Aggregate Planning

Aggregate operations planning refers to translating annual and quarterly business plans into labor and production outputs plan for the intermediate term The objective is to minimize the cost of resources required to meet the demand The end goal is an agreement between various departments on the best course of action to achieve the optimal balance between supply and demand. The idea is to put the operational plan in line with the business plan
8. Aggregate Planning 1

Aggregate Planning Goals

Meet demand Use capacity efficiently Meet inventory policy Minimize cost
Labor Inventory Plant & equipment Subcontract
8. Aggregate Planning 2

Planning Horizons
Short-range plans Job assignments Ordering Job scheduling Dispatching
Responsible: Operations managers, supervisors, foremen Responsible: Operations managers

Intermediate-range plans Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans

Responsible: Top executives

Long-range plans R&D New product plans Capital expenses Facility location, expansion

Today

3 Months

1 year

5 years
3

Planning Horizon
8. Aggregate Planning

Relationship of Aggregate Plan

Marketplace and Demand Product Decisions Research and Technology Demand Forecasts, orders Process Planning & Capacity Decisions Aggregate Plan for Production Master Production Schedule

Work Force

Raw Materials Available Inventory On Hand External Capacity Subcontractors

MRP system

Detailed Work Schedules

8. Aggregate Planning

Key Terms
Master Production Schedule: MPS is a schedule of the amounts and times when specific items will be manufactured Rough-Cut-Capacity Planning: Verification that sufficient capacity exists to meet a MPS Material Requirement Planning: MRP takes the end product requirements from the MPS and breaks them down into their component parts and subassemblies to create a material plan 8. Aggregate Planning 5

Disaggregation of Aggregate Planning

Aggregate planning process is usually a production schedule for family grouping of products.

The details and parameters resulting from the plan including staffing, subcontracting, inventor stocking, and weekly or monthly production levels will be provided by disaggregation which results in master production schedule.
8. Aggregate Planning 6

Methods for Aggregate Planning

Intuitive approach Graphical or charting method Mathematical approaches
Linear programming Linear decision rules Management coefficient model Simulation Search decision rules
8. Aggregate Planning 7

Intuitive Approach
Least desirable method Conflicts among departments in large organizations are not unusual Management sometimes uses the same plan from year to year and adjust it up or down just

enough to meet the new demand

If the old plan was not close to optimal, the firm
8. Aggregate Planning 8

 This method helps planners to compare projected demand with existing capacity Steps followed are:

Graphical or Charting Method

Determine the demand in each period Determine the capacity for regular time, overtime, and subcontracting each period Find labor cost, hiring and layoff costs, and inventory holding cost Consider company policy that may apply to the workers or to stock level 8. Aggregate Planning 9 Develop alternative plans and examine

Production Planning Environment

Competitors Behavior Raw material availability Market demand External to firm External capacity Planning for production Economic conditions

Current physical capacity

Current workforce

Inventory levels

Activities required for production

Internal to firm

8. Aggregate Planning

10

Production Planning Environment

External environment is outside the production planners control Internal factors in themselves differ in their controllability
Physical capacity nearly fixed in short run Union agreement constrain workforce Top management limit amount of money for inventories

Still, there is some flexibility in managing these factors

8. Aggregate Planning 11

Aggregate Planning Variables

Production rate Labor levels Inventory levels Overtime work

Subcontracting rates
8. Aggregate Planning 12

Aggregate Planning Strategies Necessary questions to answer:

1. Should inventories be used to absorb changes in demand during planning period? 2. Should changes be accommodated by varying the size of the work force? 3. Should part-timers be used, or overtime and idle time absorb fluctuations? 4. Should subcontractors be used on fluctuating orders so that a stable workforce can be maintained? 5. Should prices or other factors be changed to influence demand?
8. Aggregate Planning

13

Production Planning Strategies

Chase Strategy: Match the production rate to the order rate by hiring and laying off employees as the order rate varies
Success depends upon having a pool of easily trained applicants to draw on as order volume increases When order backlogs are low, employee may feel compelled to slow down out of fear of being laid off
8. Aggregate Planning 14

Production Planning Strategies

Stable workforce-Variable work hour: Vary the output by varying the number of hours worked through flexible work schedules or overtime
This strategy avoids many of the emotional and tangible costs of hiring and firing associated with chase strategies continued

Level strategy: Maintain a stable workforce working at a constant output rate. Shortages and surpluses are absorbed by fluctuating levels, order backlogs, and lost sales
Employees benefit from stable work hour at the cost of decreased customer service levels and increased inventory costs which may become 8. Aggregate Planning

15

Pure and Mixed Strategy

When just one of these variables is used to absorb demand fluctuations, it is termed as pure strategy; two or more used in combination constitute a mixed strategy. Mixed strategies are widely used Subcontracting: In addition to three essential strategies managers may choose to subcontract some portion of production. This strategy is similar to the chase strategy, but hiring and laying off are translated into subcontracting and not subcontracting.
Extensive subcontracting may be viewed as a high-risk strategy 8. Aggregate Planning 16 since a manufacturer may lose some control over schedule and

Yield Management
It is the process of allocating the right type of capacity to the right type of customer at the right price and time to maximize revenue or yield. It can be a powerful approach to making demand more predictable, which is important to aggregate planning.

Yield management has existed as long as there has been limited capacity for serving customers
8. Aggregate Planning 17

Yield management is effective when

Demand can be segmented by customer Fixed costs are high and variable costs are low Inventory is perishable Product can be sold in advance

Demand is highly variable

8. Aggregate Planning 18

Example
Month Expected demand Production days Demand per day

January February
March April May June

900 700
800 1200 1500 1100

22 18
21 21 22 20

41 39
38 57 68 55

8. Aggregate Planning

19

Example Continued

8. Aggregate Planning

20

ContinuedInterpretation
The graph shows how forecast differs from the average demand. To overcome this problem ,the firm may follow one of following strategies: Chase strategy stable workforce- variable work hours Level strategy Subcontracting Or combination of listed strategies

8. Aggregate Planning

21

Balancing Aggregate Demand and Aggregate Production Capacity

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 6000 4000 5500 4500 7000 6000 10000 8000

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

6000
4000 2000 0

4000

4000

Jan

Feb

Mar

Apr

May

Jun 22

8. Aggregate Planning

Aggregate Planning Example: Unit Demand and Cost Data

Month Demand Jan 500 Feb 600 Mar 650 Apr 800 May 900 Jun 800 Total 4,250

Working days

22

19

21

21

22

20

125

Materials Holding costs Marginal cost of stockout Marginal cost of subcontracting Hiring and training cost Layoff costs Labor hours required Straight time labor cost Overtime cost ( time and a half) Beginning inventory Safety socks required

Rs 100/unit Rs 10/unit/month Rs 20/unit/month Rs 100/unit ( Rs 200 subcontracting cost less Rs 100 material savings) Rs 50/worker Rs 100/worker 4 hrs/unit Rs 12.50/hour Rs 18.75/hour 200 units O % of month demand
8. Aggregate Planning 23

Production Plan 1: Exact Production Vary Workforce production requirement production hours required@4 Working days per month Hours per month per worker@8 Workers required New workers hired Assuming ist month workforce as base Hiring cost @ 50 Workers laidoff Layoff cost@100 Straight time cost@ 12.5 Total cost 300 600 650 800 900 800

1200
22 176 7 0

2400
19 152 16 9

2600
21 168 15 0

3200
21 168 19 4

3600
22 176 20 1

3200
20 160 20 0

0 0 0 15000

450 0 0 30000

0 1 100 32500

200 0 0 40000

50 0 0 45000

0 0 0 40000

700

100 202500 203300 24

8. Aggregate Planning

Production Plan 2: Constant workforce, vary inventory and stockout beginning inventory Working days per month Production hours available@8x10 Actual production@4hr/unit Demand forecast 200 22 1760 440 500 140 19 1520 380 600 -80 21 1680 420 650 -310 21 1680 420 800 -690 22 1760 440 900 -1150 20 1600 400 800

Ending inv
shortage cost@20 safety stock units excess inventory cost @10 straight time cost Total cost #Asume a constant workforce of 10

140
0 0 140 1400 22000

-80
1600 0 0 0 19000

-310
6200 0 0 0 21000

-690
13800 0 0 0 21000

-1150
23000 0 0 0 22000

-1550
31000 0 0 0 20000 1,400 125,000 202,000 75,600

8. Aggregate Planning

25

Production Plan 3: Constant workforce, Subcontract

production requirement Working days per month Hours per month per worker@8 Production hours available Actual production@4hr/unit Units subcontracted Subcontracting cost@100 Straight time cost@12.5 Total cost

300 22 176 1760

460 19 152 1520

650 21 168 1680

800 21 168 1680

900 22 176 1760

800 20 160 1600

440
0 0 22000

380
80 8000 19000

420
230 23000 21000

420
380 38000 21000

440
460 46000 22000

400
400 40000 20000 155,000 125,000 280,000

8. Aggregate Planning

26