AGGREGATE PLANNING (Ch. 14) Intermediate-range production and capacity planning, usually covering 6 to 18 months. Part of a Hierarchical Planning System Planning Horizon Long range Intermediate range Short range | I Now 2 months 1 Year Managerial Level Low Medium / top Top Detail End items Item groups Total production ComponentsHierarchical Planning System Business Plan Marketing Sales Plan Aggregate Plan +—} Operations —| Finance Resource Plan Master Production Schedule (M PS) Material Requirement Planning (M RP)Marketing, Financial and Operations Planning * Medium to long term functional plans designed to operationalize the long-term strategic (business) plan: — Marketing plan: defines the target customers — demand side — Financial plan: identifies the source of funds, cash flows, & sets budgets — resource side — Operations plan: identifies the desired production, outsourcing, inventory levels & staffing — balancing between demand and resource sideAggregate Production Planning Matches market demand to company resources (sales and resource plans) Plans production 6 months to 18 months in advance Expresses demand, resources, and capacity in general, aggregate terms Develops a strategy for economically meeting demand Establishes a companywide game plan for allocating resourcesAggregate Planning ¢ Based on composite (representative) products: — Simplifies calculations — Forecasts for grouped items are more accurate * Considers trade-offs between holding inventory & short-term capacity based on workforcePlanning Approaches * Proactive approach: — Coordinate Marketing & Production plans to level demand using advertising & price incentives * Reactive approach: — Allow volume forecasts based on Marketing plan to drive production planningStrategies for Managing Demand Proactive Strategies * Create demand for idle resources — advertising, ~ pricing, — promotions. ¢ Shift demand into other periods — backorder (lost case), — appointmentsBasic (Pure) Reactive 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.Pure Strategies for Meeting Demand (a) Level Production - inventory, backorder/lost sales Units -----f------4------4-------4\--- Production Demand Time Demand (Sales Plan) Production(b) Chase Demand: hire/fire, overtime, part-time, subcontract Units Time Demand ee ProductionEvaluating Alternative Plans * Level strategy plan * Chase strategy planLevel Strategy Beginning Inventory 2500 Beginning Workforce 18 Labor Standard 0.64 Reg Hrs Available 160 OT Hrs Available 20 Average Aggregate Aggregate Period 1 2 3 4 5 6 Demand Demand Demand/periog 500 6000 2000 +1500 + 4000 800 8500 28000.00 4000.00 Production/period 4000 4000 4000 ©4000» 4000» 4000» 4000, (Cum Demand 500 6500 8500 10000 14000 19500 © 28000 (Cum Production 4000 @000 12000 16000 © 20000 24000 28000 Excess Units 3500 1500 3500 © 6000» 6000» 4500 0 25000 Units Short 0 0 0 0 0 ° 0 Units/Period 250 Needed Worktoroe 16 Hires 0 Fires 2 Cost Por Unit Total Cost Materials $90.00 $840,000.00 Labor $9.60 $268,800.00 Overtime $14.40 Hing $500.00 $0.00 Finng $750.00 _ $1,500.00 Holding $5.00 $125,000.00 Total Costs $1,235,300.00Chase Strategy Boginning Inventory 2500 Beginning Workforce 18 Labor Standard 0.64 Reg Hrs Available 160 OT Hrs Available 20 Aggregate Period 1 2 3 4 = 6 7 Demand Demandiperiog 500 e000 = 2000=«t500 ©= 4000-5500 «50028000 Production/period 500 6000 2000» 500 «= 4000» $500 «8500 Workers Needed 2 24 8 6 16 22 34 Workers Hired | ° 22 o 0 10 6 12 Workers Fired 16 o 18 2 0 0 0 Unitsiperiod per employee 250 Hres 50 Fes 34 Cost Per Unit Total Cost Materials $30.00 $840,000.00 Labor $9.60 $268,800.00 Overtime $14.40 Hiring $500.00 $25,000.00 Fring $750.00 $25,500.00 Holding $5.00 $0.00 Total Cost $1,159,300.00Basic Reactive Strategies * Level plans: — Use a constant workforce & produce similar quantities each time period. — Use inventories & backorders to absorb demand peaks & valleys * Chase plans: — Minimize finished good inventories by trying to keep pace with demand fluctuationsHybrid Reactive Strategies ¢ Use a combination of options: — Build-up inventory ahead of rising demand & use backorders to level extreme peaks — Layoff or furlough workers during lulls — Subcontract production or hire temporary workers to cover short-term peaks — Reassign workers to preventive maintenance during lullsMixed Strategies for Meeting Demand Overtime/Undertime Hiring/Firing Inventory/Backordering Subcontracting Out/In Part-time/Full-TimeInputs and Outputs to Aggregate Production Planning Demand Strategic Forecasts Company Objectives Policies Capacity Financial ‘ Aggregate . Constraints — 5 Production Constraints Planning Size of a \ Units or dollars 5 subcontracted, Workforce Production Inventory back ordered, or per month Levels ist (in units or $)Demand-based Options ¢ Finished goods inventories: — Anticipate demand * Back orders & lost sales: — Delay delivery or allow demand to go unfilled * Shift demand to off-peak times: — Proactive marketingCapacity-based Options Overtime: Short-term option — Pay workers a premium to work longer hours Undertime: Short-term option — Slow the production rate or send workers home early (lowers labor productivity, but doesn’t tie up capital in finished good inventories) Subcontracting: Medium-term option Hire & fire workers: Long-term option — Change the size of the workforceDeveloping Aggregate Plan * Choose the basic strategy: — Level, chase, or hybrid * Determine the production rate: — Level plan with back orders: rate = average demand over the planning horizon — Level plan without back orders: rate is set to meet all demand on time — Chase plan: assign regular production, amount of overtime & subcontracted work to meet demandDeveloping the Aggregate Plan Calculate the size of the workforce needed Calculate period-to-period inventory levels, shortages, expected hiring & firings, and overtime Calculate period-by-period costs, then sum for total costs of the plan Evaluate the plan’s impact on customer service and human resource issuesSummary of Planning Techniques Technique Solution Characteristics Graphical/ Trial and Intuitively appealing, easy to charting error understand; solution not necessarily optimal. Linear Optimizing Computerized; linear assumptions | programming not always valid. Linear Optimizing Complex, requires considerable decision rule effort to obtain pertinent cost information and to construct model; cost assumptions not always valid. Simulation Trial and Computerized models can be error examined under a variety of conditions.Service Planning Issues Intangible products can’t be inventoried Possible approaches: — Try to proactively shift demand away from peaks — Use overtime or subcontracting to handle peaks — Allow lost sales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.Master Scheduling Process Inputs Outputs Beginning inveatory Projected inventory Forecast. Master production schedule Customer ordefs Uncommitted inventory