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Chapter 8: Chapter 8: Aggregate Planning in the SCAggregate Planning in the SC

Readings and Assignment:See Course Web

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1. What is Aggregate Planning (AP)?

2. Role of AP in a SC

3. AP strategies

4. AP techniques

5. Cut-and-Try method for AP

6. Optimizing AP by LP/Excel Solver

7. APS in SCM, CPFR

8. Implementation issues

Lecture contents:Lecture contents:

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45005500

7000

10000

8000

6000

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4500 4000

90008000

4000

6000

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 need to do is to balance out the demand and the capacity supply

1. What is Aggregate Planning ?1. What is Aggregate Planning ?

-- Balancing Aggregate Demand and Aggregate Production Capacity Balancing Aggregate Demand and Aggregate Production Capacity (the production rate, workforce levels and inventory …)

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Managerial PracticeManagerial Practice

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Understanding Understanding processprocess

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Managerial InputsManagerial 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

EngineeringLabor-market conditions Training capacity

Human resources

Cost data Financial condition of firm

Accounting and financeAggregate

plan

Customer needs Demand forecasts Competition behavior

Distribution and marketing

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Aggregate Planning Aggregate Planning A process by which a company determines levels of capacity, production, subcontracting, inventory, stockouts and even pricing over a specified time horizon

Goal: Specify the optimal combination (tradeoff) ofProduction

» production rate (units completed per unit of time)Capacity (regular time, overtime, subcontract)

» workforce level (number of workers/units of capacity)» overtime (the overtime production planned)» machine capacity level (units of machine capacity needed)» subcontracting (the subcontracted or outsourced capacity)

Inventory» backlog (demand not satisfied but carried over to future period)/lost sales» inventory on hand (inventory carried from previous period)

Pricesto maximizes the firm’s profit over the planning horizon

Product group or broad category (aggregation)Intermediate-range planning period: 6-18 months

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Outputs of Aggregate PlanOutputs of Aggregate PlanProduction 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

neededBacklog/stockout quantity:

used to determine what customer service levels will beMachine 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

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Aggregate Planning ObjectivesAggregate Planning Objectives

•• Minimize Costs/Maximize ProfitsMinimize Costs/Maximize Profits•• Maximize Customer ServiceMaximize Customer Service•• Minimize Inventory InvestmentMinimize Inventory Investment•• Minimize Changes in Production RatesMinimize Changes in Production Rates•• Minimize Changes in Workforce LevelsMinimize Changes in Workforce Levels•• Maximize Utilization of Plant and EquipmentMaximize Utilization of Plant and Equipment•• ……

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Overview of major operational planning activitiesOverview of major operational planning activities1

Master Production Scheduling

Material Requirements Planning

Order SchedulingWeekly Workforce &Customer Scheduling

Daily Workforce &Customer Scheduling

Process Planning

Strategic Capacity Planning

Aggregate Planning

Long-range

Intermediate-range

Short-range

Manufacturing

Services

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Aggregate Planning ProcessAggregate Planning Process

Determine requirements for planning horizon

Identify alternatives, constraints, and costs

Prepare prospective plan for

planning horizon

Move aheadto next

planning session

Implement and update the plan

Is the plan acceptable?

NoNo

YesYes

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2. Key Strategies for AP2. Key Strategies for APChase

» matching the production rate to the order rate by hiring and laying off employees as the order rate varies

Level » Maintain a stable workforce working at a constant output rate, Shortage

and surpluses are absorbed by fluctuating inventory levels, order backlogs, and lost sales.

Time flexibility from workforce or capacity» Vary the output by varying the number of hours worked through flexible

work schedules or overtime

Some combination of the strategies

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3. Aggregate Planning Techniques3. Aggregate Planning Techniques

Cut-and-try simple methodinvolving costing out various production planning alternatives and selecting the one that is bestElaborate spreadsheets are developed to facilitate the decision process

Math. Programming (LP/IP/GP …)highly effectivesystem optimizationwhat-if analysis, scenario analysis

Simulation…

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Example 1Example 1Aggregate Planning: Unit Demand and Cost DataAggregate Planning: Unit Demand and Cost Data

Materials $5/unitHolding costs $1/unit per mo.Marginal cost of stockout $1.25/unit per mo.Hiring and training cost $200/workerLayoff costs $250/workerLabor hours required . .15 hrs/unitStraight time labor cost $8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8Beginning labor force 7

Suppose we have the following unit demand and cost information:

Demand/mo. Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000

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4.4. CutCut--andand--TryTry methodmethod

Days/mo 22 19 21 21 22 2Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 14Units/worker/mo 1063.33 918.33 1015 1015 1063.33 966.6$/worker/mo $1,408 1,216 1,344 1,344 1,408 1,28

Productive hours/worker/day 7.25Paid straight hrs/day 8Labor hours required .15 hrs/unit

Demand/mo Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000

Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker?

159.5 x (1/.15)unit/hr/wke

22 x 8hr x $8/hr

7.25 X 227.25 X 22

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Chase StrategyChase Strategy(Varying workforce by hiring & firing to meet demand)

Janays/mo 22rs/worker/mo 159.5nits/worker/mo 1,063.33worker/mo $1,408

Janabor force 7emand 4,500eg. inv. 250et req. 4,250eq. workers 3.997redredorkforce

nding inventory 0

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

Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 should be fired.

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Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1,063 918 1,015 1,015 1,063 967$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250 0 0 0 0 0Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207HiredFiredWorkforce 4 6 7 10 8 7Ending inventor 0 0 0 0 0 0

Below are the complete calculations for the remaining months in the six month planning horizon.

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Jan Feb Mar Apr May Junmand 4,500 5,500 7,000 10,000 8,000 6,000g. inv. 250t req. 4,250 5,500 7,000 10,000 8,000 6,000q. workers 3.997 5.989 6.897 9.852 7.524 6.207

red 2 1 3red 3 2 1orkforce 4 6 7 10 8 7ding inventor 0 0 0 0 0 0

Jan Feb Mar Apr May Jun Coaterial $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.bor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.ring cost 400.00 200.00 600.00 1,200.ring cost 750.00 500.00 250.00 1,500.

$260,408.

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included.

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Chase StrategyChase Strategy

Production rate is synchronized with demand by varying machine capacity or hiring and laying off workers as the demand rate variesHowever, in practice, it is often difficult to vary capacity and workforce on short noticeExpensive if cost of varying capacity is highNegative effect on workforce moraleResults in low levels of inventoryShould be used when inventory holding costs are high and costs of changing capacity are low

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Level Workforce Strategy:Level Workforce Strategy:(Fixed workforce/production level and use inventory to surplus and shortage )

JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6ProductionEnding inventorySurplusShortage

Lets take the same Example1 problem and show how to use the Level Workforce strategy.

The workforce level is fixedfixed as6 workers.

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Jan Feb Mar Apr May Juemand 4,500 5,500 7,000 10,000 8,000 6,00eg. inv. 250 2,130 2,140 1,230 -2,680 -4,30et req. 4,250 3,370 4,860 8,770 10,680 10,30

Workers 6 6 6 6 6roduction 6,380 5,510 6,090 6,090 6,380 5,80nding inventory 2,130 2,140 1,230 -2,680 -4,300 -4,50urplus 2,130 2,140 1,230 0 0hortage 0 0 0 2,680 4,300 4,50

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

The calculations for the remaining months in the six month planning horizon.

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Demand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250 2,130 2,140 1,230 -2,680 -4,300Net req. 4,250 3,370 4,860 8,770 10,680 10,300Workers 6 6 6 6 6 6Production 6,380 5,510 6,090 6,090 6,380 5,800Ending inv. 2,130 2,140 1,230 -2,680 -4,300 -4,500Surplus 2,130 2,140 1,230 0 0 0Shortage 0 0 0 2,680 4,300 4,500

Labor $8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.00Material 31,900 27,550 30,450 30,450 31,900 29,000 181,250.00Carrying 2,130 2,140 1,230 0 0 0 5,500.00Stockout 0 0 0 3,350 5,375 5,625 14,350.00

$249,100.00

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included.

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

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Level StrategyLevel StrategyMaintain stable machine capacity and workforce levels with a constant output rateShortages and surpluses result in fluctuations in inventory levels over timeInventories that are built up in anticipation of future demand or backlogs are carried over from high to low demand periodsBetter for worker moraleLarge inventories and backlogs may accumulateShould be used when inventory holding and backlog costs are relatively low

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Aggregate Planning StrategiesAggregate Planning StrategiesPLANNING STRATEGIES FOR AGGREGATE PLANS

Possible Alternatives Possible AlternativesStrategy during Slack Season during Peak Season

4. Level #2: constant Layoffs, building antici- Hiring, depleting antici-output rate pation inventory, pation inventory, over-

undertime, vacations time, subcontracting,backorders, stockouts

1. Chase #1: vary workforce Layoffs Hiringlevel to match demand

2. Chase #2: vary output Layoffs, undertime, Hiring, overtime,rate to match demand vacations subcontracting

3. Level #1: constant No layoffs, building No hiring, depletingworkforce level anticipation inventory, anticipation inventory,

undertime, vacations overtime, subcontracting,backorders, stockouts

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5. Optimizing AP by LP and Excel Solver5. Optimizing AP by LP and Excel Solver

• A small manufacturer (assembling) of gardening equipment• All demand is to be met. The demand for gardening tools is highly seasonal.

Example 2:Example 2: Red Tomato Tools

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M onth D em and Forecast January 1,600

February 3,000 M arch 3,200 A pril 3,800 M ay 2,200 June 2,200

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Demand forecast and costs data for Red Tomato:Demand forecast and costs data for Red Tomato:

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

The capacity is determined mainly by the size of its workforce

No limits on subcontracting, inventories and stockouts/backlogsTool price is $40/unitAt the beginning of January, the

starting inventory holding is 1000 tools and 80 employees20 working days in each month and 8

hours per dayNo employee works more than 10

hours of overtime per monthThe ending inventory holding at the

end of June is at least 500 units. No stockouts at the end of June

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The optimization principlesThe optimization principles

Minimize costsMaximize profitsMinimize inventory levelsMinimize changes in work force levelsMinimize use of overtimeMinimize use of subcontractingMinimize changes in production ratesMinimize number of machine setupsMinimize idle time for plant and personnelMaximize customer service…

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Key Strategies for AP:Key Strategies for AP:Chase

» matching the production rate to the order rate by hiring and laying off employees as the order rate varies

Level » Maintain a stable workforce working at a constant output rate, Shortage and surpluses are

absorbed by fluctuating inventory levels, order backlogs, and lost sales.

Time flexibility from workforce or capacity» Vary the output by varying the number of hours worked through flexible work schedules or

overtime

Some combination of the strategies

LP/IPLP/IP

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Graphical presentation of Red Tomato AP problemGraphical presentation of Red Tomato AP problem

Using graphs for analysis and understanding of the model structure!!

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Define Decision VariablesDefine Decision Variables

Wt = Workforce size for month t, t = 1, ..., 6Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6Pt = Production in month t, t = 1, ..., 6It = Inventory at the end of month t, t = 1, ..., 6St = Number of units stocked out at the end of month t, t = 1, ..., 6Ct = Number of units subcontracted for month t, t = 1, ..., 6Ot = Number of overtime hours worked in month t, t = 1, ..., 6

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Decision Objective:Decision Objective:

Minimize Total Cost = Cost of Regular time labor + Hiring and training

+ layoffs + Overtime labor + holding inventory+ stocking out + subcontracting + material

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Decision Constraints Decision Constraints –– (1)(1)Monthly inventory balance

( Node balancing for product flow, ( Node balancing for product flow, Inflow = OutflowInflow = Outflow. ). )

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Decision ConstraintsDecision Constraints –– (2)(2)

Workforce size for each month is based on hiring and layoffs

( Node balancing for workforce flow network, ( Node balancing for workforce flow network, Inflow = OutflowInflow = Outflow. ). )

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Decision Constraints Decision Constraints –– (3)(3)

Monthly production cannot exceed capacity

( Link the production with the capacity )( Link the production with the capacity )

≤

workforceitswithmontheachproduced

becanthatamountThe

montheachprocutionActual

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Decision Constraints Decision Constraints –– (4)(4)

Monthly OT cannot exceed 10hr./hd./mth.

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Use Excel Use Excel ““SolverSolver””: :

Excel FileExcel File

(Refer to the Excel file from the Course Web )

Data Input

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The Optimal PlanThe Optimal Plan

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Use Excel for Scenarios /WhatUse Excel for Scenarios /What--if analysisif analysis

Increased demand fluctuation (Refer to Example 5.1)

Increase in holding cost (from $2 to $6, Refer to Example 5.2)Over time cost drops to $4.1 per hour……

Month Demand ForecastJanuary 1,000February 3,000March 3,800April 4,800May 2,000June 1,400

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6. Aggregate Planning in SCM 6. Aggregate Planning in SCM

Supplier CustomerRetailerDistributorManufacturer

Strategic

Planning

Operational

SupplierApps

SCM

MES

Dem Plan

Transport execution &WMS

APSTransport & Inventory

Planning

CRM/SFA

• Aggregate Planning across supply chain …• Aggregate (integrated) planning for multiple products; decision units; function areas; chain parties; regions …

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Collaborative Planning, Forecasting, and Replenishment (CPFR)

CPFR is recognized as a breakthrough business model for planning, forecasting, and replenishment.Developed by Wal-Mart and Warner-Lambert in 1995.Emphasizes a sharing of consumer purchasing data among and between supply chain partners.Creates a direct link between the consumer and the supply chain.The plan and the forecast are entered by suppliers and buyers intoan Internet accessible system.Within established parameters, any of the participating partners isempowered to change the forecast (- Centralized and shared information !) Only a few CPFR initiatives have been made public, but results are impressive.

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CPRF Model:CPRF Model:

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CPRF Tasks:CPRF Tasks:5

Network ArchitectureNetwork Architecture

Distribution Center

FactorySupplier Customer

Web Browser AlertsE-mailFax

Enterprise Software

XML

SatelliteCellular

Savi Data CenterInternet Internet

SaviMobile Data Appliance

Savi Data ApplianceHandheld DevicesPeripherals

SaviSite Server

Ethernet802.11

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CPFR: Collaborative Planning, Forecasting and Replenishment

Inter-face

BUYER SELLER

ForecastTable

Shared Data

Inter-face

PromotionsTable

ItemTable

APP

LIC

ATI

ON

ForecastTable

PromotionsTable

ItemTable

APPLIC

ATIO

N

ITEMNUMBER

1234567890001

1234567890002

1234567890003…

RTLR’SFORECAST

1200

14000

330

MFR..FORECAST

1150

9000

350

DELTA

50

5000

20

TOLERANCE

100

2000

50

OK?

Internet

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APS System ModulesAPS System ModulesRequirementsOptimization

Demand Management

ERP/Legacy System

Resource Allocation

Resource Management

Demand managementFactory planningTransportation planningIntegrated resource planningSupply chain designPricing

APS Examples:APS Examples:

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APS CharacteristicsAPS CharacteristicsDriven by forecast and order requirementsConstrained resource planningIntegrated supply chain decision makingTime phasedRequires high data integrity and accuracy

Key Features of APSKey Features of APSConstraint managementConcurrent planningSynchronized planningModelingOptimizationSimulationAvailable-to-promise capability

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7. 7. Implementation issuesImplementation issues

It is important to perform AP over as wide a scope of the supply chain as is reasonably possibleMake plans flexible to cope with forecasts errorsUse safety stock or safety capacity to cope with uncertainties…

A real Hong Kong case A real Hong Kong case ……