Aggregate Planning

Chapter 5

Outline
Types of Operations Plan Role of aggregate planning in a supply chain Information Needed for an Aggregate Plan Aggregate planning strategies Implementing aggregate planning in practice Master Production Scheduling Material Requirement Planning
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Hierarchical Operations Plan

Long Range Plan A year or more Capacity Decisions
Construction of facilities Purchase of Capital

Equipment
More general (product

groups/families) Resources & output in aggregate hours & units Consider Production capacity fixed in plan

Mid/Intermediate Range Plan 6 to 8 month long plan Details of long range plan Minor change in capacity shown (e.g. change in workforce)

Short Range Plan Days or weeks long plan Most detailed & specific plan Planning of exact end time and quantities

Aggregate Production Plan (APP)

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Master Production Schedule (MPS)

Material Requirement Plan (MRP)

Operation Planning
Aggregate Production Plan (APP)
Sets aggregate output

Master Production Schedule (MPS)

Sets quantity and

Material Requirement Plan (MRP)

Convert end items from master production schedule into set of time phased component and parts requirements

rate and workforce size Specifies utilization and inventory level Denotes backlog levels for entire facilities

timing of end items or services

Manufacturing Planning and Control System

Planning Horizon
Long Range

Capacity Plan
Resource requirements planning (RRP)

Materials Plan
Aggregate production planning (APP) Demand management

Medium Range

Rough-cut capacity planning (RCCP)

Master production scheduling (MPS)

Distribution requirements planning (DRP)

Short Range

Capacity requirements planning (CRP)

Material requirements planning (MRP)

Bill of material + Inventory status

Production activity control

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Purchase planning and control

Role of Aggregate Planning in a Supply Chain

Capacity has a cost, lead times are greater than zero Aggregate planning:
process by which a company determines levels of capacity, production,

subcontracting, inventory, stockouts, and pricing over a specified time horizon

goal is to maximize profit decisions made at a product family (not SKU) level time frame of 3 to 18 months how can a firm best use the facilities it has?

All supply chain stages should work together on an aggregate plan that

will optimize supply chain performance

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Information Needed for an Aggregate Plan

Demand forecast in each period Production costs
labor costs, regular time ($/hr) and overtime ($/hr) subcontracting costs ($/hr or $/unit) cost of changing capacity: hiring or layoff ($/worker) and cost of

adding or reducing machine capacity ($/machine)

Labor/machine hours required per unit Inventory holding cost ($/unit/period) Stockout or backlog cost ($/unit/period) Constraints: limits on overtime, layoffs, capital available,
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stockouts and backlogs

Outputs of Aggregate Plan

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,
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excess inventory, or excess capacity

Fundamental Tradeoffs in Aggregate Planning

Capacity (regular time, overtime, subcontract) Inventory Backlog / lost sales

Basic Strategies
Chase strategy Time flexibility from workforce or capacity Level strategy
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Aggregate Planning Strategies

Trade-off between capacity, inventory,

backlog/lost sales 1. Chase strategy using capacity as the lever 2. Time flexibility from workforce or capacity strategy using utilization as the lever 3. Level strategy using inventory as the lever 4. Mixed strategy a combination of one or more of the first three strategies
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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
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Time Flexibility Strategy

Workforce is kept stable, but the number of hours worked is

varied over time to synchronize production and demand Can be used if there is excess machine capacity 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
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Level Strategy
Keeps a constant output rate Inventories that are built up in anticipation of future demand

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or backlogs are carried over from high to low demand periods Maintain stable machine capacity and workforce levels Shortages and surpluses result in fluctuations in inventory levels over time Better for worker morale Large inventories and backlogs may accumulate Should be used when inventory holding and backlog costs are relatively low

Aggregate Planning at Red Tomato Tools

Month January February March April May June Demand Forecast 1,600 3,000 3,200 3,800 2,200 2,200

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Aggregate Planning at Red Tomato Tools

Item Materials Inventory holding cost Marginal cost of a stockout Hiring and training costs Layoff cost Labor hours required Regular time cost Over time cost Cost of subcontracting
Working hours per month is 20 days x 8 hours per day
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Cost $10/unit $2/unit/month $5/unit/month $300/worker $500/worker 4/unit $4/hour $6/hour $30/unit

Aggregate Planning at Red Tomato Tools (Define Decision Variables)

Wt = Workforce size for month t, t = 1, ..., 6 Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6 Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6 Pt = Production in month t, t = 1, ..., 6 It = Inventory at the end of month t, t = 1, ..., 6 St = Number of units stocked out at the end of month t, t = 1, ..., 6 Ct = Number of units subcontracted for month t, t = 1, ..., 6 Ot = Number of overtime hours worked in month t, t = 1, ..., 6
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Aggregate Planning at Red Tomato Tools (Define Objective Function)

Min 640W t + 300 H t

t =1 6 6 t =1 6

+ 500 Lt + 6 Ot + 2 I t
t =1 6 6 t =1 6 t =1

+ 5 S t + 10 Pt + 30 C t
t =1
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t =1

t =1

Aggregate Planning at Red Tomato tools (Define Constraints Linking Variables)

Workforce size for each month is based on hiring and layoffs

W t = W t -1 + H t - Lt, or W t - W t -1 - H t + Lt = 0 for t = 1,...,6, where W 0 = 80.

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Aggregate Planning at Red Tomato Tools (Constraints)

Production for each month cannot exceed capacity

Pt 40W t + Ot 4 , 40W t + Ot 4 - Pt 0, for t = 1,...,6.

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Aggregate Planning at Red Tomato Tools (Constraints)

Inventory balance for each month

I t -1 + Pt + C t = Dt + S t -1 + I t - S t , I t -1 + Pt + C t - Dt - S t -1 - I t + S t = 0, for t = 1,...,6,where I 0 = 1,000, S 0 = 0,and I 6 500.

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Aggregate Planning at Red Tomato Tools (Constraints)

Over time for each month

Ot 10W t, 10W t - Ot 0, for t = 1,...,6.

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Scenarios
Increase in holding cost (from $2 to $6) Overtime cost drops to $4.1 per hour Increased demand fluctuation

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Increased Demand Fluctuation

Month January February March April May June Demand Forecast 1,000 3,000 3,800 4,800 2,000 1,400

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Aggregate Planning in Practice

Think beyond the enterprise to the entire supply

chain Make plans flexible because forecasts are always wrong Rerun the aggregate plan as new information emerges Use aggregate planning as capacity utilization increases

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Aggregate Planning in Excel

Construct a table with the decision variables Construct a table for constraints Create a cell containing the objective function Use Data Analysis Solver

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Aggregate Planning in Services

Services occur when they are rendered Demand for service can be difficult to predict Capacity availability can be difficult to predict Labor flexibility can be an advantage in services

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Master Production Schedule

MPS is a detailed dis-aggregation of aggregate

production plan, listing the exact end items to be produced by a specified period.
Its like an appointment book with shorten planning

horizon not longer than lead time to produce the item

MPS is used to compute component parts &

subassembly requirements
Frequent change in MPS may create System

Nervousness
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Master Production Schedule

Period January-wk 1 January-wk 2 January-wk 3 January-wk 4 February-wk1 February-wk2 February-wk3 February-wk4 Total Model A 10 10 20 0 20 0 0 20 80 Model B 10 10 0 20 0 20 0 20 80 Model C 10 10 10 10 0 0 20 0 60
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Available to Promise (ATP) quantity

MPS gives time-phased quantities of specific items. It

also give information of any additional order (ATP) can be supplied Three basic method Discrete available to promise Cumulative available to promise without look ahead Cumulative available to promise with look ahead
(Production and Inventory Management by Fogarty)

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Discrete ATP calculation for January and February1

Week Model A MPS BI = 30 10 10 30 20 10 0 10 20 30 0 0 0 10 0 20 0 20 0 20 0 0 0 0 20 10 10 1 2 3 4 5 6 7 8

Committed Customer Orders ATP:D Model B MPS BI = 30

10 20 20 10

10 10 0

0 10 0

20 0 20 0

0 0 0

20 20 0

0 20 0

20 0

Committed Customer Orders ATP:D Model C MPS BI = 40

10 20 30 20

10 10 0

10 20 0

10 0 10 0

0 0 0

0 10 0

20 0 20 5

0 15 0

Committed Customer Orders ATP:D

The computation shows that 20 units of the Model A can be promised for delivery in the first week of January or later, and another 10 units can be promised for delivery in week 8 or later
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The Bill of Materials (BOM)

MPS of independent demand is calculated from APP where as

MRP of depended demand is calculated from BOM BOM is an engineering document that shows an inclusive listing of all component parts and assemblies making up the final product
Three types of BOM Multilevel BOM Indented BOM Super Bill of materials

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Multi-level BOM
All-terrain Vehicle (ATV)

Level 0 (Finished good)

Body and accessories

Engine assembly Engine block

Chassis

Suspension And brake

Exhaust and fuel system

Transmission

Level 1

Piston assembly

Cylinder head

Crankshaft

Camshaft

Seals and gaskets

Level 2

Piston Subassemblies (4)

Connecting rods (4)

12 steel Bar (1/2)

Level 3

Piston rings (3)

Piston

24 solid steel bar

Level 4

6 steel bar (1/4) 24 solid Steel bar

Level 5

Level 6

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Indented Bill of Materials- ATV

Part Description Engine assembly Engine Block (components not shown) Cylinder Head Piston assembly Piston subassembly Piston rings Pistons 6 steel bar 24 solid steel bar Connecting rods Crankshaft Camshaft 12 steel bar 24 solid steel bar Seals & gaskets Chassis Level 1 2 2 2 3 4 4 5 6 3 2 2 3 4 2 1 Planning Factor 1 1 1 1 4 3 1 1 4 1 1 1 1 1 33

Super Bill of Materials

All Terrain Vehicle (ATV)

Engine assembly

Transmission

Model A 100/3 %

Model B 100/3 %

Model C 100/3 %

Auto 75%

Manual 25%

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Material Requirement Planning (MRP)

MRP is a computer-based material management system

used widely by manufacturing firms by computing dependent demand

With the advent of computer and ICT, MRP changed to

closed-loop MRP

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Material Requirement Planning (MRP)

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