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Aggregate Production Planning

Planning
Planning is probably one of the most important , yet least understood , jobs that a manager performs. Poor planning can mean a companys inability to handle unexpected occurrences. Good planning can place a company in an extremely competitive position !

Business/Functional Strategy

Overview of Operations Planning Activities


Long range Medium Range
Forecasting & demand management

Process planning
Strategic capacity planning Sales and operations (aggregate) planning Sales plan Aggregate operations plan

Manufacturing
Master scheduling Material requirements planning

Services

Short range

Order scheduling

Weekly workforce and customer scheduling Daily workforce and customer scheduling

Aggregate Planning Aggregate planning is a first rough-cut approximation at determining how existing resources of facilities and people should be used.

Aggregate Operations Planning


The main purpose of aggregate operations planning is to 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)

This planning is done over an intermediate-range planning period of 3 to18 months Sets production rates, etc. by product group or some broad category or products (aggregation)

Balancing Aggregate Demand and Production Capacity


Suppose the top figure represents forecast demand
10000 8000 6000 4500 5500 7000 10000

8000
6000

and suppose the 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.

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

8000

Inputs to Production Planning


Competitors behavior Raw material availability

Market demand

External
External capacity

Production Planning

Economic conditions

Current physical capacity

Current workforce

Inventory levels

Activities required for production

Internal

Types of Aggregate or Production Plans

Level Aggregate Plans Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products like appliances Disadvantage- builds inventory and/or uses back orders Chase Aggregate Plans Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage- constantly changing short term capacity

Types of Aggregate or Production Plans (Cont.)

Hybrid Aggregate Plans


Uses a combination of options Options should be limited to facilitate execution May use a level workforce with overtime & temps May allow inventory buildup and some backordering May use short term sourcing

Steps for Developing the Aggregate Plan

Step 1- Choose strategy: level, chase, or Hybrid Step 2- Determine the aggregate production rate Step 3- Calculate the size of the workforce Step 4- Test the plan as follows: Calculate Inventory, expected hiring/firing, overtime needs Calculate total cost of plan Step 5- Evaluate performance: cost, service, human resources, and operations

Production Planning Strategies


The following can be used: Chase production rates are matched to the demand by hiring and laying off employees Stable workforce, variable hours use flexible work schedules and overtime to match demands Levelling maintain level workforce and constant output Subcontracting can subcontract portion of production to deal with periods of high demand

Production Planning Example


If we have the following unit demand and cost data, is it cheaper to use chase or levelling strategies?
Jan 4500 Feb 5500 monthly demand Mar Apr 7000 10000
$5/unit $1/unit per mo. $1.25/unit per mo. $200/worker $250/worker 0.15 hrs/unit $8/hour 250 units 7.25 8

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

Chase: Assume you start with 7 workers Levelling: Assume you use 6 workers throughout

Production Planning Example: Chase Strategy


# days/month hrs/worker/mon. units/worker cost per worker Jan 22 159.5 1063.33 $1,408

7.25 hours/day x 22 days = 159.5 hours

159.5 hours 0.15 hours/unit = 1063.33 units


$8/hour x 8 hours/day x 22 days = $1408

Production Planning Example: Chase Strategy (2)


# days/month hrs/worker/mon. units/worker cost per worker Jan 22 159.5 1063.33 $1,408 Feb 19 137.75 918.33 $1,216 Mar 21 152.25 1015.00 $1,344 April 21 152.25 1015.00 $1,344 May 22 159.5 1063.33 $1,408 June 20 145 966.67 $1,280

Production Planning Example: Chase Strategy (3)


# days/month hrs/worker/mon. units/worker cost per worker
demand begin inv. net req. workers req. hired fired # workers end inv

Jan 22 159.5 1063.33 $1,408


4500 250 4250 3.997 0 3 4 3

Feb 19 137.75 918.33 $1,216

Mar 21 152.25 1015.00 $1,344

April 21 152.25 1015.00 $1,344

May 22 159.5 1063.33 $1,408

June 20 145 966.67 $1,280

4500 250 = 4250 units


4250 units 1063.33 units/worker = 3.997 workers only need 4 workers so can fire 3 (assume we started with 7) 4 workers produced 4 x 1063.33 = 4253 units Since we need only 4250, then we have 3 left

Production Planning Example: Chase Strategy (4)


# days/month hrs/worker/mon. units/worker cost per worker
demand begin inv. net req. workers req. hired fired # workers end inv

Jan 22 159.5 1063.33 $1,408


4500 250 4250 3.997 0 3 4 3

Feb 19 137.75 918.33 $1,216


5500 3 5497 5.986 2 0 6 13

Mar 21 152.25 1015.00 $1,344


7000 13 6987 6.884 1 0 7 118

April 21 152.25 1015.00 $1,344


10000 118 9882 9.736 3 0 10 268

May 22 159.5 1063.33 $1,408


8000 268 7732 7.271 0 2 8 774

June 20 145 966.67 $1,280


6000 774 5226 5.406 0 2 6 574

Production Planning Example: Chase Strategy (5)


# days/month hrs/worker/mon. units/worker cost per worker
demand begin inv. net req. workers req. hired fired # workers end inv
material cost labour cost hiring cost firing cost

Jan 22 159.5 1063.33 $1,408


4500 250 4250 3.997 0 3 4 3
$21,250 $5,632 $0 $750

Feb 19 137.75 918.33 $1,216


5500 3 5497 5.986 2 0 6 13

Mar 21 152.25 1015.00 $1,344


7000 13 6987 6.884 1 0 7 118

April 21 152.25 1015.00 $1,344


10000 118 9882 9.736 3 0 10 268

May 22 159.5 1063.33 $1,408


8000 268 7732 7.271 0 2 8 774

June 20 145 966.67 $1,280


6000 774 5226 5.406 0 2 6 574

4250 units x $5/unit = $21 250 $1408/worker x 4 workers = $5 632 $250/layoff x 3 layoffs = $750

Production Planning Example: Chase Strategy (6)


# days/month hrs/worker/mon. units/worker cost per worker
demand begin inv. net req. workers req. hired fired # workers end inv
material cost labour cost hiring cost firing cost

Jan 22 159.5 1063.33 $1,408


4500 250 4250 3.997 0 3 4 3
$21,250 $5,632 $0 $750

Feb 19 137.75 918.33 $1,216


5500 3 5497 5.986 2 0 6 13
$27,485 $7,296 $400 $0

Mar 21 152.25 1015.00 $1,344


7000 13 6987 6.884 1 0 7 118
$34,935 $9,408 $200 $0

April 21 152.25 1015.00 $1,344


10000 118 9882 9.736 3 0 10 268
$49,410 $13,440 $600 $0

May 22 159.5 1063.33 $1,408


8000 268 7732 7.271 0 2 8 774
$38,660 $11,264 $0 $500

June 20 145 966.67 $1,280


6000 774 5226 5.406 0 2 6 574
$26,130 $7,680 $0 $500

Total cost: $255 540

Production Planning Example: Levelling Strategy


# days/month hrs/worker/mon. units/worker cost per worker
demand begin inv. net req. production end inv surplus shortage

Jan 22 159.5 1063.33 $1,408


4500 250 4250 6380 2130 2130 0

Feb 19 137.75 918.33 $1,216

Mar 21 152.25 1015.00 $1,344

April 21 152.25 1015.00 $1,344

May 22 159.5 1063.33 $1,408

June 20 145 966.67 $1,280

1063.33 units/worker x 6 workers = 6380 units 6380 units 4250 units = 2130 units

Production Planning Example: Levelling Strategy (2)


# days/month hrs/worker/mon. units/worker cost per worker
demand begin inv. net req. production end inv surplus shortage

Jan 22 159.5 1063.33 $1,408


4500 250 4250 6380 2130 2130 0

Feb 19 137.75 918.33 $1,216


5500 2130 3370 5510 2140 2140 0

Mar 21 152.25 1015.00 $1,344


7000 2140 4860 6090 1230 1230 0

April 21 152.25 1015.00 $1,344


10000 1230 8770 6090 -2680 0 2680

May 22 159.5 1063.33 $1,408


8000 -2680 10680 6380 -4300 0 4300

June 20 145 966.67 $1,280


6000 -4300 10300 5800 -4500 0 4500

Production Planning Example: Levelling Strategy (3)


# days/month hrs/worker/mon. units/worker cost per worker
demand begin inv. net req. production end inv surplus shortage
labour cost material cost carrying cost stockout cost

Jan 22 159.5 1063.33 $1,408


4500 250 4250 6380 2130 2130 0
$8,448 $31,900 $2,130 $0

Feb 19 137.75 918.33 $1,216


5500 2130 3370 5510 2140 2140 0

Mar 21 152.25 1015.00 $1,344


7000 2140 4860 6090 1230 1230 0

April 21 152.25 1015.00 $1,344


10000 1230 8770 6090 -2680 0 2680

May 22 159.5 1063.33 $1,408


8000 -2680 10680 6380 -4300 0 4300

June 20 145 966.67 $1,280


6000 -4300 10300 5800 -4500 0 4500

$1408/worker x 6 workers = $8 448 $5/units x 6380 units = $31 900 $1/unit x 2130 surplus units = $2 130

Production Planning Example: Levelling Strategy (4)


# days/month hrs/worker/mon. units/worker cost per worker
demand begin inv. net req. production end inv surplus shortage
labour cost material cost carrying cost stockout cost

Jan 22 159.5 1063.33 $1,408


4500 250 4250 6380 2130 2130 0
$8,448 $31,900 $2,130 $0

Feb 19 137.75 918.33 $1,216


5500 2130 3370 5510 2140 2140 0
$7,296 $27,550 $2,140 $0

Mar 21 152.25 1015.00 $1,344


7000 2140 4860 6090 1230 1230 0
$8,064 $30,450 $1,230 $0

April 21 152.25 1015.00 $1,344


10000 1230 8770 6090 -2680 0 2680
$8,064 $30,450 $0 $3,350

May 22 159.5 1063.33 $1,408


8000 -2680 10680 6380 -4300 0 4300
$8,448 $31,900 $0 $5,375

June 20 145 966.67 $1,280


6000 -4300 10300 5800 -4500 0 4500
$7,680 $29,000 $0 $5,625

Total cost: $249 100

Example Problem
With the following demand forecast and production data, which production plan is best?
1. Chase strategy on 8-hour day 2. Constant workforce strategy 3. Produce to meet minimum expected demand and subcontract for extra production 4. Produce to meet expected demand for all but first two months and use overtime to meet additional requirements
Jan 1800 22 Feb 1500 19 Mar 1100 21 Apr 900 21 May 1100 22 Jun 1600 20
5 hours/unit $4/hour $6/hour 400 units 25% monthly demand

demand # days

Materials Holding costs Marginal cost of stockout Marginal subcontracting cost Hiring and training cost Layoff costs

$100/unit $1.50/unit per month $5/unit per month $20/unit $200/worker $250/worker

Labour hours required Regular labour cost Overtime labour cost Beginning inventory Safety stock

Level Plan Example


Level production rate= 28,000 units/7 periods= 4000 units Level workforce= (4000 units x .64 std.)/160 = 16 people

Chase Plan Example

Chase hires and fires staff to exactly meet each periods demand Period 1 = (500 units x .64 std.)/160 = 2 people, need to fire 16 people

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