Models of aggregate planning

1. Models of Aggregate Planning Neil K. George ITM EEC 1

2. AGGREGATE PLANNING The aggregate plan links the strategic goals and objectives of the organization with the plans for individual products, services and their various components. Objectives of Aggregate Planning: 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. 2

3. AGGREGATE PLANNING PROCESS Operations Current machine capacities. Plans for future capacities. Workforce capacities Current staffing level Marketing and Distribution Customer Needs Demand Forecasts Competitor behaviour Materials Supplier capabilities. Storage capacity. Materials availability. Accounting and Finance Cost Data Financial condition of firm. Engineering New Products. Product design changes. Machine standards. Human Resources Labour market conditions. Training capacity. AGGREGATE PLAN 3

4. STRATEGIES IN AGGREGATE PLANNING Once the demand has been determined employing the most suited demand forecasting method for the organization, there are basically 3 strategies in aggregate planning to managing supply. Chase Strategy Level Strategy Mixed Strategy 4

5. CHASE STRATEGY A Chase Strategy is a strategy aimed at adjusting capacity in anticipation of demand. It is basically “Chasing demand” by doing it dynamically and quickly. Demand Units Time Production 5

6. Some of the options available in Chase Strategy Having part time workers when needed to chase demand. Varying production rates through over time. Sharing capacity with other divisions / firms. Outsourcing Varying work force size by hiring ( during peak season) or layoffs ( during off season) 6

7. Level Strategy Level strategy is a strategy the firm maintains a constant capacity over a period of time irrespective of the fluctuations in demand. This strategy is used when the skill level, training required, or the cost of hiring people and terminating them is high. Demand Units Time Production 7

8. Level Strategy The firm maintains a level workforce and a steady rate of output when demand is low. T he firm will be forced to have higher inventory levels than that are currently needed. As demand increases, the firm is able to continue a steady production rate /steady employment level, while allowing the inventory surplus to absorb the increased demand. 8

9. Chase Vs Level Strategy 9

10. Mixed Strategy Mixed Strategy is a combination of Level Production and Chase Demand strategy. Examples of management policies no more than x % of the workforce can be laid off in a particular quarter. inventory levels cannot exceed x lakhs / crores of rupees . Some industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time. Example Chinese Lunar New Year Holiday. 10

11. Techniques used in Aggregate Planning Process 11

12. Trial & Error Method Procedure: Determine demand for each period. Determine capacities (regular time, O/T, Subcontracting) for each period. Identify company policies Determine unit costs for regular time, O/T, subcontracting, inventories, back orders, layoffs and other relevant costs. Develop alternative plans and compute the costs for each. Select the one that best satisfies the objectives . 12

13. Linear programming LP models are methods for obtaining optimal solutions to problems involving the allocation of scarce resources in terms of Cost M inimization or Profit M aximization . T he goal is to minimize the sum of costs related to regular labor time, over time, inventory holding costs, and costs associated with changing size of the work force . Constraints involve the capacities of the workforce, inventories and subcontracting. 13

14. Linear Programming E.H. BOWMAN - proposed formulating the problem in terms of transportation type programming model as a way to obtain aggregate plans that would match capacities with demand requirements and minimize cost. In order to use this approach, planners must identify capacity (supply) of regular labor time, over time, subcontracting and inventory on a period by period basis as well as related costs of each variable. 14

15. LINEAR DECISION RULE Linear decision rule is another optimizing technique. It seeks to minimize total production costs (labor, overtime, hiring/lay off, inventory carrying cost) using a set of cost-approximating functions to obtain a single quadratic equation. Then , by using calculus, two linear equations can be derived from the quadratic equation, one to be used to plan the output for each period and the other for planning the workforce for each period . 15

16. SIMULATION MODELS By developing an aggregate plan within the environment of a simulation model, it can be tested under a variety of conditions to find a most acceptable plan. These models can also be incorporated into a Decision S upport System (DSS ), which can aid in planning and evaluating alternative control policies. These models can integrate the multiple conflicting objectives inherent in manufacturing strategy by using different quantitative measures of productivity, flexibility etc 16

17. AGGREGATE PLANNING OF SERVICES 17 Accurate scheduling of labour -hours to assure quick response to customer demand An on-call labour resource to cover unexpected demand Multitasking skills of the labour resource. Flexibility in rate of output or hours of work

18. YIELD MANAGEMENT 18 Price Room sales 100 50 Rs 4000 Price charged for room Rs 500 Variable cost of room Passed-up contribution Money left on the table Demand Curve Potential customers exist who are willing to pay more than the Rs 500 variable cost of the room Some customers who paid Rs 4000 who were actually willing to pay more for the room Total Rs contribution = ( Price ) x (50 rooms ) = (Rs 4000 – Rs 500) x (50) = Rs1,75,000

19. 19 YIELD MANAGEMENT MATRIX Duration of use U npredictable Predictable Price Tend to be fixed Tend to be variable Quadrant 1: Quadrant 2: MOVIE HALLS Hotels Airlines Quadrant 3: Quadrant 4: Restaurants Super specialist care hospitals

20. CONCLUSION SUCCESS IN AGGREGATE PLANING PROCESS ENSURES THAT THE FIRM IS IN SYNC WITH THE CURRENT MARKET / CUSTOMER DEMANDS AND WHETHER IT CAN BE A SOURCE OF COMPETITIVE ADVANTAGE. 20