You are on page 1of 54

Aggregate Planning

Aggregate Planning in a Supply Chain


What is Aggregate planning? Management options Costs involved Aggregate strategies


Level Strategy Chase Strategy

Aggregate planning using Linear Programming Examples

The Planning Process


Long-range plans (over one year)
Research and Development New product plans Capital investments Facility location/expansion Top executives

Intermediate-range plans (3 to 18 months)


Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans

Operations managers

Short-range plans (up to 3 months)


Operations managers, supervisors, foremen Responsibility Job assignments Materials Requirement Planning Job scheduling Dispatching Overtime Part-time help Planning tasks and horizon
3

What is Aggregate Planning?


Aggregate Planning is a overall production planning process by which a company determines ideal levels of capacity to meet the demand over a specified time horizon. ( roughly between 3 and 18 months).
Example: Steel manufacturing.

Forecast of demand

Current Capacities Costs Commitments

AGGREGATE PRODUCTION PLAN Raw material requirement

Inventory Backorder/ Lost sales

Machine capacity increase/ decrease Workforce level

Goal: Maximize profits/Minimize costs, meet demand. The Aggregate Planning Problem:
Given the demand forecast for each period in the planning

horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firms profit over the planning horizon

Management options to meet fluctuating demand

Build inventories in slack periods in anticipation of higher demand later in the planning horizon Carry backorders or tolerate lost sales during peak periods Use overtime in peak periods and under time (idle time)in slack periods, while holding workforce and facilities constant.

Vary capacity by changing the size of the workforce through hiring and firing. Vary capacity through changes in plant and equipment ( long term option)

Each option involve cost ( tangible and intangible). Aim of Aggregate production planning is to choose the best option.

Capacity Options
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 15% to 40% Shortages can mean lost sales and poor customer service
9

Capacity Options
Varying workforce size by hiring or layoffs
Match production rate to demand
Training and severance costs for hiring and laying off workers

New workers may have lower productivity


Laying off workers may lower morale and productivity
10

Capacity Options
Varying production rate 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
11

Capacity Options
Subcontracting
Temporary measure during periods of peak demand May be costly Assuring quality and timely delivery may be difficult

12

Capacity Options
Using part-time workers
Useful for filling unskilled or low skilled positions, especially in services

13

Demand Options
Influencing demand
Use advertising or promotion to increase demand in low periods Attempt to shift demand to slow periods May not be sufficient to balance demand and capacity
14

Demand Options
Back ordering during highdemand periods
Requires customers to wait for an order without loss of goodwill or the order Most effective when there are few if any substitutes for the product or service
Often results in lost sales
15

Aggregate Planning Options


Option Changing inventory levels Advantages Disadvantages Some Comments Applies mainly to production, not service, operations. Changes in human Inventory holding resources are cost may increase. gradual or none; no Shortages may abrupt production result in lost sales. changes.

Varying Avoids the costs of workforce size other alternatives. by hiring or layoffs

Hiring, layoff, and training costs may be significant.

Used where size of labor pool is large.

16

Aggregate Planning Options


Option Varying production rates through overtime or idle time Subcontracting Advantages Matches seasonal fluctuations without hiring/ training costs. Disadvantages Some Comments Overtime premiums; Allows flexibility tired workers; may within the aggregate not meet demand. plan.

Permits flexibility and smoothing of the firms output.

Loss of quality control; reduced profits; loss of future business.

Applies mainly in production settings.

17

Aggregate Planning Options


Option Advantages Disadvantages High turnover/ training costs; quality suffers; scheduling difficult. Uncertainty in demand. Hard to match demand to supply exactly. Some Comments Good for unskilled jobs in areas with large temporary labor pools. Creates marketing ideas. Overbooking used in some businesses. Using part-time Is less costly and workers more flexible than full-time workers.

Influencing demand

Tries to use excess capacity. Discounts draw new customers.

18

Aggregate Planning Options


Option Back ordering during highdemand periods Advantages May avoid overtime. Keeps capacity constant. Disadvantages Customer must be willing to wait, but goodwill is lost. Some Comments Many companies back order.

19

Costs involved
1.

2.
3. 4. 5. 6.

7.

Procurement Cost Production Cost Inventory holding cost Back orders/ Lost sales Cost of Increasing/Decreasing work force Cost of overtime/ under time Costs to vary production rates.

Inputs for an aggregate plan


Specify the planning horizon (typically 3-18 months) Aggregate planner requires the following information

Demand forecast in each period Production costs labor costs, regular time ($/hr) and overtime ($/hr) subcontracting costs ($/hr or $/unit) cost of changing capacity: hiring or layoff ($/worker) and cost of adding or reducing machine capacity ($/machine) Labor/machine hours required per unit Inventory holding cost ($/unit/period) Stockout or backlog cost ($/unit/period) Constraints: limits on overtime, layoffs, capital available, stockouts and backlogs

Outputs of Aggregate Plan

Production quantity from regular time, overtime, and subcontracted time: used to determine number of workers and
supplier purchase levels

Inventory held: used to determine how much warehouse space


and working capital is needed

Backorder/stock out quantity: determines the customer


service levels.

Machine capacity increase/decrease: used to determine if


new production equipment needs to be purchased

Aggregate Planning Strategies


Chase strategy using capacity as the lever Level strategy using inventory as the lever Mixed strategy a combination of the two strategies

Chase Strategy (using capacity as lever)


Production rate is synchronized with demand by varying machine capacity or hiring and laying off workers as the demand rate varies. Drawbacks: In practice, it is often difficult to vary capacity and workforce on short notice Expensive if cost of varying capacity is high Negative effect on workforce morale When to use: Inventory holding costs are high and costs of changing capacity are low. Favored by many service organization.

Level Strategy
(using inventory as lever)
Maintain stable machine capacity and workforce levels with a constant output rate Shortages and surpluses result in fluctuations in inventory levels over time Drawback: Large inventories and backlogs may accumulate. When to use: Should be used when inventory holding and backlog costs are relatively low

Roofing Supplier Example ( Using level strategy)


Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55

Total expected demand Average requirement = Number of production days 6,200 = = 50 units per day 124
26

Roofing Supplier Example 1


Production rate per working day Forecast demand

70 60 50 40 30

Level production using average monthly forecast demand

Jan

Feb

Mar

Apr

May

June

= Month
= Number of working days
27

22
Figure 13.3

18

21

21

22

20

Roofing Supplier Example 2


Cost Information
Inventory carrying cost $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit

Subcontracting cost per unit Average pay rate


Overtime pay rate Labor-hours to produce a unit

Cost of increasing daily production rate (hiring and training)


Cost of decreasing daily production rate (layoffs)

$300 per unit


$600 per unit

28

Roofing Supplier Example 2


Cost Information Production at
Subcontracting cost per unit Jan 1,100
Inventory carry cost Month 50 Units per Day

Monthly Demand Inventory Ending Forecast $ 5 per unit per month Change Inventory
$10 per unit +200

900 Average pay rate Feb 900 700 Mar 1,050 800 Overtime pay rate Apr 1,050 1,200 Labor-hours to produce a unit May 1,100 1,500 Cost of increasing daily production rate (hiring June 1,000 1,100 and training)
Cost of decreasing daily production rate (layoffs)

200 $ 5 per hour ($40 per day) +200 400 $ 7 per hour +250 650 (above 8 hours per day) -150 500 1.6 hours per unit -400 100 $300 per unit -100 0 $600 per unit 1,850

Total units of inventory carried over from one month to the next = 1,850 units Table 13.3 Workforce required to produce 50 units per day = 10 workers
29

Roofing Supplier Example 2


Cost Information Costs Production at Inventory carry50 Units per Day cost Inventory carrying Month
Subcontracting cost per unit Jan 1,100

Regular-time Average pay rate labor 900 Feb Mar Overtime pay rate

Monthly Calculations Demand Inventory Ending $9,250 (= $ 5 perunits carried x $5 per Forecast 1,850 unit per month Change Inventory $10 +200 900 unit) per unit 200

1,050 Other costs (overtime, Apr hiring, layoffs, 1,050 Labor-hours to produce a unit May subcontracting) 1,100

49,600 (= $ 5 workers ($40 per day) x 10 per hour x $40 per400 day 700 +200 124 7 per hour $ days)
800 1,200 1,500 0
(above 8 hours per day) 1.6 hours per unit

+250

650 500 100 0

-150 -400 -100

Cost of increasing daily production rate (hiring June 1,000 1,100 Total training) $58,850 and cost
Cost of decreasing daily production rate (layoffs)

$300 per unit


$600 per unit

1,850

Total units of inventory carried over from one month to the next = 1,850 units Table 13.3 Workforce required to produce 50 units per day = 10 workers
30

Roofing Supplier Example 2


7,000
6,000 Cumulative demand units 5,000 4,000 3,000 Reduction of inventory Cumulative level production using average monthly forecast requirements 6,200 units

2,000
1,000 Jan Feb Mar

Cumulative forecast requirements

Excess inventory
Apr May June

Figure 13.4
31

Roofing Supplier Example 3


Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124
Table 13.2

Demand Per Day (computed) 41 39 38 57 68 55

Minimum requirement = 38 units per day


32

Roofing Supplier Example 3


Production rate per working day Forecast demand

70 60 50 40 30
Level production using lowest monthly forecast demand

Jan

Feb

Mar

Apr

May

June

= Month
= Number of working days
33

22

18

21

21

22

20

Roofing Supplier Example 3


Cost Information
Inventory carrying cost $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit

Subcontracting cost per unit Average pay rate


Overtime pay rate Labor-hours to produce a unit

Cost of increasing daily production rate (hiring and training)


Cost of decreasing daily production rate (layoffs)
Table 13.3

$300 per unit


$600 per unit

34

Roofing Supplier Example 3


Cost Information
Inventory carry cost

In-house production Subcontracting cost per unit


Average pay rate
Overtime pay rate

= 38 units per day $10 per unit x $ 5 per hour ($40 per day) 124 days = 4,712 hour $ 7 per units
(above 8 hours per day)

$ 5 per unit per month

Subcontract Labor-hours to produce a unit


and training)

units = 6,200 - per unit 1.6 hours 4,712 Cost of increasing daily production rate (hiring 1,488 units = $300 per unit
Cost of decreasing daily production rate (layoffs)
Table 13.3

$600 per unit

35

Roofing Supplier Example 3


Cost Information
Inventory carry cost

In-house production Subcontracting cost per unit


Average pay rate
Overtime pay rate

= 38 units per day $10 per unit x $ 5 per hour ($40 per day) 124 days = 4,712 hour $ 7 per units
(above 8 hours per day)

$ 5 per unit per month

Costs Subcontract Labor-hours to produce a unit


and training)

units = Calculationsper unit 6,200 - 4,712 1.6 hours Regular-time labor $37,696= 1,488 units 7.6 per unit Cost of increasing daily production rate (hiring (= $300workers x $40 per day x
124 days)

Subcontracting 14,880 1,488 units Cost of decreasing daily production rate (layoffs) (= $600 per unitx $10 per unit)
Table 13.3

Total cost

$52,576
36

Roofing Supplier Example 4


Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124
Table 13.2

Demand Per Day (computed) 41 39 38 57 68 55

Production = Expected Demand


37

Roofing Supplier Example 4


Production rate per working day

70 60 50 40 30

Forecast demand and monthly production

Jan

Feb

Mar

Apr

May

June

= Month
= Number of working days
38

22

18

21

21

22

20

Roofing Supplier Example 4


Cost Information
Inventory carrying cost $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit

Subcontracting cost per unit Average pay rate


Overtime pay rate Labor-hours to produce a unit

Cost of increasing daily production rate (hiring and training)


Cost of decreasing daily production rate (layoffs)
Table 13.3

$300 per unit


$600 per unit

39

Roofing Supplier Example 4


Basic Production Daily Cost (demand x Inventory carrying cost Forecast Prod 1.6 hrs/unit x Month (units) Rate Subcontracting cost per unit $5/hr)

Cost Information

Extra Cost of Extra Cost of Increasing 5 per unit per month Decreasing $ Production (hiring Production cost) $10 per unit cost) (layoff Total Cost

Jan Average pay 900 rate

41 39

$ 7,200 5,600

$ 5 per hour per day)$ 7,200 ($40 $ 7 per hour x $600) (= 2 (above 8 hours per day) $600
(= 1 x $600) 1.6 hours per unit $1,200 6,800

Overtime pay rate


Mar 800

Feb

700

Labor-hours to produce a unit

38

6,400

$5,700

7,000
15,300 15,300 16,600

Apr 1,200 57 9,600 Cost of increasing daily production rate (hiring 19 x $300) per unit $300 (= and training) $3,300 May 1,500 1,100 68 55 12,000

Cost of decreasing daily production rate (layoffs)


June 8,800 $49,600

(= 11 x $300) $600 $9,000

per unit

$7,800 (= 13 x $600) $9,600

Table 13.3

$68,200

Table 13.4
40

Comparison of Three Plans


Cost Inventory carrying Regular labor
Overtime labor Hiring Layoffs Subcontracting Total cost

Plan 1 $ 9,250 49,600


0 0 0 0 $58,850

Plan 2 $ 0
0 0 0 14,880 $52,576

Plan 3 $ 0
0 9,000 9,600 0 $68,200

37,696

49,600

Plan 2 is the lowest cost option

Table 13.5
41

Aggregate planning using Linear Programming

Case Study: Red Tomato Gardening Tools Inc.

42

The demand is highly seasonal for gardening tools. Red Tomatos options for handling seasonality are

Adding workers during peak season Subcontracting Building up inventory during slow months Building up backorders ( orders delivered late to customers)

Starting Point: Build a Demand Forecast.

43

Aggregate Planning using Linear Programming Case Study: Red Tomato Tools.

Month January February March April May June


Time horizon: 6 months Selling price:$40 Beginning inventory: 1,000 units Ending inventory: at least 500 units

Demand Forecast 1,600 3,000 3,200 3,800 2,200 2,200

Workforce as on Jan 1st: 80 employees


20 working days each month- 8 hour day at $4 per hour regular time No employee is allowed to work more than 10 hours of overtime per month .

Case Study: Red Tomato Inc.

Cost Parameters
Item Materials Inventory holding cost Marginal cost of a stockout Hiring and training costs Layoff cost Labor hours required Regular time cost Over time cost Cost of subcontracting Cost $10/unit $2/unit/month $5/unit/month $300/worker $500/worker 4/unit $4/hour $6/hour $30/unit

Following costs are evaluated.


Regular time Labor cost Overtime Labor cost Cost of Hiring Cost of Layoff Cost of Inventory Cost of Stock out Cost of Materials Cost of Subcontracting
46

Case Study: Red Tomato Inc.

Decision Variables
Wt = Workforce size for month t, t = 1, ..., 6 Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6 Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6 Pt = Number of units produced in month t, t = 1, ..., 6 It = Inventory at the end of month t, t = 1, ..., 6 St = Number of units stocked out/ backlogged at the end of month t, t = 1, ..., 6 Ct = Number of units subcontracted for month t, t = 1, ..., 6 Ot = Number of overtime hours worked in month t, t = 1, ..., 6

Objective Function
Min 640 W t 300 H t
t 1 t 1 6 6

500 Lt 6 Ot 2 I t
t 1 6 t 1 t 1

5 S t 10 P t 30 C t
t 1 t 1 t 1

Constraints:
1. Workforce, hiring and layoff constraint

W t W t 1 H t Lt, or W t W t 1 H t Lt 0 for t 1,..., 6, where W 0 80.

Constraints ( Contd..)
2. Capacity Constraint: Production for each month cannot exceed capacity

P t 40 W t O t 4 , 40 W t O t 4 P t 0, for t 1,..., 6.

Constraints ( Contd..)
3.

Inventory balance constraint:


(Balances inventory at the end of each period)

I t 1 Pt C t Dt S t 1 I t S t , I t 1 Pt C t Dt S t 1 I t S t 0, for t 1,..., 6,where I 0 1,000, S 0 0,and I 6 500 .

Constraints ( Contd..)
4. Over time limit constraint
O t 10 W t, 10 W t O t 0, for t 1,..., 6.
Plus, add constraints such that Each variable must be non-negative

Make number of employees, number of production units an Integer value


There is no backlogs at the end of period ie, S6 =0 The LPP can be solved using Excel tool solver, LINGO, LINDO etc.

Summary

Aggregate planning is an intermediate time frame planning process by which a company determines optimum levels of capacity, production and inventory over a specified time horizon. Aggregate planning problem aims to maximize firms profit/ minimize costs over the planning horizon. There are 3 main kinds of aggregate planning strategies: Chase, Level and Mixed. Aggregate planning problem can be solved as an LPP, depending on the nature of parameters involved.

Thank you !