Dr. S.

Venkataramanaiah (S Venkat)
OM & QT Area IIM Indore Prabhandh Shikhar Rau-Pithampur Road Indore- 453 331 Email: svenkat@iimidr.ac.in

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Aggregate Planning

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OBJECTIVES
To understand Importance of Business Plan Planning Activities and their relation Planning for Sales and Operations The Aggregate Operations Plan Approaches for AP- Chase and Level Strategies
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Business Plan- Importance

BP strategic in nature and addresses the following: Should we meet the projected demand entirely or a portion of the projected demand? What are the implications of this decision on the overall competitive scenario and the firms standing in the market? How is this likely to affect the operating system and planning in other functional areas of the business such as marketing and finance? What resources should we commit to meet the chosen demand during the planning horizon? APP seeks to translate business plans to operational decisions
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Why APP?
Demand fluctuations Capacity fluctuations Difficulty level in altering production or output rates Production systems are complex and varying the rate of production requires prior planning and co-ordination with supplier and distributor Benefits of multi-period planning
Aggregate Planning is done in an organisation to match the demand with the supply on a period-byperiod basis in a cost effective manner

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The Aggregate Plan

Main purpose is to specify optimal combination of Production rate (units completed per unit of time) Workforce level (number of workers) Inventory on hand (inventory carried from period to period) Product group or broad category (Aggregation) This planning is done over an intermediaterange planning period of 6 to 18 months
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Aggregate Demand- Components

AGGREGATE DEMAND For PSEUDO PRODUCT

ITEM 3 DEMAND

ITEM 2 DEMAND

ITEM 1 DEMAND

Time
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Production Planning System- Inputs

Competitors behavior External capacity Raw material availability Market demand Economic conditions External to firm

Planning for production

Current physical capacity

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Current workforce

Inventory levels
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Activities required for production

Internal to firm
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MPS Linkages with APP &

Forecasting
Order Inflow

Market

Aggregate Production Planning

Forecasting

Capacity Plan

Master Production Scheduling

Materials Plan

Labour & Resources

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Resource availability

Actual Production
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Vendors
Material Inflow
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Hierarchical Approach to Planning

Business Plan Marketing Plan Production Plan (rough cut capacity) Financial Plan

Level 1 Level 2 Materials Requirement Plan

Master Production Schedule Capacity Requirement Plan Detailed Scheduling

Level 3
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Shop Floor Control

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APP Decision Variables: An illustration

The decisions involve Amount of resources (productive capacity and labour hours) to be committed Rate at which goods and services needs to be produced during a period Inventory to be carried forward from one period to the next

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APP Decision Variables: An illustration

An example from Garment Manufacturing Produce at the rate of 9000 metres of cloth everyday during the months of January to March Increase it to 11,000 metres during April to August Change the production rate to 10,000 metres during September to December Carry 10% of monthly production as inventory during the first 9 months of production. Work on a one-shift basis throughout the year with 20% over time during July to October
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Aggregate Units for CapacityExamples

Sl. No 1 2 3 4 5 6 Product Acetic Acid Data Entry Systems Mini computer Printed Circuit Board Alloy Iron Castings Cement Aggregate Unit of capacity Metric tonnes Numbers Value (ex-factory) in Rs. Square Metres Metric tonnes Metric tonnes

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Aggregate Planning Framework

Forecasting Targeted Demand
to be fulfilled

Alternatives for Modifying demand Arriving at effective

Period-by-period Demand to be met

Actual period-by-period Supply Schedules

Arriving at Period-by-Period Supply Schedules Alternatives for Modifying supply

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Alternatives for managing demand

Reservation of Capacity Influencing Demand
Special Tariffs Differential Discount Structures Limited period special offers

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Alternatives for Managing Supply

Inventory Based Alternatives
Stock out, Backordering/Backlogging Carrying Inventory

Capacity Adjustment Alternatives

Hiring/Lay-off of workers Varying shifts Varying Working Hours (OT,UT)

Capacity Augmentation Alternatives

Sub-contracting/Outsourcing De-bottlenecking Addition of new capacity
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APP-Example
1400 Total-lbr hrs 1200 Total-m/c hrs

1000

800

600

400

200

0 1 2 3 4 5 6 7 8 9 10 11 12

Any Observations?
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APP-Example
12000 10000 Cumulative labr hrs Cumulative m/c hrs

8000

6000

4000

2000

0 1 2 3 4 5 6 7 8 9 10 11 12

Any Observations?
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APP-Example
5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1 2 3 4 5 6 7 8 9 10 11 12 Total-lbr hrs Total-m/c hrs Total-Fin Rs

Any Observations?
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APP-Example
35000 30000 25000 20000 15000 10000 5000 0 1 2 3 4 5 6 7 8 9 10 11 12 Cumulative labr hrs Cumulative m/c hrs Cumulative fin res Rs

Any Observations?
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Balancing Aggregate Demand and Aggregate Production Capacity

Avg demand= 41000/6 10000 Suppose the figure to the right represents forecast demand in units Now suppose this lower figure represents the aggregate capacity of the company to meet demand What we want to do is balance the production rate, workforce levels, and inventory to make these figures match up
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8000 6000 4000 2000 0 Jan Feb Mar Apr May Jun 5500 4500 7000 6000 10000 8000

Avg Capacity= 35500/6; what is the gap?

10000 8000 6000 6000 4000 2000 0 Jan Feb Mar Apr May Jun 4500 4000 4000 9000 8000

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APP-Demand and Capacity

12000 Demand 10000 35000 8000 6000 4000 2000 0 1 2 3 4 5 6 30000 25000 20000 15000 10000 5000 0 1 2 3 4 5 6 Cap 45000 40000 Cum Dmd Cum Cap

Any Observations?

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APP Examples: Unit Demand and Cost Data

Suppose we have the following unit demand and cost information:
Month Demand Jan 4500 Feb 5500 Mar 7000 Apr 10000 May 8000 Jun 6000 Total 41000

Materials Holding costs Marginal cost of stockout Hiring and training cost Layoff costs Labor hours required Straight time labor cost Beginning inventory Productive hours/worker/day Paid straight hrs/day
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Rs5/unit Rs1/unit per mo. Rs1.25/unit per mo. Rs200/worker Rs250/worker 0.15 hrs/unit Rs8/hour 250 units 7.25 8
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Cut-and-Try Example: Determining Straight Labor Costs and Output

Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and Rs/worker?

Month Jan Demand 4500

Feb 5500

Mar 7000

Apr 10000 7.25 8

May 8000

Jun 6000

Total 41000

7.25x22

Productive hours/worker/day Paid straight hrs/day

22x8hrsxRs8=Rs1408
Days/mo Hrs/worker/mo Units/worker Rs/worker
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7.25/0.15=48.33 & 48.33x22=1063.33

Mar 21 152.25 1015 1,344 Apr 21 152.25 1015 1,344 May 22 159.5 1063.33 1,408 Jun 20 145 966.67 1,280
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Jan 22 159.5 1063.33 1,408

Feb 19 137.75 918.33 1,216

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Chase Strategy (Hiring & Firing to meet demand)

Days/mo Hrs/worker/mo Units/worker Rs/worker Jan 22 159.5 1,063.33 1,408
Lets assume our current workforce is 7 workers.

First, calculate net requirements for production, or 4500-250=4250 units Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can beVenkat fired. PGP1 -OM 1 -S 25

Demand Beg. inv. Net req. Req. workers Hired Fired Workforce 11/20/2010 Ending inventory

Jan 4,500 250 4,250 3.997 3 4 0

Below are the complete calculations for the remaining months in the six month planning horizon
Jan 22 159.5 1,063 1,408 Feb 19 137.75 918 1,216 Mar 21 152.25 1,015 1,344 Apr 21 152.25 1,015 1,344 May 22 159.5 1,063 1,408 Jun 20 145 967 1,280

Days/mo Hrs/worker/mo Units/worker Rs/worker

Demand Beg. inv. Net req. Req. workers Hired Fired Workforce Ending inventory
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Jan 4,500 250 4,250 3.997 3 4 0

Feb 5,500 5,500 5.989 2 6 0

Mar 7,000 7,000 6.897 1 7 0

Apr 10,000 10,000 9.852 3 10 0

May 8,000 8,000 7.524 2 8 0

Jun 6,000 6,000 6.207 1 7 0

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Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included

Demand Beg. inv. Net req. Req. workers Hired Fired Workforce Ending inventory Material Labor Hiring cost Firing cost

Jan 4,500 250 4,250 3.997 3 4 0 Jan 21,250.00 5,627.59 750.00

Feb 5,500 5,500 5.989 2 6 0 Feb 27,500.00 7,282.76 400.00

Mar 7,000 7,000 6.897 1 7 0 Mar 35,000.00 9,268.97 200.00

Apr 10,000 10,000 9.852 3 10 0 Apr 50,000.00 13,241.38 600.00

May 8,000 8,000 7.524

Jun 6,000 6,000 6.207

2 1 8 7 0 0 May Jun 40,000.00 30,000.00 10,593.10 7,944.83 500.00 250.00

Costs 203,750.00 53,958.62 1,200.00 1,500.00 260,408.62

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Level Workforce Strategy (Surplus and Shortage Allowed)

Lets take the same problem as before but this time use the Level Workforce strategy This time we will seek to use a workforce level of 6 workers

Demand Beg. inv. Net req. Workers Production Ending inventory Surplus Shortage

Jan 4,500 250 4,250 6 6,380 2,130 2,130

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Below are the complete calculations for the remaining months in the six month planning horizon
Jan 4,500 250 4,250 6 6,380 2,130 2,130 Feb 5,500 2,130 3,370 6 5,510 2,140 2,140 Mar 7,000 2,140 4,860 6 6,090 1,230 1,230 Apr 10,000 1,230 8,770 6 6,090 -2,680 2,680 May 8,000 -2,680 10,680 6 6,380 -1,300 1,300 Jun 6,000 -1,300 7,300 6 5,800 -1,500 1,500

Demand Beg. inv. Net req. Workers Production Ending inventory Surplus Shortage

Note, if we recalculate this sheet with 7 workers we would have a surplus

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Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
Jan 4,500 250 4,250 6 6,380 2,130 2,130 Feb 5,500 2,130 3,370 6 5,510 2,140 2,140 Mar 7,000 10 4,860 6 6,090 1,230 1,230 Apr 10,000 -910 8,770 6 6,090 -2,680 2,680 Jan 8,448.00 31,900.00 2,130.00 Feb Mar Apr 7,296.00 8,064.00 8,064.00 27,550.00 30,450.00 30,450.00 2,140.00 1,230.00 3,350.00 May 8,000 -3,910 10,680 6 6,380 -1,300 1,300 May 8,448.00 31,900.00 1,625.00 Jun 6,000 -1,620 7,300 6 5,800 -1,500 1,500 Jun 7,680.00 29,000.00 1,875.00

Note:Total costs under this strategy are less than Chase at Rs260.408.62
48,000.00 181,250.00 5,500.00 6,850.00

Labor Material Storage Stockout

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Some Observations
48,000.00 181,250.00 5,500.00 6,850.00 241,600.00

Labor Material Storage Stockout

53,958.62 203,750.00 1,200.00 1,500.00 260,408.62 Chase Strg

Labor Material Hiring Firing

Which strategy is better and why? What is the impact of cost structure and level of workforce on total cost?
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APP- Alternatives
Description of the alternative Alternatives Reservation of capacity for managing Influencing Demand demand Inventory based alternatives (a) Build Inventory (b) Backlog/Backorder/Shortage Capacity adjustment alternatives Alternatives (a) Over Time/Under Time for managing (b) Vary no. of shifts supply (c) Hire/Lay-off workers Capacity augmentation alternatives (a) Sub-contract/Outsource (b) De-bottleneck (c) Add new capacity Costs Planning and Scheduling costs Marketing oriented costs Inventory holding costs Shortage/Loss of goodwill costs OT premium, Lost productivity Shift change costs Training/Hiring costs, Morale issues Transaction costs for sub-contract Annualised de-bottlenecking cost Annualised cost of new capacity

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APP-Generic strategies

In level strategy, the emphasis is not to disturb the existing production rate at all In chase strategy, no effort is made to carry inventory from one period to another; the supply demand mismatch is addressed during each period by employing a variety of capacity related alternatives
APP alternatives applicable Inventory based alternatives (a) Build Inventory (b) Backlog/Backorder/Shortage Capacity adjustment alternatives (a) Over Time/Under Time (b) Vary no. of shifts (c) Hire/Lay-off workers Capacity augmentation alternatives (a) Sub-contract/Outsource (b) De-bottleneck
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APP Strategy Level Strategy

Key features Inventory as the critical link between the periods; Made-to-stock environments; Products with low risks of obsolescence No inventory carried from one period to another; Made-to-order and project environments; Several service systems

Chase Strategy

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Key Strategies for Meeting Demand

Chase- hiring and layoff need easily trained pool of workers-match bet production and order Stable workforce-variable work hours-vary output by flexible work schedules or OT Level maintain constant workforce with constant output, variations are addressed using inventories Pure and mixed strategies Subcontracting
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Relevant cost components

From Agg production plan- production cost, inventory cost, backorder cost, cost due to variations in production Basic production cost-Fixed and variable cost includes direct and indirect material and labour cost, OT cost etc Costs associated with changes in production rate- training, hiring and firing, subcontracting etc Inventory holding cost- cost of capital tied up, storing, insurance, taxes, spoilage and obsolescence Backordering cost-hard to measure- cost of follow up, loss of goodwill, loss of sales revenue etc
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APP-DensePack Inc Problem

Densepack is to plan workforce and production levels for the sixmonth period January to June. The firm produces a line of disk drives for mainframe computers that are plug compatible with several computers produced by major manufacturers. Forecast demands over the next six months for a particular line of drives produced in the XYZ plant are 1280, 640, 900, 1200, 2000 and 1400. Numbers of working days are respectively 20, 24, 18, 26, 22, and 15. There are currently (end of December) 300 workers employed in the Densepack plant. Ending inventory in December is expected to be 500 units, and the firm would like to have 600 units on hand at the end of June.

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APP-DensePack Inc Problem

Cost of hiring one worker = Rs. 500/-, cost of firing one worker = Rs. 1000/- and cost of holding one unit of inventory for one month = Rs. 80/-. The other costs of production in regular time, over time and subcontract may be ignored. In the past, the plant manager observed that over 22 working days, with the workforce level constant at 76 workers, the firm produced 245 disk drives. Solve the APP problem by Linear Programming.

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LINGO model Solution

Global optimal solution found at step: 13 Objective value: 379286.4 Workforce level WT(0) WT(T1) WT(T2) WT(T3) WT(T4) WT(T5) WT(T6)
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300.00 273.0189 273.0189 273.0189 273.0189 737.8889 737.8889

Production level PT(T1) 800.00 PT(T2) 960.00 PT(T3) 720.00 PT(T4) 1040.00 PT(T5) 2378.378 PT(T6) 1621.622 Inventory level IT(T1) 20.00 IT(T2) 340.00 IT(T3) 160.00 IT(T4) 0.00 18.39849 IT(T5) 378.37 IT(T6) 600.00 HT( T5) FT( T1) 464.8700 26.98109

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Excel Model Solution

Base case Case 1 Case 2 Case 3 Case 4 Case 5 Hiring cost 232435.015 227089.5131 223211.4033 236313.1245 68415.12458 229762.2639 layoff cost 26981.0934 34737.3129 26981.0934 34737.3124 37702.6095 30859.2029 Inv cost 119870.2703 119658.9685 107113.5135 132415.7249 275093.3331 119764.6192 total cost 379286.38 381485.79 357306.01 403466.16 381211.07 380386.09 % Change ---0.58 -5.80 6.38 0.51 0.29 Int Invent 500 600 500 600 0 550 Final Invt 600 500 500 600 0 550

Any Observations?

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A SIMPLE EXAMPLE OF AGGREGATION

CAPACITY
MACHINE HRS. AVAILABLE/WK. 36 54 80 33.5 INDEX STD. M/C. HRS. AVAILABLE/WK. 18 54 64 20 156

1 2 3 4

0.5 1 (STANDARD) 0.8 0.6

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NEXT WEEKS FORECASTED DEMAND

JOB 1. UNITS DEMANDED 2. PRODN. RATE/SMH 3. DEMAND IN SMH = (1) / (2)

A 300 6 50

B 210 7 30

C 240 6 40

D 1800 30 60

E 400 25 16

TOTAL

196

CAPACITY SHORTFALL 196 156 = 40 S.M.H.

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APP-Conclusions
Aggregate Planning (AP) serves to translate the business plans into operational decisions The decisions include
amount of resources (productive capacity and labour hours) to commit, rate at which to produce inventory to be carried forward from one period to the next

AP is done to match the demand and the available capacity on a period-by-period using a set of alternatives available to modify demand and/or the supply Alternatives for modifying demand include reservation of capacity and methods of influencing (changing) the demand during a period Alternatives for modifying the supply include inventory variations, capacity adjustment and capacity augmentation
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APP-Conclusions
AP exercise employs the two generic strategies; chase and level production. Chase strategy is often found to be expensive and hard to implement in organisations In reality a mixed strategy using a combination of alternatives is employed in an AP exercise. It uses a variety of alternatives for modifying supply. The structure of a transportation model lends itself to studying the AP problem Linear programming can also be used to model the AP problem MPS involves dis-aggregation of product information and ensuring the required capacity and material are available as per the plan 11/20/2010 PGP1 -OM 1 -S Venkat 49

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