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Aggregate Production Planning (APP)

Operations Management II
Sachin Jayaswal Indian Institute of Management Ahmedabad

Process Planning

Long range Intermediate Forecasting & Demand range Management Manufacturing

Strategic Capacity Planning

Sales and Operations (Aggregate) Planning Sales Plan Aggregate Operations Plan

Master Production Scheduling Materials Requirements Planning

Services

Short range

Order scheduling

Weekly Workforce and Customer Scheduling

Daily Workforce and Customer Scheduling

Introduction to APP
GOAL : To find appropriate aggregate production levels and workforce levels based on predicted aggregate demand.

What is aggregate and disaggregate?

The term aggregate refers to the fact that the plan is developed for a line of products, not just one individual product.

Disaggregate Units Ladder-back chair Kitchen chair Desk chair

Aggregate Units Chair

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Introduction to APP
Aggregate production planning is a tactical/medium term decision
making process

The planning horizon is typically 3 to 12 months.

If the demand for a product changes over time, we need to plan the resource capacity the firm will need over time. Since the planning horizon is short, it is usually not feasible to build or shut down plants, purchase or sell equipment, etc.

Strategies to Meet Demand in Intermediate Term

However, capacity may be adjusted in some other ways. It is usually possible to:

Use inventory to absorb fluctuations in demand (Level) Hire or lay off workers (Chase) Increase or decrease number of shifts Increase or decrease number of working days in a week Increase or decrease working hours (Overtime or Undertime) Subcontract work to other firms Backorder

Aggregate production planning meets the requirement of resource capacity using the above.

Inputs and Outputs of Aggregate Production Planning

Capacity Constraints Demand Forecasts or Orders

Strategic Objectives

Company Policies Financial Constraints

Aggregate Production Planning

Size of Workforce

Output per month

Inventory Levels

Units Subcontracted or backordered

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Issues in APP

Planning Horizon (T): No. of periods for which demand is to be forecasted, and workforce and inventory levels be determined

If T is too large, it is likely that the forecasts far into the future will prove inaccurate in which case the decisions indicated by aggregate plan could be incorrect. Planning may be ineffective with too small planning horizon is selected.

How is APP done?

Input (Aggregate) Demand Forecast Level of resources available Relevant cost information Output Aggregate production quantities

production, inventory, backorder Workforce, overtime, machine capacity level, subcontracting

Level of resources needed

Smoothing Costs

Hiring costs

Firing costs

Number of fires Number of hires Severance pay The costs of a decline in worker morale The potential for decreasing the size of the labor pool in the future

Sl op e

un it hi rin g

Time and cost to advertise positions Interview candidates Train new recruits

Cost

e op Sl = f it un ng iri st co

co st

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Relevant Costs

Inventory Holding Costs

Opportunity cost of capital Taxes and insurance against fire, theft, and other losses Cost of storage space Breakage, spoilage, deterioration and obsolescence Example of calculation of inventory holding costs

Cost of capital Taxes and insurance Storage Breakage/spoilage Total -

15% 2% 5% 3% 25%
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Relevant Costs

Shortage Costs

Shortages occur when the demand exceeds the production capacity. One of two types of costs is charged depending on whether a shortage results in loss of sales or not:

Backorder - if the excess demand is backlogged and fulfilled in a future period, backorder cost is charged (bookkeeping and/or delay costs). Lost sales - if the excess demand is lost because the customer goes elsewhere, the lost sales is charged. The lost sales include goodwill and loss profit margin (= selling price - unit variable cost)

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Relevant Costs

Production costs

Regular time costs

Labor costs, regular time ($/hour) Labor costs, overtime costs ($/hour) Cost of subcontracting ($/unit or $/hour)

Overtime and subcontracting costs

Material cost

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Strategies for APP

Chase strategy

Produce as much as needed Hire/Fire workers as needed Results in low inventory levels To be used when smoothing costs are low and carrying inventory is expensive Not feasible for industries that require highly skilled labor or where competition for labor is fierce. Can have a significant negative impact on the morale of the workforce Produce a constant amount each period Stable workforce, no hiring/firing, no overtime To be used when smoothing costs are high and carrying inventory is relatively inexpensive.
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Level strategy

Strategies for APP

Level Strategy
14000 12000 10000 8000 6000 4000 2000 0
g ll Sp rin in m er Fa te r Su m W
45000 40000 35000 30000 25000 20000 15000 10000 5000 0 Fall Winter Spring Summer Periods Cumulative Number of Units

Level Strategy

Number of Units

Demand Production

Cumulative Demand Cumulative Production

Period

Chase Strategy
14000 12000 10000 8000 6000 4000 2000 0
Cumulative Number of Units 40000 35000 30000 25000 20000 15000 10000 5000 0 Fall

Chase Strategy

Number of Units

Demand Production

Cumulative Demand Cumulative Production

Fa ll

W in te r

Sp rin

Su m m

er

Winter

Spring

Summer

Periods

Period

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HERSHEYS Uses Chase Strategy

Hersheys major plant located in suburb (farming neighborhood in PA, USA) uses Chase strategy Demand for chocolate is high during the winter months. Facilitated by the location of Hersheys manufacturing facility, the company hires farmers from the surrounding areas to aid in meeting demand during winter months. When demand drops in the spring and summer months, the farmers return to their fields.

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What if we have more Constraints in APP?

Decision making can often be constrained by:

Production capacity of the plant

For example, suppose the production capacity of the plant in our example is only 1,500 units per month.

Maximum change in the production level from one month to the next cannot be more than a given value, e.g., 200 units. Limits on capital available. Limits on stockouts and backorders. Setup cost incurred in changing production levels

steel mills, pharmaceutical industry, fertilizer plants

As the constraints become more complex, finding good solutions becomes more difficult. Most constraints of this nature can be incorporated easily into Linear Programming (LP) formulations of Aggregate Planning Problems.
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What if we have more Constraints in APP?

Options for handling the variation in demand across periods:
Hire/Fire Workers Use overtime during peak periods Subcontract some of the work during peak periods Build Inventory during the slow periods Build up Backlog of orders during peak periods

How to best use these options?

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LP Model for APP

Parameters:

CH : Hiring and training cost per worker ($200) CF : Cost of laying off one worker ($250) CI : Cost of holding one unit of inventory for one period ($1.5) CR : Regular time cost of labor per hour ($4) CO : Overtime cost of labor per hour ($6) CS : Cost of stocking out one unit per period ($5) CC : Cost of subcontracting one unit ($120) CM : Cost of material required to produce one unit ($100) h = Number of regular hours worked per day (8) nt = Number of production days in period t (varies by period) K = Number of hours required per unit (5) I0 = Initial inventory at the start of the planning horizon (400) W0 = Initial workforce at the start of the planning horizon (53) Dt = Forecast of demand in period t (varies by period) SSt = Safety Stock in period t (varies by period)
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LP Model for APP

Decision Variables:
Wt = Workforce level in period t (no. of workers) Ot = Overtime hours worked in period t (no. of hours) Ht = Number of workers hired in period t Ft = Number of workers fired in period t Pt = Production level in period t (no. of units) It = Inventory level at the end of period t Ct = Number of units subcontracted from outside in period t St = Number of units stocked out/backlogged out at the end of period t

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LP Model for APP

Objective Function:
Regular time labor cost in period t = (Wt) (nt)(h)(CR)= $ 32 (Wt )(nt) Overtime labor cost in period t = (CO)(Ot) = 6(Ot) Cost of hiring in period t = (CH)(Ht) = 200Ht Cost of lay off (firing) in period t = (CF)(Ft) = 250Ft Cost of material in period t = (CM)(Pt) = 100Pt Cost of inventory at the end of period t = (CI)(It) = 1.5It Cost of subcontracting in period t = (CC)(Ct) = 120Ct Cost of stockout in period t = (CS)(St) = 5St

Total cost incurred during the planning horizon

n hc W + c O + c
t =1 t R t O t

H t + cF Ft + cI I t + cS St + cM Pt + cC Ct

(1)

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LP Model for APP

Conservation of workforce constraints

Wt = Wt 1 + H t Ft , or Wt Wt 1 H t + Ft = 0

for 1 t T ; W0 = 53

(2)

Capacity constraints

Pt (h / k )* nt *Wt (Ot / k ) = 0
No. of hrs/(hrs/unit) (hrs/day)/(hrs/unit) = (8/5)

Pt = h * nt *Wt / k + (Ot / k ) , or

for 1 t T

(3)

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LP Model for APP

Inventory balance constraints

Pt

Ct It
Period t Period t+1

I t 1
Period t-1

S t 1
I t 1 + Pt + Ct = St 1 + Dt + I t St , or I t 1 + Pt + Ct + St St 1 Dt I t = 0

Dt

St

for 1 t T ; I 0 = 400

(4)

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LP Model for APP

Safety Stock Constraints

I t SSt

for 1 t T

(5)

Non-negativity Constraints

H t , Ft , I t , Ot , Ct , St , Wt , Pt 0

for 1 t T

(6)

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LP Model for APP

MIN

hn c W + c O + c
t =1 t R t O t

H t + cF Ft + cI I t + cS St + cM Pt + cC Ct

Subject to

Wt Wt 1 H t + Ft = 0; W0 = 53 Pt = (h / k )ntWt + (Ot / k ) I t 1 + Pt + Ct + St St 1 Dt I t = 0 I 0 = 400 I t SS t H t , Ft , I t , Ot , Ct , S t , Wt , Pt 0

for 1 t T
for 1 t T

(2)
(3)

for 1 t T

(4)

for 1 t T for 1 t T

(5) (6)
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LP Model for APP

Solve the formulation using Excel Solver. See the Excel Sheet APP_LP
Period 0 1 2 3 4 5 6 Aggregate Plan Decision Variables h= 8 k= 5 Ht Ft Wt Ot It St Ct Pt Dt SSt # Hired # Fired # Workforce Over time Inventory Stockout Subcontract Production Demand Safety Stock 0 0 53 0 400 0 0 0 0 0.44 52.56 0 450 0 0 1850 1800 450 0 5.68 46.88 0 375 0 0 1425 1500 375 0 17.11 29.76 0 275 0 0 1000 1100 275 0 0.00 29.76 0 375 0 0 1000 900 225 0 0.00 29.76 0 322.62 0 0 1047.62 1100 275 0 0.00 29.76 0 400 0 725 952.38 1600 400 nt Working Days 22 19 21 21 22 20

Total Cost =

969106

Ideally these quantities should be integer variables Allowing these variables to take fractional values can still provide good approximation, and can be solved using an Excel LP solver. Or these quantities can be declared as integers and solved using an IP solver like cplex. Visit <http://www.ampl.com>.
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Rolling schedule

To minimize the inventory holding cost during the planning horizon, the aggregate plan may recommend zero inventory (when safety stock is 0) or firing all workers (when firing cost is small) at the end of the planning horizon. This is known as the end-of-horizon effect. This may be a poor strategy, specially if demand increases suddenly in the subsequent period. Rolling schedule

In a rolling schedule, a plan is prepared for several periods more than the planning horizon over which the plan will be implemented. At the time of the next decision, a new forecast is appended and old forecasts may be revised. The new plan may recommend different production and workforce levels than were recommended earlier.

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Rolling schedule
How can a rolling schedule be used?
Apply the first month of the plan Delay applying the remaining part of the plan until the next month Rerun the model with new data for next month

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What do we do after APP?

Aggregate Production Plan (Determination of aggregate production and workforce levels for t period planning horizon) Master Production Schedule (MPS) (Production level by item by time period)

Materials Requirement Planning (MRP) (Detailed timetable for production and assembly of components and subassemblies)

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Master Production Schedule (MPS)

The MPS translates the aggregate plan output in terms of specific
production goals by product and time period.
For example, suppose that a firm produces three types of chairs: ladder-back chair,
kitchen chair and desk chair.

The aggregate production considers an aggregate unit of chair and finds that the firm
should produce 550 units of chairs in April.

MPS then translates this output in terms of three product types and four work-weeks in
April. MPS suggests that the firm produce 200 units of desk chairs in Week 1, 150 units of ladder-back chair in Week 2, and 200 units of kitchen chairs in Week 3.
April 1 Ladder-back chair Kitchen chair Desk chair Aggregate production plan 200 550 2 150 200 120 200 790 200 29 3 4 5 6 150 120 May 7 8

Materials Requirement Planning (MRP)

The MRP system translates the MPS output into detailed schedule for production and assembly (or procurement if outsourcing) of components and subassemblies by looking at the Bill-ofMaterial (BOM) information.

Back slats

Seat cushion

Leg supports Back legs Front legs

Seat-frame boards

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