Aggregate Sales and Operations Planning

Planning Horizon
Aggregate planning: Intermediaterange capacity planning, usually covering 2 to 12 months.
Long range
Intermediate range

Short range Now

2 months

1 Year

Overview of Planning Levels

Long-range plans
Long

term capacity Location / layout

Intermediate plans (General levels)

Employment Output Inventory Subcontracting Overtime/Under

Time

Short-range plans (Detailed plans)

Machine

loading Job assignments/sequencing/work schedules

Hierarchical Approach to Planning

Aggregate Planning

Also called Sales and Operation Planning

The

term has been coined by companies to refer to the process that helps companies keep demand and supply in balance

What does Aggregate Mean?

Overall terms
Product

families or product lines rather than individual products Big picture approach to planning Aggregate, for example # bicycles to be produced, but would not identify bicycles by colour, size, type etc.

Aggregate Planning
Jan 150,000
Quarter 1 Feb 120,000 Quarter 2 May 130,000 Quarter 3 Aug 150,000

Mar 110,000

Apr 100,000

Jun 150,000

Jul 180,000

Sep 140,000

Disaggregation

In the manufacturing environment the process of breaking down the aggregate plan into greater detail is called disaggregation Disaggregation results in Master Production Schedule (MPS)
MPS
Purchasing Production of

parts or components

Aggregate Plan to Master Schedule

Aggregate Planning

Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon.

Disaggregation

Master Schedule

Aggregate Planning

It determines the resource capacity a firm will need to meet its demand over an intermediate time horizon
In this time frame it is too early to determine production level by SKU but too late to arrange additional capacity

Aggregate Planning

Aggregate planning: General plan Combined products = aggregate product Short and long sleeve shirts = shirt Single product Pooled capacities = aggregated capacity Dedicated machine and general machine = machine Single capacity Time periods = time buckets Consider all the demand and production of a given month together Quite a few time buckets

Why Aggregate Planning?

Provides for fully loaded facilities, thus minimizing

Overloading

and under loading Minimizing cost over the planning period

Adequate production capacity to meet expected aggregate demand

Optimize

balance between demand and

supply

Why Aggregate Planning?

A plan for orderly and systematic change of production capacity to meet peaks and valleys of expected customer demand
Getting the most output for the amount of resources available, which is important in times of scarce production resources

Steps in Aggregate Planning

1.

Begin with sales forecast for each product that indicates the quantities to be sold in each time period (usually weeks, months, or quarters) over the planning horizon (3-18 months) Total all the individual product or service forecast into one aggregate demand.

2.

Steps in Aggregate Planning

3.

Determine capacities (regular time, OT, Subcontracting) for each period Identify company policy (chase, level)
Determine unit costs for regular time, OT, subcontracting, holding inventories, back orders, layoffs etc.

4.

5.

Steps in Aggregate Planning

6.

7.

Develop alternative plans and compute cost for each Select the best alternative that satisfies companys objectives

Strategies for Meeting Demand

Proactive
Alter

demand to match capacity capacity to match demand of each

Reactive
Alter

Mixed
Some

Strategies for Meeting Demand

Proactive strategies
Influencing

Demand

Offer discounts and promotions

Increase

advertising in slack periods

Counter

seasonal products

Lawnmowers (summer) and snow-blowers (winter)

Strategies for Meeting Demand

Reactive Strategies
Changing

inventory levels Vary workforce size (hiring and lay-off) Varying shifts Varying working hours Varying production through overtime or idle time Subcontracting

Inputs to Aggregate Planning

Production rates Demand forecast Policies on work force changes Costs (inventory, hiring, firing, OT, subcontracting) Inventory levels

Outputs of Aggregate Planning

Total cost of a plan Projected levels of

Inventory

Output
Employment Subcontracting

Inventory Calculations
Inventory Calculations

# Workers Calculations

Graphical Method
Popular techniques Easy to understand and use

Trial-and-error approaches that do not guarantee an optimal solution

Require only limited computations

Graphical Method
Month Expected Demand
Production Days

Demand / day

Avg. daily demand

Jan

900

22

41

50

Feb
March

700
800

18
21

39
38

50
50

April
May

1200
1500

21
22

57
68

50
50

June

1100
6,200

20
124

55

50

Graphical Method

Note: Forecast differs from average demand

Aggregate Planning Techniques

Two pure forms of aggregate planning strategies Level Production Maintain constant workforce and adjust inventory Chase Demand Hiring and Firing people Mixed Strategy Combination of Overtime, under time, & subcontracting Part Time employees Hiring and firing Inventory Backordering Note: When one alternative: Pure Strategy When two or more are selected: Mixed strategies

Level Strategy

It is an aggregate planning in which daily or monthly production is uniform

Toyota

and Nissan follow this strategy Finished goods inventory go up or down to buffer the difference between demand and production

Works when demand is stable

Level Production Strategy

LEVEL PRODUCTION STRATEGY

Assume begin inventory: 2000

Chase Strategy
It attempts to achieve output rates that match demand forecast for that period. This strategy can be accomplished by:

Vary

workforce levels (hiring and firing)

Chase Demand Strategy

CHASE DEMAND STRATEGY

OVERTIME & SUBCONTRACTING

Chase vs. Level

Chase Approach

Level Approach

Advantages
Investment

Advantages

in inventory

is low
Labor

Stable output rates and workforce

utilization in high

Disadvantages
Greater

Disadvantages
The

inventory costs overtime and

cost of adjusting output rates and/or workforce levels

Increased

idle time

Resource utilizations vary over time

Mixed Strategy

For most firms, neither a chase strategy nor a level strategy is likely to prove ideal, so a combination of options must be achieved to meet demand and minimize cost More complex than pure ones but typically yield a better strategy

Mixed Strategy

Examples
Do

not hire or lay off workers, adjust the production rate by varying the number of shifts, use inventory and subcontracting to match supply and demand not hire or lay off workers, use subcontracting during periods of high demand and build inventory during periods of low demand

Do

MIXED STRATEGY

Linear Programming Approaches to AP

Finds minimum cost solution related to regular labour time, overtime, subcontracting, caring inventory, and costs associated with changing the size of workforce

Mathematical Techniques to Aggregate Planning

Linear Programming
Optimal

solutions Cost minimization Profit maximization

Appropriate when cost and variable relationships are linear Application in industry limited

Transportation Method in AP

Transportation Method in AP

Transportation Method (An Example)

Total Costs

Period

Demand

Regular Production

Overtime

Subcontract

End Inventory

1 2 3 4 Total

900 1500 1600 3000 7000

1000 1200 1300 1300 4800

100 150 200 200 650

0 250 500 500 1250

500 600 1000 0 2100

Total Cost: 4800$20+650$25+1250$28+2100$3 = $153,550

Transportation Method (Second Example Prob 7)

Transportation Method: Cost of Plan

Period 1: 50($0)+300($50)+50($65)+50($80)=$22,250 Period 2: 400($50)+50($65)+100($80)=$31,250 Period 3: 50($81)+450($50)+50($65)+200($80)=$45,800

Total Cost: $99,300

Simulation Models in AP

Development of computerized model under variety of conditions to find reasonably acceptable solutions Advantages
Lends

itself to problems that are difficult to solve mathematically Experimenting system behaviour without any risk Compresses time to understand system Understand system behaviour under wide range of conditions

Simulation Models in AP

Limitations
Simulation

does not produce optimal solutions, it merely indicates approximate behaviour for a set of inputs are based on models, and models are only approximation of reality

Simulations

Summary of Aggregate Planning Techniques

Technique
Spreadsheet

Solution Approach
Heuristic (trial and error) Optimizing

Characteristics
Intuitively appealing, easy to understand, solution not optimal Computerized

Linear Programming

Simulation

Heuristic (trial and error)

Computerized models can be examined under various scenarios