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Aggregate PlanningChapter 12

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Learning Objectives

Review of forecasting Forecast errors

Aggregate planning

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Phases of Decisions

Strategy or design: Forecast Planning: Forecast Operation Actual demand

Since actual demands differs from forecasts so does the execution from the plans. – E.g. Supply Chain concentration plans 40 students per year

whereas the actual is ??.

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Characteristics of forecasts

Forecasts are always wrong. Should include expected value and measure of error.

Long-term forecasts are less accurate than short-term forecasts. Too long term forecasts are useless: Forecast horizon– Forecasting to determine

» Raw material purchases for the next week» Annual electricity generation capacity in TX for the next 30 years

Aggregate forecasts are more accurate than disaggregate forecasts– Variance of aggregate is smaller because extremes cancel out

» Two samples: {3,5} and {2,6}. Averages of samples: 4 and 4.» Variance of sample averages=0» Variance of {3,5,2,6}=5/2

Several ways to aggregate– Products into product groups– Demand by location– Demand by time

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Forecast Variability implies time zones Frozen and Flexible zones

Volume

Time

Firm Orders Forecasts

Frozen Zone Flexible Zone

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Time Fences in MPSTime Fences in MPS

Period

“frozen”(firm orfixed)

“slushy”somewhat

firm

“liquid”(open)

1 2 3 4 5 6 7 8 9

Time Fences divide a scheduling time horizon into three sections or phases, referred as frozen, slushy, and liquid.

Strict adherence to time fence policies and rules.

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Planning Horizon

Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months. In other words, it is matching the capacity and the demand.

Shortrange

Intermediate range

Long range

Now 2 months 1 Year

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Short-range plans (Detailed plans)– Machine loading– Job assignments

Intermediate plans (General levels)– Employment– Output

Long-range plans– Long term capacity– Location / layout– Product/Process design

Overview of Planning Levels

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Listen to Tom Thumb’s manager

- Need more space in 2005 to expand the store - Allocate 25% of the floor space to fresh produce- During the winter months employ 6 cashiers during rush hours- On Wed before Thanksgiving, employ 12 cashiers throughout

the day- In the next two weeks, no Italian parsley will be delivered.

Shelve Dill instead of parsley

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Why aggregate planning Details are hard to gather for longer horizons

– Demand for Christmas turkeys at Tom Thumb’s vs Thanksgiving turkeys Details carry a lot of uncertainty: aggregation reduces variability

– Demand for meat during Christmas has less variability than the total variability in the demand for chicken, turkey, beef, etc.

If there is variability why bother making detailed plans, inputs will change anyway– Instead make plans that carry a lot of flexibility– Flexibility and aggregation go hand in hand

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Aggregate Planning

Aggregate planning: General plan– Combined products = aggregate product

» Short and long sleeve shirts = shirt Single product

– Pooled capacities = aggregated capacity» Dedicated machine and general machine = machine

Single capacity

– Time periods = time buckets» Consider all the demand and production of a given month together

Quite a few time buckets When does the demand or production take place in a time bucket?

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Planning Sequence

Corporatestrategies

and policies

Economic,competitive,and political conditions

Aggregatedemand

forecasts

Business Plan

Production plan

Master schedule

Establishes productionand capacity strategiesEstablishes productionand capacity strategies

Establishesproduction capacity

Establishesproduction capacity

Establishes schedulesfor specific products

Establishes schedulesfor specific products

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Resources– Workforce– Facilities

Demand forecast Policy statements

– Subcontracting– Overtime– Inventory levels– Back orders

Costs– Inventory carrying– Back orders– Hiring/firing– Overtime– Inventory changes– subcontracting

Aggregate Planning Inputs

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Total cost of a plan Projected levels of inventory

– Inventory– Output– Employment– Subcontracting– Backordering

Aggregate Planning Outputs

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Strategies

Proactive– Alter demand to match capacity

Reactive– Alter capacity to match demand

Mixed– Some of each

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Pricing– Price reduction leads to higher demand

Promotion– Not necessarily via pricing– Free delivery, free after sale service

» Some Puerto Rico hotels pay for your flight

Back orders– Short selling: Sell now, deliver later

New demand– Finding alternative uses for the product

Demand Options to Match Demand and Capacity

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Hire and layoff workers, unions are pivotal– Layoff: Emotional stress

» Fired Moulinex (appliances producer in France) workers start fire at the plant

– Hire: Availability of qualified work force» Operators at semiconductor plants

Overtime/slack time– How too use slack time constructively? Training.– Overtime is expensive, low quality, prone to accidents

Part-time workers– 35 hour work week of Europe

Inventories, To smooth demands Subcontracting. Low quality. Reveals technological secrets

Capacity Options to Match demand and Capacity

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Fundamental tradeoffs in Aggregate Planning Capacity (regular time, over time, subcontract)

Inventory

Backlog / lost sales: Customer patience?

Basic Strategies

Chase (the demand) strategy; Matching capacity to demand; the planned output

for a period is the expected demand for that period

– fast food restaurants

Time flexibility from high levels of workforce or capacity;

– machining shops, army

Level strategy; Maintaining a steady rate of regular-time output while meeting

variations in demand by a combination of options.

– swim wear

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Matching the Demand with Level or Time flexibility strategies

Use

inve

ntor

y

Use delivery time

Use ca

pacit

y

Demand

Demand

Demand

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Chase vs. Level

Chase Approach

Advantages– Investment in inventory is low

– Labor utilization in high

Disadvantages– The cost of adjusting output rates

and/or workforce levels

Level Approach

Advantages– Stable output rates and

workforce

Disadvantages– Greater inventory costs

– Increased overtime and idle time

– Resource utilizations vary over time

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Inputs:– Determine demand for each period– Determine capacities for each period– Identify policies that are pertinent– Determine units costs

Analysis– Develop alternative plans and costs– Select the best plan that satisfies objectives

Techniques for Aggregate Planning

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Technique 1: Cumulative Graph

1 2 3 4 5 6 7 8 9 10

Cumulativeproduction

CumulativedemandC

um

ula

tive

ou

tpu

t/d

eman

d

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Technique 2: Mathematical Techniques

Linear programming: Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization.

Minimize Costs

Subject to: Demand, capacity, initial inventory requirements

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Summary of Planning Techniques

Technique Solution Characteristics

Graphical/ charting

Trial and error

Intuitively appealing, easy to understand; solution not necessarily optimal.

Linear programming

Optimizing Computerized; linear assumptions not always valid.

Simulation Trial and error

Computerized models can be examined under a variety of conditions.

Linear decision rule???

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Example - RelationshipsBasic Relationships

Workforce                

Number of workers in a period =

Number of workers at end of previous period +

Number of new workers at start of the period -

Number of laid off workers at start of the period

Inventory                

Inventory at the end of a period =

Inventory at end of the previous period +

Production in current period -

Amount used to satisfy demand in current period

Cost                

Cost for a period =

Output Cost (Reg+OT+Sub) +

Hire/Lay Off Cost + Inventory Cost +

Back-order Cost

               

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Technique 3: Simulation ExampleLevel Output

Period 1 2 3 4 5 6 Total  

Forecast 200 200 300 400 500 200 1800  

                 

Policy: Level Output Rate of 300 per period              

Output               Cost

Regular 300 300 300 300 300 300 1800 $2

Overtime               $3

Subcontract               $6

Output-Forecast 100 100 0 -100 -200 100 0  

Inventory                

Beginning 0 100 200 200 100 0    

Ending 100 200 200 100 0 0    

Average 50 150 200 150 50 0 600 $1

Backlog 0 0 0 0 100 0 100 $5

Costs                

Regular $600 $600 $600 $600 $600 $600 $3,600  

Inventory $50 $150 $200 $150 $50 $0 $600  

Back Orders $0 $0 $0 $0 $500 $0 $500  

Total Cost of Plan $650 $750 $800 $750 $1,150 $600 $4,700  

Average Inventory= (Beginning Inventory + Ending Inventory)/2

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Technique 3: Simulation ExampleLevel Output + Overtime

Period 1 2 3 4 5 6 Total  

Forecast 200 200 300 400 500 200 1800  

                 

Policy: Level Output Rate+Overtime              

Output               Cost

Regular 280 280 280 280 280 280 1680 $2

Overtime     40 40 40 0 120 $3

Subcontract               $6

Output-Forecast 80 80 20 -80 -200 -180 0  

Inventory                

Beginning 0 80 160 180 100 0    

Ending 80 160 180 100 0 0    

Average 40 120 170 140 50 0 520 $1

Backlog 0 0 0 0 80 0 80 $5

Costs                

Regular $560 $560 $560 $560 $560 $560 $3,360  

Overtime $0 $0 $120 $120 $120 $0 $360  

Inventory $40 $120 $170 $50 $0 $0 $520  

Back Orders $0 $0 $0 $0 $400 $0 $400  

Total Cost of Plan $600 $680 $850 $730 $1,080 $560 $4,640  

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Services occur when they are rendered– Limited time-wise aggregation

Services occur where they are rendered– Limited location-wise aggregation

Demand for service can be difficult to predict– Personalization of service

Capacity availability can be difficult to predict Labor flexibility can be an advantage in services

– Human is more flexible than a machine, well at the expense of low efficiency.

Aggregate Planning in Services

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Aggregate Plan to Master Schedule

AggregatePlanning

Disaggregation

MasterSchedule

For a short planning range 2-4 months: 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.

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Master Scheduling

Master schedule– Determines quantities

needed to meet demand

– Interfaces with» Marketing

» Capacity planning

» Production planning

» Distribution planning

Master Scheduler– Evaluates impact of

new orders

– Provides delivery dates for orders

– Deals with problems» Production delays

» Revising master schedule

» Insufficient capacity

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Master Scheduling Process

MasterScheduling

Beginning inventory

Forecast

CommittedCustomer orders

Inputs Outputs

Projected inventory

Master production schedule

ATP: Uncommitted inventory

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Preview of Materials Requirement Planning Terminology Net Inventory After Production

Requirements=Forecast

Assuming that the forecasts include committed orders

Net inventory before production=

Projected on hand inventory in the previous period

- Requirements

Produce in lots if Net inventory is less than zero

Net inventory after production=

Net inventory before production+ Production

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Projected On-hand Inventory

64 1 2 3 4 5 6 7 8

Customer Orders (committed) 33 30 30 30 40

Projected on-hand inventory 31 1 -29

JUNE JULY

Beginning Inventory

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Example: Find ATP with lot size of 70

  June July

64 1 2 3 4 5 6 7 8

Forecast 30 30 30 30 40 40 40 40

Customer Orders (Committed) 33 20 10 4 2      

Projected on Hand Inventory + + - + - + - -

MPS: Production     70   70   70 70

Projected on Hand Inventory 31 1 41 11 41 1 31 61

Available to promise Inventory until next production (uncommitted) 11   57   79   71 ???

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Summary

Aggregate planning:

conception, demand and capacity option Basic strategy:

level capacity strategy, chase demand strategy Techniques:

Trial and Error, mathematical techniques Master scheduling

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Practice Questions

1. The goal of aggregate planning is to achieve a production plan that attempts to balance the organization's resources and meet expected demand.

Answer: True Page: 541 2. A “chase” strategy in aggregate planning would attempt to match

capacity and demand.

Answer: True Page: 548 3. Ultimately the overriding factor in choosing a strategy in aggregate

planning is overall cost.

Answer: True Page: 550

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Practice Questions1. Which of the following best describes aggregate planning?

A) the link between intermediate term planning and short term operating decisions

B) a collection of objective planning tools C) make or buy decisions D) an attempt to respond to predicted demand within the

constraints set by product, process and location decisions E) manpower planning Answer: D Page: 541

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Practice Questions

2.Which of the following is an input to aggregate planning?

A) beginning inventory

B) forecasts for each period of the schedule

C) customer orders

D) all of the above

E) none of the above

Answer: D Page: 561

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Practice Questions

3.Which of the following is not an input to the aggregate planning process:

A) resources

B) demand forecast

C) policies on work force changes

D) master production schedules

E) cost information

Answer: D Page: 545

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Practice Questions4. Which one of the following is not a basic option for

altering demand?

A) promotion

B) backordering

C) pricing

D) subcontracting

E) All are demand options.

Answer: D Page: 545

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Practice Questions

5. Which of the following would not be a strategy associated with adjusting aggregate capacity to meet expected demand?

A) subcontract

B) vary the size of the workforce

C) vary the intensity of workforce utilization

D) allow inventory levels to vary

E) use backorders

Answer: E Page: 546-547

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Practice Questions

6. Moving from the aggregate plan to a master production schedule requires:

A) rough cut capacity planning

B) disaggregation

C) sub-optimization

D) strategy formulation

E) chase strategies

Answer: B Page: 559