Aggregate Planning

Chapter 12

Aggregate Planning

Aggregate Planning

MANUFACTURING RESOURCE PLANNING

Core MRP II
Aggregate Forecast Aggregate Production Plan

Detailed Forecast

Master Production Schedule

Rough-Cut Capacity Planning

Material Requirements Planning

Capacity Requirements Planning

Purchasing

Dispatching

Aggregate Planning

Aggregate Planning Strategies

Maintain a level workforce Maintain a steady output rate Match demand period by period Use a combination of decision variables

Aggregate Planning

Basic Strategies
Level capacity:
Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options.

Chase demand:
Matching capacity to demand; the planned output for a period is the expected demand for that period.

Aggregate Planning

Disaggregating
Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon. Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.

Aggregate Planning

Master Scheduling Process

Inputs
Beginning inventory Forecast Customer orders

Outputs
Projected inventory

Master Scheduling

Master production schedule Uncommitted inventory

Aggregate Planning

Time Fences in MPS

Period 1 2 3 4 5 6 7 8 9 10 11 12

frozen

firm

full

open

Aggregate Planning

Aggregate Production Planning

Aggregate Versus Detailed Plans

Costs Of Production
Chase, Level, And Mixed Strategies

Aggregate Planning

Aggregate Versus Detailed Plans

Plans differ in terms of detail and planning horizons
The aggregate production plan has a moderate horizon but little detail
E.g., Plan overall facility production month-by-month for the the next 18 months

The master production schedule has a short horizon but great detail
E.g., Plan production for each product week-by-week for the next 12 weeks

Aggregate Planning

Aggregate Versus Detailed Plans

Why plan aggregate production levels?
Aggregate plans do not provide detail needed to run facility

But detail unnecessary for medium-range resource deployment decisions

Labor force size Financing inventory

Aggregate forecasts are more accurate than detailed forecasts

Aggregate Planning

Aggregate Versus Detailed Forecasts

Sales forecasts can be aggregated with respect to time:

January February March Aggregate Product A 100 150 200

Aggregate Planning

Aggregate Versus Detailed Forecasts

Sales forecasts can be aggregated with respect to time:

January February March Aggregate Product A 100 150 200 450

Aggregate Planning

Aggregate Versus Detailed Forecasts

Sales forecasts can be aggregated with respect to product:
January Product A 100 Product B 200 Aggregate

Aggregate Planning

Aggregate Versus Detailed Forecasts

Sales forecasts can be aggregated with respect to product:
January Product A 100 Product B 200 Aggregate 300

Aggregate Planning

Aggregate Versus Detailed Forecasts

Why? Aggregate forecasts are more accurate than individual detailed forecasts
January January Forecast Forecast Actual Error 100 120 200 180 300

% Error

Product A Product B Aggregate

Aggregate Planning

Aggregate Versus Detailed Forecasts

Why? Aggregate forecasts are more accurate than individual detailed forecasts
January January Forecast Forecast Actual Error % Error 100 120 -20 -17% 200 180 20 11% 300 300 0 0

Product A Product B Aggregate

Aggregate Planning

Aggregate Versus Detailed Forecasts

Use aggregate forecasts for planning medium-range overall production levels.
High long-range forecast accuracy Detail not needed for planning long-range resource use (labor, inventory, etc.)

Use detailed forecasts for initial detailed short-range Master Production Schedule (MPS)
Detailed forecasts reasonably accurate for this time frame Need product-specific detail for MPS

Aggregate Planning

The Aggregate Production Plan

Consider the following aggregate demand forecast:
The plan is stated in the the common unit of capacity direct labor hours
Period Forecasted Demand (DLH) Aggregate Production (DLH) Q1 5,000 Q2 0 Q3 20,000 Q4 5,000

Aggregate Planning

The Aggregate Production Plan

Suppose we want to try to match demand:

Period Forecasted Demand (DLH) Aggregate Production (DLH)

Q1 5,000 5,000

Q2 0 0

Q3 20,000 20,000

Q4 5,000 5,000

Aggregate Planning

The Aggregate Production Plan

Suppose we want to try to match demand:
How do we cost out the plan?

Period Forecasted Demand (DLH) Aggregate Production (DLH)

Q1 5,000 5,000

Q2 0 0

Q3 20,000 20,000

Q4 5,000 5,000

Aggregate Planning

The Aggregate Production Plan

First need some more information:

Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers

Q1 5,000 5,000 0 10

Q2 0 0

Q3 20,000 20,000

Q4 5,000 5,000

Aggregate Planning

The Aggregate Production Plan

Projected Available Balance is simply the estimated ending inventory for each period
Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Q1 5,000 5,000 0 Q2 0 0 0 Q3 20,000 20,000 0 Q4 5,000 5,000 0

0 10

Aggregate Planning

The Aggregate Production Plan

The # workers needed is based on the planned production and average worker productivity here, it is 500 DLH/Worker/Quarter
Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Q1 5,000 5,000 0 10 Q2 0 0 0 0 Q3 20,000 20,000 0 40 Q4 5,000 5,000 0 10

0 10

Aggregate Planning

Costs Of Maintaining And Changing Production Levels

Costs of keeping production steady:
Ch -- Holding cost ($ / DLH / quarter) Cb -- Backorder cost ($ / DLH / quarter)

Costs of changing production

CH -- Hiring cost ($ / Worker) CF -- Firing cost ($ / Worker)

Also need to worry about:

CR -- Wage rate ($ / DLH / period)

Aggregate Planning

The Aggregate Production Plan

For our example, the wage rate is $10/DLH

Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Wages Cost Hiring Cost Firing Cost Holding Cost Backorder Cost Total Cost

0 10

Q1 5,000 5,000 0 10 50,000

Q2 0 0 0 0 0

Q3 20,000 20,000 0 40 200,000

Q4 5,000 5,000 0 10 50,000

Aggregate Planning

The Aggregate Production Plan

The hiring and firing costs are $2000 and $500, respectively
Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Wages Cost Hiring Cost Firing Cost Holding Cost Backorder Cost Total Cost Q1 5,000 5,000 0 10 50,000 0 0 Q2 0 0 0 0 0 0 5,000 Q3 20,000 20,000 0 40 200,000 80,000 0 Q4 5,000 5,000 0 10 50,000 0 15,000

0 10

Aggregate Planning

The Aggregate Production Plan

Holding and backorder costs are $1 and $3 /DLH/Quarter, respectively
Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Wages Cost Hiring Cost Firing Cost Holding Cost Backorder Cost Total Cost Q1 5,000 5,000 0 10 50,000 0 0 0 0 Q2 0 0 0 0 0 0 5,000 0 0 Q3 20,000 20,000 0 40 200,000 80,000 0 0 0 Q4 5,000 5,000 0 10 50,000 0 15,000 0 0

0 10

Aggregate Planning

The Aggregate Production Plan

Which gives us a projected cost of $400,000 for the year

Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Wages Cost Hiring Cost Firing Cost Holding Cost Backorder Cost Total Cost

0 10

Q1 5,000 5,000 0 10 50,000 0 0 0 0 50,000

Q2 0 0 0 0 0 0 5,000 0 0 5,000

Q3 20,000 20,000 0 40 200,000 80,000 0 0 0 280,000

Q4 5,000 5,000 0 10 50,000 0 15,000 0 0 65,000 400,000

Aggregate Planning

Chase, Level, & Mixed Strategies

This example is the first of the two "pure" strategies
Chase strategy: make only as much as you can sell

The other pure strategy has a different cost structure

Level strategy: maintain a steady production rate

In reality, a firm's strategy will be a combination or mixture of chase and level

Aggregate Planning

The Aggregate Production Plan

A level strategy will absorb fluctuations in demand through fluctuations in inventory
Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Wages Cost Hiring Cost Firing Cost Holding Cost Backorder Cost Total Cost Q1 5,000 7,500 0 10 Q2 0 7,500 Q3 20,000 7,500 Q4 5,000 7,500

Aggregate Planning

The Aggregate Production Plan

A level strategy will absorb fluctuations in demand through fluctuations in inventory
Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Wages Cost Hiring Cost Firing Cost Holding Cost Backorder Cost Total Cost Q1 5,000 7,500 0 10 15 Q2 0 7,500 15 Q3 20,000 7,500 15 Q4 5,000 7,500 15

Aggregate Planning

The Aggregate Production Plan

A level strategy will absorb fluctuations in demand through fluctuations in inventory
Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Wages Cost Hiring Cost Firing Cost Holding Cost Backorder Cost Total Cost Q1 5,000 7,500 2,500 15 Q2 0 7,500 15 Q3 20,000 7,500 15 Q4 5,000 7,500 15

0 10

Aggregate Planning

The Aggregate Production Plan

A level strategy will absorb fluctuations in demand through fluctuations in inventory
Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Wages Cost Hiring Cost Firing Cost Holding Cost Backorder Cost Total Cost Q1 5,000 7,500 2,500 15 Q2 0 7,500 10,000 15 Q3 20,000 7,500 15 Q4 5,000 7,500 15

0 10

Aggregate Planning

The Aggregate Production Plan

A level strategy will absorb fluctuations in demand through fluctuations in inventory
Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Wages Cost Hiring Cost Firing Cost Holding Cost Backorder Cost Total Cost Q1 5,000 7,500 2,500 15 Q2 0 7,500 10,000 15 Q3 20,000 7,500 -2,500 15 Q4 5,000 7,500 0 15

0 10

Aggregate Planning

The Aggregate Production Plan

A level strategy will absorb fluctuations in demand through fluctuations in inventory
Period Forecasted Demand (DLH) Aggregate Production (DLH) Projected Available Balance (DLH) Workers Wages Cost Hiring Cost Firing Cost Holding Cost Backorder Cost Total Cost Q1 5,000 7,500 2,500 15 75,000 10,000 0 2,500 0 87,500 Q2 0 7,500 10,000 15 75,000 0 0 10,000 0 85,000 Q3 20,000 7,500 -2,500 15 75,000 0 0 0 7,500 82,500 Q4 5,000 7,500 0 15 75,000 0 0 0 0 75,000 330,000

0 10