BUAD306

Aggregate Planning

Aggregate Planning

Determines the resource capacity needed to meet demand over an intermediate time horizon

Typically 2 - 12 months in duration

Objectives

To establish a company-wide game plan for allocating resourcesExample: Avoid battles between

Marketing and Production To develop an economic strategy for

meeting demandDemand can be met by adjusting

capacity or by managing the demand

Managing Demand

Pricing – raise prices during high-demand times

Promotion – to increase demand during low-demand seasons

Backorders – taking orders before production and shipping at a later date

New Demand – developing new products

Managing Capacity

Hire and lay off workers Use overtime and slack time Use part-time workers Use inventory to absorb fluctuations in

demand Subcontract work to other firms

Aggregate Production Planning

CapacityConstraints

StrategicObjectives Company

Policies

FinancialConstraints

DemandForecasts

Size ofworkforce

Productionper month

(in units or $)

Inventorylevels

Units or dollarssubcontracted,backordered, or

lost

Inputs

Outputs

Planning Sequence

Business Plan

Production Plan

Master Schedule

Aggregate Planning

Service Considerations

Services occur when they are rendered

Demand for service can be difficult to predict

Capacity availability can be difficult to predict

Labor flexibility can be an advantage in services

Level Production

Time

Production

Demand

Units

Strategy for meeting uneven demand

Chase Demand

Time

Units

Production

Demand

Strategy for meeting uneven demand

Aggregate Planning Schedule

Period 1 2 3 4 5 6 TOTALForecastOutput

Regular Overtime

Subcontract

Output - ForecastInventory

Beginning Ending

Average

BacklogCosts:Output

Regular Overtime

Subcontract Hire/Lay off

InventoryBack ordersTotal

Mathematical CalculationsNumber of Number of workers Number of new Number ofworkers in = at the end of + workers at the start - laid-off workersa period the previous period of the period at the start of period

Inventory Inventory Production Amount used toat the end of = at the end of + in the current - satisfy demand in a period the previous period period the current period

Averageinventory

Beginning Inventory + Ending Inventory2

=

Cost for = Output cost + Hire/lay-off + Inventory + Back-ordera period (Reg.+OT+Subcontract) cost cost cost

Read on your own

Calculating Costs

Type of Cost How to calculate

Output Regular Regular cost per unit * Quantity ofregular output

Overtime Overtime cost per unit * Overtimequantity

Subcontract Subcontracting cost per unit *Subcontract quantity

Hire/lay off Hire Cost per hire * Number hired Lay off Cost per layoff * Number laid off

Inventory Carrying cost per unit * Averageinventory

Back order Back order cost per unit * Number ofback-ordered units

Read on your own

•Zero inventory on hand to start

•15 employees, each person produces 20 units per period max

Example - Develop a plan for this scenario: LEVEL

Period 1 2 3 4 5 6 TotalForecast 200 200 300 400 500 200 1800

Costs Output

Regular time = $2 per skateboardOvertime = $3 per skateboard

Subcontract = $6 per skateboard Inventory = $1 per skateboard per period on avg. inventory Back orders = $5 per skateboard per period

Hawk Skateboards are preparing an aggregate plan that will cover 6 months.

They have assembled the following and want a plan for steady output.

Example - LEVELReg Time = $2/Board OT = $3/BoardSub-C = $6/board Backorders = $5/board/pd Inventory = $1/board avg inv

Period 1 2 3 4 5 6 TOTALForecast 200 200 300 400 500 200 1800

OutputRegular

Overtime Subcontract

Output - ForecastInventory

Beginning Ending

Average

BacklogCosts:Output

Regular Overtime

Subcontract Hire/Lay off

InventoryBack orders

Total

•Zero inventory on hand to start

•15 employees, each person produces 20 units per period max

Example - Develop a plan for this scenario: CHASE

Period 1 2 3 4 5 6 TotalForecast 200 200 300 400 500 200 1800

Costs Output

Regular time = $2 per skateboardOvertime = $3 per skateboard

Subcontract = $6 per skateboard Inventory = $1 per skateboard per period on avg. inventory Back orders = $5 per skateboard per period

Hawk Skateboards now wants to compare this to a CHASE strategy

assuming maximum of 40 units of overtime per period.

Example - CHASEReg Time = $2/Board OT = $3/BoardSub-C = $6/board Backorders = $5/board/pd Inventory = $1/board avg inv

Period 1 2 3 4 5 6 TOTALForecast 200 200 300 400 500 200 1800

OutputRegular

Overtime Subcontract

Output - ForecastInventory

Beginning Ending

Average

BacklogCosts:Output

Regular Overtime

Subcontract Hire/Lay off

InventoryBack orders

Total

Example - Develop a plan for this scenario: COMBO

Hawk Skateboards learns that one of their production workers was badly

injured during a skateboard competition and will be out of commission for

6 months. Rather than replace the person, the company would like to work

with a smaller workforce and use overtime to make up for the lost output.

The reduced regular time output is now 280 units per period. The maximum

amount of overtime output per period is 40 units. They want to develop an

aggregate plan for this scenario and compare it to the other one to confirm

that costs will be reduced.

NO SUBCONTRACTING IS ALLOWED!!!

Example – COMBOReg Time = $2/Board OT = $3/BoardSub-C = $6/board Backorders = $5/board/pd Inventory = $1/board avg inv

Period 1 2 3 4 5 6 TOTALForecast 200 200 300 400 500 200 1800

OutputRegular

Overtime Subcontract

Output - ForecastInventory

Beginning Ending

Average

BacklogCosts:Output

Regular Overtime

Subcontract Hire/Lay off

InventoryBack orders

Total

Example – Compare costs from both scenarios

Cost of Steady Production with 15 workers -Cost of Overtime Production with 14 workers -

Their decision would be to continue without their injured employee and assume overtime/backorder costs.

Why wouldn’t this be a good permanent plan?

HW #8:Nowjuice produces bottled juice. A planner had developed an aggregate forecast for demand (in cases) for the next six months.

Develop an aggregate plan using each of the following guidelines and compute total cost. Which is lowest?

a) Level plan (use OT if needed)

b) Combo OT (500 max/pd), inventory, subcontracting (500 max/pd) to handle variations

Costs: Reg Prod = $10/case, Max Reg = 5000

OT Prod = $16/case, SubC = $20, Hold = $1, BKo = $10

Month May June July Aug Sep Oct

Fore 4000 4800 5600 7200 6400 5000