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Dr. S.

Venkataramanaiah (S Venkat)
OM & QT Area IIM Indore Prabhandh Shikhar Rau-Pithampur Road Indore- 453 331 Email: svenkat@iimidr.ac.in

11/20/2010

PGP1 -OM 1 -S Venkat

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Aggregate Planning

11/20/2010

PGP1 -OM 1 -S Venkat

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OBJECTIVES
To understand • Importance of Business Plan • Planning Activities and their relation • Planning for Sales and Operations • The Aggregate Operations Plan • Approaches for AP- Chase and Level Strategies
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Business Plan- Importance
§ BP strategic in nature and addresses the following: § Should we meet the projected demand entirely or a portion of the projected demand? § What are the implications of this decision on the overall competitive scenario and the firm’s standing in the market? § How is this likely to affect the operating system and planning in other functional areas of the business such as marketing and finance? § What resources should we commit to meet the chosen demand during the planning horizon? APP seeks to translate business plans to operational decisions
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Why APP? • Demand fluctuations • Capacity fluctuations • Difficulty level in altering production or output rates – Production systems are complex and varying the rate of production requires prior planning and co-ordination with supplier and distributor • Benefits of multi-period planning Aggregate Planning is done in an organisation to match the demand with the supply on a period-byperiod basis in a cost effective manner 11/20/2010 PGP1 -OM 1 -S Venkat 5 The Aggregate Plan • Main purpose is to specify optimal combination of – Production rate (units completed per unit of time) – Workforce level (number of workers) – Inventory on hand (inventory carried from period to period) • Product group or broad category (Aggregation) • This planning is done over an intermediaterange planning period of 6 to 18 months 11/20/2010 PGP1 -OM 1 -S Venkat 6 3 .

Inputs Competitors’ behavior External capacity Raw material availability Market demand Economic conditions External to firm Planning for production Current physical capacity 11/20/2010 Current workforce Inventory levels PGP1 -OM 1 -S Venkat Activities required for production Internal to firm 8 4 .Components AGGREGATE DEMAND For PSEUDO PRODUCT ITEM 3 DEMAND ITEM 2 DEMAND ITEM 1 DEMAND Time 11/20/2010 PGP1 -OM 1 -S Venkat 7 Production Planning System.Aggregate Demand.

MPS Linkages with APP & Forecasting Order Inflow Market Aggregate Production Planning Forecasting Capacity Plan Master Production Scheduling Materials Plan Labour & Resources 11/20/2010 Resource availability Actual Production PGP1 -OM 1 -S Venkat Vendors Material Inflow 9 Hierarchical Approach to Planning Business Plan Marketing Plan Production Plan (rough cut capacity) Financial Plan Level 1 Level 2 Materials Requirement Plan Master Production Schedule Capacity Requirement Plan Detailed Scheduling Level 3 11/20/2010 Shop Floor Control PGP1 -OM 1 -S Venkat 10 5 .

000 metres during September to December – Carry 10% of monthly production as inventory during the first 9 months of production.000 metres during April to August – Change the production rate to 10. – Work on a one-shift basis throughout the year with 20% over time during July to October 11/20/2010 PGP1 -OM 1 -S Venkat 12 6 .APP Decision Variables: An illustration • The decisions involve – Amount of resources (productive capacity and labour hours) to be committed – Rate at which goods and services needs to be produced during a period – Inventory to be carried forward from one period to the next 11/20/2010 PGP1 -OM 1 -S Venkat 11 APP Decision Variables: An illustration • An example from Garment Manufacturing – Produce at the rate of 9000 metres of cloth everyday during the months of January to March – Increase it to 11.

Aggregate Units for CapacityExamples Sl. No 1 2 3 4 5 6 Product Acetic Acid Data Entry Systems Mini computer Printed Circuit Board Alloy Iron Castings Cement Aggregate Unit of capacity Metric tonnes Numbers Value (ex-factory) in Rs. Square Metres Metric tonnes Metric tonnes 11/20/2010 PGP1 -OM 1 -S Venkat 13 Aggregate Planning Framework Forecasting Targeted Demand to be fulfilled Alternatives for Modifying demand Arriving at effective Period-by-period Demand to be met Actual period-by-period Supply Schedules Arriving at Period-by-Period Supply Schedules Alternatives for Modifying supply 11/20/2010 PGP1 -OM 1 -S Venkat 14 7 .

UT) • Capacity Augmentation Alternatives – Sub-contracting/Outsourcing – De-bottlenecking – Addition of new capacity 11/20/2010 PGP1 -OM 1 -S Venkat 16 8 . Backordering/Backlogging – Carrying Inventory • Capacity Adjustment Alternatives – Hiring/Lay-off of workers – Varying shifts – Varying Working Hours (OT.Alternatives for managing demand • Reservation of Capacity • Influencing Demand – Special Tariffs – Differential Discount Structures – Limited period special offers 11/20/2010 PGP1 -OM 1 -S Venkat 15 Alternatives for Managing Supply • Inventory Based Alternatives – Stock out.

APP-Example 1400 Total-lbr hrs 1200 Total-m/c hrs 1000 800 600 400 200 0 1 2 3 4 5 6 7 8 9 10 11 12 Any Observations? 11/20/2010 PGP1 -OM 1 -S Venkat 17 APP-Example 12000 10000 Cumulative labr hrs Cumulative m/c hrs 8000 6000 4000 2000 0 1 2 3 4 5 6 7 8 9 10 11 12 Any Observations? 11/20/2010 PGP1 -OM 1 -S Venkat 18 9 .

APP-Example 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1 2 3 4 5 6 7 8 9 10 11 12 Total-lbr hrs Total-m/c hrs Total-Fin Rs Any Observations? 11/20/2010 PGP1 -OM 1 -S Venkat 19 APP-Example 35000 30000 25000 20000 15000 10000 5000 0 1 2 3 4 5 6 7 8 9 10 11 12 Cumulative labr hrs Cumulative m/c hrs Cumulative fin res Rs Any Observations? 11/20/2010 PGP1 -OM 1 -S Venkat 20 10 .

and inventory to make these figures match up 11/20/2010 8000 6000 4000 2000 0 Jan Feb Mar Apr May Jun 5500 4500 7000 6000 10000 8000 Avg Capacity= 35500/6. what is the gap? 10000 8000 6000 6000 4000 2000 0 Jan Feb Mar Apr May Jun 4500 4000 4000 9000 8000 PGP1 -OM 1 -S Venkat 21 APP-Demand and Capacity 12000 Demand 10000 35000 8000 6000 4000 2000 0 1 2 3 4 5 6 30000 25000 20000 15000 10000 5000 0 1 2 3 4 5 6 Cap 45000 40000 Cum Dmd Cum Cap Any Observations? 11/20/2010 PGP1 -OM 1 -S Venkat 22 11 .Balancing Aggregate Demand and Aggregate Production Capacity Avg demand= 41000/6 10000 Suppose the figure to the right represents forecast demand in units Now suppose this lower figure represents the aggregate capacity of the company to meet demand What we want to do is balance the production rate. workforce levels.

what are the aggregate hours/worker/month. units/worker.25 8 May 8000 Jun 6000 Total 41000 7.APP Examples: Unit Demand and Cost Data Suppose we have the following unit demand and cost information: Month Demand Jan 4500 Feb 5500 Mar 7000 Apr 10000 May 8000 Jun 6000 Total 41000 Materials Holding costs Marginal cost of stockout Hiring and training cost Layoff costs Labor hours required Straight time labor cost Beginning inventory Productive hours/worker/day Paid straight hrs/day 11/20/2010 Rs5/unit Rs1/unit per mo.5 1063.344 May 22 159.25 8 23 PGP1 -OM 1 -S Venkat Cut-and-Try Example: Determining Straight Labor Costs and Output Given the demand and cost information below.5 1063.25/0.216 PGP1 -OM 1 -S Venkat 12 .33 1.344 Apr 21 152.25 1015 1.33 1.25/unit per mo. and Rs/worker? Month Jan Demand 4500 Feb 5500 Mar 7000 Apr 10000 7.280 24 Jan 22 159. Rs200/worker Rs250/worker 0.33 Mar 21 152.25 1015 1.15 hrs/unit Rs8/hour 250 units 7.75 918.15=48.408 Feb 19 137. Rs1.408 Jun 20 145 966.33 & 48.25x22 Productive hours/worker/day Paid straight hrs/day 22x8hrsxRs8=Rs1408 Days/mo Hrs/worker/mo Units/worker Rs/worker 11/20/2010 7.33x22=1063.33 1.67 1.

408 Feb 19 137.5 1.500 5.000 6. Req. or 4250/1063.852 3 10 0 May 8. First.5 1. Req.344 May 22 159.280 Days/mo Hrs/worker/mo Units/worker Rs/worker Demand Beg.989 2 6 0 Mar 7. Net req.997 3 4 0 Feb 5.25 1.997 3 4 0 Below are the complete calculations for the remaining months in the six month planning horizon Jan 22 159. In this case we only need 4 workers.000 6.Chase Strategy (Hiring & Firing to meet demand) Days/mo Hrs/worker/mo Units/worker Rs/worker Jan 22 159.000 8.33 1.25 1. or 4500-250=4250 units Then.015 1.063 1.897 1 7 0 Apr 10.216 Mar 21 152. Net req.250 3.063.000 6.408 Jun 20 145 967 1.250 3. calculate number of workers needed to produce the net requirements.408 Lets assume our current workforce is 7 workers.524 2 8 0 Jun 6. calculate net requirements for production.33=3. so 3 can beVenkat fired. we have 7.500 5. workers Hired Fired Workforce 11/20/2010 Ending inventory Jan 4.063 1. inv.000 7.000 10.015 1.344 Apr 21 152.207 1 7 0 PGP1 -OM 1 -S Venkat 26 13 .75 918 1.500 250 4.000 9.5 1. inv.997 or 4 workers Finally.500 250 4. determine the number of workers to hire/fire.000 7. workers Hired Fired Workforce Ending inventory 11/20/2010 Jan 4. PGP1 -OM 1 -S 25 Demand Beg.

500 5.897 1 7 0 Mar 35.593.958. inv.00 10.00 250.000 10.000.250.00 1.76 400.00 Mar 7.500 250 4.62 1.130 2. Req.500.00 Feb 5.408.130 28 11/20/2010 PGP1 -OM 1 -S Venkat 14 .00 Apr 10.00 May 8.250 6 6.380 2.000 6.97 200.00 9.989 2 6 0 Feb 27.000.997 3 4 0 Jan 21.000 6.268.10 7.83 500.000 8.000 6.000 7.00 Costs 203.62 11/20/2010 PGP1 -OM 1 -S Venkat 27 Level Workforce Strategy (Surplus and Shortage Allowed) Lets take the same problem as before but this time use the Level Workforce strategy This time we will seek to use a workforce level of 6 workers Demand Beg.200.250 3.750. workers Hired Fired Workforce Ending inventory Material Labor Hiring cost Firing cost Jan 4.00 30.000. Net req.282.500 250 4.944.00 260.38 600.524 Jun 6.627.500.00 5. Workers Production Ending inventory Surplus Shortage Jan 4.852 3 10 0 Apr 50.500 5.00 13.00 53.207 2 1 8 7 0 0 May Jun 40.241.59 750.00 7.000 7.Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included Demand Beg. Net req.000. inv.000 9.

680 2.140 2.300 1.00 May 8.090 1.130 2.350.500 250 4.130 Feb 5.130 3.300 6 5.500 2.00 3.850.900.800 -1.00 6.448. inv.380 2.250.140 4.000 -2.380 2.620 7.450.00 1.680 6 6.00 Jun 6.00 2.860 6 6.230 Apr 10.000 -3.300 7.00 1.00 Labor Material Storage Stockout 11/20/2010 PGP1 -OM 1 -S Venkat 241.300 6 5.00 27. Workers Production Ending inventory Surplus Shortage Note.130 2.500 Demand Beg.130.00 31.140 Mar 7.00 Note:Total costs under this strategy are less than Chase at Rs260.00 2.00 31.Below are the complete calculations for the remaining months in the six month planning horizon Jan 4.000 2.380 -1.140 2.500 1.800 -1.900.450.370 6 5.00 1.130 Feb 5.860 6 6.00 30.00 30 15 .090 -2.62 48.230 8.230 1.064.680.00 5.140.00 30.770 6 6.910 10.300 May 8.064.680 Jan 8.680 10.625.140 Mar 7.300 1.448.300 Jun 6.680 2.500 250 4.600.875.00 8.370 6 5.250 6 6. Net req. if we recalculate this sheet with 7 workers we would have a surplus 11/20/2010 PGP1 -OM 1 -S Venkat 29 Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included Jan 4.000 -1.00 29.380 -1.250 6 6.680 May 8.130 3.000.230.00 Feb Mar Apr 7.090 -2.000 -910 8.770 6 6.500 Jun 7.550.090 1.00 181.000 -1.500 2.000 1.500 1.230 1.680 6 6.510 2.000 10 4.408.000.00 8.230 Apr 10.296.500.510 2.

600.Alternatives Description of the alternative Alternatives Reservation of capacity for managing Influencing Demand demand Inventory based alternatives (a) Build Inventory (b) Backlog/Backorder/Shortage Capacity adjustment alternatives Alternatives (a) Over Time/Under Time for managing (b) Vary no.250.00 1.500. Lost productivity Shift change costs Training/Hiring costs.00 181.62 Chase Strg Labor Material Hiring Firing • Which strategy is better and why? • What is the impact of cost structure and level of workforce on total cost? 11/20/2010 PGP1 -OM 1 -S Venkat 31 APP.62 203.850.750. of shifts supply (c) Hire/Lay-off workers Capacity augmentation alternatives (a) Sub-contract/Outsource (b) De-bottleneck (c) Add new capacity Costs Planning and Scheduling costs Marketing oriented costs Inventory holding costs Shortage/Loss of goodwill costs OT premium.958.00 5.500.00 241.408.000. Morale issues Transaction costs for sub-contract Annualised de-bottlenecking cost Annualised cost of new capacity 11/20/2010 PGP1 -OM 1 -S Venkat 32 16 .00 6.00 1.Some Observations 48.00 260.00 Labor Material Storage Stockout 53.200.

hiring and layoff – need easily trained pool of workers-match bet production and order • Stable workforce-variable work hours-vary output by flexible work schedules or OT • Level – maintain constant workforce with constant output. Made-to-order and project environments. of shifts (c) Hire/Lay-off workers Capacity augmentation alternatives (a) Sub-contract/Outsource (b) De-bottleneck PGP1 -OM 1 -S Venkat APP Strategy Level Strategy Key features Inventory as the critical link between the periods. Made-to-stock environments. Several service systems Chase Strategy 11/20/2010 33 Key Strategies for Meeting Demand • Chase. the emphasis is not to disturb the existing production rate at all In chase strategy. the supply – demand mismatch is addressed during each period by employing a variety of capacity related alternatives APP alternatives applicable Inventory based alternatives (a) Build Inventory (b) Backlog/Backorder/Shortage Capacity adjustment alternatives (a) Over Time/Under Time (b) Vary no. no effort is made to carry inventory from one period to another.APP-Generic strategies § § In level strategy. Products with low risks of obsolescence No inventory carried from one period to another. variations are addressed using inventories • Pure and mixed strategies • Subcontracting 11/20/2010 PGP1 -OM 1 -S Venkat 34 17 .

Ending inventory in December is expected to be 500 units. insurance. 24. spoilage and obsolescence • Backordering cost-hard to measure. inventory cost.cost of capital tied up.cost of follow up. 900. 640. Forecast demands over the next six months for a particular line of drives produced in the XYZ plant are 1280. 1200. OT cost etc • Costs associated with changes in production rate. and the firm would like to have 600 units on hand at the end of June. The firm produces a line of disk drives for mainframe computers that are plug compatible with several computers produced by major manufacturers. 26. 22. There are currently (end of December) 300 workers employed in the Densepack plant. subcontracting etc • Inventory holding cost. 11/20/2010 PGP1 -OM 1 -S Venkat 36 18 . taxes. 2000 and 1400. and 15. hiring and firing. backorder cost.training.production cost. cost due to variations in production • Basic production cost-Fixed and variable cost includes direct and indirect material and labour cost. Numbers of working days are respectively 20.Relevant cost components • From Agg production plan. storing. loss of sales revenue etc 11/20/2010 PGP1 -OM 1 -S Venkat 35 APP-DensePack Inc Problem Densepack is to plan workforce and production levels for the sixmonth period January to June. 18. loss of goodwill.

APP-DensePack Inc Problem Cost of hiring one worker = Rs. 500/-. In the past. cost of firing one worker = Rs. over time and subcontract may be ignored. The other costs of production in regular time. Solve the APP problem by Linear Programming. 80/-. 1000/. with the workforce level constant at 76 workers. the firm produced 245 disk drives. 11/20/2010 PGP1 -OM 1 -S Venkat 37 11/20/2010 PGP1 -OM 1 -S Venkat 38 19 .and cost of holding one unit of inventory for one month = Rs. the plant manager observed that over 22 working days.

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00 IT(T3) 160.8700 26.0189 737.98109 PGP1 -OM 1 -S Venkat 44 22 .8889 Production level PT(T1) 800.00 PT(T5) 2378.622 Inventory level IT(T1) 20.0189 273.37 IT(T6) 600.00 HT( T5) FT( T1) 464.0189 273.4 Workforce level WT(0) WT(T1) WT(T2) WT(T3) WT(T4) WT(T5) WT(T6) 11/20/2010 300.0189 273.00 PT(T2) 960.00 PT(T3) 720.00 IT(T2) 340.8889 737.11/20/2010 PGP1 -OM 1 -S Venkat 43 LINGO model Solution Global optimal solution found at step: 13 Objective value: 379286.00 IT(T4) 0.378 PT(T6) 1621.39849 IT(T5) 378.00 PT(T4) 1040.00 18.00 273.

9685 107113. 36 54 80 33.0934 34737.79 357306.38 381485.1245 68415.0934 34737.8 0.2639 layoff cost 26981.12458 229762.38 0.3331 119764.5131 223211.6 11/20/2010 PGP1 -OM 1 -S Venkat 46 23 . AVAILABLE/WK.5135 132415. AVAILABLE/WK.7249 275093.07 380386.29 Int Invent 500 600 500 600 0 550 Final Invt 600 500 500 600 0 550 Any Observations? 11/20/2010 PGP1 -OM 1 -S Venkat 45 A SIMPLE EXAMPLE OF AGGREGATION CAPACITY MACHINE HRS.51 0.Excel Model Solution Base case Case 1 Case 2 Case 3 Case 4 Case 5 Hiring cost 232435.80 6.2703 119658.015 227089.01 403466.5 INDEX STD.16 381211.6095 30859. 18 54 64 20 156 1 2 3 4 0.5 1 (STANDARD) 0.4033 236313.3129 26981.09 % Change ---0. M/C. HRS.58 -5.2029 Inv cost 119870.6192 total cost 379286.3124 37702.

DEMAND IN SMH = (1) / (2) A 300 6 50 B 210 7 30 C 240 6 40 D 1800 30 60 E 400 25 16 TOTAL 196 CAPACITY SHORTFALL 196 – 156 = 40 S. rate at which to produce inventory to be carried forward from one period to the next • • • AP is done to match the demand and the available capacity on a period-by-period using a set of alternatives available to modify demand and/or the supply Alternatives for modifying demand include reservation of capacity and methods of influencing (changing) the demand during a period Alternatives for modifying the supply include inventory variations. UNITS DEMANDED 2. RATE/SMH 3. capacity adjustment and capacity augmentation 11/20/2010 PGP1 -OM 1 -S Venkat 48 24 . 11/20/2010 PGP1 -OM 1 -S Venkat 47 APP-Conclusions • • Aggregate Planning (AP) serves to translate the business plans into operational decisions The decisions include – – – amount of resources (productive capacity and labour hours) to commit.M.H. PRODN.NEXT WEEK’S FORECASTED DEMAND JOB 1.

The structure of a transportation model lends itself to studying the AP problem Linear programming can also be used to model the AP problem MPS involves dis-aggregation of product information and ensuring the required capacity and material are available as per the plan 11/20/2010 PGP1 -OM 1 -S Venkat 49 • • • 25 . chase and level production. It uses a variety of alternatives for modifying supply.APP-Conclusions • • • AP exercise employs the two generic strategies. Chase strategy is often found to be expensive and hard to implement in organisations In reality a mixed strategy using a combination of alternatives is employed in an AP exercise.