Aggregate Planning

AGGREGATE PLANNING

(Ref S.N. Chari-p-32.1)

Introduction: Production planning in the intermediate range of time is termed as “aggregate planning” . it is thus called because the demand on facilities and available capacities is specified in aggregate quantities., eg: aggregate quantities of thousands of liters of paint, or tones of fabrication work, or number of automobiles, etc. this means that the total demand(expected) is measured without regard to the product mix that makes up this figure. Meaning: the aggregate planning is made within broad frame work of the long-range plan. Usually, the planning horizon for such plans ranges from a month to a year. The physical plant and equipment capacity would be fixed over this planning horizon. Therefore, the sales orders have to be met by strategies like using overtime, hiring of extra staff (temporary) or layoff of such persons , carrying inventory or giving a subcontract. The intermediate planning time-horizon derives its ‘intermediate’ character due to the ‘type’ of decisions that need to be taken, given a certain framework of long-term decisions which have been taken. What the actual time span of such planning should be-six months or 24 months or less than six months-is dependent upon the business, technology and production system of the particular organization. The first step for such planning would be make a sales forecast of demand for the intermediate range. And based on this sales forecast one has to develop the aggregate production strategy. A production aggregate plan can be developed by the following procedure. Checking as to whether the total requirements for the forecast period are within the combined equipments and manpower capacity of the plant. If the forecasted sales requirements cannot be met by existing plant capacity including any additional capacity that can be installed within the intermediate planning period, the sales forecast may have to be scaled down to the maximum capacity that is available during the aggregate planning period. Now the alternative production plans have to be made and the one that is most economical will be selected. We could be have a production plan which closely follows peaks and valleys in the production requirements forecast or we could have a steady production rate equaling the average of these peaks and valleys. There could be other plans which could be combinations of these two plans.

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STRATEGIES AND COSTS In trying to met the demand with the production capacity in the intermediate range we have the following different strategies at hand. 1. Overtime and Under time 2. Hiring and Layoff, working single or multiple shifts 3. Carrying inventories to meet the peak demands 4. Having backlog of orders 5. Sub-contracting to other companies 6. Turning down some sales demands. Each of these strategies has a cost factor associated with it. The marginal cost of overtime is not difficult to estimate, whereas, the cost of under time are not that easy to determine. The hiring costs include the costs of selections, the costs of training and the cost of maintaining additional records. Moreover, there are cost associated with learning on-the job of a newly hired employee. The cost of inventory include the capital cost for carrying the inventory, the cost of obsolescence, taxes and insurance, etc. the stock out cost are the costs due to lost sale or the loss of goodwill of the customer. These might be somewhat difficult to estimate. The cost of sub-contracting is the amount by which the sub-contracting cost is greater than the manufacturing cost at the higher level of production. The combination , rather than a single strategy, will usually result in the most economical plan. A few mathematical methods are presented below which employ a combination of the different strategies mentioned above which will lead to minimum cost. The whole idea behind this exercise is to plan different amounts of overtime, hiring, inventory, backlogs of orders and sub-contracting such that the different levels of demand for different future periods are met most economically. The most common model used is that of linear programming.

Linear Programming Model The production requirements specify the quantities of product to be made available in each of the several time periods in the future. Te limits on production capacity can be expressed as the maximum quantities of product that can be produced in regular and overtime operation in each of the time intervals to e planned. When one has to increase production capacity within the regular time, one has to hire more labour, and viceversa for decreasing the production capacity.

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The total of opening inventory plus accumulated production planned must equal or exceed the accumulated expected demand at every point in the period in the planning horizon. The job will be to minimize the sum of the costs incurred over the aggregate planning horizon. In simple algebra, we can express the regular-time production limit ¹(constraint) as follows: P¹ ≤ M¹ Where P¹ is the scheduled regular time production in period 1, and M¹ is the maximum regular-time production that can be scheduled in period 1. similarly, write for the second period: P² ≤ M² And for the third period: P³ ≤ M³ and so on. We can write similar inequalities for the ‘overtime’ strategy. Once again the caoacity estimates must be made before hand. This time, they include the maximum overtime production that can be scheduled in each period. The overtime limits (constraint) for the first period can be written as: T ¹ ≤ Y¹ Where T ¹ is the scheduled overtime in period 1 and Y¹ is the previously estimated overtime production capacity in period 1. Similarly for the period 2 we can express: T² ≤ Y² and for third period: T³ ≤ Y³ and so on. Now we have the restriction that the total of opening a inventory plus accumulated production planned must equal or exceed accumulated expected sales in each of these periods. This restriction (constraint) can be expressed for the first period as: P1 + T1 >D¹ (assuming that the initial level of inventory is zero) where D1 is aggregate demand for period 1. for period 2, we can express the constraints as P1 + T1 – D1 + P2 + T2 > D2. (P1 + P2) + (T1 + T2) > ( D1 + D2) *******

Transportation Problem Bowman has indicated a transportation Problem approach to aggregate planning. The model considering a combination of only the three strategies of (i) regular time production (ii) overtime production and (iii) inventory. Where M i =Maximum regular time production possible during period ’i’ Y I = Maximum overtime Production Possible during period ‘i’ 3

Di= Demand (market) during period ‘I’ I i = Inventory at the of period r = regular time cost of production, per unit v = Overtime cost of production, pr unit c = cost of carrying the inventory pr unit per period L = total slack = I o + € M i + €Ÿi - € Di – I n X = very high cost, so that those cells are forbidden. TABLE = ( CHARI P-32.5) REFER HMMS ( Holt , Modigliani, Muth and simon) Model In the previous model linear programming model the cost functions or relationships ere assumed to be linear, that means cost relations were assumed to consist of fixed elements, plus elements which varied directly in proportion to the variables specified in a plan-amount of overtime, amount of inventory, etc. the cost of carrying the first unit in inventory was supposed to be the same as the cost of carrying the one hundredth unit in inventory. The cost of hiring the first employee was supposed to be the same as the cost hiring the one hundredth employee. The HMMS model uses quadratic functions for the different costs such as over time, inventory, hiring model instead of simplified linear programming model. For this model the following costs are considered. 1. costs relating to production level with optimal workforce. 2. Hiring costs 3. Layoff costs 4. Overtime costs 5. Under time costs 6. Inventory holding costs 7. Back-order costs HMMS model fit a quadratic function approximation. Thus the hiring and layoff costs are expressed as: HMMS Model: Hiring and Layoff Costs

Quadratic approximation for the cost workers laidoff

0 workers hired

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over time costs are incurred when production levels exceed the regular time production capacity of the workforce. These costs depend on tow variables the size of the workforce at a given time and the aggregate production rate. For a given production rate, the larger the workforce level, the less the overtime that is required. The Control Process, ASSEMBLY LINE BALANCING Basic production Planning Problem, Visual Grouping of work Elements Heuristics Method, Kilbridge and Wester Method Other methods for Assembly Line Balancing have to be read. EVOLUTION OF MRP –II While MRP that has grown out of traditional production and inventory management does an excellent job of planning for the materials, such a technique cannot be fully effective in achieving the business objectives unless it takes into account the other resources of a manufacturing organization. Without such integration the planning for materials may not be able to mesh properly with the production schedules, the production plans in the longer term, the planned production capacities and more importantly the other resources required for the manufacturing function such as human resources, the machines and the finance. Therefore planning for the requirement of materials has to take into consideration the business plans, the financial plans, the available human resources at any point in time, the available capacities, the machines also the aspects of logistics such as shipping status. Because of these needs and considerations there evolved an integrated manufacturing management system called manufacturing resource planning (MRP- II) has been defined by APICS ( American Production and Inventory Control System) A method for effective planning of all the resources of manufacturing company . ideally it addresses operational planning in units, financial planning in dollars and has a simulation capability to answer ‘what-if’ questions. It is made up of a variety of functions each linked together. Business planning, Production Planning, Master Production scheduling, Material requirement Planning, Capacity Requirement Planning, and the execution system for capacity and priority. Outputs from these systems would be integrated with financial reports, such as the business plan, the purchase commitment report, shipping budget, inventory production , etc. Thus MRP-II is a logical extension that goes beyond the computations for materials requirement. It aims at addressing the entire manufacturing function rather than a single task within that function. This is very significant improvement in terms of integration that has been achieved by the use of IT, . the developments in IT have made these improvements more and more possible. (EVOLUTION TO ERP, Benefits of ERP

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Implementation of ERP, costs of Installing ERP, Steps in ERP implementation. SAP,

BaaN, what next ERP?, ELECTRONIC COMMERCE, Web and Relationship, B2B and B2C e-commerce,, significance to OM. BA1651

PRODUCTION MANAGEMENT

1. Global /trade operations and supply network application 2. EOQ, EBQ Models, Quantity discount models 3. MRP II systems Introduction to ERP, e-business and e-operations strategies. 4. Aggregate planning theory and problems 5. Forecasting – Types, Methods ( moving average methods) 6. Johnson’s Algorithm for job sequencing (n job thro’ 2 machines, n jobs thro’ 3 machines, n jobs thro’ m machines 7. PERT / CPM 8. Fixed Position, and Production, Process, Flexible), Methodologies (Distance Minimising 9. Time study, methods-time measurement, Work Sampling, White color measurement and learning curves, Using WM to increase productivity. 10. CRAFT, ALDAP, CAM, CAD, CIM, JIT, KANBAN.

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