Chapter 12: Aggregate Planning - site.iugaza.edu.pssite.iugaza.edu.ps/aschokry/files/2011/09/OM-Chap-13-Aggr-Plan2.pdf · • Describe ways to dis-aggregate aggregate plans using

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Islamic University of Gaza - Palestine

Chapter 12: Aggregate Planning


Learning Outcomes

• Describe the overall frameworks for resource planning framework in both goods-producing and service-providing organizations.

• Explain options for aggregate planning.• Describe how to evaluate level production and chase demand

strategies for aggregate planning.• Describe ways to dis-aggregate aggregate plans using master

production scheduling and material requirements planning.• Explain the concept and application of capacity

requirements planning.

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• Aggregate planning is the development of a long-term output and resource plan in aggregate units of measure.

• These typically define output levels over a planning horizon of 1 to 2 years, focusing on product families or total capacity requirements.

• Aggregate planning later translates into monthly or quarterly production plans, taking into account capacity limitations such as supply availability, equipment, and labor.

Aggregate planning


• Level 2 planning, or disaggregation, is the process of translating aggregate plans into short-term operational plans that provide the basis for weekly and daily schedules and detailed resource requirements.

• Level 3 focuses on execution, moving work from one workstation to another, assigning people to tasks, setting priorities for jobs, scheduling equipment, and controlling processes.

Aggregate planning (cont.)

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• Aggregate planning is most challenging when demand fluctuates over time.

• Managers have a variety of options in developing aggregate plans in the face of fluctuating demand:

Ø Demand managementØ Production-rate changesØ Workforce changesØ Inventory smoothingØ Facilities, equipment, and transportation

Aggregate planning (cont.)


• Most service organizations do not require as many levels of intermediate planning (Level 2) as goods-producing firms.

• Level 1 and 2 planning are often combined in service businesses.

• One way to think of disaggregation in services is to go from aggregate planning (Levels 1 and 2) to front line resource (staff) capacity and scheduling decisions (Level 3). Manufacturers use and need an intermediate level of planning (Level 2), where work-in-process and subassemblies reside.

Disaggregating Service Plans

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Dealing with the Problem Complexity through Decomposition

Aggregate Planning

Master Production Scheduling

Materials Requirement Planning

Aggregate UnitDemand

End Item (SKU)Demand

Corporate Strategy

Capacity and Aggregate Production Plans

Stock Keeping Units (SKU)-level Production Plans

Manufacturingand Procurementlead times

Component Production lots and due dates

Part processplans

(Plan. Hor.: 1 year, Time Unit: 1 month)

(Plan. Hor.: a few months, Time Unit: 1 week)

(Plan. Hor.: a few months, Time Unit: 1 week)

Shop floor-level Production Control(Plan. Hor.: a day or a shift, Time Unit: real-time)


Aggregate Planning Problem

Aggregate Planning

AggregateUnit Demand

AggregateUnit Availability(Current InventoryPosition)

Aggregate Production Plan

Required Production Capacity

Aggr. Unit, Production Reqs Corporate Strategy

Aggregate Production Plan:•Aggregate Production levels•Aggregate Inventory levels•Aggregate Backorder levels

Production Capacity Plan:•Workforce level(s)•Overtime level(s)•Subcontracted Quantities

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Figure 12.1


Example Aggregate Planning Variables and Revenue/Cost Implications

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Islamic University of Gaza - PalestineUsing our “Seasonally Adjusted Trend Sales Forecast as a starting point, IDES Management has decided upon the following sales forecast for 2003.Our goal is to compare the cost of “Aggregate Plan Options” that will deal with this sales forecast.

Unit Sales ForecastFor 2003

Quarter 1 307,200

Quarter 2 379,200

Quarter 3 360,000

Quarter 4 489,600

Total 1,536,000


• Meet demand (Sales Forecast)

• Use capacity efficiently• Meet inventory policy• Minimize cost

– Labor– Inventory– Plant & equipment– Subcontract

Aggregate Planning Goals

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Aggregate Planning Strategies: Pure Strategies

Demand Options — change demand:• influencing demand (e.g. change price)• backordering during high demand periods• counter seasonal product mixing


Capacity Options — change capacity:• changing inventory levels• varying work force size by hiring or layoffs• varying production capacity through overtime or idle time• subcontracting (aka “outsourcing”)• using part-time workers

Aggregate Planning Strategies: Pure Strategies (cont.)

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Aggregate Scheduling Options - Advantages and disadvantages

Option Advantage Disadvantage SomeComments

Changinginventory levels

Changes inhuman resourcesare gradual, notabruptproductionchanges

Inventoryholding costs;Shortages mayresult in lostsales

Applies mainlyto production,not serviceoperations

Varyingworkforce sizeby hiring orlayoffs

Avoids use ofother alternatives

Hiring, layoff,and trainingcosts

Used where sizeof labor pool islarge



Varyingproduction ratesthrough overtimeor idle time

Matches seasonalfluctuationswithouthiring/trainingcosts

Overtimepremiums, tiredworkers, may notmeet demand

Allowsflexibility withinthe aggregateplan

Subcontracting Permitsflexibility andsmoothing of thefirm's output

Loss of qualitycontrol; reducedprofits; loss offuture business

Applies mainlyin productionsettings

Advantages and disadvantages (cont.)

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Using part-timeworkers

Less costly andmore flexiblethan full-timeworkers

Highturnover/trainingcosts; qualitysuffers;schedulingdifficult

Good forunskilled jobs inareas with largetemporary laborpools

Influencingdemand

Tries to useexcess capacity.Discounts drawnew customers.

Uncertainty indemand. Hard tomatch demand tosupply exactly.

Createsmarketing ideas.Overbookingused in somebusinesses.




Back orderingduring high-demand periods

May avoidovertime. Keepscapacity constant

Customer mustbe willing towait, butgoodwill is lost.

Many companiesbacklog.

Counterseasonalproducts andservice mixing

Fully utilizesresources; allowsstable workforce.

May requireskills orequipmentoutside a firm'sareas ofexpertise.

Risky findingproducts orservices withopposite demandpatterns.


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The Extremes

Level Strategy

Chase Strategy

Production equals sales

forecastProduction rate

is constant


• Level scheduling strategy– Produce same amount every day– Keep work force level constant – Vary non-work force capacity or demand options– Often results in lowest production costs

• Chase scheduling strategy– Vary the amount of production to match (chase) the sales forecast– This requires changing the workforce (hiring & firing)

• Mixed strategy– Combines 2 or more aggregate scheduling options

Aggregate Planning Strategies

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Chase Demand Strategies

plan for matching output to customer demand

a production control plan that attempts to match capacity to the varying levels of forecast demand. Chase demand plans require flexible working practices and place varying demands on equipment requirements. Pure chase demand plans are difficult to achieve and are most commonly found in operations where output cannot be stored or where the organization is seeking to eliminate stores of finished goods.


The Trial & Error Approach to Aggregate Planning

• Forecast the demand for each period• Determine the capacity for regular time, overtime, and

subcontracting, for each period• Determine the labor costs, hiring and firing costs, and inventory

holding costs• Consider company policies which may apply to the workers,

overtime, outsourcing, or to inventory levels• Develop alternative plans, and examine their total costs

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Materials Requirements Planning (MRP)• Materials Requirements Planning (MRP) is a forward-looking,

demand-based approach for planning the production of manufactured goods and ordering materials and components to minimize unnecessary inventories and reduce costs.

• The output of an MRP system is a schedule for obtaining raw materials and purchased parts, a detailed schedule for manufacturing and controlling inventories, and financial information that drives cash flow, budget, and financial needs.

Disaggregation in Manufacturing


1. Dependent demand is demand that is directly related to the demand of other Stock Keeping Units (SKUs) and can be calculated without needing to be forecasted. Demand for materials needed to produce finished goods is dependent on the number of finished goods planned.

2. Time phasing: all dependent demand requirements do not need to be ordered at the same time, but rather are time-phased as necessary.

3. Lot sizing is the process of determining the appropriate amount and timing of ordering to reduce costs.

Three Major Concepts of MRP Systems

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MRP explosion is the process of using the logic of dependent demand to calculate the quantity and timing of orders for all subassemblies and components that go into and support the production of finished goods.

Lot sizing is the process of determining the appropriate amount and timing of ordering to reduce costs.

• There are three common lot sizing methods for MRP:

1. Lot-for-lot (LFL)2. Fixed order quantity (FOQ)3. Periodic order quantity (POQ)4. Economic Order Quantity (EOQ)

Each of these is illustrated in the following examples.

MRP explosion


The IDES Sales Forecast for 2003


Quarter 1 307,200

Quarter 2 379,200

Quarter 3 360,000

Quarter 4 489,600

Total 1,536,000

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IDES Manufacturing Example

• IDES Manufacturing wants to compare the annual (year 2003) costs associated with scheduling using the following three (3) options:

• Option 1 – Maintain a constant work force during the entire year (Level).

• Option 2 – Maintain the present work force of 150 and use overtime and sub-contracting as needed (Mixed)

• Option 3 – Hire/layoff (stop) workers as needed to produce the required output (Chase).


IDES Cost Information

• Inventory Carrying Cost (per quarter) $ 0.50/unit

• Subcontracting cost $ 7/unit• Pay rate – regular time $20/hr• Pay rate – overtime $30/hr• Labor standard per unit 0.2 hrs• Cost to increase production $ 3/unit• Cost to decrease production $ 2/unit• IDES has 0 units in inventory• Each Quarter has 60 working days• At end of 2002, IDES has 150 prod. workers• IDES Policy – Maximum of 72,000 units/qtr produced using overtime

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Option 1 – Constant Workforce without overtime or subcontracting

• First, determine the number of workers required to produce the units forecast for 2003.

• Ave. Prod/day = 1,536,000 = 6,400/day240 days

• Then determine how many workers are needed.• Workers needed = 6,400/day = 160

5 units/hr X 8 hrs


Option 1 Continued:Calculate Inventory Carrying Costs

Qtr Production @ 6400/day

Sales Forecast

Inventory Change

Ending Inventory

1 384,000 307,200 +76,800 76,800

2 384,000 379,200 + 4,800 81,600

3 384,000 360,000 +24,000 105,600

4 384,000 489,600 -105,600 0

Total 1,536,000 1,536,000 264,000

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Option 1 Continued: Calculation of Annual Costs

• Inventory carrying cost:264,000 units X $0.50/unit = $ 132,000

• Cost to increase capacity:(384,000-360,000) units X $5/unit = $ 120,000

• Regular time labor cost:1,536,000 units X $4/unit = $6,144,000

• Total Annual Cost for Option 1 = $6,396,000


Option 2 – Present Workforce (150) using O/T & subcontracting

Qtr SalesForecast

In-house Production

InvChange

EndInv

UnitsReq’d

O/T OutSource

1 307,200 360,000 +52,800 52,800 0 0 0

2 379,200 360,000 -19,200 33,600 0 0 0

3 360,000 360,000 0 33,600 0 0 0

4 489,600 360,000 -33,600 0 96,000 72,000 24,000

Total 1,536,000 1,440,000 0 72,000 24,000

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Option 2 Continued: Calculation of Annual Costs

• Inventory Carrying Costs 120,000 units X $.50/unit = $ 60,000

• Regular time labor (150 workers)$4/unit X 1,440,000 units = $5,760,000

• Overtime labor$6/unit X 72,000 units = $ 432,000

• Out-sourcing$7/unit X 24,000 units = $ 168,000

• Total Annual Costs for Option 2 = $6,420,000


Option 3 – Vary Production (Workforce) to match Sales Forecast

QtrSales

ForecastBeginningCapacity

CapacityChangeNeeded

Cost ofCapacityChange

1 307,200 360,000 -52,800 $105,600

2 379,200 307,200 +72,000 216,000

3 360,000 379,200 -19,200 38,400

4 489,600 360,000 +129,600 388,800

Total 1,536,000 $748,800

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Option 3 calculation of Annual Costs (Cont.)

• Regular time labor costs1,536,000 units X $4/unit = $6,144,000

• Capacity Change Costs = $ 748,800• Total Annual Cost - Option 3 = $6,892,800


Annual Cost Comparison of the Aggregate Scheduling Strategies

Option Annual Cost

1. Level – No use of O/T or Outsourcing

$6,396,000

2. Mixed – Present work force w/ O/T & Outsourcing

$6,420,000

3. Chase – Vary Production (workforce)

$6,892,800

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The IDES Sales Forecast for 2003 revised


Quarter 1 388,000

Quarter 2 440,000

Quarter 3 400,000

Quarter 4 500,000

Total 1,728,000


IDES Cost Information - Revised

• Inventory Carrying Cost (per quarter) $ 0.75/unit

• Subcontracting cost $ 7.50/unit• Pay rate – regular time $20/hr• Pay rate – overtime $30/hr• Labor standard per unit 0.2 hrs• Cost to increase production $ 1.50/unit• Cost to decrease production $ 1/unit• IDES has 0 units in inventory• Each Quarter has 60 working days• At end of 2000, IDES has 140 prod. workers• IDES Policy – Maximum of 78,000 units/qtr produced using overtime

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Capacity Requirements Planning (CRP) is the process of determining the amount of labor and machine resources required to accomplish the tasks of production on a more detailed level, taking into account all component parts and end items in the materials plan.

• This information is provided in a work center load report.

Capacity Requirements Planning (CRP)


• Basic MRP does not consider capacity limitations (assumes infinite capacity so no rescheduling, etc.), so CRP addresses this issue.

Chapter 13 Resource Management

Capacity Requirements Planning (CRP) (cont.)

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End of Chapter 12)

Documents

Chapter 12: Aggregate Planning - site.iugaza.edu.pssite.iugaza.edu.ps/aschokry/files/2011/09/OM-Chap-13-Aggr-Plan2.pdf · • Describe ways to dis-aggregate aggregate plans using