MAN 3520 Spring 2012 CP6 Aggregate Planning and Master Scheduling: Page 1 of 17

AGGREGATE PLANNING
Aggregate plan: Also called the production plan, it details the aggregate production rate decisions, work force decisions, and inventory scheduling decisions over an intermediate planning horizon. The aggregate plan is an intermediate range plan that typically spans one full year so that it can react to all the seasonal swings in the demand.

Aggregate plan units: At this level of planning, there is not a lot of detail. Individual end product identity is typically not present. Instead, planning is performed for a composite, or average unit of product in a particular family of similar products. For example, we may plan for units of hair dryers, without regard for whether they are 1500 watt dryers, 1600 watt dryers, 1875 watt dryers, travel dryers, etc. Decisions are typically aggregated into monthly time periods. Weekly or daily detail is not needed at this level of decision making. Eventually that finer detail will surface after the aggregate plan is further broken down (disaggregated).

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NATURE OF THE AGGREGATE PLANNING PROBLEM

Units of Aggregate Product Demand Forecast

Regular (or Normal) Capacity Limit

Time

1 year

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AGGREGATE PLANNING STRATEGIES

Options for coping with fluctuating demand are categorized as either capacity oriented options (operations oriented strategies) or demand oriented options (marketing oriented strategies). Operations oriented strategies can be further classified as either a leveling strategy or a chase strategy. Marketing tactics for dealing with demand seasonality include inducing demand shifts, utilizing back orders, or offering counter seasonal products

Aggregate Planning Strategies

Capacity Oriented Options

Leveling strategy - Changing inventory levels Chase strategy - Hire or layoff - Overtime or idle time - Subcontracting - Part-time workers

Demand Oriented Options

Influencing demand - Sales, discounts, rebates, promotions, etc. Back ordering - Take orders, ship later Counter seasonal products

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EXAMPLES OF OPERATIONS STRATEGIES

Leveling strategy: Maintain output at a constant (level) rate throughout the planning horizon. Accommodate seasonal variations in demand through the accumulation and depletion of inventories. Chase strategy: Vary the output rate to match the seasonal variations in demand. Output rate can be varied by (1) hiring and firing workers, (2) utilizing overtime and idle time, (3) subcontracting, (4) using part time workers. Mixed strategy: A cost effective aggregate plan may require the use of a combination of the various strategies listed above. Such a plan is referred to as a mixed strategy.

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SIMPLE DATA SET TO DEMONSTRATE DIFFERENT STRATEGIES

Demand forecasts have been made for our composite product, and they appear in the following table (I have scaled the numbers down to a manageable size. Demands were originally in thousands of units, but I am knocking off three zeros to make it more compact):
Month Demand Forecast JAN 100 FEB 150 MAR 250 APR 400 MAY 250 JUN 50 JUL 90 AUG 160 SEP 260 OCT 390 NOV 240 DEC 60

The total annual demand from the above set of forecasts is 2400 units. Additional Data Hiring cost: $200 per worker hired Firing cost: $100 per worker fired Regular pay: $5000 per worker per month Overtime pay: 1.5 times regular pay Inventory carrying cost: $10 per unit (based on end of month balances) Backorder cost: $20 per unit (based on end of month shortage) Productivity: 10 units per worker per month (this has also been scaled down from what was originally expressed in thousands of units per month) Beginning workforce size: 20 workers (available at the beginning of January) Beginning inventory: 0 units (no inventory available at the beginning of January)

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LEVEL STRATEGY WITH INVENTORY AND BACKORDERS

This strategy will produce at a constant rate, and simply accumulate and deplete inventory throughout the year. A first step is to determine what the monthly production needs to be (in order to produce enough to satisfy the demand for the year), and determine whether our initial work force size is sufficient to produce at this rate. Total annual demand = 2,400 units. Average monthly production needed = 2,400 units/12 months = 200 units per month. Current work force size is 20 workers. This is just enough (because productivity = 10 units per worker per month).

Month Demand Forecast Production Beginning Inv. Ending Inv. Carrying Cost Backorder Cost Regular Labor Cost Overtime Cost

JAN 100 200 0 100 1000

100,000

FEB 150 200 100 150 1500

100,000

MAR 250 200 150 100 1000

100,000

APR 400 200 100 -100 2000

100,000

MAY 250 200 -100 -150 3000

100,000

JUN 50 200 -150 0

JUL 90 200 0 110 1100

100,000

AUG 160 200 110 150 1500

100,000

SEP 260 200 150 90 900

100,000

OCT 390 200 90 -100 2000

NOV 240 200 -100 -140 2800

100,000

DEC 60 200 -140 0

100,000

100,000

100,000

Total Inventory Carrying Cost: Total Backorder Cost: Total Hiring Cost Total Firing Cost Total Regular Payroll Cost: Total Overtime Payroll Cost: Total Annual Cost:

$7,000 $9,800 0 0 $1,200,000 0 $1,216,800

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CHASE STRATEGY WITH HIRING AND FIRING

This strategy will produce exactly what is demanded each month. It will adjust capacity by hiring and firing workers at the beginning of each month so that the work force is the proper size to produce just what is demanded each month.

Month Demand Forecast Workers Needed Number Hired Number Fired Hiring Cost Firing Cost Labor Cost Overtime Cost

JAN 100 10 10

FEB 150 15 5
1,000

MAR 250 25 10
2,000
125,000

APR 400 40 15
3,000

MAY 250 25 15
1,500

JUN 50 5 20

JUL 90 9 4
800

AUG 160 16 7
1,400
80,000

SEP 260 26 10
2,000
130,000

OCT 390 39 13
2,600

NOV 240 24 15
1,500

DEC 60 6 18
1,800
30,000

1,000
50,000 75,000 200,000

2,000
25,000 45,000 195,000

125,000

120,000

Total Inventory Carrying Cost: Total Backorder Cost: Total Hiring Cost Total Firing Cost Total Regular Payroll Cost: Total Overtime Payroll Cost: Total Annual Cost:

0 0 $12,800 $7,800 $1,200,000 0 $1,220,600

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CHASE STRATEGY WITH OVERTIME AND IDLE TIME

This strategy will produce exactly what is demanded each month by maintaining its current workforce size of 20 workers at a constant value. It will adjust capacity by using overtime when demand exceeds the regular time capacity, and allow workers to sit idle when demand is less than the regular time capacity.

Month Demand Forecast Capacity * Capacity Needed * Overtime * Idle Time * Regular Labor Cost Overtime Cost

JAN 100 20 10 10
100,000

FEB 150 20 15
5
100,000

MAR 250 20 25 5
100,000 37,500

APR 400 20 40 20
100,000 150,000

MAY 250 20 25 5
100,000 37,500

JUN 50 20 5
15
100,000

JUL 90 20 9
11
100,000

AUG 160 20 16
4
100,000

SEP 260 20 26 6
100,000 45,000

OCT 390 20 39 19
100,000 142,500

NOV 240 20 24 4
100,000 30,000

DEC 60 20 6
14
100,000

* These items are expressed in worker months of output. For example, In January we need 100 units of output. The productivity of one worker is 10 units per month, so we would need 10 fully active workers worth of output during January to get 100 units of output. Since we actually have 20 workers on the payroll, we have the equivalent of 10 worker months of idle time during January. In March we have our first overtime, which is the equivalent of 5 worker months of overtime. One worker month of labor on a regular time basis costs $5,000. Since the overtime rate is given as time and a half, a worker month of overtime would cost $7,500. Total Inventory Carrying Cost: Total Backorder Cost: Total Hiring Cost Total Firing Cost Total Regular Payroll Cost: Total Overtime Payroll Cost: Total Annual Cost: 0 0 0 0 $1,200,000 $442,500 $1,642,500

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COMMENTS ABOUT THE PURE STRATEGIES DEVELOPED

Although the least costly of the three strategies developed above is the level strategy, and the most costly is the chase strategy using overtime, don't try to draw any general conclusions from these results. The costs generated are purely a function of the relative costs of hiring, firing, overtime, inventory carrying, and backorders. If these costs were to have had different values, the results could have been quite different. Also, no claims are being made about the practicality of these pure strategies. There could be plenty of reasons why one or more would be impractical. For example, if the skilled workers are in great demand and hard to find, one would probably think twice about firing workers whenever they were not immediately needed. It might be quite difficult to replace them when the need arose. Also, close examination of the overtime strategy would reveal that the month of April is a killer for the workforce (and October isn't much kinder). In April we need the equivalent of 40 worker months of output. Since we have a workforce size of 20, that is equivalent to needing 20 worker months of overtime. To put this in perspective, if our workers normally work 40 hours per week, then each will have to work 80 hours per week in the month of April! In reality, a company's aggregate plan will probably be a hybrid plan that may have used a combination of several of the pure strategies mentioned. For example, to ease the burden on the work force during April, we probably would not have allowed our workers to sit idle during January and February, but instead had them using their full time capacity to produce in excess of January and February demand. Those excess units would have been held in inventory to lessen the need for overtime in the later months. Even with that, overtime needs might have been excessive, so it may have been necessary to hire some temporary workers during those peak months to help get by. (Or, we might have subcontracted out some of the work, or we might have accepted some backorders, with the unsatisfied demand being satisfied in some of the later months when demand tails off.) In short, the pure strategies might provide a starting point in the development of an aggregate plan, but those will almost certainly have to be tweaked to get a plan that is practical.

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CHECKING THE FEASIBILITY OF THE AGGREGATE PLAN

Once an aggregate plan has been developed, it is a good idea to perform a check to make sure the plan will not overtax some critical or limited resource for the organization. (This is very similar to what we saw in MRP, when we used capacity requirements planning to check the feasibility of the materials plan. If the planned order releases were going to overburden a department, work center, or machine, we found it necessary to adjust the planned order releases). In a similar fashion, we use a process called resource requirements planning to see if we will have sufficient resources to carry out our aggregate plan. These resources can be many and varied. For example, there may be limitations on our storage space (which impacts inventory), limitations on our personnel department capabilities (which impacts hiring and firing), limitations on machine capacity (which impacts production scheduled), limitations on energy availability (which impacts production scheduled), etc., etc., etc.

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BRIEF ILLUSTRATION OF RESOURCE REQUIREMENTS PLANNING

To get a flavor for the concept of resource requirements planning, consider the following small portion of an aggregate plan that was developed for some company: (the company had a beginning workforce of 120 workers at the start of January, and zero beginning inventory) These first two columns reflect the demand forecasts. We developed an aggregate plan that would accommodate these forecasts Month January February March April Etc. Demand 800 1200 1800 2000 Etc. These last five columns represent the results of our aggregate planning process. We put together a plan that had production decisions in each month, some inventory accumulation and depletion, and some workforce size adjustments (hiring and firing). Before we implement this plan, it will be necessary to check to see if we have enough resources to make it work. Ending Workforce Number Number Production Inventory Size Hired Fired 1000 200 100 20 2000 1000 200 100 1500 700 150 50 1800 500 180 30 Etc. Etc. Etc. Etc. Etc.

Suppose that the warehouse has a storage limitation of 800 units. This plan will overtax that resource in February. We will either have to scale down the production quota for February, or find some alternative place for inventory storage. Suppose that the personnel department staff is only capable of recruiting, interviewing, and training at most 50 workers in a given month. This plan will overtax the personnel department in February, with its requirement to hire 100 workers. Suppose that the machines that make the product have a design capacity of only 1800 units per month. This plan will overtax the equipment in February, with its production quota of 2000 units. As a result of all these observations, we should be doing a little tweaking of this plan to get it in a form that is doable. Otherwise, if we simply try to implement it as it stands, we are in for some trouble down the road.

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FACTS ABOUT THE MASTER PRODUCTION SCHEDULE

The master production schedule (MPS) is an anticipated build schedule for end products. While it is a plan to satisfy customer demand, it is a statement of production and not a statement of demand. The master production schedule is a disaggregation (break down) of the aggregate plan. It contains more product detail than the aggregate plan (distinct end items rather than composite or average units of product), and it uses finer time intervals (weeks rather than months). The master production schedule is the driving force behind the generation of the material requirements plan.

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BREAKING DOWN THE AGGREGATE PLAN

In this illustration we manufacture two different models (Model A and Model B) of some product. The aggregate plan generated the following schedule of planned production for an average unit of our product (I am displaying only the first few months of the aggregate plan, which would have spanned at least a full year. In addition, I have scaled down the numbers by dropping several zeros.) Aggregate Plan: Month Planned Production

Jan 200

Feb 100

Mar 300

Apr 400

For the purpose of projecting the needs for individual models, we have looked at historical records and find that Model A accounts for 60% of the demand for product, while Model B accounts for 40% of the demand. We will use those percentages, and our knowledge that demand typically occurs uniformly throughout a month to project the week by week production needs for our two models.

Aggregate Plan: Month Planned Production

Jan 200

Feb 100

Mar 300

Apr 400

Week Model A Model B

1 30 20

January 2 3 30 30 20 20

4 30 20

5 15 10

February 6 7 15 15 10 10

8 15 10

These numbers can be viewed as a projection of our master schedule needs (we can refer to them as a "forecast" of MPS needs). In actual practice the process of developing a master production schedule is quite a bit more complex than what is pictured above. That was just a first pass. Additional factors (such as available inventories of finished products, lot sizing issues with production batches, etc.) result in further tweaking of the numbers to get to a final master production schedule.

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TESTING THE FEASIBILITY OF THE MPS ROUGH-CUT CAPACITY PLANNING

When a master production schedule is developed, it must be checked for feasibility (i.e., check to see if there is enough available capacity to do what the master production calls for). Rough-cut capacity planning (RCCP) is the mechanism that tests the feasibility of the master production schedule. RCCP can be performed in a variety of ways. Some are simple and straightforward (but perhaps less precise) while others are more cumbersome and complex (but perhaps more precise). The simplest of these approaches is illustrated here. It uses historical averages to project capacity loads in the system. Continuing our simple illustration in which we have two models (Model A and Model B) for our finished product, historical records indicate that each model requires machine time on two different machines, as follows: Hours per unit on Machine 1 2 3 Hours per unit on Machine 2 1.5 2.5

Model A Model B

Assume that we have disaggregated our aggregate plan and we have done some further tweaking to account for available inventories and lot sizing issues, resulting in the following master production schedule (displayed for only 8 weeks due to space limitations here). Week MPS - Model A MPS - Model B 1 20 30 2 40 30 3 20 30 4 40 0 5 20 0 6 20 30 7 0 0 8 20 0

These MPS quantities can be combined with the historical data from above to project the following machine time loads. Machine 1 Load Due to Model A Due to Model B Total Machine 1 Load 1 40 90 130 2 80 90 170 3 40 90 130 4 80 0 80 Week 5 40 0 40 6 40 90 130 7 0 0 0 8 40 0 40

Machine 2 Load Due to Model A Due to Model B Total Machine 2 Load 1 30 75 105 2 60 75 135 3 30 75 105 4 60 0 60

Week 5 30 0 30 6 30 75 105 7 0 0 0 8 30 0 30

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CONTINUATION OF ROUGH-CUT CAPACITY PLANNING EXAMPLE

We will assume that our factory operates 7 days per week, and runs three 7-hour shifts each day (21 hours of operating time each day for 7 days yields a weekly machine capacity of 147 hours on each machine). These capacity limits suggest that the proposed master production schedule presents a problem. There is not sufficient capacity on Machine 1 during week 2 to complete the schedule. Modifications to the master production schedule will be required before we can proceed with production. If this observation is not obvious from the Machine 1 projected load table on the prior page, a graphical load profile (standard bar charts) would have provided a quick visual display of the problem, as noted below: Load Profile for Machine 1 Machine Hours 180 160 140 120 100 80 60 40 20 1 2 3 4 5 6 7 8 Weekly Capacity Limit for Machine 1

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TIME FENCES IN THE MASTER PRODUCTION SCHEDULE

Things change over time (orders get cancelled, new orders are placed, items in inventory get damaged, quality problems cause us to scrap a batch of items, etc., etc.). Circumstances like these impact our projections for MPS quantities. Sometimes these circumstances suggest that we must change the MPS to reflect these new conditions. Not all portions of the MPS are readily changeable; what changes we can make depend upon how far out into the future they are. In that context, the MPS is often thought of as having the following three portions: Liquid portion of the MPS: This is the portion of the MPS that is beyond the total cumulative lead time for manufacturing the item. We haven't yet even started to make or order the lowest level items in the bill of materials for those MPS quantities. Therefore, we can easily change those MPS values with little or no impact on our planning system. Slushy portion of the MPS: This is the portion of the MPS that is inside the total cumulative lead time for manufacturing the item, but beyond the lead time for the final assembly of components into the finished product. We can make limited changes at this stage, for we have already begun building the pieces and parts that will make up our final product. We can make changes like product mix changes (changing models, or versions of the product by assembling slightly different configurations of the already manufactured components). Frozen portion of the MPS: This is the portion of the MPS that is inside the final assembly lead time for the item. At this point, we have already begun assembling the MPS batches of the items in question, and it is difficult to undo this or make model switches at this point.

A time fence is simply a point in time that defines the dividing line between two adjacent portions of the MPS. The demand time fence is the point in time on the time horizon that separates the frozen portion of the MPS from the slushy portion of the MPS. Further out on the time horizon you will find the planning time fence, which is the point in time on the time horizon that separates the slushy portion of the MPS from the liquid portion of the MPS.

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THE BIG PICTURE

Demand Forecasting

Aggregate Planning

Revise

Is Aggregate Plan Feasible? (check with Resource Requirements Planning, RRP) Yes Disaggregate the Aggregate Plan

No

Master Production Schedule (MPS)

Revise

No Is Master Production Schedule Feasible? (check with Rough Cut Capacity Planning, RCCP) Yes Bill of Materials (BOM) Material Requirements Planning (MRP) Inventory Records File (INV)

Planned Order Releases (POR)

Revise

No Are Planned Order Releases Feasible? (check with Capacity Requirements Planning, CRP) Yes Release Orders According to this Schedule