AGGREGATE PLANNING

POM Lepatacsil

AGGREGATE
AGGREGATE PLANNING

PLANNING

Prepared and Reported by: LUCELLE ESTIGOY PATACSIL

is a process by which a company determines levels of capacity, production, subcontracting, inventory, stock-outs and pricing over a specified time horizon Also called macro planning where a company decides how many employees the firm should retain or for a manufacturing firm, the quantity and the mix of products to be produced the objective is to satisfy demand in a way that maximizes profit or minimizes costs for the firm Predicated with the existence of an aggregate unit of production

AGGREGATE UNIT OF PRODUCTION

Similar item - an aggregate production unit can correspond to an average item, but Different types of items - in terms of
weights (tons of steel) volume (gallons of gasoline) amount of work required (worker-years of programming time) peso value (value of inventory in peso) Fictitious aggregated units - they are a composite that estimates a tangible input constant

DEVELOPING AGGREGATE UNITS

(Example) One plant produced 6 models of washing machines: Model Number A5532 K4242 L9898 L3800 M2624 M3880 Worker-hours Required to Produce 4.2 4.9 5.1 5.2 5.4 5.8 Selling Price 285 345 395 425 525 725 % Sales 32 21 17 14 10 6

*Selling Prices are not consistent with the worker-hours required to produced them. *For aggregating, we can use individual product demand forecasts modified with a weighted average (sales weights) of individual item forecasts to develop a aggregate production forecast.

Thus,

Agg. Demand = .32*(DA5532) + .21(DK4242) + .17(DL9898 ) + .14(DL3800) + .10(DM2624) + .06(DM3880)

AGGREGATE PLANNING
POM Lepatacsil This method for defining an aggregate unit points to an aggregate labor requirement (/Agg. Unit) of: .32(4.2) + .21(4.9) + .17(5.1) + .14(5.2) + .10(5.4) + .06(5.8) = 4.8644 worker hours We can obtain sales forecasts for aggregate production units in multiplying the appropriate fractions by the forecasts for unit sales of each type of machine.

HIERARCHICAL PRODUCTION PLANNING

by Hax and Meal They recommend the following hierarchy Items final products to be delivered to the customers Families group of items that share a common manufacturing set up costs Types groups of families with production quantity that are determined by a single aggregate production plan On the above example: Items individual models of washing machine Family all washing machine Type large appliances

OVERVIEW OF THE AGGREGATION PROBLEM

Suppose that D1, D2, . . . , DT are the forecasts of demand for aggregate units over the planning horizon (T periods.) The problem is to determine both work force levels (Wt) and production levels (Pt ) to minimize total costs over the T period planning horizon.

IMPORTANT ISSUES
Smoothing. Refers to the costs that result from changing production and work force levels from one
period to the next

Bottleneck Problem. Inability of the system to respond to sudden changes in demand as result of

capacity restrictions Planning Horizon. The number of periods to be forecasted and hence the number of periods for which workforce and inventory levels are to be determined. End of horizon effect and rolling schedules are both important issues

Treatment of Demand. Assume demand is known. Ignores uncertainty to focus on the predictable or
systematic variations in demand

RELEVANT COSTS
Smoothing Costs
changing size of the work force changing number of units produced

Holding Costs
primary component: opportunity cost of investment s tied up in inventory

Shortage Costs
Cost of demand exceeding stock on hand.

AGGREGATE PLANNING
POM Lepatacsil

Regular Time Costs

Costs of producing one unit of output during regular working hours

Overtime and Subcontracting Costs

Costs of production of units not produced on regular time

PROTOTYPE PROBLEM
Densepack is to plan workforce and production levels for the six-month period January to June. Month Forecasted Demand January February March April May June End of December 300 workers employed Ending Inventory as of December 500 units Planned Ending Inventory as of June 600 units We can incorporate the starting and ending inventory constraints by : Define the net predicted demand in period 1 demand minus initial inventory Define ending inventory by adding minimum ending inventory constraint to the demand in period T THUS, Month January February March April May June Net Predicted Demand 780 640 900 1,200 2,000 2,000 Net Cumulative Demand 780 1,420 2,320 3,520 5,520 7,520 1,280 640 900 1,200 2,000 1,400

Minimum buffer inventories can also be handled by modifying the predicted demand. If there is a minimum buffer inventory in every period, this amount should be added to the first periods demand. If there is a minimum buffer inventory in only one period this amount should be added to that periods demand and subtracted from the next periods demand.

TYPES OF AGGREGATE PLANS

AGGREGATE PLANNING
POM Lepatacsil

Level Aggregate Plans

Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products like appliances Disadvantage- builds inventory and/or uses back orders

Illustration using the example above considering the following additional information: CH = Cost of Hiring one worker = 500 CF = Cost of Firing one worker = 1,000 CF = Cost of Holding one unit of inventory for one month = 80 We require aggregate production in units to workforce levels We will use a day as an indivisible unit of measure and define K no. of aggregate units produced by one worker in one day Over 22 working days, with workforce level constant at 76 workers, the firm produced 245 disk drives. 245/22 = 11.1364 disk drives per day 11.1364/76 = 0.1465 disk drive per worker Month January February March April May June No. of Working Days 20 24 18 26 22 15 No. of Units Produced per Worker 2.931 3.517 2.638 3.810 3.224 2.198

No. of Units Produced per Worker = No. of Working Days x Units Produced per worker in a day (.14653 ) Month Net Cumulative Demand Cumulative No. of Units Produced per Worker Ratio(minimum workforce)

January

780

2.931

267

AGGREGATE PLANNING
POM Lepatacsil February March April May June 1,420 2,320 3,520 5,520 7,520 6.448 9.086 12.896 16.12 18.318 221 256 273 343 411

The minimum workforce required for the entire six month planning is the maximum entry which is 411 workers. 300 employed at the end of December, the level aggregate plan requires hiring 111 workers at the beginning of January.

Month

No. of Units Produced per Worker 2.931 3.517 2.638 3.810 3.224 2.198

Monthly Production 1,205 1,445 1,084 1,566 1,325 903

Cumulative Production 1,205 2,650 3,734 5,300 6,625 7,528

Net Cumulative Demand 780 1,420 2,320 3,520 5,520 7,520

Ending Inventory 425 1230 1414 1780 1105 8 5,962

January February March April May June

Total Monthly Production = No. of Units Produced per Worker x 411 workers Inventory Costs = (5,962 + 600) x 80 = 524,960 Hiring Costs = 111 workers x 500 = 55,500 Total Cost Plan of 580,460

TYPES OF AGGREGATE PLANS (CONT.)

Chase Aggregate Plans
Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage- constantly changing short term capacity

AGGREGATE PLANNING
POM Lepatacsil

Month

No. of Working Days 20 24 18 26 22 15

No. of Units Produced per Worker 2.931 3.517 2.638 3.810 3.224 2.198

Net Predicted Demand 780 640 900 1,200 2,000 2,000 No. of Units Produced 783 640 902 1200 2002 2000 Cumulative Production 783 1423 2325 3525 5527 7527

Minimum of Workers Required 267 182 342 315 621 910 Net Cumulative Demand 780 1,420 2,320 3,520 5,520 7,520 Ending Inventory 3 3 5 5 7 7 30

January February March April May June Month Minimum of Workers Required 267 182 342 315 621 910

No. of Workers Hired

No. of Workers Fired 33 85

No. of Units Produced per Worker 2.931 3.517 2.638

January February March April May June TOTAL

160 27 306 289 755 145

3.810 3.224 2.198

Hiring Cost = 755 x 500 = 377,500 Firing Cost = 145 x 1,000 = 145,000 Holding Cost = (30 + 600) x 80 = 50,400 Total Cost of the Plan = 572,900

EVALUATION
Level Aggregate Plan Cost = 580,460 Chase Aggregate Plan Cost = 572,900 Comparing the results of the two planning strategies, Level Aggregate Plan Cost is somewhat higher than the Cost of Chase Aggregate Plan. However, because costs of the two plans are relatively close, it

AGGREGATE PLANNING
POM Lepatacsil is likely that the company would prefer the constant workforce plan in order to avoid any unaccounted costs of making frequent changes in the workforce.

TYPES OF AGGREGATE PLANS (CONT.)

Hybrid Aggregate Plans/Mixed Strategies and Additional Constraints
Uses a combination of options May use a level workforce with overtime & temps May allow inventory buildup and some backordering May use short term sourcing

OPTIMAL SOLUTIONS TO Aggregate Planning Problems Via Linear Programming

Linear Programming provides a means of solving aggregate planning problems optimally. The LP formulation is fairly complex requiring 8*T variables and (at least) 3*T constraints, where T is the length of the planning horizon.

Exploring the Optimal (L.P.) Approach

We need an Objective Function for cost of the aggregate plan (target is to minimize costs):

c
t 1

N H cF N F cI IT cR PR co OT cu UT cS ST

AGGREGATE PLANNING
POM Lepatacsil

Here the cis are cost for hiring, firing, inventory, production, etc HT and FT are number of workers hired and fired IT, PT, OT, ST AND UT are numbers units inventoried, produced on regular time, on overtime, by sub-contract or the number of units that could be produced on idled worker hours respectively

This objective Function would be subject to a series of constraints (one of each type for each period) Number of Workers Constraints:

Wt Wt 1 H t Ft
Inventory Constraints: Production Constraints:

I t I t 1 Pt St Dt Pt k nt Wt Ot U t

OTHER METHODOLOGIES
SEARCH DECISION RULE
Allows the user to state cost data input in very general terms. It requires that a computer program be constructed that will unambiguously evaluate any production plans cost. It then searches among alternative plans for the one with the minimum cost. However, unlike linear programming there is no assurance of optimality

SIMULATION
By developing an aggregate plan within the environment of a simulation model, it can be tested under variety of conditions to find acceptable plans for considerations

FUNCTIONAL OBJECTIVE SEARCH APPROACH

FOS System is a computerized aggregate planning that incorporates a broad range of actual planning conditions. It is capable of realistic, low-cost operating schedules that provide options for attaining goals It also uses computer search to output a plan that minimizes costs and meets delivery deadlines.

AGGREGATE PLANNING IN SERVICES

Services cannot be stockpiled or inventoried, are perishable, difficult to measure Aggregate planning in manufacturing is planning so that you allocate the right amount of resources for every process of the manufacturing so that time will be minimized when in IDLE mode.

AGGREGATE PLANNING
POM Lepatacsil For services, aggregate planning serves to schedule your employees and it varies as to what particular season you are in.

Moreover aggregate planning for services (as oppose to manufacturing) implies: 1. Most services cannot be inventoried 2. Demand for services is difficult to predict 3. Capacity is also difficult to predict 4. Service capacity must be provided at the appropriate place and time 5. Labor is usually the most constraining resource for services

THE END

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