Aggregate Planning

Involves planning the best quantity to produce during time periods in the intermediate range horizon and planning the lowest cost method of providing the adjustable capacity to accommodate production requirements

Traditional Aggregate planning strategies

concentrates on Maintaining a level workforce Maintaining a steady output rate Match demand period by period

Types of aggregate plans

Level capacity plan- Maintaining a steady rate of regular-time output while
meeting variations in demand by a combination of options. Here Surplus and Shortages are allowed concentrates on Cost of hiring workers Elimination of overtime Chase demand plan: Matching capacity to demand; the planned output for a period is the expected demand for that period. Here Hiring & Firing are practiced to meet demand

Sales and Operations Planning Activities

Long-range planning

Greater than one year planning horizon Usually performed in annual increments

Medium-range planning

Six to eighteen months Usually with monthly or quarterly increments

Short-range planning

One day to less than six months Usually with weekly increments

Long range

Aggregate Planning

Process planning Strategic capacity planning

Intermediate Forecasting & demand range management Manufacturing

Sales and operations (aggregate) planning Sales plan Aggregate operations plan

Master scheduling Material requirements planning

Services

Short range

Order scheduling

Weekly workforce and customer scheduling Daily workforce and customer scheduling

The Aggregate Operations Plan

Main purpose: Specify the optimal combination of production rate (units completed per unit of time) workforce level (number of workers) inventory on hand (inventory carried from previous period) Product group or broad category (Aggregation) This planning is done over an intermediaterange planning period of 6 to18 months

Balancing Aggregate Demand and Aggregate Production Capacity

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 out the production rate, workforce levels, and inventory to make these figures match up

10000 8000 8000 6000 4000 5500 4500 7000 6000

2000
0 Jan Feb Mar 9000 8000 6000 Apr May Jun

10000 8000

6000
4000 2000 0

4500

4000

4000

Jan

Feb

Mar

Apr

May

Jun

Required Inputs to the Production Planning System

Competitors behavior External capacity

Raw material availability

Market demand Economic conditions

External to firm

Planning for production

Current physical capacity

Current workforce

Inventory levels

Activities required for production

Internal to firm

Aggregate Planning Examples: Unit Demand and Cost Data

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

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

$5/unit $1/unit per mo. $1.25/unit per mo. $200/worker $250/worker .15 hrs/unit $8/hour 250 units 7.25 8

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 dollars/worker?
Demand/mo Jan Feb Mar 7000 Apr 10000 May 8000 Jun 6000

7.25x22

4500 5500

Productive hours/worker/day Paid straight hrs/day

22x8hrsx$8=$1408
Days/mo Hrs/worker/mo Units/worker $/worker Jan 22 159.5 1063.33 $1,408 Feb 19 137.75 918.33 1,216

7.25 7.25x0.15=48.33 & 8

48.33x22=1063.33
M ar 21 152.25 1015 1,344 Apr 21 152.25 1015 1,344 M ay 22 159.5 1063.33 1,408 Jun 20 145 966.67 1,280

Chase Strategy (Hiring & Firing to meet demand)

Days/m o Hrs/wo rker/m o Units/wo rker $ /wo rker Jan 22 1 5 9 .5 1 ,0 6 3 .3 3 $ 1 ,4 0 8

Lets assume our current workforce is 7 workers.

First, calculate net requirements for production, or 4500-250=4250 units

Dem and Beg. inv. Net req. Req. wo rkers Hired Fired W o rkfo rce Ending invento ry

Jan 4 ,5 0 0 250 4 ,2 5 0 3 .9 9 7 3 4 0

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 be fired.

Below are the complete calculations for the remaining months in the six month planning horizon
Days/mo Hrs/worker/mo Units/worker $/worker 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

Demand Beg. inv. Net req. Req. workers Hired Fired Workforce Ending inventory

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

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 W orkforce Ending inventory 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

Material Labor Hiring cost Firing cost

Jan Feb Mar Apr May Jun $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 400.00 200.00 600.00 750.00 500.00 250.00

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

$260,408.62

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. W orkers P roduction Ending inventory Surplus Shortage

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

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

Master Production Schedule (MPS):

The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon.

Master Scheduling Process

Inputs
Beginning inventory Forecast Customer orders

Outputs
Projected inventory

Master Scheduling

Master production schedule Uncommitted inventory

Need for Capacity Planning

Whenever the existing demand changes or addition of new products has to be made, then Capacity planning becomes a need

Capacity Planning Design includes:

Re-assessment of existing capacity Effect of change in demand ie, effect of addition, deletion of products and their impact on existing capacity Identifying ways of meeting desired capacity through

Better Utilisation Higher Efficiency Overtime Adding a shift or two Adding new machinery, adding another production unit

Capacity Reduction
Sell-off existing facilities Sell-off surplus inventories Lay off or transfer employees to other units Shut down equipment & place them as standby

Reasons for Capacity Change

A capacity shortage situation where present capacity is not enough to meet the forecast demand for the product An excess or surplus capacity situation where the present capacity exceeds the expected future demand

Capacity Planning
Market Considerations Capacity Decisions Resources Available Long term Based on time horizon Short term Capacity Planning Classification Finite Based on amount of resources employed

Infinite

Capacity Planning Strategies

The term Strategy is derived from the Greek word strateg means the art of the general
Alfred .D.Chandler defines Strategy as the determination of the basic long term goals and objectives of an enterprise and the adoption of the courses of action & the allocation of resources necessary for carrying out these goals Strategy levels Corporate level Business unit level Functional level

Strategies Involved:
Active strategies:
Objective- To smooth out the peaks and values of demand during planning horizon to obtain a smoother load on production facilities; during periods of low demand, sales can be encouraged through price cuts

Passive strategies:
1. Pure strategy- vary anyone of the factors such as work force, production rate, inventory, sub contracting, capacity utilisation.

2. Mixed strategy- Involves two or more pure strategies

Strategy 1 : Vary the size of the work force in accordance with the fluctuations in demand Strategy 2 : Vary output rate keeping the same size of the work force and using overtime or idle time or short work week with reduced pay to workers. Strategy 3 : Maintaining the same level of production, keep inventory during periods of low demand and using the accumulated inventory to meet high demand in other time periods Strategy 4 : Sub-contracting work during high demand periods Strategy 5 : By varying the utilisation of capacity according to the demand to met

3. Mixed strategies to meet non- uniform demand Strategy 1 : Absorbing demand fluctuations by varying inventory level, back ordering or shifting demand Strategy 2 : Changing only the production to match with the non-uniform demand pattern Strategy 3 : Changing the size of the work force to vary the production level in accordance with demand