Aggregate PlanningSales & Operations Planning

ISQA 459 Class 2

Sales & Operations Planning

Planning production to meet the firms strategic objectives
Demand vs. Supply Volume Mix

How is sales plan different from operations plan?

Demand > Supply Demand < Supply

Balance Supply & Demand

Intermediate Term (3-18 months) APP = Competitive Advantage: Anheuser-Busch- 40% of US beer
Production of certain brands in specific plants
High volume & low variety/plant

Labor requirements Meticulous cleaning between batches Inventory Capacity

Goal:
High facility utilization Why?

Production Stages
Raw Material Selection
QA Delivery

Brewing: (Milling to Aging) Packaging Distribution

Temp-controlled delivery Storage

Resource limitations at each stage Scheduling Challenges????

Hierarchical Planning
Decision Level Corporate Decision Process
Allocates production among plants

Forecasts needed
Annual demand by item and by region

Plant manager

Determines seasonal plan by product family

Monthly demand for 15 months by product family

Shop superintendent

Determines monthly item production schedules

Monthly demand for quarter by item

At this stage
Generally Planning for a product line or family (AGGREGATE) not individual SKUs
How much beer at each plant of each type
Not container types, etc.

Inputs
Strategic objectives, demand forecasts, company policy, financial constraints, capacity constraints.

Outputs
Size of workforce, production per month (units or $), inventory levels, and units subcontracted, back ordered, or lost.

Aggregate Planning
Goal: Specify the optimal combination of the following variables to minimize cost

production rate (units completed per unit of time) workforce level (number of workers) inventory on hand (inventory carried from previous period)

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 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

Key Strategies for Meeting Demand

Chase

Level

Some combination of the two

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 stock-out 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 4500 Feb 5500 Mar 7000 Apr 10000 May 8000 Jun 6000

Productive hours/worker/day Paid straight hrs/day

Days/mo Hrs/worker/mo Units/worker $/worker Jan 22 Feb 19

7.25 8
Mar 21 Apr 21 May 22 Jun 20

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 4500 Feb 5500 Mar 7000 Apr 10000 May 8000 Jun 6000

7.25x22

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 Mar 21 152.25 1015 1,344

7.25 8 7.25/0.15=48.33 &

Apr 21 152.25 1015 1,344 May 22 159.5 1063.33 1,408

48.33x22=1063.33
Jun 20 145 966.67 1,280

Chase Strategy (Hiring & Firing to meet demand)

Days/mo Hrs/worker/mo Units/worker $/worker Jan 22 159.5 1,063.33 $1,408
Lets assume our current workforce is 7 workers.

First, calculate net requirements for production, or Demand-Begin Inv. Then, calculate number of workers needed to produce the net requirements, or Net req/Units per worker or # workers

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

Jan 4,500 250

Finally, determine the number of workers to hire/fire. Current WorkersRequired = (-) hire or (+) fire
0

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 Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers **Round-up

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

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. Workers Production 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 Demand 4,500 Beg. inv. 250 Net req. 4,250 Workers 6 Production 6,380 Ending inventory 2,130 Surplus 2,130 Shortage 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

Note, if we recalculate this sheet with 7 workers we would have a surplus.

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included.
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 10 4,860 6 6,090 1,230 1,230 Apr 10,000 -910 8,770 6 6,090 -2,680 2,680 Jan $8,448 31,900 2,130 Feb $7,296 27,550 2,140 Mar $8,064 30,450 1,230 Apr $8,064 30,450 3,350 May 8,000 -3,910 10,680 6 6,380 -1,300 1,300 May $8,448 31,900 1,625 Jun 6,000 -1,620 7,300 6 5,800 -1,500 1,500 Jun $7,680 29,000 1,875

$48,000.00 181,250.00 5,500.00 6,850.00 $241,600.00

Labor Material Storage Stock-out

Note, the total costs under this strategy are less than under Chase.

Graphical Methods
Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1200 1500 1100 6200 Production Days 22 18 21 21 22 20 124 Demand per Day 41 39 38 58 68 55

Level = 6200/124= 50 units/day

Month Estimated Demand/ Month 900 Level Production 1100 Difference Build vs. Deplete Inv +200

Jan

Feb
Mar Apr May

700
800 1200 1500

900
1050 1050 1100

+200
+250 -150 -400

June

1100

1000

-100

Level demand: plotted cumulatively

7000 6000 5000 4000

Level

Deplete Inv
3000 2000 1000

Estimate

Build Inv.
0 Jan Feb Mar April May June

Determining the Optimal Mix Strategy

Try multiple attempts with different scenarios OR Use Linear Programming (LP)
You will need to install Solver on your laptop In Excel:
Click Tools Click Add-ins Click Solver Add-in

We can use LP to address many production planning & distribution problems.

What is Linear Programming?

A sequence of steps that will lead to an optimal solution. Used to
allocate scarce resources assign workers determine transportation schemes solve blending problems solve many other types of problems

Five essential conditions:

Explicit Objective: What are we maximizing or minimizing? Usually profit, units, costs, labor hours, etc. Limiting resources create constraints: workers, equipment, parts, budgets,etc. Linearity (2 is twice as good as 1, if it takes 3 hours to make 1 part then it takes 6 hours to make 2 parts) Homogeneity (machines make identical parts)

Farm Resource Allocation

A farmer owns 45 acres of land. The farmer is gong to plant each acre with wheat (W) or corn (C). Each acre planted with wheat yields $200 profit while corn yields $300 profit.
An acre of wheat requires 3 workers and 2 tons fertilizer An acre of corn requires 2 workers and 4 tons of fertilizer. 100 workers and 120 tons of fertilizer are available How many acres of Wheat or Corn should be planted?

Graphical Approach (2 variables)

Formulate the problem in mathematical equations Plot all the Equations Determine the area of feasibility
Maximizing problem: feasible area is on or below the lines Minimization: feasible area is on or above the lines Plot a few Profit line (Iso-profit) by setting profit equation = different values. Answer point will be one of the corner points (most extreme)

Equations
Maximize Profit : $200 C + $300 W Constrained Resources
2 C + 3 W < 100 (Worker resource) 4 C + 2 W < 120 (Fertilizer resource) C + W < 45 (available land resource)
W>0; C>0 (non-negative) C = acres of planted corn ? W =acres of planted wheat ?

Wheat & Corn

50 40

Corn

30 20 10 0 0

Wheat = 20, Corn = 20 Profit = 10000

Labor Fert Land

50

100

Wheat

Solver Set-up on Excel

Wheat VARIABLES Profit Labor Fertilizer Land 0 200 3 2 1

Corn 0 300 2 4 1

LSE 0 0 0 0

RSE =SUMPRODUCT(C2:D2,C3:D3) =SUMPRODUCT(C2:D2,C5:D5)

100 120 45

Report Created: 1/17/2006 3:04:11 PM

Target Cell (Max) Cell Name $E$3 Profit LSE

Original Value Final Value 10000 10000

Adjustable Cells Cell Name Original Value Final Value $C$2 VARIABLES Wheat 0 20 $D$2 Corn 0 20

Constraints Cell Name $E$5 Labor LSE $E$6 Fertilizer LSE $E$7 Land LSE

Cell Value Formula Status Slack 100 $E$5<=$F$5 Binding 0 120 $E$6<=$F$6 Binding 0 40 $E$7<=$F$7 Not Binding 5