aggregate planning and eoq

Production Planning and Control (Assignment)

M Ehsan (08-Dcet-314)

Dawood College Of Engineering andTechnology, Karachi

Department: Industrial Engineering and Management

Muhammad Ehsan(08-Dcet-314)

Production Planning and ControlAssignment No # 3

Submitted To: Engr. Imran Khan ShaikhDate # 08-11-2010



Question No # 1: Explain aggregate planning, managerial importance of aggregate planning,objectives, reactive and aggressive alternatives of aggregative planning?

a) Aggregate Planning:

Introduction:Aggregate Production Planning (APP) is a macro approach to operational planning that

focuses on determining the best way to satisfy demand with production, workforce, inventoryand capacity constraints. For example, a manufacturing company may use APP to determine howmuch production to schedule each month to satisfy forecasted demand with minimal inventoryand workers.Aggregate production planning (APP) is an approach to operations management focused onsatisfying demand as it relates to production, workforce, inventory and other concepts. APP cantie in facility planning with scheduling decisions.

Definition:Aggregate production plans are necessary to maximize workforce opportunity and

constitute a crucial part of operations management. Aggregate production plans help matchsupply and demand while minimizing costs. Aggregate production planning applies the upper-level forecasts to lower-level, production-floor scheduling and is most effective when applied toperiods 2 to 18 months in the future. Plans generally either "chase" demand, adjusting workforceaccordingly, or are "level" plans, meaning that labor is relatively constant with fluctuations indemand being met by inventories and back orders.

There are two basic types of aggregate plans:

Plans for production Plans for staffing

Two level of aggregation:

Aggregation by product family Aggregation by time

Aggregate Planning Strategies:

Supply:Workforce Inventory

Hire / fireOvertime / slackTemporariesExtra shifts

Subcontracting Product Mix



Demand:Pricing PromotionCustomer Service Backorders

b) The Managerial Importance of Aggregate Plans:

Managerial Importance:Aggregate production planning helps to minimize production costs, the effect of variant demand,cost of inventory and labor costs. By doing so, aggregate production planning also maximizesplant and equipment utilization and profits. Aggregate production planning is also a useful toolin creation and evaluation of alternatives such as the adjustment of the labor force throughhire/fire/layoff/overtime, the use of subcontractors, anticipatory inventory, and even thedevelopment of complementary products and pricing strategies.

There are several APP techniques available to the operations manager.

Chase Planning:The "chasing" strategy adjusts production to meet demand. Also called just-in-time management,the chase strategy maintains minimal levels of inventory, if any. While this feature is positive formany industries, such as a bakery, employment of this strategy decreases the ability to thecompany to meet unexpected demand increases and increases the risk of back orders.

Level Planning:The level aggregate plan essentially smooths over fluctuations, holding inventory or placing backorders as needed. This plan supports regular scheduling and minimal overtime. The level planapproach has more holding cost that the hybrid aggregate plan, but does not require the use of asmuch overtime.

Hybrid Aggregate Planning:A hybrid aggregate plan will take advantage of a combination of "chasing" and "leveling."Basically, the current workforce will be used with demand fluctuations being handled byovertime. Should the levels of demand overreach the maximum labor output, back orders will beused. In this system, there is a greater probability of layoffs and large amounts of overtime.Hybrid planning is the most popular form of aggregate production planning.

Importance of Aggregate planning other than above are:

1. Typical managerial objectives: (APP is often called "management's hold on the business")Minimize production costs Maximize profitsMaximize customer service Minimize inventoryMinimize changes in production rates Minimize changes in work-force levelsMaximize utilization of plant and equipment



2. Reactive alternatives:Adjusting the workforce (hire, fire and layoff) Overtime and under-timeVacation schedules Anticipation inventorySubcontractors Backorder, backlogs and stock-outs

3. Aggressive alternatives (adjusting the demand patterns):Complementary productsCreative pricing

5. Planning strategies: The level strategy holds the production rate constant

and uses anticipation inventory, subcontractors,backorders, backlogs and stock-outs to satisfydemand.

The chase strategy adjusts production to exactly matchdemand.

The mixed (or hybrid) strategy may employ any orall of the reactive or aggressive alternatives.

c) Objectives of Aggregate Planning:“Objective of aggregate planning frequently is to minimize total cost over the planninghorizon”.

Other objectives should be considered:

Maximize customer service Minimize inventory investment Minimize changes in workforce levels Minimize changes in production rates Maximize utilization of plant and equipment



d) Reactive Alternatives:“Accept demand forecast as a given and React to fluctuations in demand”.

i. Workforce adjustment: Hiring and firing (Varies by industry, training requirements, labor pool). Limitations:

Labor supply Economic conditions Cost Skill requirements Union contract Productivity

ii. Anticipation inventory: Stock goods during light periods and use it during heavy periods. Stabilizes output rates and workforce levels, but can be costly, especially if inventory

is in the form of finished goods. This, generally, is not an option for services, although some services can be performed

in anticipation of need (For example: Laying cables for service to new subdivisionbefore construction begins).

iii. Workforce utilization (overtime and under-time): Overtime means that work longer than regular workday or workweek and paid extra

(if nonexempt). Under-time means that don’t work productively for the regular-time workday or

workweek. Under-time can be paid or unpaid. Excessive overtime leads to declining quality and productivity. To retain skilled

employees in a slack business period, under-time is preferable to layoffs. Limitations:

Wage premium Productivity Legal limit

iv. Vacation schedules: Schedule vacations to decrease output when inventories are high, or when replacement

labor is available. Limitations:

Union contract Availability of seasonal workers

v. Subcontractors (outsourcing): Subcontractors provide extra capacity, but scheduling, quality, and labor relations

issues are more difficult to control.



Limitations: Cost Subcontractor capability

vi. Backlogs, backorders, and stock-outs: Backlog—an accumulation of customer orders promised for a future date. Backlogs

are used when customers expect to wait some defined time period for delivery as anormal course of business.

A back order is an order that the customer expected to be filled immediately; thecustomer reluctantly asks for delivery as soon as possible.

A stock-out is an inability to satisfy demand for a stock item at the time it occurs,leading the customer to go elsewhere.

Limitations: Lost sales, Competition, and Competitive priorities

e) Aggressive Alternatives:Adjust the demand pattern to achieve efficiency and reduce costs. These actions are typically specifiedin the marketing (sales) plan.

i. Complementary products: Peak demand occurs at different times, leveling demand on production facilities. Example: Parks counterbalancing seasonal staffing requirements for summer activities

by offering winter ones as well. Limitations

Resource flexibility Maintaining focus

ii. Creative pricing: Gives customers an incentive to shift demand from peak times. Example: automobile rebate programs. Limitation:

squeezes the contribution margin



Question No # 2: Explain graphical approach of aggregate planning in the preparation ofinventory balance?

Methods of aggregate production planning range from the simplistic (i.e., trial anderror) to the use of complex quadratic calculus methods. However, aggregate productionplanning can have a mathematical basis while still being easy to implement and understand.

Mathematical Techniques/Approaches:

Linear Programming Simulation

The above two techniques are mostly used and usually provide accurate answer, (i-e Moreinvolved, and usually better answers are obtained).

Graphical & Charting Techniques/Approaches:

Trial & error approach (Popular & easy-to-understand)

Mathematical Techniques/Approaches:Some most commonly used techniques are:

Linear Decision Rule (LDR): Uses calculus to derive decision rules that minimize fourcost functions (regular payroll, hire & fire, overtime & under-time, and inventory &backlog). There are a couple of major concerns with this tool that limit its applicability:

All cost functions are quadratic and thus symmetric Implementation is difficult The tool has seen little exposure

Management coefficient model (MCM): Uses regression and historical managementbehavior to derive decision rules. This model attempts to combine the best, most-recentmarketplace information with smoothed past practice to eliminate erratic managerialbehavior.

Data gathering is challenging Simply tries to mimic managerial behavior thus not intuitive Little exposure to real-world problems

Parametric production planning (PPP): Uses a grid search procedure to minimize moregeneral cost functions.

Frightfully complex

Search decision rule (SDR): A computer-based heuristic that does not restrict form ofthe cost functions



Has a great deal of intuitive appeal Possible artificial intelligence application

Production switching heuristic (PSH): Uses a rule with three levels of production.Routine switches between levels as required by the sales forecast, inventory levels, andcost functions

Simple to apply Very limited in scope Probably best application is within larger system

Linear programming (LP): Locate the optimal solution to a linear objective functionusing linear constraints. Goal programming used when multiple objectives must besatisfied. Mixed integer programming allows nonlinear relationships to be expressedwithin the model

Easy to use and understand Very flexible Linear form of objective function and constraints may limit its usefulness in Some applications

Simulation models: Uses a search procedure to try different combinations of variables. Develops feasible but not necessarily optimal solutions.

Graphical & Charting Techniques/Approaches:

Determine the demand for each period. Determine the capacity for regular time, overtime, and subcontracting each period. Find labor costs, hiring and layoff costs, and inventory holding costs. Consider company policy on workers and stock levels. Develop alternative plans and examine their total costs.

Graphical approach Mathematical approach



Question No # 3: Explain EOQ and also derive formula?

Economic Order Quantity (EOQ):

Inventory & Inventory System:Inventory is the set of items that an organization holds for later use by the organization. Aninventory system is a set of policies that monitors and controls inventory. It determines howmuch of each item should be kept, when low items should be replenished, and how many itemsshould be ordered or made when replenishment is needed.

Basic Types of Inventory:

Independent demand, Dependent demand, and Supplies.

Independent demand items are those items that we sell to customers.

Dependent demand items are those items whose demand is determined by other items.Demand for a car translates into demand for four tires, one engine, one transmission, andso on. The items used in the production of that car (the independent demand item) are thedependent demand items.

Supplies are items such as copier paper, cleaning materials, and pens that are not useddirectly in the production of independent demand items

Why Hold Inventory:

To decouple work-centers; To meet variations in demand; To allow flexible production schedules; As a safeguard against variations in delivery time; and To get a lower price.

The Cost Of Inventory:

Holding costs; Setup costs; Ordering costs; and Shortage costs.



t t t

T

Time = t

InventoryLevel = S

S = R x t

The Economic Order Quantity Model:This is one of the simplest inventory models. In this model we have to assume the followingnecessary factors:

Production is instantaneous: There is no capacity constraint and the entire lot isproduced simultaneously.

Delivery is immediate: There is no time lag between production and availability to satisfydemand.

Demand is deterministic: There is no uncertainty about the quantity or timing of demand. Demand is constant over time: In fact, it can be represented as a straight line, so that if

annual demand is 365 units this translates into a daily demand of one unit. A production run incurs a constant setup cost: Regardless of the size of the lot or the

status of the factory, the setup cost is the same. Products can be analyzed singly: Either there is only a single product or conditions exist

that ensure reparability of products.

Now Suppose:Total Cost of Inventory = CSet-up Cost or Procurement Cost = CS

Holding Cost = CH

Level of Inventory = SRate of Consumption = RTime Factor = t

Inventory Situation for a Model



CS

t

NowTotal Cost = Set-up Cost + Holding Cost

C = CS + CH A

Where St-up Cost with respect to time cycle will be: CS =And

Holding Cost will be: CH = x S x CH

Put the valves in Equation “A”

C B

Also we know that:

S = R x t t = put the value in “B”

C C C

Differentiate Equation “C” with respect to “S”,

0 = - CS x R x S-2 + ½ CH

CH = CS x R x S-2 Or CH = S2 =

S = D

Or

R x t = :- t =

t = E



Now putting the values of “S” and “t” in equation “B”,:-

+

F

Where:C = Total CostR = Consumption RateCS = Set-up CostCH = Holding Cost

Example: A stockiest has to supply 12,000 $ units of a product per year to his customer. Thedemand is fixed and known and the storage cost is assumed to be infinite. The inventory holdingcost is 0.20 $ per month and the ordering cost per order is 350 $.Determine: a) The optimum lot size, b) Optimum scheduling period, and c) Minimum totalvariable yearly cost?

Solution:R = 12,000 $ units per year = 1,000 units per monthCH = 0.20 $ per unit per monthCs = 350 $ per order

Optimum lot size = S =? (Use equation “D” and answer will be: S = 1870 units per order).Optimum scheduling period = t =? (Use equation “E” and answer will be: t = 1.87 months).Minimum total variable yearly cost = C =? (Use equation “F” and answer will be: C = 4,490 $per year).



Question No # 4: Write down factors of Plant layout?

Plant Layout:After the flow process diagrams are completed and before detailed piping, structural andelectrical design can begin, the layout of process units in a plant and the equipment within theseprocess unit must be planned. This layout can play an important part in determining constructionand manufacturing costs, and thus must be planned carefully with attention being given to futureproblems that may arise.Thus the economic construction and efficient operation of a process unit will depend on howwell the plant and equipment specified on the process flow sheet is laid out.

The principal factors that are considered are listed below:

a) Economic considerations: construction and operating costs.b) Process requirements.c) Convenience of operation.d) Convenience of maintenance.e) Health and Safety considerations.f) Future plant expansion.g) Modular construction.h) Waste disposal requirements.

a) Economic Considerations: construction and operating costs:The coat of construction can be minimized by adopting a layout that gives the shortest run ofconnecting pipe between equipment, and least amount of structural steel work. However, thiswill not necessarily be the best arrangement for operation and maintenance.

b) Process Requirements:An example of the need to take into account process consideration is the need to elevate the baseof columns to provide the necessary net positive suction head to a pump.

c) Convenience of Operation:Equipment that needs to have frequent attention should be located convenient to the controlroom. Valves, sample points, and instruments should be located at convenient positions andheights. Sufficient working space and headroom must be provided to allow easy access toequipment.

d) Convenience of Maintenance:Heat exchangers need to be sited so that the tube bundles can be easily withdrawn for cleaningand tube replacement. Vessels that require frequent replacement of catalyst or packing should belocated on the out side of buildings. Equipment that requires dismantling for maintenance, suchas compressors and large pumps, should be places under cover.



e) Health and Safety Considerations:Blast walls may be needed to isolate potentially hazardous equipment, and confine the effects ofan explosion. At least two escape routes for operators must be provided from each level inprocess buildings.

f) Future Plant Expansion:Equipment should be located so that it can be conveniently tied in with any future expansion ofthe process. Space should be left on pipe alleys for future needs, and service pipes over-sized toallow for future requirements.

g) Modular Construction:In recent years there has been a move to assemble sections of plant at the plant manufacturer’ssite. These modules will include the equipment, structural steel, piping and instrumentation. Themodules are then transported to the plant site, by road or sea.

The advantages of modular construction are:

Improved quality control. Reduced construction cost. Less need for skilled labors on site.

The disadvantages of modular construction are: Higher design costs & more structural steel work. More flanged constructions & possible problems with assembly, on site.

h) Waste Disposal Requirements:A plant site must be closed or near to a disposal area like rivers or lake. But before disposing thewaste, it should be properly treated to avoid pollution. The proper disposing of waste must beimplemented in the industry or through other sources.

Plant Layout Keywords:

1. Raw material Storage 2. Maintenance Workshop3. Process Site 4. Stores for maintenance and operating supplies5. Product Storage 6. Canteen & Change house7. Fire Station and Fire Brigade 8. Central Control Room9. Security office 10. Administrative Building11. Site for Expansion project 12. Effluent treatment plant13. Power house 14. Emergency water storage15. Plant utilities 16. Vehicle parking space17. Library and Laboratories 18. Training Centre19. Research and Development Centre 20. Green Belt Area

End

aggregate planning and eoq

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