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Intermediate range capacity planning that usually covering 2 to 24 months (or 1 to 18 months) Goal is to achieve a production plan that will effectively utilize the organizations resources to satisfy expected demand.
Planning inputs
Corporate
Planning outputs
for capacity expansion (or contraction) Plans for - new products, -new technologies, -new markets, -new plants and their location.
Plans
strategies & policies, Demand forecasts, Economic, technological & political scenario, Available capital etc.
To
make the most effective use of available capacity through existing resources
Long-term
plans Limits on present capacity Period by period annual demand forecast Feasible production alternatives and costs
1-18 months
Levels of use for available production alternatives: Work-force size, Production rate, Inventory, Subcontracting
Aggregate production plans specifying how demand will be met from existing productive resources
Shortterm plan
ensure customer satisfaction through prompt delivery times To achieve maximum effectiveness from the use of production factors
To
Aggregate
1-30 days
Size
of work-
Production
force schedule Production rate Assigning orders to specific Sequencing of Departments, orders Shifts, Personnel, Equipments etc.
Planning Sequence
Corporate strategies and policies Economic, competitive, and political conditions Aggregate demand forecasts
Business Plan
Aggregate plan
Master schedule
Aggregate planning
Aggregate planning:
process by which a company determines levels of capacity, production, subcontracting, inventory, stock outs, and pricing over a specified time horizon goal is to maximize profit decisions made at a product family (not SKU) level time frame of 1 to 18 months how can a firm best use the facilities it has?
Operational parameters of AP
Specify operational parameters over the time horizon:
production rate workforce Overtime/under time machine capacity level subcontracting backlog inventory on hand
Given the demand forecast for each period in the planning horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firms profit over the planning horizon Specify the planning horizon (typically 1-18 months) Specify the duration of each period Specify key information required to develop an aggregate plan
Labor/machine hours required per unit Inventory holding cost ($/unit/period) Stock out or backlog cost ($/unit/period) Constraints: limits on overtime, layoffs, capital available, stockouts and backlogs
Production quantity from regular time, overtime, and subcontracted time: used to determine number of workers and supplier purchase levels Inventory held: used to determine how much warehouse space and working capital is needed Backlog/stockout quantity: used to determine what customer service levels will be Machine capacity increase/decrease: used to determine if new production equipment needs to be purchased A poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity
Proactive
Alter demand to match capacity
Reactive
Alter capacity to match demand (Chase strategy: using capacity as the lever Level strategy: using inventory as the lever Time flexibility Strategy: using utilization as the lever)
Mixed
Some of each
Demand Options
Capacity Options
Hire and layoff workers Overtime/under time Part-time workers Inventories Subcontracting
Chase Strategy
Production rate is synchronized with demand by varying machine capacity or hiring and laying off workers as the demand rate varies However, in practice, it is often difficult to vary capacity and workforce on short notice Expensive if cost of varying capacity is high Negative effect on workforce morale Results in low levels of inventory Should be used when inventory holding costs are high and costs of changing capacity are low
Can be used if there is excess machine capacity Workforce is kept stable, but the number of hours worked is varied over time to synchronize production and demand Can use overtime or a flexible work schedule Requires flexible workforce, but avoids morale problems of the chase strategy Low levels of inventory, lower utilization Should be used when inventory holding costs are high and capacity is relatively inexpensive
Level Strategy
Maintain stable machine capacity and workforce levels with a constant output rate Shortages and surpluses result in fluctuations in inventory levels over time Inventories are built up in anticipation of future demand or backlogs are carried over from high to low demand periods Better for worker morale Large inventories and backlogs may accumulate Should be used when inventory holding and backlog costs are relatively low
Planners of a company have obtained information regarding the forecasted demand of a product as follows: Period 1 2 3 4 5 6 Total Forecast 200 200 300 400 500 200 1800 Costs Regular time: $2/unit Overtime: $3/unit Subcontract: $6/unit Inventory: $1/unit Backorder: $5/unit They now want to evaluate a plan that calls for a steady rate of regular-time output, mainly using inventory to absorb the uneven demand but allowing some backlog. Overtime and subcontracting are not used because they want steady output. They intend to start with zero inventory on hand in the first period. Prepare an aggregate plan and determine its cost using the preceding information. Assume a level output rate of 300 units per period with regular time. Note that the planned inventory is zero. There are 15 workers, each can produce 20 units per period.
Example 3: LP
Month January February March April May June Demand Forecast 1,600 3,000 3,200 3,800 2,200 2,200
500 L t 6 O t 2 I t
t !1 6 t !1 t !1
5 S t 10 P t 30 C t
t !1 t !1 t !1
W t ! W t 1 W t W t 1
t t
t, t
or
!0
e 40W t t
4,
u 0, t
40W t
4
for t ! 1,..., 6.
I t 1 I t 1
t t
! D t S t 1 I t S t , D t S t 1 I t S t ! 0,
O t e 10 W t, 10 W t O t u 0, for t ! 1,..., 6.