Aggregate Planning

Lecture Outline
Aggregate Planning Process Strategies for Adjusting Capacity Strategies for Managing Demand Quantitative Techniques for Aggregate Production Planning Hierarchical Nature of Planning Aggregate Planning for Services

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Aggregate Planning
Determine the resource capacity needed to meet demand over an intermediate time horizon

Aggregate refers to product lines or families Aggregate planning matches supply and demand Establish a company wide game plan for allocating resources Develop an economic strategy for meeting demand

Objectives

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Aggregate Planning Process

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Meeting Demand Strategies

Adjusting capacity

Resources necessary to meet demand are acquired and maintained over the time horizon of the plan Minor variations in demand are handled with overtime or under-time

Managing demand

Proactive demand management

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Strategies for Adjusting Capacity

Level production

Overtime and under-time

Producing at a constant rate Increasing or decreasing and using inventory to working hours absorb fluctuations in Subcontracting demand Let outside companies Chase demand complete the work Hiring and firing workers to Part-time workers match demand Hiring part time workers to Peak demand complete the work Maintaining resources for Backordering high-demand levels Providing the service or product at a later time period

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Level Production
Demand Production Units

Time
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Chase Demand
Demand Production Units

Time
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Strategies for Managing Demand

Shifting demand into other time periods

Incentives Sales promotions Advertising campaigns

Offering products or services with countercyclical demand patterns Partnering with suppliers to reduce information distortion along the supply chain
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Quantitative Techniques For APP

Pure Strategies Mixed Strategies Linear Programming Transportation Method Other Quantitative Techniques

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Pure Strategies
Example:
QUARTER
Spring Summer Fall Winter

SALES FORECAST (LB)

80,000 50,000 120,000 150,000

Hiring cost = $100 per worker Firing cost = $500 per worker Regular production cost per pound = $2.00 Inventory carrying cost = $0.50 pound per quarter Production per employee = 1,000 pounds per quarter Beginning work force = 100 workers
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Level Production Strategy

Level production (50,000 + 120,000 + 150,000 + 80,000) = 100,000 pounds 4 SALES FORECAST PRODUCTION PLAN INVENTORY

QUARTER Spring Summer Fall Winter

100,000 100,000 100,000 100,000 400,000 Cost of Level Production Strategy (400,000 X $2.00) + (140,00 X $.50) = $870,000

80,000 50,000 120,000 150,000

20,000 70,000 50,000 0 140,000

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Chase Demand Strategy

QUARTER SALES PRODUCTION FORECAST PLAN WORKERS NEEDED WORKERS WORKERS HIRED FIRED

Spring Summer Fall Winter

80,000 50,000 120,000 150,000

80,000 50,000 120,000 150,000

80 50 120 150

0 0 70 30 100

20 30 0 0 50

Cost of Chase Demand Strategy (400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

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Mixed Strategy
Combination of Level Production and Chase Demand strategies Examples of management policies

no more than x% of the workforce can be laid off in one quarter inventory levels cannot exceed x dollars

Many industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time
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General Linear Programming (LP) Model

LP gives an optimal solution, but demand and costs must be linear Let

Wt = workforce size for period t Pt =units produced in period t It =units in inventory at the end of period t Ft =number of workers fired for period t Ht = number of workers hired for period t
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LP MODEL
Minimize Z = $100 (H1 + H2 + H3 + H4) + $500 (F1 + F2 + F3 + F4) + $0.50 (I1 + I2 + I3 + I4)
Subject to

Demand constraints Production constraints

Work force constraints

P1 - I1 I1 + P2 - I2 I2 + P3 - I3 I3 + P4 - I4 1000 W1 1000 W2 1000 W3 1000 W4 100 + H1 - F1 W1 + H2 - F2 W2 + H3 - F3 W3 + H4 - F4

= 80,000 = 50,000 = 120,000 = 150,000 = P1 = P2 = P3 = P4 = W1 = W2 = W3 = W4

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
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Transportation Method
QUARTER EXPECTED DEMAND REGULAR CAPACITY OVERTIME CAPACITY SUBCONTRACT CAPACITY

1 2 3 4

900 1500 1600 3000

1000 1200 1300 1300

100 150 200 200

$20 $25 $28 $3 300 units

500 500 500 500

Regular production cost per unit Overtime production cost per unit Subcontracting cost per unit Inventory holding cost per unit per period Beginning inventory

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Transportation Tableau
PERIOD OF USE Unused Capacity 9 300 PERIOD OF PRODUCTION Beginning Inventory 1 Regular Overtime Subcontract 2 Regular Overtime Subcontract 3 Regular Overtime Subcontract 4 Regular Overtime Subcontract Demand 900 1500 1600 300 600 1 0 2 3 3 6 4 Capacity

20
25 28

300

23
28 31

100

26
31 34

100

29
34 37

1000 100 500 1200 150 250 500 1300 200 500 1300 200 500 250 18

1200

20 25 28

23 28 31

150 250 500 1300 200 500 3000

26 31 34 23 28 31 20 25 28

1300 200

20 25 28

Burruss Production Plan

REGULAR SUBENDING PERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY

1 2 3 4 Total

900 1500 1600 3000 7000

1000 1200 1300 1300 4800

100 150 200 200 650

0 250 500 500 1250

500 600 1000 0 2100

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Other Quantitative Techniques

Linear decision rule (LDR) Search decision rule (SDR) Management coefficients model

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Hierarchical Nature of Planning

Items
Product lines or families

Production Planning
Aggregate production plan

Capacity Planning
Resource requirements plan

Resource Level
Plants

Individual products

Master production schedule

Rough-cut capacity plan

Critical work centers

Components

Material requirements plan

Capacity requirements plan

All work centers

Manufacturing operations

Shop floor schedule

Input/ output control

Individual machines

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Aggregate Planning for Services

Most services cant be inventoried Demand for services is difficult to predict Capacity is also difficult to predict Service capacity must be provided at the appropriate place and time 5. Labor is usually the most constraining resource for services 1. 2. 3. 4.

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