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Aggregate Planning

The Planning Process Aggregate Planning

Long-range plans (over one year)
Capacity decisions critical to long range plans
Issues:
Research and Development
New product plans
Capital investments
Facility location/expansion
The objective of aggregate planning
Top
executives Intermediate-range plans (3 to 18 months)
is usually to meet forecast demand
Issues:
Sales and operations planning
while minimizing cost over the
Production planning and budgeting
Operations Setting employment, inventory,
subcontracting levels
planning period
managers with
sales and Analyzing operating plans
operations Short-range plans (up to 3 months)
planning team Scheduling techniques
Issues:
Job assignments
Operations Ordering
managers, Job scheduling
supervisors, Dispatching
foremen Overtime
Part-time help
Responsibility Planning tasks and time horizons

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Aggregate Planning Aggregate Planning

QUARTER 1 ▶ Combines appropriate resources into
Jan. Feb. March general terms
▶ Part of a larger production planning
150,000 120,000 110,000

QUARTER 2 system
April May June
100,000 130,000 150,000 ▶ Disaggregation breaks the plan down
into greater detail
QUARTER 3
July Aug. Sept. ▶ Disaggregation results in a master
180,000 150,000 140,000 production schedule

Aggregate Planning Strategies Capacity Options

1. Should inventories be used to absorb
changes in demand?
2. Should changes be accommodated by
varying the size of the workforce?
3. Should part-timers, overtime, or idle time be
used to absorb changes?
4. Should subcontractors be used and
maintain a stable workforce?
5. Should prices or other factors be changed to
influence demand?
1. Changing inventory levels
▶ Increase inventory in low demand periods to
meet high demand in the future
▶ Increases costs associated with storage,
insurance, handling, obsolescence, and
capital investment
▶ Shortages may mean lost sales due to long
lead times and poor customer service

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Capacity Options Capacity Options

2. Varying workforce size by hiring or layoffs
▶ Match production rate to demand
▶ Training and separation costs for hiring and
laying off workers
▶ New workers may have lower productivity
▶ Laying off workers may lower morale and
productivity
3. Varying production rates through overtime
or idle time
▶ Allows constant workforce
▶ May be difficult to meet large increases in
demand
▶ Overtime can be costly and may drive down
productivity
▶ Absorbing idle time may be difficult

Capacity Options Capacity Options

4. Subcontracting 5. Using part-time workers
▶ Temporary measure during periods of peak ▶ Useful for filling unskilled or low skilled
demand positions, especially in services
▶ May be costly
▶ Assuring quality and timely delivery may be
difficult
▶ Exposes your customers to a possible
competitor

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Demand Options Demand Options

1. Influencing demand
2. Back ordering during high-demand
▶ Use advertising or promotion to increase periods
demand in low periods
▶ Requires customers to wait for an order
▶ Attempt to shift without loss of goodwill or the order
demand to slow
periods ▶ Most effective when there are few if any
substitutes for the product or service
▶ May not be
sufficient to ▶ Often results in lost sales
balance demand
and capacity

Demand Options Mixing Options to Develop a Plan

3. Counterseasonal product and service
mixing
▶ Develop a product mix of counterseasonal
items
▶ May lead to products or services outside the
company’s areas of expertise
▶ Chase strategy
▶ Match output rates to demand forecast for
each period
▶ Vary workforce levels or vary production
rate
▶ Favored by many service organizations

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Mixing Options to Develop a Plan Methods for Aggregate Planning

▶ Level strategy
▶ Daily production is uniform
▶ Use inventory or idle time as buffer
▶ Stable production leads to better quality
and productivity
▶ Some combination of capacity options,
a mixed strategy, might be the best
solution
▶ Graphical Methods
▶ Popular techniques
▶ Easy to understand and use
▶ Trial-and-error approaches that do not
guarantee an optimal solution
▶ Require only limited computations

Graphical Methods Roofing Supplier Example 1

TABLE 13.2 Monthly Forecasts
1. Determine the demand for each period EXPECTED PRODUCTION DEMAND PER
MONTH DEMAND DAYS DAY (COMPUTED)
2. Determine the capacity for regular time, Jan 900 22 41
overtime, and subcontracting each period Feb 700 18 39
Mar 800 21 38
3. Find labor costs, hiring and layoff costs, Apr 1,200 21 57
and inventory holding costs May 1,500 22 68
June 1,100 20 55
4. Consider company policy on workers and 6,200 124
stock levels
Average Total expected demand
5. Develop alternative plans and examine requirement =
Number of production days
their total cost
6,200
= = 50 units per day
124

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Roofing Supplier Example 1 Roofing Supplier Example 2

Forecast demand Figure 13.3
TABLE 13.3 Cost Information
Production rate per working day

70 – Inventory carrying cost $ 5 per unit per month

Level production using average
monthly forecast demand Subcontracting cost per unit $20 per unit
60 –
Average pay rate $10 per hour ($80 per day)
50 – $17 per hour
Overtime pay rate
(above 8 hours per day)
40 – 1.6 hours per unit
Labor-hours to produce a unit
30 – Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
0 – (layoffs)
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days

Roofing Supplier Example 2 Roofing Supplier Example 2

PRODUCTION MONTHLY COST PRODUCTION MONTHLY
CALCULATIONS
PRODUCTION AT 50 UNITS DEMAND INVENTORY ENDING PRODUCTION AT 50 UNITS DEMAND INVENTORY ENDING
MONTH DAYS PER DAY FORECAST CHANGE INVENTORY MONTH
Inventory DAYS
carrying PER$9,250
DAY FORECAST carried xINVENTORY
CHANGE
(= 1,850 units $5 per
Jan 22 1,100 900 +200 200 Jan 22 1,100 900
unit) +200 200
Feb 18 900 700 +200 400 Feb 18 900 700 +200 400
Regular-time labor 99,200 (= 10 workers x $80 per day x
Mar 21 1,050 800 +250 650 Mar 21 1,050 800
124 days) +250 650
Apr 21 1,050 1,200 –150 500 Apr 21 1,050 1,200 –150 500
May 22 1,100 1,500 –400 100 Other
May costs (overtime,
22 1,100 1,500 –400 100
June 20 1,000 1,100 –100 0
hiring,
June
layoffs, 20 1,000 1,100 –100 0
subcontracting) 0
1,850 1,850
Total cost $108,450

Total units of inventory carried over from one Total units of inventory carried over from one
month to the next = 1,850 units month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers Workforce required to produce 50 units per day = 10 workers

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Roofing Supplier Example 3 Roofing Supplier Example 3

In-house production = 38 units per day Forecast demand

Production rate per working day

x 124 days
70 –
= 4,712 units Level production
60 – using lowest
Subcontract units = 6,200 – 4,712 monthly forecast
50 – demand
= 1,488 units
40 –
COST CALCULATIONS
30 –
Regular-time labor $75,392 (= 7.6 workers x $80 per day x
124 days)
Subcontracting 29,760 (= 1,488 units x $20 per unit) 0 –
Total cost $105,152 Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days

Roofing Supplier Example 4 Roofing Supplier Example 4

TABLE 13.4 Cost Computations for Plan 3 Forecast demand and
BASIC monthly production
Production rate per working day

PRODUCTION
COST EXTRA COST OF EXTRA COST OF
DAILY (DEMAND X INCREASING DECREASING 70 –
FORECAST PROD 1.6 HRS/UNIT PRODUCTION PRODUCTION TOTAL
MONTH (UNITS) RATE X $10/HR) (HIRING COST) (LAYOFF COST) COST
60 –
Jan 900 41 $ 14,400 — — $ 14,400

Feb 700 39 11,200 —

$1,200
12,400
50 –
(= 2 x $600)

Mar 800 38 12,800 —

$600
13,400
40 –
(= 1 x $600)
$5,700 30 –
Apr 1,200 57 19,200 (= 19 x — 24,900
$300)
$3,300
May 1,500 68 24,000 (= 11 x — 24,300
$300) 0 –
$7,800 Jan Feb Mar Apr May June = Month
June 1,100 55 17,600 — (= 13 x 25,400      
$600)
22 18 21 21 22 20 = Number of
$99,200 $9,000 $9,600 $117,800
working days

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Comparison of Three Plans Mathematical Approaches

▶ Useful for generating strategies
TABLE 13.5 Comparison of the Three Plans ▶ Transportation Method of Linear Programming
COST PLAN 1 PLAN 2 PLAN 3
Inventory carrying $ 9,250 $ 0 $ 0 ▶ Produces an optimal plan
Regular labor 99,200 75,392 99,200 ▶ Works well for inventories, overtime,
Overtime labor 0 0 0 subcontracting
Hiring 0 0 9,000
▶ Does not work when nonlinear or negative factors
Layoffs 0 0 9,600
are introduced
Subcontracting 0 29,760 0
Total cost $108,450 $105,152 $117,800 ▶ Other Models
▶ General form of linear programming
Plan 2 is the lowest cost option
▶ Simulation

Transportation Method Transportation Example

TABLE 13.6 Farnsworth’s Production, Demand, Capacity, and Cost Data
SALES PERIOD ▶ Important points
MAR. APR. MAY
Demand 800 1,000 750
1. Carrying costs are $2/tire/month. If goods
Capacity: are made in one period and held over to the
Regular 700 700 700 next, holding costs are incurred.
Overtime 50 50 50
Subcontracting 150 150 130
2. Supply must equal demand, so a dummy
Beginning inventory 100 tires column called “unused capacity” is added.
COSTS
3. Because back ordering is not viable in this
Regular time $40 per tire example, cells that might be used to satisfy
Overtime $50 per tire earlier demand are not available.
Subcontracting $70 per tire
Carrying cost $ 2 per tire per month

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DEMAND FOR TOTAL

Transportation Example Transportation SUPPLY FROM
Period 1
(Mar)
Period 2
(Apr)
Period 3
(May)
Unused
Capacity
(dummy)
CAPACITY
AVAILABLE
(supply)

4. Quantities in each column designate the

Example Beginning inventory
P
100
0

40
2

42
4

44
0

0
100

e
levels of inventory needed to meet demand r
i
Regular time 700
50 52 54 0
700

requirements o
d
Overtime 50 50
70 72 74 0

5. In general, production should be allocated to 1

P
Subcontract 150
40 42 0
150

the lowest cost cell available without e

r
Regular time X 700 700
50 52 0
exceeding unused capacity in the row or i
o Overtime X 50 50
d
demand in the column 2 Subcontract X 50
70 72
100
0
150
P 40 0
e 700
Regular time X X 700
r
i 50 0
o Overtime X X 50 50
d
70 0
3 Subcontract X X 130 130
Table 13.7 TOTAL DEMAND 800 1,000 750 230 2,780

Revenue Management
Aggregate Planning in Services Example
Room sales Demand Figure 13.5

▶ Most services use combination strategies Curve

Potential customers exist who are
and mixed plans 100 willing to pay more than the $15
variable cost of the room, but not
▶ Controlling the cost of labor is critical $150

1. Accurate scheduling of labor-hours to assure Passed-up

contribution
Some customers who paid
$150 were actually willing to
quick response to customer demand Total 50 pay more for the room
$ contribution
2. An on-call labor resource to cover = (Price) x (50
rooms)
unexpected demand = ($150 - $15)
x (50) Money left
3. Flexibility of individual worker skills = $6,750 on the table
4. Flexibility in rate of output or hours of work $15 $150 Price
Variable cost Price charged
of room for room

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Revenue Management
Revenue Management Approaches
Example Figure 13.6
Room sales Demand
▶ Airlines, hotels, rental cars, etc.
Curve
Total $ contribution =
100 (1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =
$2,550 + $5,550 = $8,100 ▶ Tend to have predictable duration of service
and use variable pricing to control availability
60
and revenue
▶ Movies, stadiums, performing arts centers
▶ Tend to have predicable duration and fixed
30
prices but use seating locations and times to
manage revenue

$15 $100 $200 Price

Variable cost Price 1 Price 2
of room for room for room

Aggregate Plan to Master

Revenue Management Approaches
Schedule Jan Feb Mar.
▶ Restaurants, golf courses, ISPs Aggregate
Planning Aggregate
▶ Generally have unpredictable duration of plan 200 300 400
customer use and fixed prices, may use “off-
peak” rates to shift demand and manage
revenue Disaggregation Type Jan. Feb. Mar
▶ Health care businesses, etc. 21 100 100 100
▶ Tend to have unpredictable duration of Master
inch
service and variable pricing, often attempt to schedule 26 75 150 200
Master inch
control duration of service Schedule 29 25 50 100
inch
total 200 300 400

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Master Scheduling Master Scheduling Process

▶ Master schedule
▶ Determines quantities needed to meet demand Inputs Outputs
▶ Interfaces with Beginning inventory Projected inventory
▶ Marketing: it enables marketing to make valid delivery Master
Forecast Master production schedule
commitments to warehouse and final customers. Scheduling
▶ Capacity planning: it enables production to evaluate Customer orders Uncommitted inventory
capacity requirements
▶ Production planning
▶ Distribution planning

Master schedule Projected On-hand Inventory

▶ Inputs:
▶ Beginning inventory; which is the actual inventory on hand
from the preceding period of the schedule
▶ Forecasts for each period demand
▶ Customer orders; which are quantities already committed Projected on-hand Inventory from Current week’s
inventory
=
previous week
- requirements
to customers.
▶ Outputs
▶ Projected inventory
▶ Production requirements
▶ The resulting uncommitted inventory which is referred to
as available-to-promise (ATP) inventory

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Example: Master Schedule Solution: Master schedule

A company that makes industrial pumps wants to prepare a master The master schedule before MPS
production schedule for June and July. Marketing has forecasted Beginning
demand of 120 pumps for June and 160 pumps for July. These have Inventory
been evenly distributed over the four weeks in each month: 30 per
week in June and 40 per week in July. JUNE JULY
Now suppose that there are currently 64 pumps in inventory (i.e., 64 1 2 3 4 5 6 7 8
beginning inventory is 64 pumps), and that there are customer
orders that have been committed for the first five weeks (booked) Forecast 30 30 30 30 40 40 40 40
and must be filled which are 33, 20, 10, 4, and 2 respectively. The Customer Orders
following figure (see next slide) shows the three primary inputs to
the master scheduling process: beginning inventory, the forecast, (committed) 33 20 10 4 2
and the customer orders that have been committed. This information Projected on-hand
is necessary to determine three quantities: the projected on-hand Forecast is larger than
inventory, the master production schedule (MPS) and the inventory 31 1 -29 Customer orders in week 3
uncommitted (ATP) inventory. Suppose a production lot size of 70
pumps is used.
Customer orders are larger Forecast is larger than
Prepare the master Schedule than forecast in week 1 Customer orders in week 2

Solution: The master schedule Solution: Master Schedule

▶ The first step you have to calculate the on hand inventory ▶ The projected on-hand inventory and MPS are added to
the master schedule
Week Inventory Requirements Net MPS Projected Initial inventory June July
from previous inventory inventory
week before MPS 64 1 2 3 4 5 6 7 8
1 64 33 31 31
2 31 30 1 1 Forecast 30 30 30 30 40 40 40 40

3 1 30 -29 70 41 Customer orders 33 20 10 4 2

4 41 30 11 11 (committed)

5 11 40 -29 70 41 Projected on hand 31 1 41 11 41 1 31 61

inventory
6 41 40 1 1 MPS 70 70 70 70
7 1 40 -39 70 31
Available to 11 56 68 70 70
8 31 40 -9 70 61 promise inventory
(uncommitted)

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Notes
▶ The requirements equals the maximum of the
forecast and the customer orders
▶ The net inventory before MPS equals the inventory
from previous week minus the requirements.
▶ The MPS = run size, will be added when the net
inventory before MPS is negative ( weeks 3, 5, 7,
and 8).
▶ The projected inventory equals the net inventory
before MPS plus the MPS (70).

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