Chapter 4_Aggregate Planning (2).pptx

planning

1. CHAPTER 4 AGGREGATE PLANNING 1

2. Planning Horizon Aggregate planning : Intermediate-range capacity planning, usually covering 2 to 12 months . The goal of aggregate planning is to achieve a production plan that will effectively utilize the organization’s resources to satisfy expected demand. Short range Intermediate range Long range Now 2 months 1 Year

3. Planning Levels Organizations make capacity decisions on three levels: Short-range plans (Detailed plans) Machine loading Job assignments Intermediate plans (General levels) Employment Output, and inventories Long-range plans Long term capacity Location / layout

4. Planning Sequence Business Plan Establishes operations and capacity strategies Aggregate plan Establishes operations capacity Master schedule Establishes schedules for specific products Corporate strategies and policies Economic, competitive, and political conditions Aggregate demand forecasts

5. Aggregate planning Aggregate planning begins with a forecast of aggregate demand for the intermediate range. This is followed by a general plan to meet demand requirements by setting output, employment, and finished-goods inventory or service capacities. Managers must consider a number of plans, each of which must be examined in light of feasibility and cost. Aggregate plans are updated periodically , often monthly, to take into account updated forecast and other changes.

6. Aggregate Plan – Managerial Inputs Supplier capabilities Storage capacity Materials availability Materials Current machine capacities Plans for future capacities Workforce capacities Current staffing level Operations New products Product design changes Machine standards Engineering Labor-market conditions Training capacity Human resources Cost data Financial condition of firm Accounting and finance Aggregate plan Customer needs Demand forecasts Competition behavior Distribution and marketing

7. Aggregate Plan – Outputs Units or dollars subcontracted Size of Workforce and Workforce Adjustment Production per month (in units or $) Inventory Levels Aggregate plan Units or dollars Of Backlogs, backorders , or stockout Reactive Alternatives Complementary Products Competitive Pricing Aggressive Alternatives

8. Relationships of Aggregate Schedule Forecast & Firm Orders Material Requirements Planning Aggregate Production Planning Resource Availability Shop Floor Schedules Capacity Requirements Planning Realistic? Yes No, modify CRP, MRP, or MPS Work force Inventory Subcontractors Master Production Scheduling

9. Aggregate Level Scheduling Aggregate Schedule: Month Jan Feb Mar Apr May No. of Chips 600 650 620 630 640 Master Production Schedule: Month Jan Feb Mar Apr May P4 1.5 ghz 300 200 310 300 340 P4 1.7 ghz 300 450 310 330 300

10. Aggregate Scheduling Goals : Meet demand , Use capacity efficiently, Meet inventory policy, Minimize cost (Labor, Inventory, Plant & equipment, Subcontract) Aggregate Scheduling Options Capacity Demand Inventory Hire and layoff Overtime or idle Subcontract Part-time workers Promotion and price Back ordering Counter-seasonal product mixing

11. Aggregate Planning Objectives Minimize Costs/Maximize Profits Maximize Customer Service Minimize Inventory Investment Minimize Changes in Production Rates Minimize Changes in Workforce Levels Maximize Utilization of Plant and Equipment

12. Examples of Capacity Adjustment to Meet Demand Producing at a constant rate and using inventory to absorb fluctuations in demand Hiring and firing workers to match demand Maintaining resources for high demand levels Increase or decrease working hours (overtime and under time) Subcontracting work to other firms Using part-time workers Providing the service or product at a later time period (backordering)

13. PLANNING STRATEGIES Chase Strategies Match demand during the planning horizon by either Vary workforce or vary output rate Level Strategies Maintain a constant workforce level or constant output rate during the planning horizon Constant workforce or constant output rate Mixed Strategies Combined several strategies

14. PLANNING STRATEGIES Level Production Production Demand Units Time Production Demand Units Time Chase Demand

15. PLANNING STRATEGIES FOR AGGREGATE PLANS Strategy Possible alternative s during slack season Possible alternative s during peak season 1.Chase #1: vary workforce level to match demand Layoffs Hiring 2.Chase#2: vary output to match demand Layoffs, under time, vacations Hiring, overtime, subcontracting 3.Level #1: Constant workforce level No layoffs, building anticipation inventory, under time, vacations No hiring, depleting anticipation inventory, overtime, subcontracting, backorders, stockouts 4.Level #2: constant output rate Layoffs, building anticipation inventory, under time, vacations Hiring, depleting anticipation inventory, overtime, subcontrating , backorders, stockouts

16. Techniques for aggregate planning are classified into two categories : Informal trial-and-error techniques (frequently used) Mathematical techniques Chase approach Level approach Advantage Investment in inventory is low, Labor utilization is high Stable output rates and workforce levels Disadvantage The cost of adjusting output rates and/or workforce levels Greater inventory costs, Increased overtime and idle time, Resource utilizations vary over time

17. A GENERAL PROCEDURE FOR AGGREGATE PLANNING Determine demand for each period Determine capacities (regular time, over time, and subcontracting) for each period Identify policies that are pertinent Determine units costs for regular time, overtime, subcontracting, holding inventories, back orders, layoffs, and other relevant costs Develop alternative plans and compute the costs for each Select the best plan that satisfies objectives. Otherwise return to step 5.

18. MATHEMATICAL TECHNIQUES Linear programming : Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization. Linear decision rule : Optimizing technique that seeks to minimize combined costs, using a set of cost-approximating functions to obtain a single quadratic equation. Simulation models : Developing a computerized models that can be tested under a variety of conditions in an attempt to identify reasonably acceptable (although not always optimal) solutions to problem

19. PLANNING TECHNIQUES

20. AGGREGATE PLANNING COST Regular-Time Costs Overtime Costs Hiring and Layoff Costs Inventory Holding Costs Backorder and Stock out Costs

21. EXAMPLE 1 Materials Cost: $100/unit Labor: 5 hours per unit , $4/ hr RT , $6/ hr OT Subcontract $20/unit ($120 - $100 mat’l savings) Holding cost $1.5/unit/month Stockout cost $5/unit/month Hiring cost $200/employee Firing cost $250/employee Starting inventory 400 units, safety stock 25% Jan Feb Mar Apr May June Forecasted Demand (units) 1800 1500 1100 900 1100 1600

22. Goal of 25% of sales as “safety stock” For planning, assume safety stock never used EXAMPLE 1

23. HIRE AND FIRE, NO OT

24. CONSTANT WORKFORCE (40 workers per month)

25. SUBCONTRACT April has lowest demand 21 days * 8 hrs = 168 850*5/168 = 25.3 workers Subcontract rest

26. CONSTANT WORKERS WITH OT Find # workers to do all except biggest mos in RT Trial and error Not enough safety stock

27. EXAMPLE 2 Planners for a company that makes several models of skateboards are about to prepare the aggregate plan that will cover six periods . They now want to evaluate a plan that calls for a steady rate of regular output , mainly using inventory to absorb the uneven demand but allowing some backlog. Overtime and subcontracting are not used because they want a steady output . They intend to start with zero inventory on hand in the first period . Prepare an aggregate plan and determine its cost using the following information. Assume a level of output rate of 300 unit per period with regular time . Note that the planned ending inventory is zero . There are 15 workers , and each can produce 20 units per period .

28. EXAMPLE 2 Cost: Regular time = $2 per skateboard Overtime = $3 per skateboard Subcontract = $6 per skateboard Inventory = $1 per skateboard per period on average inventory Back orders = $5 per skateboard per period period 1 2 3 4 5 6 total Forecast 200 200 300 400 500 200 1800

29. Solution: Example 2 Period 1 2 3 4 5 6 total Forecast 200 200 300 400 500 200 1800 Output Regular 300 300 300 300 300 300 1800 Overtime - - - - - - Subcontract - - - - - - Output-forecast 100 100 (100) (200) 100 Inventory Beginning 100 200 200 100 Ending 100 200 200 100 Average 50 150 200 150 50 600 Backlog 100 100 Cost Output Regular $600 600 600 600 600 600 $3600 Overtime - - - - - - Subcontract - - - - - - Hire/layoff - - - - - - Inventory $50 150 200 150 50 $600 Back order 500 $500 Total $650 750 800 750 1150 600 $4700

30. Aggregate Planning in Services Aggregate planning for services: takes into account projected customer demands, equipment, capacities, and labor capabilities. The resulting plan is a time-phased projection of service staff requirements. Aggregate planning for manufacturing and aggregate planning for services share similarities in some respect, but there are some important differences which are: Services occur when they are rendered Demand for service can be difficult to predict Capacity availability can be difficult to predict Labor flexibility can be an advantage in services

31. Disaggregating the aggregate plan For the production plan to be translated into meaningful terms of production, it is necessary to disaggregate the aggregate plan. This means breaking down the aggregate plan into specific product requirements in order to determine labor requirements (skills, size of workforce), materials, and inventory requirements. To put the aggregate production plan into operation, one must convert, or decompose, those aggregate units into units of actual product or services that are to be produced or offered.

32. For example : televisions manufacturer may have an aggregate plan that calls for 200 television in January, 300 in February, and 400 in March. This company produce 21, 26, and 29 inch TVs, therefore the 200, 300, and 400 aggregate TVs that are to be produced during those three months must be translated into specific numbers of TVs of each type prior to actually purchasing the appropriate materials and parts, scheduling operations, and planning inventory requirements.

33. Master scheduling The result of disaggregating the aggregate plan is a master schedule showing the quantity and timing of specific end items for a scheduled horizon , which often covers about six to eight weeks ahead. The master schedule shows the planned output for individual products rather than an entire product group, along with the timing of production. It should be noted that whereas the aggregate plan covers an interval of, say, 12 months, the master schedule covers only a portion of this. In other words, the aggregate plan is disaggregated in stages , or phases, that may cover a few weeks to two or three months. The master schedule contains important information for marketing as well as for production. It reveals when orders are scheduled for production and when completed orders are to be shipped

34. Aggregate Plan to Master Schedule Jan Feb Mar. 200 300 400 Aggregate Planning Disaggregation Master Schedule Type Jan. Feb. Mar 21 inch 100 100 100 26 inch 75 150 200 29 inch 25 50 100 total 200 300 400 Aggregate plan Master schedule

35. Master schedule Determines quantities needed to meet demand Interfaces with Marketing: it enables marketing to make valid delivery commitments to warehouse and final customers. Capacity planning: it enables production to evaluate capacity requirements Production planning Distribution planning

36. Master schedule Inputs: Beginning inventory; which is the actual inventory on hand from the preceding period of the schedule Forecasts for each period demand Customer orders; which are quantities already committed to customers. Outputs Projected inventory Production requirements The resulting uncommitted inventory which is referred to as available-to-promise (ATP) inventory

37. REFERENCE William J. Stevenson , Operations Management, 9 th edition