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Chapter 12

Aggregate Planning

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Learning Objectives
Review

of forecasting Forecast errors


Aggregate

planning

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Phases of Decisions
Strategy

or design: Planning: Operation


Since

Forecast Forecast Actual demand

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

Firm Orders

Forecasts

Frozen Zone

Flexible Zone

Time

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Time Fences in MPS


Period 5 6

frozen (firm or fixed)

slushy somewhat firm

liquid (open)

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.

Long range Intermediate range

Short range

Now

2 months

1 Year
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Overview of Planning Levels

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

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Listen to Tom Thumbs 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 Thumbs 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
Economic, competitive, and political conditions

Corporate strategies and policies

Aggregate demand forecasts

Business Plan

Establishes production and capacity strategies

Production plan

Establishes production capacity

Master schedule
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Establishes schedules for specific products


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Aggregate Planning Inputs

Resources
Workforce Facilities

Costs

Demand forecast Policy statements


Subcontracting Overtime Inventory levels Back orders

Inventory carrying Back orders Hiring/firing Overtime Inventory changes subcontracting

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Aggregate Planning Outputs


Total

cost of a plan Projected levels of inventory


Inventory Output Employment Subcontracting Backordering

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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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Demand Options to Match Demand and Capacity


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


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Capacity Options to Match demand and Capacity

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

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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 inventory Demand

Use delivery time

Demand

Demand
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Chase vs. Level


Chase Approach
Advantages
Investment in inventory is low Labor utilization in high

Level Approach
Advantages
Stable output rates and workforce

Disadvantages
The cost of adjusting output rates and/or workforce levels

Disadvantages
Greater inventory costs Increased overtime and idle time Resource utilizations vary over time
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Techniques for Aggregate Planning


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

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Technique 1: Cumulative Graph

Cumulative output/demand

Cumulative production Cumulative demand 2 3 4 5 6 7 8 9 10


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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
Graphical/ charting Linear programming Simulation

Solution
Trial and error Optimizing Trial and error

Characteristics
Intuitively appealing, easy to understand; solution not necessarily optimal. Computerized; linear assumptions not always valid. Computerized models can be examined under a variety of conditions.

Linear decision rule???


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Workforce

Example - Relationships
=

Basic Relationships
Number of new workers at start of the period
Number of laid off workers at start of the period

Number of workers in a period

Number of workers at end of previous period

Inventory
Inventory at end of the previous period Amount used to satisfy demand in current period

Inventory at the end of a period

Production in current period

Cost
Cost for a period Output Cost (Reg+OT+Sub) Hire/Lay Off Cost Back-order Cost

Inventory Cost

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Technique 3: Simulation Example Level Output


Period Forecast 1 200 2 200 3 300 4 400 5 500 6 200 Total 1800 Policy: Output Regular Overtime Subcontract Output-Forecast Inventory Beginning Ending Average Backlog Costs Regular Inventory Back Orders Total Cost of Plan $600 $50 $0 $650 $600 $150 $0 $750 $600 $200 $0 $800 $600 $150 $0 $750 $600 $50 $500 $1,150 $600 $0 $0 $600 $3,600 $600 $500 $4,700 0 100 50 0 100 200 150 0 200 200 200 0 200 100 150 0 100 0 50 100 0 0 0 0 600 100 $1 $5 100 100 0 -100 -200 100 0 300 300 300 300 300 300 1800 Level Output Rate of 300 per period Cost $2 $3 $6

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

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Technique 3: Simulation Example Level Output + Overtime


Period Forecast 1 200 2 200 3 300 4 400 5 500 6 200 Total 1800 Policy: Output Regular Overtime Subcontract Output-Forecast Inventory Beginning Ending Average Backlog Costs 0 80 40 0 80 160 120 0 160 180 170 0 180 100 140 0 100 0 50 80 0 0 0 0 520 80 $1 $5 80 80 20 -80 -200 -180 0 280 280 280 40 280 40 280 40 280 0 1680 120 Level Output Rate+Overtime Cost $2 $3 $6

Regular
Overtime Inventory Back Orders Total Cost of Plan

$560
$0 $40 $0 $600

$560
$0 $120 $0 $680

$560
$120 $170 $0 $850

$560
$120 $50 $0 $730

$560
$120 $0 $400 $1,080

$560
$0 $0 $0 $560

$3,360
$360 $520 $400 $4,640

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Aggregate Planning in Services


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.

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Aggregate Plan to Master Schedule


Aggregate Planning

Disaggregation

Master Schedule
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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

Inputs
Beginning inventory Forecast Committed Customer orders

Outputs
Projected inventory

Master Scheduling

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


Beginning Inventory

64 1 Customer Orders (committed) 33 Projected on-hand inventory 31

JUNE 2 3 30 1 30 -29

4 30

5 40

JULY 6 7

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Example: Find ATP with lot size of 70


June
64 Forecast Customer Orders (Committed) Projected on Hand Inventory MPS: Production Projected on Hand Inventory 31 1 1 30 33 2 30 20 3 30 10 4 30 4

July
5 40 2 6 40 7 40 8 40

70 41

70 11 41

70 1 31

70 61

Available to promise Inventory until next production (uncommitted)


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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 Questions
1. 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 Questions
4. 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
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