Pom Lecture (38)

Unit 3 Scheduling Operations Chapter 12: Aggregate Planning Lesson 37 - THE AGGREGATE PLANNING PROCESS Learning Objectives After reading this lesson you will be able to understand Concept of aggregation Goals of aggregate planning Strategies for aggregate planning Capacity planning

My dear friends, let us straight away focus on the issue at hand:AGGREGATE PLANNING PROCESS The process consists of four basic considerations as follows: 1. Concept of Aggregation starts with a meaningful measure of output. In a single product output organization there is no problem with the output measure. Many organizations have multiple products and it is difficult to find a common factor of measure of output. For e.g. steel producer can plan in terms of tons of steel, gallons of paint in case of paint industry. Service organizations such as transport system may use passenger miles as a common measure, health care facilities may use patient visits, and educational institutes may use student to faculty contact ratio in terms of hours as a reasonable measure. You may recall that a group of products or services that have similar demand requirements and common processing, labour and materials requirements is called a Product Family. Therefore a firm can aggregate its products or services into a set of relatively broad families, avoiding too much detail at the planning stage. For example consider the Bicycle manufacture that has aggregated all products into two families: mountain bikes and road bikes. This approach aids production planning for the assembly lines in the plants. Let us now turn our attention to:2. Goals for aggregate planning there are number of goals to be satisfied • It has to provide the overall levels of output, inventory and backlogs

• •

dictated by the business plan Proper utilization of the plant capacity. It should not be under utilized because it is waste of resources.. It is better to operate at a near full capacity. The aggregate plan should be consistent with the company’s goals and policies regarding its employees.. A firm may like to have employee stability or hire and layoff strategy. Other firms change employees freely as the output level is varied throughout the aggregate planning horizon.

Moving over to:3. Aggregate Demand Forecasts The benefits of aggregate planning depends on the accurate forecasting. The forecasting models presented in Chapter 3 can be used to forecast demand for product groups as well as individual products. 4. Interrelationships among decisions Here the managers must consider the future consequences of current decisions. This is important mainly due to the fact that output plans are developed for a long period of time. My dear students, let us now concentrate on:STRATEGIES FOR AGGREGATE PLANNING Let us consider the strategies with the help of an example: Table 1 Quarter 1 2 3 Forecast sales 1,080,000 2,640,000 1,960,000 for all product group ( in $ ) Wagons in units 27,000 66,000 49,000 Labor in hours 21,600 52,800 39,200 Table 2 Month Units / day Productive Days Forecast (in 000 units

4 1,160,000 29,000 23,200

Jan 182 22

Feb 527 19

Mar 619 21

Apr 1000 22

May 1143 21

June 952 21

July 682 22

Aug 1454 11

Sept 857 21

Oct 637 22

Nov 499 18

Dec 286 21

4

10

13

22

24

20

15

16

18

14

9

6

The first step in the analysis is to determine the production requirements the forecasted demand places on the facility. At first glance May , appears to be the peak month with 24,000 units demanded. The number of Productive days actually available must also be considered for e.g. August has 11 productive days only Because of annual vacation.

Shutdown. The output rates, output per available productive day, are shown in figure. Let’s examine three “ pure strategies” that the planner could use to cope with these wide swings in monthly demands. Strategy 1.Vary the number of Productive employees in Response to Varying output Requirements ( also known as Chase 1 plan). Here, first the average productivity per employee is first calculated which determines the number of employees needed to meet the monthly required output demand. The employees are laid off when the output demand falls. As a result there is always Hiring and laying of employees. In our example, productivity per employee is 10 wagons / day. Therefore about 16 employees are needed in January, 53 in February, 62 in March and so on. This strategy has disadvantages. The hiring and layoff costs are going to be high, indirect costs of training new employees are going to be there, employee morale low, required work skills may not be readily available when they are needed, lead times necessary to hire and train the new employees must be accounted for in the planning process, society reaction negative. Finally this strategy is not feasible for the companies constrained by guaranteed wage and also hiring and layoff agreements. Strategy 2: Maintain a Constant Work Force Size but Vary the Utilization of the Work Force ( also known as Level # 1) Suppose, for example, we chose the strategy of employing 70 workers per month throughout the year. On an average, this work force would be capable of producing 700 wagons each day. During the lean months (January, February, March, July, October, November, December), the work force would be scheduled to produce only the amount forecasted, resulting in some idle working hours. During high-demand months (April, May, June, August, September), overtime operations would be needed to meet demand. The work force would therefore be intensely utilized during some months and underutilized in other months. A big advantage of this strategy is that it avoids the hiring and layoff costs associated with strategy 1. But other costs are incurred instead. Overtime, for example, can be very expensive, commonly at least 50 percent higher than regular-time wages. Furthermore, there are both legal and behavioral limits on overtime. When employees work a lot of overtime, they tend to become inefficient, and job-related accidents happen more often. Idle time also has some subtle drawbacks. During slack periods, employee morale can diminish, especially if the idle time is perceived to be a precursor of layoffs. Opportunity costs also result from idle time. When employees are forced to be idle, the company foregoes the opportunity of additional output. While wages are still paid, some potential output has been lost forever. Strategy 3: Vary the Size of Inventory in Response to Varying Demand also known as Chase #2 plan )

(

Finished goods inventories in make-to-stock companies can be used as a cushion against fluctuating demand. A fixed number of employees, selected so that little or no overtime or idle time is incurred, can be maintained throughout the planning horizon. Producing at a constant rate, output will exceed demand during slack demand periods, and finished goods inventories will accumulate. During peak periods, when demand is greater than

capacity, the demand can be supplied from inventory. This planning strategy results in fluctuating inventory levels throughout the planning horizon. The comparative advantages of this strategy are obvious: stable employment, no idle time, and no overtime. What about disadvantages? First, inventories of finished goods (and other supporting inventories) are not cost-free. Inventories tie up working capital that could otherwise be earning a return on investment. Materials handling costs, storage space requirements, risk of damage and obsolescence, clerical efforts, and taxes all increase with larger inventories. Backorders can also be costly. Customers may not be willing to tolerate backordering, particularly if alternative sources of supply are available; sales may be lost, and lingering customer will may decrease future sales as well. In short, there are costs for carrying too much or too little inventory.

A GRAPHICAL METHOD FOR AGGREGATE OUTPUT PLANNING Usually, no pure strategy is best by itself; a mixture of two or three is better. The various alternative plans or "mixtures" involve tradeoffs. One way to develop and evaluate these alternatives is by using a graphical planning procedure. The graphical method is convenient, relatively simple to understand, and requires only minimal computational effort. To use the graphical method, follow these steps: 1. Draw a graph showing cumulative productive days for the entire planning horizon on the horizontal axis, and cumulative units of output on the vertical axis. Plot the cumulative demand data (forecasts) for the entire planning horizon. 2. Select a planning strategy, taking into account aggregate planning goals. Calculate and plot the proposed output for each period in the planning horizon on the same set of axes used to plot the demand. 3. Compare expected demand and proposed output. Identify periods of excess inventory and inventory shortages. 4. Calculate the costs for this plan. 5. Modify the plan, attempting to meet aggregate planning goals by repeating steps 2 through 4 until a satisfactory plan is established. We will demonstrate steps 1 through 4 for three different aggregate plans. The fifth step, additional modification, is left for you to do as an exercise. A PLAN FOR LEVEL OUTPUT RATE ( also known as Level # 2 plan ) The first plan we demonstrate is a plan that calls for a constant rate of output throughout the planning horizon. Often such a plan is chosen when the costs of changing the rate of output, on a monthly basis, say, are deemed too high. Step 1 of the graphical planning procedure draw a graph of the demand data shown in Figure. This graph is the black curve in Figure. For step 2, we consider the fact that business plan, and hence the goals of the aggregate plan, calls for output that meets forecasted demand throughout the planning horizon: Relying on backordering has been deemed too costly. We consider, too, that costs will be

incurred if we change the output rate during the planning horizon: When the output rate is increased, additional employees must be hired and trained. When the output rate is decreased, some employees must be laid off and/or idle time occurs. The larger the increase or decrease in output rate, the greater the cost incurred. Table 3 shows the costs of changing output rates by different amounts. Output rates are expressed in terms of units (wagons) per day. The facility's maximum capacity is 100 employees (1,000 wagons/day) on a single shift. Using overtime with additional costs of $4/unit can temporarily increase capacity. Thus, we select a planning strategy consisting of a constant output rate for each day throughout the planning horizon, one that allows cumulative output at least to meet forecasted demand throughout the planning horizon. To plot the curve of output, then on the same set of axes we plotted forecasted demand, we must recognize that the curve should be a straight line-that is, a curve whose slope is constant, since we want the output rate to be constant. What slope should it have? What constant rate of output should we specify? The cumulative output line should be steep enough always to meet or exceed cumulative demand. But if the output line is too steep, excessive inventories are accumulated. Moreover, output rate cannot exceed the facility's maximum capacity: 1000 wagons/day, or 10 wagons/day for each of 100 employees. The desired line passes through the origin where output and Inventory days are both 0 (point A), and the outlining point B, Accumulation on the cumulative demand curve. 0 20 40 60 80 100 120 140 160 180 200 220

Aggregate output plan level production

---------------

and forecasted demand for

Units/output in 000. 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

TABLE 3

Estimated Cost for changing output rates.

Change in output rate from previous month ( in units /day increase or decrease. 1-200 201-400 401-600 601-800

Estimated cost $ 4,000 10,000 18,000 28.000

The cumulative output described by this line meets our planning requirements: Beginning on the first day production commences at a constant daily rate and total output exceeds total demand until the end of September (point B). At the end of September, units produced to date equal the total demanded to date. Thereafter, output exceeds expected demand for the remainder of the planning horizon. What is the constant output rate? Point B represents 180 productive days and 142,000 cumulative units of output (from Table.2) 1,42,000 units .

180 days

=

790 units /day approx

Comparing the data in table form, as part of Step 3, the resulting monthly plans are shown in Table 4. Since 790 units are produced each day, and since each employee can average 10 units/day, 79 employees are needed. Step 4 requires that we calculate the costs for this plan. Since the daily output rate is unchanged from month to month, there are no change of output rate costs. The cumulative average monthly inventory is 120,405 units for the year. Inventory carrying cost is $l/unit/month, based on the average monthly inventory. Therefore inventory costs are about $120,405. A Plan for Output Closely Following Demand (Chase Plan)

An alternative to producing at a constant _rate is a plan in which monthly output is geared to meeting expected monthly demand. This is sometimes called a chase plan because the output rate is chasing (closely following) the demand rate. When graphed, the cumulative output curve coincides with the cumulative demand curve. Therefore the daily output rates are those shown earlier in Table.2. The resulting plan is shown in Table 5 . Since monthly inventories are trivial, inventory costs for this plan are very low and backorders or stock outs are not permitted. The daily output rate is changed each month. February's output is 345 units per day greater than January's. From Table 3, we know that the cost of this increase is approximately $10,000. Similarly, we can calculate the cost of changing output rates for all the months in the planning horizon. Further costs are incurred for overtime work in May and August when output exceeds' the fixed capacity of 1000 units/day. Overtime costs $4 per unit produced. TABLE .4

Monthly plan for level output rate Average Inventory Beginning (subtraction Ending [(beginning + Demand Inventory to Inventory Inventory ending) 12] (in units) (in units) (in units) (in units) (in units) 4,000 0 13,380 13,380 6,690 10,000 13,380 5,010 18,390 15,885 13,000 18,390 3,590 21,980 20,185 22,000 21,980 (4,620) 17,360 19,670 24,000 17,360 (7,410) 9,950 13,655 20,000 9,950 (3,410) 6,540 8,245 15,000 6,540 2,380 8,920 7,730 16,000 8,920 (7,310) 1,610 5,265 18,000 1,610 (1,410) 200 905 14,000 200 3,380 3,580 1,890 9,000 3,580 5,220 8,800 6,190 6,000 8,800 10,590 19,390 14,095 Cumulative average 120,405 Net Additions

Month Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

Output Rate Output Days (in units/day) (in units) 22 790 17,380 19 790 15,010 21 790 16,590 22 790 17,380 21 790 J6,590 21 790 16,590 22 790 17,380 11 790 8,690 21 790 16,590 22 790 17,380 18 790 14,220 21 790 16,590

TABLE .5

Monthly plan for variable output rate (chase plan)

Net Additions Beginnin (subtraction Output Output Ending Average g s) Inventor Inventor Inventory Rate Rate Output Demand to inventory y y ' (in (in (in (in Month Days (in units) (in units) (in units) (in units) units/day) units/day) units) unit,5) Jan 22 182 4,004 4,000 0 4 4 2 Feb 19 +345 527 10,013 10,000 4 13 17 11 Mar 21 + 92 619 12,999 13,000 17 (1) 16 17 Apr 22 +381 1,000 22,000 22,000 16 0 16 16 May 21 +143 1,143 24,003 24,000 16 3 19 18 June 21 -191 952 19,992 20,000 19 (8) 11 15 July 22 -270 682 15,004 15,000 11 4 15 13 Aug 11 +772 1,454 15,994 16,000 15 (6) 9 12 Sept 21 -597 857 17,997 18,000 9 (3) 6 8 Oct 22 -220 637 14,014 14,000 6 14 20 13 Nov 18 -138 499 8,982 9,000 20 (18) 2 11 Dee 21 -213 286 6,000 2 6 8 5 6,006 Cumulative average 140 'Rounded to nearest whole number Change in

An. Intermediate Plan As we have seen, excessive inventory and changes in output rates can be costly. We now develop a plan that changes output rates only occasionally instead of every month. The plan in Table 10.6 calls for a constant output rate of 548 units/day during January, February, and March.

TABLE .6

Intermediate plan Change in Output Rate Output

Month Days

(in units/day)

Rate

Jan

22

548

Feb

19

548

0

Mar

21

548

0

Apr

22

1,000

+452

May

21

1,000

0

June

21

1,000

0

July

22

1,000

0

Aug

11

689

-311

Sept

21

689

0

Oct

22

689

0

Nov

18

689

0

Dec

21

689

0

Net Additions Beginnin (subtractions Ending Average g ) Outpu Inventor Demand Inventory to inventory Inventory t y 12,05 4,000 0 8,056 8,056 4,028 6 10,41 10,000 8,056 412 8,468 8,268 2 11,50 13,000 8,468 (1,492) 6,976 7,722 8 22,00 22,000 6,976 0 6,976 6,976 0 21,00 24,000 6,976 (3,000) 3,976 5,476 0 21,00 20,000 3,976 1,000 4,976 4,476 0 22,00 15,000 4,976 7,000 1,976 8,476 0 7,579 16,000 11,976 (8,421) 3,555 7,776 14,46 18,000 3,555 (3,531) 24 1,790 9 15,15 14,000 24 1,158 1,182 603 8 12,40 9,000 1,182 3,402 4,584 2,883 2 14,46 6,000 4,584 8,469 13,053 8,818 9 Cumulative average 67,276

This rate is boosted to 1000 units/day from April through July. Output is then decreased to 689 units/day for the remainder of the year. The inventory cost of this plan is $1/unit stored, or $67,276. Output rate changes cost $18,000 for the March-April change and $10,000 for the July-August change, for a total of $28,000. Comparing the Plans The three plans are evaluated on the basis of total cost for the planning horizon. We have done this in Table 7. The level output plan has high inventory costs and no overtime or rate-change costs. The variable output plan has negligible inventory costs, high ratechange costs, and some overtime costs. These plans exemplify two of the pure strategies discussed earlier. The third (intermediate) plan incurs substantial costs of inventories and rate changes but has the lowest total cost. This plan reflects a mixed strategy, using

moderate (not extreme) amounts of inventory and output rate changes to absorb demand fluctuations. Our example shows why the aggregate planning process is sometimes called production smoothing. As demand decreases to lower levels, it is cheaper to decrease output rates (occasionally) than to continue to build up excessive inventories. If there is anyone generalization that can be made about aggregate planning, it is this: When planning production, smooth out the peaks and valleys to meet uneven demand because extreme .fluctuations in production are generally very costly. Table 7 Operating Costs ( in $ ) for three plans Plan *May: 143 units/day x 21 days x $4/unit = $12,012. August: 454 units/day x 11 days x $4/unit = $19,976. $12,012 + $19,976 = $31,988 #From data in Table .3. Type of cost Level Variable Intermediate output rate output rate (Chase Plan ) Overtime 0 31,988* 0 Inventory 120,000 139 67,276 Output rate change# 0 112,000 28,000 Total Cost in 120,405 144,127 95,276. dollars

CAPACITY PLANNING In terms of capacity utilization, the level plan consistently uses 79 percent of maximum capacity. The chase plan's utilization, in contrast, varies from only 18 percent up to 145 percent during the year. The intermediate plan uses 55 to 100 percent of maximum

capacity. If these levels of utilization are unsuitable, either the demand for its products must be stimulated (to gain higher capacity utilization) or the capacity must be adjusted, by hiring more employees, for example. We give a comparative chart of all the plans at a glance:

With that, we have come to the end of today’s discussions. I hope it has been an enriching and satisfying experience. See you around in the next lecture. Take care. Bye.