AGGREGATE PLANNING

Rachmat A. Anggara 9th of April 2010

OPERATION MANAGEMENT FLOW

Marketplac e and demand Product decisions Research and technology

Demand forecasts, orders

Process planning and capacity decisions Workforce Aggregate plan for production Raw materials available Inventory on hand

Master production schedule and MRP systems

External capacity (subcontractors)

Detailed work schedules

Figure 13.2

PRASETIYA MULYA BUSINES SCHOOL

Aggregate Planning
Aggregate planning is an operational activity which does an aggregate plan for the production process, in advance of 2 to 18 months, to give an idea to management as to what quantity of materials and other resources are to be procured and when, so that the total cost of operations of the organization is kept to the minimum over that period.
Inventory carrying Back orders Hiring/firing Overtime Inventory changes subcontracting

Workforce Facilities

PRASETIYA MULYA BUSINES SCHOOL

Aggregate Planning Inputs Resources - Workforce - Facilities Demand forecast Policy statements - Subcontracting - Overtime - Inventory levels - Back orders

Costs
Inventory carrying Back orders Hiring/firing Overtime Inventory changes subcontracting

PRASETIYA MULYA BUSINES SCHOOL

Aggregate Planning Outputs

Total cost of a plan

Projected levels of inventory Inventory Output Employment Subcontracting Backordering

PRASETIYA MULYA BUSINES SCHOOL

Aggregate Planning Strategies

Capacity Options (intervening the resources)
Changing inventory levels Hiring or layoffs Varying production rate Subcontracting Using part-time workers

vs

Demand Options (intervening the input)

Influencing demand Backordering Counterseasonal product mixing

PRASETIYA MULYA BUSINES SCHOOL

Aggregate Planning Strategies

Demand options Capacity options

Input

Process

Output

PRASETIYA MULYA BUSINES SCHOOL

Aggregate Planning Strategies Advantages-disadvantages

Option Changing inventory levels Advantages Changes in human resources are gradual or none; no abrupt production changes Avoids the costs of other alternatives Disadvantages Inventory holding cost may increase. Shortages may result in lost sales. Some Comments Applies mainly to production, not service, operations

Varying workforce size by hiring or layoffs

Hiring, layoff, and training costs may be significant

Used where size of labor pool is large

PRASETIYA MULYA BUSINES SCHOOL

Aggregate Planning Strategies Advantages-disadvantages

Option Varying production rates through overtime or idle time Subcontracting Advantages Matches seasonal fluctuations without hiring/ training costs Disadvantages Overtime premiums; tired workers; may not meet demand Some Comments Allows flexibility within the aggregate plan

Permits flexibility and smoothing of the firms output

Loss of quality control; reduced profits; loss of future business

Applies mainly in production settings

PRASETIYA MULYA BUSINES SCHOOL

Aggregate Planning Strategies Advantages-disadvantages

Option Using parttime workers Advantages Is less costly and more flexible than full-time workers Disadvantages Some Comments

High turnover/ Good for unskilled training costs; jobs in areas with quality suffers; large temporary scheduling difficult labor pools Uncertainty in demand. Hard to match demand to supply exactly. Creates marketing ideas. Overbooking used in some businesses.

Influencing demand

Tries to use excess capacity. Discounts draw new customers.

PRASETIYA MULYA BUSINES SCHOOL

Aggregate Planning Strategies Advantages-disadvantages

Option Back ordering during highdemand periods Advantages May avoid overtime. Keeps capacity constant. Disadvantages Customer must be willing to wait, but goodwill is lost. Some Comments Allows flexibility within the aggregate plan

Counterseasonal product and service mixing

Fully utilizes resources; allows stable workforce

May require skills or Risky finding equipment outside products or the firms areas of services with opposite demand expertise patterns

PRASETIYA MULYA BUSINES SCHOOL

Methods for Aggregate Planning

Chase strategy Level strategy

Match output rates to demand forecast for each period Vary workforce levels or vary production rate
Favored by many service organizations

Daily production is uniform

Use inventory or idle time as buffer Stable production leads to better quality and productivity

PRASETIYA MULYA BUSINES SCHOOL

Methods for Aggregate Planning

Level strategy
Forecast demand
Production rate per working day

70 60 50 40

Level production using average monthly forecast demand

30

Jan

Feb

Mar

Apr

May

June

PRASETIYA MULYA BUSINES SCHOOL

Methods for Aggregate Planning

Chase strategy
Production rate per working day

70 60

Forecast demand and monthly production

50
40 30

Jan

Feb

Mar

Apr

May

June

PRASETIYA MULYA BUSINES SCHOOL

Graphical & Charting 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 costs

PRASETIYA MULYA BUSINES SCHOOL

Aggregate planning example!

LEVEL STRATEGY

Month Jan
Feb

Expected Demand 900

700

Production Days 22 18

Demand Per Day (computed) 41 39

Mar Apr May June

800 1,200 1,500 1,100

6,200

21 21 22 20
124

38 57 68 55

Average requirement

Total expected demand Number of production days

6,200 = = 50 units per day 124

PRASETIYA MULYA BUSINES SCHOOL

Aggregate planning example!

Forecast demand Production rate per working day

70 60 50 40 30

Level production using average monthly forecast demand

Jan 22

Feb 18

Mar 21

Apr 21

May 22

June 20

= Month
= Number of working days

PRASETIYA MULYA BUSINES SCHOOL

Aggregate planning example!

Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit $600 per unit

Labor-hours to produce a unit

Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs)

PRASETIYA MULYA BUSINES SCHOOL

Aggregate planning example!

Production at 50 Units per Day 1,100 900 1,050 1,050 1,100 1,000 Demand Forecast 900 700 800 1,200 1,500 1,100 Monthly Inventory Change +200 +200 +250 -150 -400 -100 Ending Inventory 200 400 650 500 100 0 1,850

Month
Jan Feb Mar Apr May June

Total units of inventory carried over from one month to the next = 1,850 units Workforce required to produce 50 units per day = 10 workers
PRASETIYA MULYA BUSINES SCHOOL

Aggregate planning example!

Costs Inventory carrying Regular-time labor $9,250 49,600 Calculations (= 1,850 units carried x $5 per unit) (= 10 workers x $40 per day x 124 days)

Other costs (overtime, hiring, layoffs, subcontracting) Total cost

0 $58,850

PRASETIYA MULYA BUSINES SCHOOL

Aggregate planning example!

CHASE STRATEGY Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55

Production = Expected Demand

PRASETIYA MULYA BUSINES SCHOOL

Aggregate planning example!

Forecast demand = monthly production

Production rate per working day

70 60 50 40 30

Jan 22

Feb 18

Mar 21

Apr 21

May 22

June 20

= Month
= Number of working days

PRASETIYA MULYA BUSINES SCHOOL

Aggregate planning example!

Daily Prod Rate 41 39 38 57 68 55
Basic Production Cost (demand x 1.6 hrs/unit x $5/hr)

Month Jan Feb Mar Apr May June

Forecast (units) 900 700 800 1,200 1,500 1,100

Extra Cost of Increasing Production (hiring cost) $5,700 (= 19 x $300) $3,300 (= 11 x $300) $9,000

Extra Cost of Decreasing Production (layoff cost) $1,200 (= 2 x $600) $600 (= 1 x $600) $7,800 (= 13 x $600) $9,600

Total Cost $ 7,200 6,800 7,000 15,300 15,300 16,600 $68,200

$ 7,200 5,600 6,400 9,600 12,000 8,800 $49,600

PRASETIYA MULYA BUSINES SCHOOL

Aggregate planning example!

Cost Inventory carrying Regular labor Overtime labor Hiring Layoffs Subcontracting Total cost

LEVEL $ 9,250 49,600 0 0 0 0 $58,850

CHASE $ 0

49,600 0 9,000 9,600 0 $68,200

PRASETIYA MULYA BUSINES SCHOOL

Mathematical Approach

Useful for generating strategies

Transportation Method of Linear Programming
Produces an optimal plan

Management Coefficients Model

Model built around managers experience and performance

Other Models
Linear Decision Rule Simulation
PRASETIYA MULYA BUSINES SCHOOL