Aggregate Planning

Aggregate Planning

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Un us e Ca d T pa Ca otal pa ty ci ty ci

Production Planning Horizons Long-Range Capacity Planning

Long-Range (years)

Aggregate Planning

Medium-Range (6-18 months)

Master Production Scheduling

Short-Range (weeks)

Production Planning and Control Systems

Very-Short-Range (hours - days)

Production Planning: Units of Measure Long-Range Capacity Planning

Entire Product Line

Aggregate Planning

Product Family

Master Production Scheduling

Specific Product Model

Production Planning and Control Systems

Labor, Materials, Machines

The long term plan is defined at the corporate level. These decisions are more strategic. This activity is often referred to as "strategic planning". The following needs to be addressed in a strategic plan which market segment ? how to reach it ? which plant / facility ? which prodn policy ? (make to order, make to stock etc.) which prodn system ? (cellular, job shop, mixed etc.)

Steps in Aggregate Planning

Define an aggregate unit An aggregate unit, such as the labor hour or the machine hour must be selected in order to translate the demand for the different products into the same units. This unit must be related to the capacity you want to plan (machine or manpower).

Estimate aggregate demand (over 12-24 months) Here we need the monthly forecast for all the products for  the  period  considered  (the  intermediate  term).  These  forecasts are translated into aggregate units.

Determine an aggregate production plan; On  the  basis  of  this  demand,  we  can  select  the  best  production plan.

Aggregate Planning Objectives

• • • • • •

Minimize Costs/Maximize Profits Maximize Customer Service Minimize Inventory Investment Minimize Changes in Production Rates Minimize Changes in Workforce Levels Maximize Utilization of Plant and Equipment

Managerial Inputs

Aggregate plan

Managerial Inputs

Demand forecasts

Aggregate plan

Managerial Inputs

Demand forecasts

Aggregate plan

Accounting and finance Cost data

Managerial Inputs

Demand forecasts

Aggregate plan

Accounting and finance Cost data

Human resources Labor-market conditions Training capacity

Managerial Inputs

Demand forecasts

Aggregate plan

Engineering New products Product design changes Machine standards

Accounting and finance Cost data

Human resources Labor-market conditions Training capacity

Managerial Inputs Operations Current machine capacities Plans for future capacities Workforce capacities Current staffing level

Materials Supplier capabilities Storage capacity Materials availability

Demand forecasts

Aggregate plan

Engineering New products Product design changes Machine standards

Accounting and finance Cost data

Human resources Labor-market conditions Training capacity

Aggregate Planning Process

Determine requirements for planning horizon

Aggregate Planning Process

Determine requirements for planning horizon

Identify alternatives, constraints, and costs

Aggregate Planning Process

Determine requirements for planning horizon

Identify alternatives, constraints, and costs

Prepare prospective plan for planning horizon

Aggregate Planning Process

Determine requirements for planning horizon

Identify alternatives, constraints, and costs

Prepare prospective plan for planning horizon

Is the plan acceptable?

Aggregate Planning Process

Determine requirements for planning horizon

Prepare prospective plan for planning horizon

Identify alternatives, constraints, and costs

No

Is the plan acceptable?

Aggregate Planning Process

Determine requirements for planning horizon

Prepare prospective plan for planning horizon

Identify alternatives, constraints, and costs

No

Is the plan acceptable?

Yes Implement and update the plan

Aggregate Planning Process

Determine requirements for planning horizon

Prepare prospective plan for planning horizon

Identify alternatives, constraints, and costs

No

Move ahead to next planning session

Is the plan acceptable?

Yes Implement and update the plan

Aggregate Planning Costs

• • •

Regular-Time Costs Overtime Costs Hiring and Layoff Costs

•

Inventory Holding Costs

•

Backorder and Stockout Costs

Quantity Produced during a period

Production Plan 1500 — 1250 — Requirements

1000 — 750 — 500 — 250 — 0— | 1

| | 2 3 Quarter

| 4

Quantity Produced during a period

Production Plan 1500 — 1250 — Requirements

1000 —

Production plan

750 — 500 — 250 — 0— | 1

| | 2 3 Quarter

| 4

Production Plan Quantity Produced during a period

Inventory accumulation

1500 — 1250 — Requirements

1000 —

Production plan

750 — 500 —

300

250 — 0 — 510 | 1

| | 2 3 Quarter

| 4

Production Plan Quantity Produced during a period

Inventory accumulation

1500 —

Inventory consumption

400

1250 —

Requirements

1000 —

Production plan

750 —

110

500 —

300

250 — 0 — 510 | 1

| | 2 3 Quarter

| 4

Three Methods of Aggregate Planning

Level Strategy - Constant Work Force, and as demand changes Vary Only Inventory & Stock outs Chase Strategy - as demand changes, hire and layoff to produce the units required. Some inventory also has to be accounted for, because of rounding errors Mixed Strategy - use any or all of the production variables to determine the lowest cost plan

Production Variables As demand changes these are the things management can change to meet the changing demand.

These variables

include: Number of workers - More or less workers by hiring and layoff changes the number of units one can produce Inventory - If you have additional capacity now, produce extra units and store them in inventory to satisfy increasing demand in the future

Production Variables Stock out - This is negative inventory. If demand is more than you can produce, use a stock out and satisfy demand in the future when capacity exceeds demand. Attempt should be such that stock outs do not occur in the last period of any aggregate plan.

Subcontracting - Pay some other business to produce extra units needed.

Overtime - Ask employees to produce more units by working, for example, more than the normal eight hours/day or 40 hours/week.

LEVEL STRATEGY Example 1

Level Strategy for Services

Dock

Aisle

Level Strategy for Services

Dock

Aisle

TIME PERIOD Requirement*

1

2

3

4

5

6

Total

6

12

18

15

13

14

78

Current employment = 10 part-time emp

* Number of part-time employees

Level Strategy for Services

Dock

Aisle

TIME PERIOD Requirement*

1

2

3

4

5

6

Total

6

12

18

15

13

14

78

Current employment = 10 part-time emp 1. 2. 3. 4.

* Number of part-time employees

No more than 10 new hires in any period No backorders are permitted Overtime can not exceed 20% of regular-time capacity The following costs can be assigned: Regular-time wage 2,000/period at 20 hours/week Overtime wages 150% of regular-time Hiring 1,000/person Layoffs 500/person

Level Strategy for Services

Dock

Aisle

TIME PERIOD Requirement*

1

2

3

4

5

6

Total

6

12

18

15

13

14

78

Current employment = 10 part-time clerks Peak Requirement 1. 2. 3. 4.

No more than 10 new hires in any period No backorders are permitted Overtime can not exceed 20% of regular-time capacity The following costs can be assigned: Regular-time wage 2,000/period at 20 hours/week Overtime wages 150% of regular-time Hiring 1,000/person Layoffs 500/person

Level Strategy for Services

Dock

Aisle

TIME PERIOD Requirement*

1

2

3

4

5

6

Total

6

12

18

15

13

14

78

Current employment = 10 part-time clerks Peak Requirement 1. 2. 3. 4.

No more than 10 new hires in any period No backorders are permitted 1.20w = 18 employees in peak period Overtime can not exceed 20% of regular-time capacity The following costs can be assigned: Regular-time wage 2,000/period at 20 hours/week Overtime wages 150% of regular-time Hiring 1,000/person Layoffs 500/person

Level Strategy for Services

Dock

Aisle

TIME PERIOD Requirement*

1

2

3

4

5

6

Total

6

12

18

15

13

14

78

Current employment = 10 part-time clerks Peak Requirement 1. 2. 3. 4.

No more than 10 new hires in any period No backorders are permitted 1.20w = 18 employees in peak period Overtime can not exceed 20% of regular-time capacity The following costs can be assigned: 18 w = = 15 employees Regular-time wage 2,000/period at 20 hours/week 1.20 Overtime wages 150% of regular-time Hiring 1,000/person Layoffs 500/person

TIME PERIOD

Requirement level undertime overtime Hires Fires

Total

1

2

3

4

5

6

6 15 9 0 5 0

12 15 3 0 0 0

18 15 0 3 0 0

15 15 0 0 0 0

13 15 2 0 0 0

14 15 1 0 0 0

78 90 15 3 5 0

Cost

180000 9000 5000 0 194000

LEVEL STRATEGY Example 2

Know the demand We would have to know each forecast value for the time period of our aggregate plan. Consider the following forecasting information. Month

J anuary

Feb.

March

April

May

J une

Forecast

1,800

1,500

1,100

900

1,100

1,700

Safety stock Its purpose is to satisfy demand when demand is greater than what we expect ( the forecasted value). A very simple method based on company policy can be used to calculate safety stock. For eg. The safety stock value could be 25% of the forecasted value for that period.

Month

J anuary

Feb.

March

April

May

J une

Forecast

1,800

1,500

1,100

900

1,100

1,700

Safety Stock

450

375

275

225

275

425

The beginning inventory value (in this case for Jan.) would have to be known before we could continue. In some cases one can assume the value is zero to continue with calculations. The remaining beginning inventory values are determined from the safety stock in the previous period.

Month

J anuary

Feb.

March

April

May

J une

Forecast

1,800

1,500

1,100

900

1,100

1,700

Safety Stock

450

375

275

225

275

425

Beginning Inventory

400

Production Required is determined by adding the forecast plus the safety stock and subtracting the beginning inventory for each period: FORECAST + SAFETY STOCK - BEGINNING INVENTORY J anuary

Feb.

March

April

May

J une

Forecast

1,800

1,500

1,100

900

1,100

1,700

Safety Stock

450

375

275

225

275

425

400

450

375

275

225

275

1,850

1,425

1,000

850

1,150

1,850

Beginning Inventory Required Production

Starting Conditions Storage or inventory holding Cost = Rs. /unit-month Standard Pay Rate = Rs. /hour Overtime Rate = Rs. /hour Cost of Stockout = Rs. /unit-month Cost of Subcontracting = Rs. /unit Hiring and Training Cost = Rs. /person Layoff Costs = Rs. /person Worker-hours/unit = hrs/unit Manufacturing Cost = Rs. Beginning Work Force = No. of workers

Storage Cost (Inventory holding cost) = Rs. /unit-month Each unit that is held in inventory for one month will cost us some amount. This cost includes the costs of storage space administrative costs lost income (cost of capital) from having this item sitting in inventory

Standard Pay Rate = Rs. /hour This is the hourly wage rate for direct labor.

Overtime Rate = Rs. /hour Often when employees work more than the regular time, they are paid at a higher pay rate for the addition hours. This higher pay rate is usually 1.5 times the Standard pay rate. Eg. If regular rate is 60/hr 1.5 times Rs. 60 = Rs. 90 /hr

Cost of Stockout (back order) = Rs. /unit-month This is our cost if we fail to satisfy demand. This cost includes the cost of: Penalties Possible loss of sale if customer buys from an other business Possible loss in future sales Loss of good will Administrative customers.

cost

for

keeping

track

of

back-ordered

Cost of Subcontracting = Rs. /unit Cost of having an other business produce one unit of product to meet the demand. This is given as a marginal cost or as a total cost.

Marginal Cost : the cost in addition (above and beyond) our cost to produce that same unit (the manufacturing cost).

Total Cost : the amount the other business would receive for producing one unit.

Hiring and Training Cost = Rs. /person This is the cost to add another employee to our work force. This includes the cost of: advertising interviewing and selection training and less than full productivity for the new employee during the training period

Layoff Costs = Rs. /person This includes the cost of: Severance pay Increases in unemployment insurance Negative

reactions

by

remaining

uncertainties about their futures

workers

because

of

Worker-hours/unit This is the direct labor content of the product being manufactured. It can be used for cost calculations. For eg. If wage rate is Rs. 60/hr and it takes 5 hrs/unit Direct labor cost/unit is 5 hours/unit X 60/hour = Rs. 300/unit As a comparison; if we produce one unit using overtime, the cost would be 5 hours/unit X 90/hour = Rs. 450/unit. The difference (450 - 300) Rs. 150 is the marginal cost of producing a unit on overtime.

Beginning Work Force This is the number of production workers we have when we start aggregate planning If we want to produce more units than this work force can produce on regular time, than we would need to hire additional workers and pay the hiring and training costs for those new employees

The first question is “How many workers?”

J anuary

Feb.

March

April

May

J une

Forecast

1,800

1,500

1,100

900

1,100

1,700

Safety Stock

450

375

275

225

275

425

400

450

375

275

225

275

22

19

21

21

22

20

1,850

1,425

1,000

850

1,150

1,850

1,850

3,275

4,275

5,125

6,275

8,125

Beginning Inventory Days in a month Required Production Cum Prodn

How many workers? 8,125 units need to be produced during Jan. - June Assume that each unit requires 5 labor hours and each worker works 8 hours/day The 6-month period Jan. - June includes 125 work days (8,125 units X 5 hours/unit) / (8 hours/person day X 125 days) = 40.6 persons 40.6 is rounded up (to 41), because if we round down we will not produce the required 8125 units.

Cumulative Produced These values are calculated from the formula: (number of workers X hours/day X number of days) / (5 hours/unit) For Jan.: (41 workers X 8 hours/day X 22 days) / (5 hours/unit) = 1443.2 and rounding normally to 1443. For Feb the only difference is 41 cumulative days in place of 22. The result is 2689.6 and rounded to 2690

J anuary

Feb.

March

April

May

J une

Forecast

1,800

1,500

1,100

900

1,100

1,700

Safety Stock

450

375

275

225

275

425

400

450

375

275

225

275

22

19

21

21

22

20

22

41

62

83

105

125

1,850

1,425

1,000

850

1,150

1,850

1,850

3,275

4,275

5,125

6,275

8,125

1443

2690

4067

5445

6888

8200

Excess

0

0

0

320

613

75

Shortage

407

585

208

0

0

0

Beginning Inventory Days in a month Cum Days Required Production Cum req Prod Actual Cum Prod

Cum Production

10,000 8,500 7,000 5,500 4,000 2,500 1,000 0

1

2

3

4

5

6

Quarter Req cum prodn

Act cum prod

7

Excess or (Short) = (Cumulative Production Required) - (Cumulative Produced) Shortage Costs This cost is the number short in any period X the stock out cost For Jan it is (407 units) X stock out cost Storage Costs This cost is the number excess in any period X the storage cost For April it is (320 units) X shortage cost

If we have 36 workers in the beginning of the planning horizon, Hiring Cost = (41 required workers – 36 available workers) X hiring cost Lay-off Cost = 0 Total Cost = storage + shortage + hiring + Lay-off

Chase Strategy

Workers Required From the Beginning Information and Starting Conditions we know: 1,850 units need to be produced during Jan. Each unit requires 5 labor hours Each worker works 8 hours/day The month of Jan. has 22 work days (1850 units) X (5 hours/unit) / (8 hours/person-day) X (22 days) = 52.56 persons 52.56 is rounded up (to 53), because if we round down we will not produce the required 1850 units. Remember that a chase strategy doesn't allow stock outs

Units Produced In Jan. if each person works 8 hours each of the 22 days, the number of worker hours available to produce products will be: (53 people) X (8 hours/day) X (22 days) = 9328 worker hours

The number of units that can be produced in Jan. will be the total worker-hours available in Jan. divided by the number of worker-hours required for each unit. For Jan.: (9328 worker hours) / (5 worker hours/unit) = 1865.6 units We can round it to 1866

Workers Hired People Hired is the number of additional people needed to meet the demand. For Jan. it is the difference between 53 (people required in Jan.) and the 36 people at the start. 53 - 36 = 17

Hiring Cost In Jan. company hired 17 additional employees. The cost of hiring 17 people is 17 X Hiring cost

People Laid Off This is similar to people hired. It is the number of fewer workers we need as demand declines. For Feb., it is 53 - 47 = 6.

Layoff Cost The cost of Laying Off 6 people is 6 X lay-off cost

Ending Inventory Ending inventory is the number of cumulative unused units at the end of any one month. Cumulative means we need to consider not only what happens this month, but also what happened the previous month.

Jan. Feb. March April

Prod. Reg. 1,850 1,425 1,000 850

People Req. 53 47 30 25

Units Prod. 1866 1429 1008 840

People Hired 17 0 0 0

People LaidOff

Ending Inv. 16

6 17 5

20 28 18

Inventory Cost Number of units in Ending Inv. for any one month x holding Cost

The beginning inventory for Jan. is 0. We need 1850 units and we produce 1866. The difference (1866 - 1850 = 16) is the Ending Inv. for Jan. For Feb. one needs to consider the inventory in the previous month (16 for Jan.) In Feb. with 47 people one can produce 1429 units. 1429 is 4 more than than the production required (1425). These 4 additional units added to Jan. Ending Inv. gives 20 units of Ending Inv. in Feb.

Example

Product A B C

Q1

Q3

Q3

Q4

2500 7500 30000

12500 20000 25000

7500 20000 27500

7500 7000 33000

2.5 hrs/gallon 65 days/quarter 8 hrs/day Hiring cost = 1000 Firing cost = 2000 Inventory carrying cost = 50 per gallon per quarter Stock out cost = 100 per gallon per quarter Starting work force = 200

Find the following for Level and Chase strategies

No. of workers required per day Units produced per quarter Beginning and end inventories Inventory costs Stock out costs Hire and lay-off costs

Quarter

Q1

Q3

Q3

Q4

Req Production

40000

57500

55000

47500

Master Production Scheduling

Objectives of MPS • Determine the quantity and timing of completion of end items over a short-range planning horizon. • Schedule end items (finished goods and parts shipped as end items) to be completed promptly and when promised to the customer. • Avoid overloading or under-loading the production facility so that production capacity is efficiently utilized and low production costs result.

Master Production Scheduling PAREN T Independent Demand

Dependent Demand

COMPONE

Master Production Scheduling Months

January

February

Aggregate Production Plan shows the total quantity of bicycles

1,500

1,200

Weeks

1

2

3

4

5

6

7

8

Master Production Schedule Shows the specific type and quantity of bike to be produced Road bike Hybrid bike Mountain bike

100

100 500

100 500

300

100 450

450 100

Master Production Scheduling Arizona Instruments produces bar code scanners for consumers and other manufacturers on a produce-to-stock basis. The production planner is developing an MPS for scanners for the next 6 weeks. The minimum lot size is 1,500 scanners, and the safety stock level is 400 scanners. scanners in inventory.

There are currently 1,120

The estimates of demand for

scanners in the next 6 weeks are shown on the next slide.

Master Production Scheduling

Demand Estimates

WEEK

1

2

3

4

5

6

CUSTOMERS

500 1000 500 200 700 1000

BRANCH WAREHOUSES

200 300 400 500 300 200

MARKET RESEARCH PRODUCTION RESEARCH

0

50

0

0

10

0

10

0

0

0

0

0

Master Production Scheduling WEEK

1

2

3

4

5

6

CUSTOMERS

500 1000 500 200 700 1000

BRANCH WAREHOUSES

200 300 400 500 300 200

MARKET RESEARCH PRODUCTION RESEARCH TOTAL DEMAND BEGINNING INVENTORY REQUIRED PRODUCTION ENDING INVENTORY

0

50

0

0

10

0

10

0

0

0

0

0

710 1350 900 700 1010 1200 1120 410 560 1160 460 950 0

1500 1500

0

1500 1500

410 560 1160 460 950 1250

Master Production Scheduling

WEEK

1 SCANNER PRODUCTION

0

2

3

1500 1500

4 0

5

6

1500 1500

Rough Cut Capacity Planning

•

As orders are slotted in the MPS, the effects on the production work centers are checked

•

Rough cut capacity planning identifies under-loading or overloading of capacity

Rough Cut Capacity Planning Texprint Company makes a line of computer printers on a produce-to-stock basis for other computer manufacturers. Each printer requires an average of 24 labor-hours. The plant uses a backlog of orders to allow a level-capacity aggregate plan. This plan provides a weekly capacity of 5,000 labor-hours. Texprint’s rough-draft of an MPS for its printers is shown on the next slide. Does enough capacity exist to execute the MPS? If not, what changes do you recommend?

Rough Cut Capacity Planning

WEEK 1 PRODUCTION

2

3

4

5

100 200 200 250 280

TOTAL 1030

LOAD

2400 4800 4800 6000 6720 24720

CAPACITY

5000 5000 5000 5000 5000 25000

UNDER or OVER LOAD

2600 200 200 1000 1720

280

Rough Cut Capacity Planning •

Rough-Cut Capacity Analysis – The plant is under-loaded in the first 3 weeks (primarily week 1) and it is overloaded in the last 2 weeks of the schedule. – Some of the production scheduled for week 4 and 5 should be moved to week 1.

MPS rules – Do not change orders in the frozen zone – Do not exceed the agreed on percentage changes when modifying orders in the other zones

Frozen No Change 1-2 weeks

+/- 5%

+/- 10%

+/- 20%

Change

Change

Change 6+ weeks

2-4 weeks 4-6 weeks

MPS rules – Try to level load as much as possible – Do not exceed the capacity of the system when promising orders. – If an order must be pulled into level load, pull it into the earliest possible week without missing the promise.