Professional Documents
Culture Documents
Aggregate Planning
Aggregate planning
Intermediate-range capacity planning that
typically covers a time horizon of 2 to 18 months
Useful for organizations that experience
seasonal, or other variations in demand
Goal:
Achieve a production plan that will effectively utilize
the organizations resources to satisfy demand
Planning Levels
Planning Horizon
Long range
Short
range
Now
Intermediate
range
6 months
18 months
Process planning
Long
range
Intermediate Forecasting
& demand
range
management
Manufacturing
Services
Master scheduling
Material requirements planning
Short
range
Order scheduling
Economic,
competitive
and political
conditions
Aggregate
demand
forecasts
Business Plan
Establishes operations
and capacity strategies
Aggregate Plan
Establishes
operations capacity
Master Schedule
Establishes schedules
for specific products
Medium-range planning
Short-range planning
10
Aggregation
The plan must be in units of measurement that can
be understood by the firms non-operations
personnel
Aggregate units of output per month
Dollar value of total monthly output
Total output by factory
Measures that relate to capacity such as labor hours
11
12
13
14
Timing of demand
Even if demand and capacity are approximately equal,
planners still often have to deal with uneven demand
within the planning period
10000
10000
8000
8000
6000
7000
6000
5500
4500
4000
2000
0
10000
Jan
Feb
9000
9000
Jan
Feb
Mar
9900
Apr
8800
May
Jun
9500
9500
May
Jun
8000
What
Whatwe
wewant
wantto
todo
doisis
balance
balanceout
outthe
the
production
productionrate,
rate,
workforce
workforcelevels,
levels,and
and
inventory
inventoryto
tomake
make
these
figures
these figuresmatch
matchup
up
6000
4000
2000
0
Mar
Apr
Demand
Forecasts,
orders
Product
Decisions
Process
Planning & Capacity
Decisions
Aggregate
Plan for
Production
Master
Production
Schedule, and MRP systems
Detailed Work
Schedules
Research and
Technology
Work Force
Raw Materials
Available
Inventory On
Hand
External
Capacity
Subcontractors
Demand
Forecasts
Size of
Workforce
Strategic
Objectives
Aggregate
Production
Planning
Production
per month
(in units or $)
Inventory
Levels
Company
Policies
Financial
Constraints
Units or dollars
subcontracted,
backordered, or lost
Demand forecast
Policies
Workforce changes
Subcontracting
Overtime
Inventory levels/changes
Back orders
Inventory carrying
Back orders
Hiring/firing
Overtime
Inventory changes
Subcontracting
20
Meet demand
Use capacity efficiently
Meet inventory policy
Minimize total cost
Strategy Details
Overtime & undertime - common when
demand fluctuations are not extreme
Subcontracting - useful if supplier meets
quality & time requirements
Part-time workers - feasible for unskilled
jobs or if labor pool exists
Backordering - only works if customer is
willing to wait for product/services
Advantage
Disadvantage
Some
Comments
Changing
inventory levels
Changes in
human resources
are gradual, not
abrupt
production
changes
Inventory
holding costs;
Shortages may
result in lost
sales
Applies mainly
to production,
not service,
operations
Varying
workforce size
by hiring or
layoffs
Avoids use of
other alternatives
Hiring, layoff,
and training
costs
Advantages/Disadvantages (2 of 4)
Option
Advantage
Disadvantage
Some
Comments
Varying
production rates
through overtime
or idle time
Matches seasonal
fluctuations
without
hiring/training
costs
Permits
flexibility and
smoothing of the
firm's output
Overtime
premiums, tired
workers, may not
meet demand
Allows
flexibility within
the aggregate
plan
Loss of quality
control; reduced
profits; loss of
future business
Applies mainly
in production
settings
Subcontracting
Advantages/Disadvantages (3 of 4)
Option
Advantage
Disadvantage
Some
Comments
Using part-time
workers
Good for
unskilled jobs in
areas with large
temporary labor
pools
Influencing
demand
Tries to use
excess capacity.
Discounts draw
new customers.
High
turnover/training
costs; quality
suffers;
scheduling
difficult
Uncertainty in
demand. Hard to
match demand to
supply exactly.
Creates
marketing ideas.
Overbooking
used in some
businesses.
Advantages/Disadvantages
(4 of 4)
Option
Advantage
Disadvantage
Some
Comments
Back ordering
during highdemand periods
May avoid
Customer must
overtime. Keeps be willing to
capacity constant wait, but
goodwill is lost.
Many companies
backorder.
Risky finding
products or
services with
opposite demand
patterns.
The Extremes
Level
Strategy
Chase
Strategy
Production rate
is constant
Production
equals
demand
33
Chase Approach
Capacities are adjusted to match demand
requirements over the planning horizon
Advantages
Investment in inventory is low
Labor utilization in high
Disadvantages
The cost of adjusting output rates and/or workforce
levels
34
Level Approach
Capacities are kept constant over the planning
horizon
Advantages
Stable output rates and workforce
Disadvantages
Greater inventory costs
Increased overtime and idle time
Resource utilizations vary over time
The McGraw-Hill Companies, Inc.,
Level Production
Demand
Units
Production
Time
Chase Demand
Demand
Units
Production
Time
P r o d u c tio n r a te p e r w o r k in g d a y
Forecast
Demand
40
30
20
10
0
Jan
Feb
Mar
Apr
May
22
20
18
21
21
22
Jun
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Reduction of
inventory
Cumulative level
production using
average monthly
forecast
requirements
Cumulative forecast
requirements
Excess inventory
Solution
Characteristics
Graphical/charting
Trial and
error
Linear
programming
Linear
decision rule
Optimizing
Simulation
Trial and
error
Optimizing
41
Trial-and-Error Techniques
Trial-and-error approaches consist of developing
simple table or graphs that enable planners to
visually compare projected demand requirements
with existing capacity
Alternatives are compared based on their total costs
Disadvantage of such an approach is that it does
not necessarily result in an optimal aggregate plan
43
Trial-and-Error Technique
Assumptions
44
Cumulative output/demand
Cumulative Graph
Inventory Shortage
Inventory Build Up
Cumulative
production
Cumulative
demand
Period
Example 1:
Level Production Strategy (2 of 4)
QUARTER
Spring
Summer
Fall
Winter
80,000
50,000
120,000
150,000
Level production
(50,000 + 120,000 + 150,000 + 80,000)
4
= 100,000 pounds
Example 1:
Level Production Strategy (3 of 4)
QUARTER
Spring
Summer
Fall
Winter
SALES
FORECAST
80,000
50,000
120,000
150,000
Total
PRODUCTION
PLAN
INVENTORY
100,000
100,000
100,000
100,000
400,000
20,000
70,000
50,000
0
140,000
Example 1:
Chase Demand Strategy (4 of 4)
QUARTER
SALES PRODUCTION
FORECAST
PLAN
Spring
Summer
Fall
Winter
80,000
50,000
120,000
150,000
80,000
50,000
120,000
150,000
WORKERS
NEEDED
80
50
120
150
WORKERS WORKERS
HIRED
FIRED
0
0
70
30
20
30
0
0
100
50
MONTH
January
February
March
April
May
June
Aggregate Planning:
Example 2
DEMAND (CASES)
1000
400
400
400
400
400
MONTH
July
August
September
October
November
December
DEMAND (CASES)
500
500
1000
1500
2500
3000
Aggregate Planning:Example 3
(1 of 8)
Suppose
Supposewe
wehave
havethe
thefollowing
followingunit
unit
demand
demandand
andcost
costinformation:
information:
Demand/mo
Jan
Feb
Mar
Apr
May
Jun
4500
5500
7000
10000
8000
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
0.15 hrs/unit
$8/hour
250 units
7.25
8
Jun
Jan
Feb
Mar
Apr
May
4500
5500
7000
10000
8000 6000
7.25x22
7.25/0.15=48.33 &
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
Mar
21
152.25
1015
1,344
48.33x22=1063.33
Apr
May
Jun
21
22
20
152.25
159.5
145
1015 1063.33 966.67
1,344
1,408
1,280
Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory
J an
22
159.5
1,063.33
$1,408
J an
4,500
250
4,250
3.997
3
4
0
Lets
Letsassume
assumeour
ourcurrent
currentworkforce
workforceisis77
workers.
workers.
Example 3 (4 of 8)
Below
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Days/mo
Hrs/worker/mo
Units/worker
$/worker
Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory
J an
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
J un
20
145
967
1,280
J an
4,500
250
4,250
3.997
Feb
5,500
Mar
7,000
Apr
10,000
May
8,000
J un
6,000
5,500
5.989
2
7,000
6.897
1
10,000
9.852
3
8,000
7.524
6,000
6.207
2
8
0
1
7
0
3
4
0
6
0
7
0
10
0
Example 3 (5 of 8)
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
J an
4,500
250
4,250
3.997
3
4
0
Feb
5,500
Mar
7,000
Apr
10,000
May
8,000
Jun
6,000
5,500
5.989
2
7,000
6.897
1
10,000
9.852
3
8,000
7.524
6,000
6.207
2
8
0
1
7
0
6
0
7
0
10
0
J an
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
Demand
Beg. inv.
Net req.
Workers
Production
Ending inventory
Surplus
Shortage
J an
4,500
250
4,250
6
6,380
2,130
2,130
Example 3 (7 of 8)
Below
Below are
arethe
thecomplete
completecalculations
calculations for
for the
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Demand
Beg. inv.
Net req.
Workers
Production
Ending inventory
Surplus
Shortage
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
May
8,000
-2,680
10,680
6
6,380
-1,300
Jun
6,000
-1,300
7,300
6
5,800
-1,500
2,680
1,300
1,500
Note,
Note, ifif we
we recalculate
recalculate this
this sheet
sheet with
with 77 workers
workers
we
we would
would have
have aa surplus
surplus
Example 3 (8 of 8)
Below
Beloware
are the
thecomplete
complete calculations
calculations for
for the
the remaining
remaining months
months
in
in the
the six
six month
month planning
planning horizon
horizon with
with the
the other
other costs
costs
included
included
Jan
4,500
250
4,250
6
6,380
2,130
2,130
Jan
$8,448
31,900
2,130
Feb
5,500
2,130
3,370
6
5,510
2,140
2,140
Feb
$7,296
27,550
2,140
Mar
7,000
10
4,860
6
6,090
1,230
1,230
Mar
$8,064
30,450
1,230
Apr
10,000
-910
8,770
6
6,090
-2,680
May
8,000
-3,910
10,680
6
6,380
-1,300
Jun
6,000
-1,620
7,300
6
5,800
-1,500
2,680
1,300
1,500
Apr
$8,064
30,450
May
$8,448
31,900
Jun
$7,680
29,000
3,350
1,625
1,875
Note,
Note,total
total
costs
costs under
under
this
thisstrategy
strategy
are
areless
lessthan
than
Chase
Chaseat
at
$260.408.62
$260.408.62
Labor
$48,000.00 Material
181,250.00 Storage
Stockout
5,500.00
6,850.00
$241,600.00
where
Ht = # hired for period t
Ft = # fired for period t
It = inventory at end
of period t
Pt = units produced
in period t
Wt = workforce size
for period t
P1 - I1 = 80,000
(1)
Demand
I1 + P2 - I2 = 50,000
(2)
constraints
I2 + P3 - I3 = 120,000
(3)
I3 + P4 - I4 = 150,000
(4)
Production
1000 W1 = P1
(5)
constraints
1000 W2 = P2
(6)
1000 W3 = P3
(7)
1000 W4 = P4
(8)
100 + H1 - F1 = W1
(9)
Work force
W 1 + H2 - F 2 = W 2
(10)
constraints
W 2 + H3 - F 3 = W 3
(11)
EXPECTED
DEMAND
REGULAR
CAPACITY
OVERTIME
CAPACITY
SUBCONTRACT
CAPACITY
1
2
3
4
900
1500
1600
3000
1000
1200
1300
1300
100
150
200
200
500
500
500
500
$20
$25
$28
$3
300 units
Beginning
2
0
Inventory
300
Regular
600
3
3
20
300
23
100
29
1000
100
34
100
37
500
31
Subcontract
28
31
34
23
26
1200
150
Overtime
25
28
150
31
Subcontract
28
31
250
34
Regular
1300
Overtime
200
Regular
25
500
1300
Overtime
200
Subcontract
Demand
20
28
Subcontract
4
28
20
300
26
25
1200
500
900
1500
1600
Capacity
Overtime
Regular
Unused
Capacity
3000
250
23
500
1300
28
200
31
500
20
1300
25
200
28
500
250
61
1
2
3
4
Total
900
1500
1600
3000
7000
1000
1200
1300
1300
4800
100
150
200
200
650
0
250
500
500
1250
500
600
1000
0
2100
62
Capacity
Planning
Resource
Level
Product lines
or families
Aggregate
production
plan
Resource
requirements
plan
Plants
Individual
products
Master
production
schedule
Rough-cut
capacity
plan
Critical
work
centers
Components
Material
requirements
plan
Capacity
requirements
plan
All
work
centers
Manufacturing
operations
Shop
floor
schedule
Input/
output
control
Individual
machines
Items
Disaggregation
Master
Schedule
66
Master Scheduling
The heart of production planning and control
It determines the quantity needed to meet demand from all
sources
It interfaces with
Marketing
Capacity planning
Production planning
Distribution planning
67
68
Outputs
Beginning inventory
Forecast
Customer orders
Projected inventory
Master
Production
Schedule
69
70
71
Inventory from
previous week
Current weeks
requirements
72
64
Forecast
Customer Orders
(committed)
Projected on-hand
inventory
Customer orders are
larger than forecast in
week. Projected on hand
inventory is 64-33=31
1
30
JUNE
2
3
30 30
4
30
5
40
33
20
31
10
JULY
6
7
40 40
8
40
-29
73
74
75
Available to Promise
76
Available-to-Promise
ON-HAND = 50
Forecast
Customer orders
Master production schedule
Available to promise
ON-HAND = 50
Forecast
Customer orders
Master production schedule
Available to promise
100
100
200
PERIOD
3
4
100
100
200
100
90
200
40
100
120
100
100
200
PERIOD
3
4
100
130
200
0
100
70
100
20
200
170
100
10
77
Available-to-Promise
Product
Request
Yes
Is the product
available at
this location?
No
Availableto-promise
Yes
Is an alternative
product available
at this location?
No
Allocate
inventory
Yes
Is this product
available at a
different
location?
No
Is an alternative
product available
at an alternate
location?
Yes
No
Allocate
inventory
Capable-topromise date
Is the customer
willing to wait for
the product?
No
Availableto-promise
Yes
Revise master
schedule
Trigger production
Lose sale
The McGraw-Hill Companies, Inc.,
78
Time Fences
Time Fences points in time that separate
phases of a master schedule planning
horizon.
79
frozen
(firm or
fixed)
slushy
somewhat
firm
liquid
(open)
81
Airlines:
Aggregate planning in this environment is complex due to
the number of factors involved
Capacity decisions must take into account the percentage
of seats to be allocated to various fare classes in order to
maximize profit or yield
The McGraw-Hill Companies, Inc.,
82
83
84
Yield Management
Yield management
An approach to maximizing revenue by using a
strategy of variable pricing; prices are set relative to
capacity availability
During periods of low demand, price discounts are
offered
During periods of peak demand, higher prices are charged
Users of yield management include
Airlines, restaurants, hotels, restaurants
Demand Curve
$150 Price
charged for room
$ Sales = $ 6,750
Price
Demand
Total sales =
1st net price *30 +
2nd net price *30
= $8100
$15 variable
cost of room
$100
Price #1
$Sales = $ 8,100
$200
Price #2
Yield Management
P(n < x)
Cu
Cu + Co
where
n = number of no-shows
x = number of rooms or seats overbooked
Cu = cost of underbooking; i.e., lost sale
Co = cost of overbooking; i.e., replacement cost
P = probability
Yield Management
NO-SHOWS
PROBABILITY
0
.25
2
3
.15
.30
.30
Yield Management
NO-SHOWS
PROBABILITY
P(N < X)
0
1
2
3
.15
.25
.30
.30
.00
.15
.40
.70
.517
Yield Management
NO-SHOWS
PROBABILITY
P(N < X)
Cost of overbooking
0
.15
.00
[2(.15) + 1(.25)]$70
1
= $38.50 Cost
.25 of bumping customers
.15
2(.30)$75 = $22.50 Lost
.30 revenue from no-shows
.40
.517
3
.30 cost of overbooking
.70
$61.00 Total
by
2 rooms
Expected number of no shows
Expected savings = ($131.225 - $61) = $70.25 a night
0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75
Optimal probability of no-shows
Cu
75
P(n < x)
=
= .517
75 + 70
Cu + Co