Aggregate Planning in Production Planning

Production Planning Course

1. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-1
Chapter 8
Aggregate
Planning
in the Supply
Chain

2. 8-2
Outline
Role of aggregate planning in a supply chain
The aggregate planning problem
Aggregate planning strategies
Aggregate planning with Linear Programming
Implementing aggregate planning in practice

3. Planning Horizon
Long RangeLong Range Medium RangeMedium Range Short RangeShort Range
1 to 10 years1 to 10 years6 to 18 months6 to 18 months 1 to 10 weeks1 to 10 weeks
StrategicStrategic Aggregate PlanningAggregate PlanningTactical/OperationalTactical/Operational
What is our
business?
Capital
investments
(new factories, new
machines, etc.)
Production schedule
for a product group
Production level
Labour force level
Inventory level
(Production capacity
fixed)
Production schedule
for specific products,
detailed scheduling.

4. 8-4
Role of Aggregate Planning
in a Supply Chain
Capacity has a cost, lead times are greater than zero
Aggregate planning:
Match workforce and materials to available equipment so as to meet
projected demand at low cost.
–determines levels of capacity, production, subcontracting, inventory,
stockouts, and pricing over a specified time horizon
–goal is to maximize profit
–decisions made at a product family (not SKU) level
–time frame of 3 to 18 months
–how can a firm best use the facilities it has?
First alert in marshalling resources!

5. 8-5
Aggregate Planning Decisions
Specify operational parameters over the time horizon:
–production rate
–workforce
–overtime
–machine capacity usage
–subcontracting
–backlog
–inventory on hand
All supply chain stages should work together on an aggregate
plan that will optimize supply chain performance
Plant capacity fixed;
Adjust: labour,
materials,
utilisation.

6. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-6
The Aggregate Planning Problem
Given the demand forecast for each period in the
planning horizon, determine the production level,
inventory level, capacity level and the labour (type and
level) for each period that maximizes the firm’s (supply
chain’s) profit over the planning horizon
Specify the planning horizon (typically 3-18 months)
Specify the duration of each period
Specify key information required to develop an
aggregate plan

7. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-7
Information Needed for
an Aggregate Plan
Demand forecast in each period
Production costs
–labor costs, regular time ($/hr) and overtime ($/hr)
–subcontracting costs ($/hr or $/unit)
–cost of changing capacity: hiring or layoff ($/worker) and cost of adding or
reducing machine capacity ($/machine)
Labor/machine hours required per unit
Inventory holding cost ($/unit/period)
Stockout or backlog cost ($/unit/period)
Constraints: limits on overtime, layoffs, capital available, stockouts and
backlogs

8. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-8
Outputs of Aggregate Plan
Production quantity from regular time, overtime, and subcontracted
time: used to determine number of workers and supplier purchase
levels
Inventory held: used to determine how much warehouse space and
working capital is needed
Backlog/stockout quantity: used to determine what customer service
levels will be
Machine capacity increase/decrease: used to determine if new
production equipment needs to be purchased
A poor aggregate plan can result in lost sales, lost profits, excess
inventory, or excess capacity

9. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-9
Aggregate Planning Strategies
Trade-off between capacity, inventory,
backlog/lost sales
Chase strategy – using capacity as the lever
Time flexibility from workforce or capacity
strategy – using utilization as the lever
Level strategy – using inventory as the lever
Mixed strategy – a combination of one or more of
the first three strategies

10. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-10
Chase Strategy
Production rate is synchronized with demand by varying
machine capacity or hiring and laying off workers as the
demand rate varies
However, in practice, it is often difficult to vary capacity and
workforce on short notice
Expensive if cost of varying capacity is high
Negative effect on workforce morale
Results in low levels of inventory
Should be used when inventory holding costs are high and costs
of changing capacity are low

11. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-11
Time Flexibility Strategy
Can be used if there is excess machine capacity
Workforce is kept stable, but the number of hours worked
is varied over time to synchronize production and demand
Can use overtime or a flexible work schedule
Requires flexible workforce, but avoids morale problems
of the chase strategy
Low levels of inventory, lower utilization
Should be used when inventory holding costs are high and
capacity is relatively inexpensive

12. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-12
Level Strategy
Maintain stable machine capacity and workforce levels with a
constant output rate
Shortages and surpluses result in fluctuations in inventory levels
over time
Inventories that are built up in anticipation of future demand or
backlogs are carried over from high to low demand periods
Better for worker morale
Large inventories and backlogs may accumulate
Should be used when inventory holding and backlog costs are
relatively low

13. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-13
Fundamental Tradeoffs in
Aggregate Planning
Capacity (regular time, overtime, subcontract)
Inventory
Backlog / lost sales
Basic Strategies
Chase strategy
Time flexibility from workforce or capacity
Level strategy

14. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-14
Aggregate Planning at
Red Tomato Tools
Month Demand Forecast
January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200

15. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-15
Aggregate Planning at Red Tomato
Tools
Item Cost
Materials $10/unit
Inventory holding cost $2/unit/month
Marginal cost of a stockout $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Over time cost $6/hour
Cost of subcontracting $30/unit

16. CHASE Strategy
MonthDemand Production (units)Regular time (hours)Inventory (units)Backlog (units)Hires Fires
January 1600 1600 6400 40
February 3000 3000 12000 35
March 3200 3200 12800 5
April 3800 3800 15200 15
May 2200 2200 8800 40
June 2200 2200 8800
Costs 464,500$ 160,000$ $256,000 $28,500$20,000
Total
LEVEL PRODUCTION Strategy
MonthDemand Production (units)Regular time (hours)Inventory (units)Backlog (units)
January 1600 2666.666667 10666.66667 1066.666667 66.66667
February 3000 2666.666667 10666.66667 733.3333333
March 3200 2666.666667 10666.66667 200
April 3800 2666.666667 10666.66667 933.3333333
May 2200 2666.666667 10666.66667 466.6666667
June 2200 2666.666667 10666.66667
Costs 447,000$ 160,000$ $256,000 $4,000.00 $7,000.00$20,000 $0
Average demand= 2666.666667

17. Aggregate Planning Strategies
For level production, inventory buildup and backlogs
can be reduced by “starting” the cycle differently
Adjusting production rate
–Overtime and “furlough”
–Subcontract (instead of hire-and-fire)
Mixed strategies
–Linear programming!

18. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-18
Summary of Learning Objectives
What types of decisions are best solved by aggregate
planning?
What is the importance of aggregate planning as a
supply chain activity?
What kinds of information are needed to produce an
aggregate plan?
What are the basic trade-offs a manager makes to
produce an aggregate plan?
How are aggregate planning problems formulated and
solved using Microsoft Excel?

19. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Aggregate Planning in Excel
Construct a table with the decision variables
Construct a table for constraints
Create a cell containing the objective function
Use Data Analysis Solver
8-19

20. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-20
Aggregate Planning at Red Tomato Tools
(Define Decision Variables)
W
t = Workforce size for month t, t = 1, ..., 6
H
t = Number of employees hired at the beginning of month t,
t = 1, ..., 6
L
t = Number of employees laid off at the beginning of month t,
t = 1, ..., 6
P
t = Production in month t, t = 1, ..., 6
I
t = Inventory at the end of month t, t = 1, ..., 6
S
t = Number of units stocked out at the end of month t,
t = 1, ..., 6
C
t = Number of units subcontracted for month t, t = 1, ..., 6
O
t = Number of overtime hours worked in month t, t = 1, ..., 6

21. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-21
Aggregate Planning at Red Tomato Tools
(Define Objective Function)






6
1
6
1
6
1
6
1
6
1
6
1
6
1
6
1
30105
26500
300640
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
CPS
IOL
HWMin

22. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-22
Aggregate Planning at Red Tomato tools
(Define Constraints Linking Variables)
Workforce size for each month is based on hiring
and layoffs
.80,6,...,1
0
,
0
1
1





Wwheretfor
LHWW
orLHWW
tttt
tttt

23. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-23
Aggregate Planning at Red Tomato Tools
(Constraints)
Production for each month cannot exceed capacity
.6,...,1
,0440
,440



tfor
POW
OWP
ttt
ttt

24. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-24
Aggregate Planning at Red Tomato Tools
(Constraints)
Inventory balance for each month
.500,0
,000,1,6,...,1
,0
,
60
0
11
11



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

IandS
Iwheretfor
SISDCPI
SISDCPI
ttttttt
ttttttt

25. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-25
Aggregate Planning at Red Tomato Tools
(Constraints)
Over time for each month
.6,...,1
,010
,10



tfor
OW
WO
tt
tt

26. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-26
Scenarios
Increase in holding cost (from $2 to $6)
Overtime cost drops to $4.1 per hour
Increased demand fluctuation

27. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-27
Increased Demand Fluctuation
Month Demand Forecast
January 1,000
February 3,000
March 3,800
April 4,800
May 2,000
June 1,400

28. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8-28
Aggregate Planning in Practice
Think beyond the enterprise to the entire supply chain
Make plans flexible because forecasts are always
wrong
Rerun the aggregate plan as new information emerges
Use aggregate planning as capacity utilization
increases

29. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-29
Chapter 9
Sales and
Operations
Planning

30. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-30
Outline
Responding to predictable variability in a supply chain
Managing supply
Managing demand
Implementing solutions – Sales and Operations
Planning - to predictable variability in practice

31. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-31
Responding to Predictable
Variability in a Supply Chain
Predictable variability is change in demand that can be
forecasted
Can cause increased costs and decreased responsiveness
in the supply chain
A firm can handle predictable variability using two
broad approaches:
–Manage supply using capacity, inventory, subcontracting, and
backlogs
–Manage demand using short-term price discounts and trade
promotions

32. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-32
Managing Supply
Managing capacity
–Time flexibility from workforce
–Use of seasonal workforce
–Use of subcontracting
–Use of dual facilities – dedicated and flexible
–Designing product flexibility into production processes
Managing inventory
–Using common components across multiple products
–Building inventory of high demand or predictable demand products

33. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-33
Inventory/Capacity Trade-off
Leveling capacity forces inventory to build up in
anticipation of seasonal variation in demand
Carrying low levels of inventory requires capacity
to vary with seasonal variation in demand or
enough capacity to cover peak demand during
season

34. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-34
Managing Demand
Promotion
Pricing
Timing of promotion and pricing changes is
important
Demand increases can result from a combination of
three factors:
–Market growth (increased sales, increased market size)
–Stealing share (increased sales, same market size)
–Forward buying (same sales, same market size)

35. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-35
Demand Management
Pricing and aggregate planning must be done
jointly
Factors affecting discount timing
–Product margin: Impact of higher margin ($40 instead
of $31)
–Consumption: Changing fraction of increase coming
from forward buy (100% increase in consumption
instead of 10% increase)
–Forward buy

36. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Red Tomato Tools
Planning example
9-36

37. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-37
Off-Peak (January) Discount
from $40 to $39
Month Demand Forecast
January 3,000
February 2,400
March 2,560
April 3,800
May 2,200
June 2,200
Cost = $421,915, Revenue = $643,400, Profit = $221,485

38. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-38
Peak (April) Discount
from $40 to $39
Month Demand Forecast
January 1,600
February 3,000
March 3,200
April 5,060
May 1,760
June 1,760
Cost = $438,857, Revenue = $650,140, Profit = $211,283

39. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-39
January Discount: 100% Increase in
Consumption, Sale Price = $40 ($39)
Month Demand Forecast
January 4,440
February 2,400
March 2,560
April 3,800
May 2,200
June 2,200
Off-peak discount: Cost = $456,750, Revenue = $699,560

40. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-40
Peak (April) Discount: 100% Increase
in Consumption, Sale Price = $40 ($39)
Month Demand Forecast
January 1,600
February 3,000
March 3,200
April 8,480
May 1,760
June 1,760
Peak discount: Cost = $536,200, Revenue = $783,520

41. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-41
Performance Under
Different Scenarios
Regular
Price
Promotion
Price
Promotion
Period
Percent
increase in
demand
Percent
forward
buy
Profit Average
Inventory
$40 $40 NA NA NA $217,725 895
$40 $39 January 10% 20% $221,485 523
$40 $39 April 10% 20% $211,283 938
$40 $39 January 100% 20% $242,810 208
$40 $39 April 100% 20% $247,320 1,492
$31 $31 NA NA NA $73,725 895
$31 $30 January 100% 20% $84,410 208
$31 $30 April 100% 20% $69,120 1,492

42. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-42
Implementing Solutions to
Predictable Variability in Practice
Coordinate planning across enterprises in the supply
chain
Take predictable variability into account when
making strategic decisions
Preempt, do not just react to, predictable variability

43. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9-43
Summary of Learning Objectives
How can supply be managed to improve
synchronization in the supply chain in the face of
predictable variability?
How can demand be managed to improve
synchronization in the supply chain in the face of
predictable variability?
How can sales and operations planning be used to
maximize profitability when faced with predictable
variability in the supply chain?