jan.:

(9328 worker hours) / (5 worker hours/unit) = 1865.6 units

We can round it to 1866


Workers Hired

People Hired is the number of additional people needed to


meet the demand. For Jan. it is the difference between 53
(people required in Jan.) and the 36 people at the start.

53 - 36 = 17

Hiring Cost

In Jan. company hired 17 additional employees.

The cost of hiring 17 people is 17 X Hiring cost


People Laid Off

This is similar to people hired. It is the number of fewer workers


we need as demand declines.

For Feb., it is 53 - 47 = 6.

Layoff Cost

The cost of Laying Off 6 people is 6 X lay-off cost


Ending Inventory

Ending inventory is the number of cumulative unused units at the


end of any one month. Cumulative means we need to consider
not only what happens this month, but also what happened the
previous month.

Prod. People Units People People Ending


Reg. Req. Prod. Hired LaidOff Inv.
Jan. 1,850 53 1866 17 16
Feb. 1,425 47 1429 0 6 20
March 1,000 30 1008 0 17 28
April 850 25 840 0 5 18

Inventory Cost
Number of units in Ending Inv. for any one month x holding Cost
The beginning inventory for Jan. is 0. We need 1850 units and
we produce 1866. The difference (1866 - 1850 = 16) is the Ending
Inv. for Jan.

For Feb. one needs to consider the inventory in the previous


month (16 for Jan.)

In Feb. with 47 people one can produce 1429 units.

1429 is 4 more than than the production required (1425).

These 4 additional units added to Jan. Ending Inv. gives 20 units


of Ending Inv. in Feb.
Example
Product Q1 Q3 Q3 Q4
A 2500 12500 7500 7500
B 7500 20000 20000 7000
C 30000 25000 27500 33000

2.5 hrs/gallon
65 days/quarter
8 hrs/day
Hiring cost = 1000
Firing cost = 2000
Inventory carrying cost = 50 per gallon per quarter
Stock out cost = 100 per gallon per quarter
Starting work force = 200
Find the following for Level and Chase strategies

No. of workers required per day

Units produced per quarter

Beginning and end inventories

Inventory costs

Stock out costs

Hire and lay-off costs


Quarter Q1 Q3 Q3 Q4
Req
40000 57500 55000 47500
Production
Master Production Scheduling
Objectives of MPS

• Determine the quantity and timing of completion of end


items over a short-range planning horizon.
• Schedule end items (finished goods and parts shipped as
end items) to be completed promptly and when promised to
the customer.
• Avoid overloading or under-loading the production facility
so that production capacity is efficiently utilized and low
production costs result.
Master Production Scheduling
PAREN
T

Independent
Demand

Dependent Demand

COMPONE
Master Production Scheduling

Months January February


Aggregate Production Plan
shows the total quantity of
bicycles 1,500 1,200

Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
Shows the specific type
and quantity of bike to be
produced
Road bike 100 100 100 100
Hybrid bike 500 500 450 450
Mountain bike 300 100
Master Production Scheduling

Arizona Instruments produces bar code scanners for


consumers and other manufacturers on a produce-to-stock
basis. The production planner is developing an MPS for
scanners for the next 6 weeks.

The minimum lot size is 1,500 scanners, and the safety


stock level is 400 scanners. There are currently 1,120
scanners in inventory. The estimates of demand for
scanners in the next 6 weeks are shown on the next slide.
Master Production Scheduling

WEEK
Demand Estimates
1 2 3 4 5 6
CUSTOMERS 500 1000 500 200 700 1000
BRANCH WAREHOUSES 200 300 400 500 300 200
MARKET RESEARCH 0 50 0 0 10 0
PRODUCTION RESEARCH 10 0 0 0 0 0
Master Production Scheduling

WEEK
1 2 3 4 5 6
CUSTOMERS 500 1000 500 200 700 1000
BRANCH WAREHOUSES 200 300 400 500 300 200
MARKET RESEARCH 0 50 0 0 10 0
PRODUCTION RESEARCH 10 0 0 0 0 0

TOTAL DEMAND 710 1350 900 700 1010 1200


BEGINNING INVENTORY 1120 410 560 1160 460 950
REQUIRED PRODUCTION 0 1500 1500 0 1500 1500
ENDING INVENTORY 410 560 1160 460 950 1250
Master Production Scheduling

WEEK
1 2 3 4 5 6
SCANNER PRODUCTION 0 1500 1500 0 1500 1500
Rough Cut Capacity Planning

• As orders are slotted in the MPS, the effects on the production work
centers are checked

• Rough cut capacity planning identifies under-loading or overloading of


capacity
Rough Cut Capacity Planning

Texprint Company makes a line of computer printers on a


produce-to-stock basis for other computer manufacturers. Each
printer requires an average of 24 labor-hours. The plant uses a
backlog of orders to allow a level-capacity aggregate plan. This
plan provides a weekly capacity of 5,000 labor-hours.

Texprint’s rough-draft of an MPS for its printers is shown on the


next slide. Does enough capacity exist to execute the MPS? If
not, what changes do you recommend?
Rough Cut Capacity Planning

WEEK
1 2 3 4 5 TOTAL
PRODUCTION 100 200 200 250 280 1030
LOAD 2400 4800 4800 6000 6720 24720
CAPACITY 5000 5000 5000 5000 5000 25000
UNDER or OVER LOAD 2600 200 200 1000 1720 280
Rough Cut Capacity Planning

• Rough-Cut Capacity Analysis


– The plant is under-loaded in the first 3 weeks (primarily
week 1) and it is overloaded in the last 2 weeks of the
schedule.
– Some of the production scheduled for week 4 and 5
should be moved to week 1.
MPS rules

– Do not change orders in the frozen zone

– Do not exceed the agreed on percentage changes when


modifying orders in the other zones

Frozen +/- 20%


+/- 5% +/- 10%
No Change
Change Change Change
1-2
weeks 6+
2-4
weeks
weeks
4-6
weeks
MPS rules

– Try to level load as much as possible

– Do not exceed the capacity of the system when


promising orders.
– If an order must be pulled into level load, pull it into the
earliest possible week without missing the promise.