Chapter 13

Aggregate PlanningAggregate Planning

An Overview of Aggregate Planning

MarketDemand

Research andTechnology

Productdecisions

(Chapter 4)

i l

Work ForceProcess planning &capacity decisions

AggregateDemand

forecasts, Inventory on

Raw materialsavailable

p y(Chapter 5)

Aggregateplan

forecasts, orders

(Chapter 3)

M t d tiExternal

Inventory onhand

Master productionschedule &

MRP systems(Chapter 15) Detailed Work

capacity(subcontractors)

12-2

(Chapter 15) Detailed WorkSchedules

(Chapter 17)

Aggregate planningAggregate planning

It is an intermediate-range capacity planning, usually covering 2 to 12 p a g, usua y co e g to months.

I t di t

Long range

Shortrange

Intermediate range

range

Now 2 months 1 Year

12-3

O i f Pl i L lOverview of Planning Levels

L l• Long-range plans– Long term capacity

l– Location/layout• Intermediate plans (2 to 12 months)

– Employment– Inventory

Aggregate Planning

• Short-range plans– Machine loading

g

g– Job assignments

12-4

Aggregate What?

• Demand for products in a family or broad categorybroad category

• Capacities from various sources– Regular time– OvertimeOvertime– Subcontracting

12-5

Aggregate Planning ExampleKeepdry, a small manufacturing company (200 employees), Keepdry, a small manufacturing company (200 employees), produces umbrellas. The company produces the following three product lines: 1) the Executive Line, 2) the Durable Line and 3) the Compact line shown in the following figure Compact line shown in the following figure.

Compact

12-6Executive Line

Durable Line

Line

Aggregate Demand

1000010000

6000

8000

45005500

70008000

6000

2000

40004500

0J a n Fe b Ma r Apr Ma y J un

How can we meet demand?12-7

Aggregate Unit

• In reality, production involves many products in a variety of ways. y y

• As a medium-range planing tool, aggregation does not need that level of detail. does not need that level of detail.

• Therefore, products are lumped together to form on one “product ” which is often in units form on one product, which is often in units and hours.

12-8

Aggregate Unit -ExampleP d t A B CProduct A B CProduction time/unit (Hr) 5 2.5 0.75Monthly demand (Units) 200 100 1000

Total production time required = 5(200) + 2 5(100) + 0 75(1 000) = 2 000 hours/month5(200) + 2.5(100) + 0.75(1,000) 2,000 hours/month

12-9

Aggregate Unit - Capacity

Production capacity must be measured in the same units as the aggregate product. gg g p

For example with 50 full time employees there are For example, with 50 full time employees, there are

(50 workers)(8 hours/day)(25 days/month) = 10,000

hours of production time available in a typical month of 25 working days.

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of 25 working days.

Aggregation Planning

Aggregate units are not actually produced, so the aggregate plan should be converted into gg g pappropriate production schedules for individual products which share the same process or machine p pin the same period.

Answers to the sizing and time of production for Answers to the sizing and time of production for individual products may be obtained by disaggregation -- breakdown of the aggregate plan disaggregation breakdown of the aggregate plan into a master production schedule (MPS), and we will come back to this issue later.

12-11

will come back to this issue later.

What if current capacity is not enough?What if current capacity is not enough?

What options are available for better AP?

Demand Options

p

Demand Options

• Alternatives that may reduce the forecasted Alternatives that may reduce the forecasted demand fluctuations

Advertising and price cuts/increase– Advertising and price cuts/increase– Backordering during high demand period– Counter-seasonal product mixing

12-12

Wh t ti il bl f b tt AP?

Supply Options

What options are available for better AP?

Supply Options• Alternatives that may be available to change

intermediate- or short-term capacity– varying work force size by hiring or layoffsy g y g y– varying capacity through the use of overtime

or idle timeor idle time– using part-time workers

h i i t l l– changing inventory levels– subcontracting

12-13

Relevant Options and Their Costs

• Cost of hiring and laying off workersI t h ldi t• Inventory holding costs

• Overtime costs• Subcontracting costs

12-14

Summary overview for more complex problems

Inputs to the Aggregate Planning Processgg g g

• A forecast of aggregate demand covering an i t di t t l i h i (6 18 th )intermediate-term planning horizon (6-18 months)

• The alternative means available to adjust short-to medium-term system capacity, the costs of using each alternative and the extent each alternative impacts capacity

• The current status of the system in terms of workforce ylevel, inventory level and production rate

12-15

f h

Summary overview for more complex problems

Outputs of theAggregate Planning Processgg g g

• A production plan: aggregate decisions p p gg gfor each period in the planning horizon aboutabout– workforce level

d ti t– production rate– inventory level

• Projected costs of the production plan over the planning horizon

12-16

over the planning horizon

Aggregate PlanningAggregate PlanningFormal Statement

• Given the demand forecast TtFt ,...,1, =

• Determine tWtPt

at timelevelWorkforce:at timerateProduction:

Determine

tItW

t

t

at timelevelInventory :at timelevelWorkforce:

• To minimize the relevant costs over the

tt at t eeveve to y:

planning horizon T.

12-17

Two Key Supply Strategies for Meeting DemandDemand

• Ch d d • Chase demand: – Matching capacity to demand; the planned

f d h d d d foutput for a period is the expected demand for that period (without using inventory).

• Level capacity: – Maintaining a steady rate of regular-time g y f g

output while meeting variations in demand by a combination of options (inventory, overtime yetc).

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Chase Strategy: ExampleChase Strategy: ExampleThe forecasted demands (in thousand)Month 1 2 3 4 5 6Demand 12 11 13 11 12 15

Summary informationCurrent workforce 12 employeesp yProduction capacity 1,000 boxes/employee/monthPayroll cost $1,730/person/month

Hiring cost $200L ff t $300Layoff cost $300

12-19

Chase Strategy: ExampleChase Strategy: ExampleThe forecasted demands (in thousand)Month 1 2 3 4 5 6Demand 12 11 13 11 12 15

Summary informationCurrent workforce 12 employeesp yProduction capacity 1,000 boxes/employee/monthPayroll cost $1,730/person/month

Hiring cost $200L ff t $300Layoff cost $300

12-20

Chase Strategy: Example-SolutionD d E l E l

Month

1

Demand (in 1000)

Employee Rqrd.

Employee Hired Layoffs

1

212

11

12

11 13

413

11

13

11

2

24

511

12

11

12

2

16 15 15 3

74 6 374 6 3

Total cost = 74 (1730) + 6(200) + 3(300) = $130,120

12-21

( ) ( ) ( )

Level Strategy with Inventory: ExampleLevel Strategy with Inventory: ExampleThe forecasted demands (in thousand)Month 1 2 3 4 5 6Demand 12 11 13 11 12 15

Summary informationCurrent workforce 12 employeesCurrent workforce 12 employeesProduction capacity 1,000 units/employee/monthPayroll cost $1,730/person/monthy , p

Inventory holding cost $0.17/unit/monthInitial inventory 2,000 units

12-22

Level Strategy: Example-SolutionEmploye I t (i 1000) D d

MonthEmployee Level

12

Inventory (in 1000) Beginning Ending

Demand (in 1000)

1

2

12

12

2 2

2 312

113

4

12

12

3 2

2 313

114

5

12

12

2 3

3 311

126 12 3 0

72 15 1315

Total cost = 72 (1730) + 14 000(0 17) = $126 940

Ending Inv. = Beginning Inv. + Production - Demand

12-23

Total cost 72 (1730) + 14,000(0.17) $126,940

Basic RelationshipsSummary overview for more complex problems

Basic Relationships

• Period-ending inventories or backlogs are g gdetermined using the inventory balance equation

)F(OEIEItttt

tt1-tt

SOTROwhere)F-(O+EI=EI

++=

• A shortfall between the amount available to the market [output during the period plus beginning inventory] and the market demand is made up y p(buffered) by inventory, backlog, overtime, part-time labor and/or subcontracting

12-24

g

Examples 1 and 2 on Pages 553-554(Assigned problems 1 and 2)(Assigned problems 1 and 2)

A l i f 6 i d• Aggregate planning for next 6 period.• Production optionsp

– Regular time, Overtime, Subcontractor• Backlogs are also allowed• Backlogs are also allowed

12-25

Examples 1 and 2 (Assigned problems 1 and 2)(Assigned problems 1 and 2)

• Conditions in Example 1– Steady rate of regular time output (level y g p (

strategy) = 300 units/month

12-26

Examples 1 and 2(Assigned problems 1 and 2)(Assigned problems 1 and 2)

• Conditions in Example 2– Steady rate of regular time output (level y g p (

strategy) = 280 units/month– Overtime option is available, but maximum p ,

overtime is 40 units/month

12-27

(Assigned problems 1, 2, and 3)

• File name: AggregatePlanning_Example1 in Excel template

Solutions• 1: $6,3501: $6,350• 2a: $4,670• 2b: $4 800• 2b: $4,800

• T i i i l EXCEL i t t ith 12-28

• Turn in original EXCEL printouts with your name on (Due by ???)

Disaggregating the Aggregate Plan

• Breaking down the aggregate plan into specific product requirements in order p p qto determine labor requirements, materials and inventory requirementsmaterials, and inventory requirements

• The result is a master schedule– quantity and timing of specific end items

for a scheduled horizon

12-29

Figure 12-6gu e 6

Master Scheduling Process

Beginning inventory

Inputs Outputs

Projected inventory

Masterscheduling

g g y

Forecast

j y

Master production schedule

Customer orders Uncommitted inventory

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Figure 12-7

Output 1. Projected On-hand Inventorygu e

JUNE JULY

Beginning Inventory

64 1 2 3 4 5 6 7 8Forecast 30 30 30 30 40 40 40 40

JUNE JULY

Customer Orders (committed) 33 20 10 4 2Projected on-hand inventory 31 1 -29

Customer orders are larger than forecast in week 1; projected on-

Forecast is larger than customer orders in week 2;projected on-hand

Forecast is larger than customer orders in week 3;projected on-hand

12-31

p jhandis 64-33 = 31

p jinventory is 31-30 = 1

p jinventoryis 1-30 = -29

Output 2. Master Production Schedule

64 1 2 3 4 5 6 7 8Forecast 30 30 30 30 40 40 40 40Customer Orders (committed) 33 20 10 4 2Projected on-hand inventory 31 1 41 11 -29

MPS 7070

1 + 70 – 30 = 41

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2. Master Production Schedule

64 1 2 3 4 5 6 7 8Forecast 30 30 30 30 40 40 40 40Customer Orders (committed) 33 20 10 4 2Projected on-hand inventory 31 1 41 11 41 1 -39

MPS 70 7070 70

11 + 70 – 40 = 41

12-33

2. Master Production Schedule

64 1 2 3 4 5 6 7 8Forecast 30 30 30 30 40 40 40 40Customer Orders (committed) 33 20 10 4 2Projected on-hand inventory 31 1 41 11 41 1 31 61

MPS 70 70 70 7070 70 70 70

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Output 3. Available-to-Promise Inventory

64 1 2 3 4 5 6 7 8

p y

Forecast 30 30 30 30 40 40 40 40Customer Orders ( itt d) 33 20 10 4 2(committed) 33 20 10 4 2Projected on-hand inventory 31 1 41 11 41 1 31 61inventory 31 1 41 11 41 1 31 61

MPS 70 70 70 70A il bl tAvailable-to-promise inventory(uncommitted) 11 56 68 70 70

12-35

(uncommitted) 11 56 68 70 70

3. Available-to-Promise Inventoryy

64 1 2 3 4 5 6 7 8Forecast 30 30 30 30 40 40 40 40Customer Orders ( itt d) 33 20 10 4 2(committed) 33 20 10 4 2Projected on-hand inventory 31 1 41 11 41 1 31 61inventory 31 1 41 11 41 1 31 61

MPS 70 70 70 70A il bl tAvailable-to-promise inventory(uncommitted) 11 56 68 70 70

12-36

(uncommitted) 11 56 68 70 70

3. Available-to-Promise Inventory

64 1 2 3 4 5 6 7 8

y

Forecast 30 30 30 30 40 40 40 40Customer Orders ( itt d) 33 20 10 4 2(committed) 33 20 10 4 2Projected on-hand inventory 31 1 41 11 41 1 31 61inventory 31 1 41 11 41 1 31 61

MPS 70 70 70 70A il bl tAvailable-to-promise inventory(uncommitted) 11 56 68 70 70

12-37

(uncommitted) 11 56 68 70 70

Inputs of master h d li

Completed Master Schedulescheduling

64 1 2 3 4 5 6 7 8

p

Forecast 30 30 30 30 40 40 40 40Customer Orders (committed) 33 20 10 4 2Projected on-hand inventory 31 1 41 11 41 1 31 61inventory 31 1 41 11 41 1 31 61

MPS 70 70 70 70Available-to-promise inventory(uncommitted) 11 56 68 70 70

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(uncommitted) 11 56 68 70 70Outputs of master scheduling

Ch 13 Chapter 13 Aggregate Planning

• Discussion questions– 2, 3, 7, 10

• Solved problem• Solved problem– 2

• Assigned problems- 1, 2 (turn in Excel printouts) - AggregatePlanning Example1 in Excel

12-39

gg g g_ ptemplate

Aggregate Planning

• Goal: Specify the optimal combination ofproduction rate– production rate

– workforce level– inventory on hand

12-40

When workforce level is to be determined..

S th t d ti i t • Suppose that your production requirement is 1850 units. Each unit takes 5 hours to produce

• There are 22 working days/month with 8 There are 22 working days/month with 8 working hours/dayH k d• How many workers you need to meet production requirement?p q

12-41

When workforce level is to be determinedWhen workforce level is to be determined..Production Planning Requirements (units)

Jan. Feb. Mar. Apr. May Jun.yProduction requirement 1850 1425 1000 850 1150 1725

Labor hours requred 5 hours/unitProd hrs eq irement 9250 7125 5000 4250 5750 8625Prod. hrs. equirement 9250 7125 5000 4250 5750 8625

(1850 units * 5 hrs.

Jan. Feb. Mar. Apr. May Jun.Number of working days 22 19 21 22 22 20Number of working days 22 19 21 22 22 20Production hrs/worker 176 152 168 176 176 160

(22 days * 8 hrs.)

Workers required 53 47 30 24 33 54Average = 40 workers

12-429250/176 = 53

With average of 40 workers...

15002000

ity

0500

10001500

Qua

nti

01 2 3 4 5 6

Month

Q

Month

P d ti i t P d ti itProduction requirement Production capacity

12-43Capacity shortage maybe be met through OT or subcontracting

Summary of Planning Techniques

Technique Solution Characteristics Graphical/ Trial and Intuitively appealing, easy tocharting error understand; solution not

necessarily optimal.Linear Optimizing Computerized; linear assumptionseaprogramming

Opt g Co pute ed; ea assu pt o snot always valid.

Lineardecision rule

Optimizing Complex, requires considerableeffort to obtain pertinent costdecision rule effort to obtain pertinent costinformation and to constructmodel; cost assumptions notl lidalways valid.

Simulation Trial anderror

Computerized models can beexamined under a variety of

12-44conditions.

Graphic or Informal Approach• P id f k f l ti • Provides a framework for evaluating an

aggregate plan• Easy to use and understand• Graphs of forecasted demand may assist • Graphs of forecasted demand may assist

planner in generating a plan• Model is flexible but no optimization• Static - relies on the planner to generate a planStatic - relies on the planner to generate a plan

12-45

Forecast and Average Forecast Demandin

g D

ay

7080

te/W

orki

506070 Average of Forecast Demand

ctio

n R

at

304050

Prod

uc

1020

d

0January February March April May June

12-46Forecast Demand

Cumulative Forecast

300

nd

200

250

ve D

eman

100

150

umul

ativ

50

100Cu

0January February March April May June

12-47Forecast Demand

Cumulative Forecast

300

man

d

200

250

tive

Dem Production

Plan

100

150

Cum

ulat

CumulativeForecasted

50

100 ForecastedDemand

0January February March April May June

12-48Forecast Demand

Cumulative Forecast

300

man

d

200

250

ativ

e D

em ProductionPlan

100

150

Cum

ula

Cumulative

50

100ForecastedDemand

0January February March April May June

12-49Forecast Demand

A Pl i i S iAggregate Planning in Services

S i h h d d• Services occur when they are rendered• Demand for service and capacity Demand for service and capacity

available can be difficult to predictL b fl ibilit b d t i • Labor flexibility can be an advantage in services

12-50