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Aggregate Planning and S&OP
SCM 302 - Aggregate Planning
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Chapter 13 5
• Aggregate Planning
• Determine quantity and timing of production for intermediate range
• Meet forecasted demand while minimizing cost
• Disaggregation: breaking down plan into greater detail.
• Master Production Schedule: a timetable of what is to be made when.
QUARTER 1
• 4 things needed for aggregate planning Jan. Feb. March
1. Unit for measuring sales and output
150,000 120,000 110,000
2. Aggregate demand forecast for planning period
QUARTER 2
3. Method for determining relevant costs
April May June
4. Model that combines forecasts and costs to inform scheduling decisions
100,000 130,000 150,000
QUARTER 3
July Aug. Sept.
180,000 150,000 140,000
SCM 302 - Aggregate Planning
Chapter 13 6
Figure 13.2
SCM 302 - Aggregate Planning
Chapter 13 7
Apple
3C products
Business Level
iPhone
Macbook
Product Types
iPod
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Chapter 13 9
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Chapter 13 11
• Methods
1. Determine the demand for each period
2. Determine the capacity for regular time, overtime, and subcontracting each period
3. Find labor costs, hiring and layoff costs, and inventory holding costs
4. Consider company policy on workers and stock levels
5. Develop alternative plans and examine their total cost
SCM 302 - Aggregate Planning
Chapter 13 12
• Mixed Strategy
• Workforce levels are allowed to Time
change and inventory/ backorders
can be used.
SCM 302 - Aggregate Planning
Chapter 13 13
Costs
2 900
Production Cost: $100 per unit
Hiring: $30 per unit hired
3 1200 Firing: $70 per unit fired
Inventory: $20 per unit in inventory at
4 2000 the end of the month
Backorders: $50 per unit on backorder
5 1400 at the end of each month
6 800
Imagine that you are the assistant to the VP of Mfg and need to
develop different scenarios for the production plan.
What is the best production plan?
SCM 302 - Aggregate Planning
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(600+9000/2=
2 900 1500 750 1220 2440 940 0 122,000 18,800 0
(600+900+1200)/3
3 1200 2700 900 1220 3660 960 0 122,000 19,200 0
4700/4=
4 2000 4700 1175 1220 4880 180 0 122,000 3,600 0
6100/5=
5 1400 6100 1220 1220 6100 0 0 122,000 0 0
6900/6=
6 800 6900 1150 1220 7320 420 0 122,000 8,400 0
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8000 8000
6000 6000
4000 4000
2000 2000
0 0
1 2 3 4 5 6 1 2 3 4 5 6
Month Month
Level – No Backorders
Legend 8000
Cumulative 6000
Demand 4000
Cumulative
2000
Production
0
1 2 3 4 5 6
Month
SCM 302 - Aggregate Planning
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4 1200
Hiring Cost $50
5 3600
Firing Cost $75
6 2000 Inventory
Cost $60
Horizon Cost= Backorder
Cost $150
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2 900 Costs:
Production Cost: $100 per unit
Hiring: $30 per unit hired
3 1200
Firing: $70 per unit fired
Inventory: $20 per unit in inventory at
4 2000 the end of the month
Backorders: $50 per unit on backorder
5 1400 at the end of each month
6 800
Now you have a starting inventory of 1000 (all else the same)
What is the best production plan?
SCM 302 - Aggregate Planning
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600-1000=--400
1 600 0 0 0 1020 600 2020 1420 0 102,000 29,280 0
1500-1000=
2 900 500 500 250 1020 1500 3040 1540 0 102,000 25,760 0
3 1200 1200 1700 566.67 1020 2700 4060 1360 0 102,000 7,840 0
4 2000 2000 3700 925 1020 4700 5080 380 0 102,000 1,920 0
6 800 800 5900 983.33 1020 6900 7120 220 0 102,000 4,080 0
Labor Inventory Backorders
Maximum = 1104. Produce at this constant level. 612,000 98,400 0
Don’t forget hiring/firing at start of horizon: Fire (1020-1050)=30 workers @ cost of 30(70) =2100 Total Horizon Cost = 712,500
SCM 302 - Aggregate Planning
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Service System:
The Level Strategy With No Backorders
Imagine ABC is a life insurance company.
Assuming they never wanted back-orders how
could a level strategy be implemented?
No. of units
Month Demand Labor cost
produced
Why can’t we use the approach from before?
=max {cumulative demand/cumulative no. of periods}
1 600 2000 200,000
200,000
2 900 2000 Must have enough staff to cover the busiest
200,000 period.
3 1200 2000
Assume demand is given in terms of no. of
4 2000 2000
200,000 insurance agent working hours needed.
200,000
5 1400 2000
200,000
6 800 2000
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Chapter 13 26
Planning, Negotiation
and Revisions
Final Agreed
Plan
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Jan Feb March April May June July August Sept. Oct. Nov Dec
Jan
Feb March April May June July August Sept. Oct. Nov Dec
(next year)
3. Beginning of March 2010: Update demand forecasts and do production plan for the
following 12 months. Implement March plan.
March April May June July August Sept. Oct. Nov Dec Jan Feb
(next year) (next year)
4. etc. etc.
SCM 302 - Aggregate Planning
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1. Beginning of January: Do production plan for the year. Decisions about January and February are
frozen (i.e. cannot be changed at later date).
Jan Feb March April May June July August Sept. Oct. Nov Dec
2. Beginning of February: Update demand forecasts. Do production plan for following 12 months.
Not allowed change decision already made for February. Decisions about March are now frozen
Jan
Feb March April May June July August Sept. Oct. Nov Dec
(next year)
3. Beginning of March. Update demand forecasts and do production plan for following 12 months.
Not allowed change decision already made for March. Decisions about April are now frozen
Feb
March April May June July August Sept. Oct. Nov Dec Jan 2010
(next year)
4. etc. etc.
SCM 302 - Aggregate Planning
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Jan Feb March April May June July August Sept. Oct. Nov Dec
Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Showing example with a 6
week frozen zone
2. Beginning of February 2010: Update forecasts. Do production plan next 12 months. Decisions about
February and March broken down into individual weeks. Decision for April, May, etc. are at the month
level
Jan
Feb March April May June July August Sept. Oct. Nov Dec
(next year)
Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 Week 11 Week 12 Showing example with a 6
week frozen zone
SCM 302 - Aggregate Planning
Chapter 13 31
• At some point, the aggregate plan needs to be disaggregated for production scheduling
• E.g. The plant eventually needs to know whether it is building a CE, LE or S Corolla
• Disaggregation often occurs for the initial 0-3 months of a plan
• Because decisions regarding actual products and resources need to be finalized (frozen)
SCM 302 - Aggregate Planning
Chapter 13 32
Num. Num.
Workers Workers Workers Workers Labor Hiring Firing Production
Month Demand 15
(before (after Hired Fired Costs Costs Costs Rate
Rounding) Rounding)
1 600 Starting
Inventory 0
Target
2 500 Ending
Inventory
3 1400 Starting
Workers 70
4 1200
Labor Cost $1,600
5 1100
Hiring Cost $500
6 500
Firing Cost $1,000
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SOP EXERCISE #2.B. THE LEVEL STRATEGY WITH BACKORDERS
Produce the Average Demand Each Period
Cum. Cum. Ending Back-
Ending Labor Inventory Production
Month Demand Workers Demand Production Back- order 15
Inventory Costs Costs Rate
(CD) (CP) orders Costs
1 600 Starting
Inventory 0
2 500
3 1400 Starting
Workers 70
4 1200
Labor Cost $1,600
5 1100
Hiring Cost $500
6 500
Firing Cost $1,000
Inventory
Cost $20
Total L/I/B Costs =
Backorder
Cost $50
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SOP EXERCISE #2.C. THE LEVEL STRATEGY WITH NO BACKORDERS
Produce the Average Demand Each Period
Cum. Cum. Ending Back-
Ending Labor Inventory Production
Month Demand Workers Demand Production Back- order 15
Inventory Costs Costs Rate
(CD) (CP) orders Costs
1 600 Starting
Inventory 0
2 500
3 1400 Starting
Workers 70
4 1200
Labor Cost $1,600
5 1100
Hiring Cost $500
6 500
Firing Cost $1,000
Inventory
Cost $20
Total L/I/B Costs =
Backorder
Cost $50