LE7 Aggregate Planning - MDHzoomin.idt.mdh.se/course/KPP227/Documents/LE7_Aggregate Plannin… · aggregate plan = production plan. ... Involves keeping the workforce constant

Antti Salonen

KPP227

KPP227 1 Antti Salonen

What is Aggregate Planning?

Aggregate (or intermediate-term) planning is the process of determining a company´s aggregate plan = production plan. The aggregate plan specifies how the company will use their existing facilities and equipment most efficiently to reach their goals and satisfy demand. Capacity expansion is normally achieved though the use of overtime, subcontracting or adding work shifts.


Sales and Operations Plan

Operations planning and scheduling is the process of making sure that demand and supply plans are in balance at all levels!


Concept of Aggregation Product

decisions

Workforce

Inventory on hand

External capacity (subcontractors)

Raw materials available

Demand forecasts, orders

Detailed work schedules

Master production

schedule and MRP systems

Aggregate plan for production

Process planning and

capacity decisions

Research and

technology

Marketplace and demand


Concept of Aggregation

Business or annual plan

Production or staffing plan

MPS or workforce schedule



Instead of planning for individual products, similar products are put together in groups. In aggregate planning, one group of products is treated as one “unit”. A group of products or services that have similar demand requirements and common processing, labor and material requirements is called a product family.



Product family

Product type

Item



If demand was absolutely certain, aggregate planning would not be needed. Company could develop a production process and a workforce level that would produce exactly the amount of product needed every month in a repeating cycle while maintaining almost no inventories.

However, in real life demand is uncertain, but so is capacity (e.g. workforce level), materials prices etc. ⇒  Aggregate Planning is a dynamic process that requires constant updating!


The Process of Aggregation

Determine requirements for planning horizon

No

Yes

Implement and uppdate the plan

Prepare prospective plan for planning horizon

Identify alternatives, constraints and costs

Move ahead to next planning session

Is the plan acceptable?



Step 1: New planning horizon! Update files with actual sales, production, inventory, costs, and constraints. Step 2: Participate in the forecasting and demand planning to create the authorized demand forecasts, e.g. staff requirements. Step 3: Update the sales and operations planning spreadsheet for each family, recognizing relevant constraints and costs including e.g. availability of materials from suppliers, machine capacities, or limited storage space.



Step 4: Have one or more consensus meetings with the stakeholders on how best to balance supply with demand. Step 5: Present recommendations by product family at the executive S&OP meeting,. Step 6: Update the spreadsheets to reflect the authorized plan, and communicate the plans to the important stakeholders for implementation.


Inventory Control Systems

•  Independent demand Items for which demand is influenced by market conditions and is not related to the inventory decisions for any other item held in stock or produced.

•  Dependent demand Items required as components or inputs to a service or product. Dependent demand exhibits a pattern very different from that of independent demand and must be managed with different techniques. (will be covered in upcoming lectures)


Options and strategies

Supply options •  Anticipation inventory •  Workforce adjustment •  Workforce utilization •  Part-time workers •  Subcontractors •  Vacation schedules

Planning strategies •  Chase strategy •  Level strategy •  Mixed strategy


Approaches to Aggregate Planning

Two simple trial and error approaches

Chase strategy Involves hiring and laying off employees to match the demand forecast over the planning horizon. Varying the workforce’s regular-time capacity to equate supply to demand requires no inventory investment, overtime, or undertime.

Level Involves keeping the workforce constant (except possibly at the beginning of the planning horizon). Utilization is varied to match the demand forecast via overtime, undertime (paid or unpaid), and vacation planning (i.e. paid vacations when demand is low).


Definitions

Backlog Accumulation of customer orders that have been promised for delivery at some future date. Backorder An order that a customer is (reluctantly) prepared to wait a limited time for. Stockout The customer is not ready to wait and hence, the order is lost.


EXAMPLE 1 Chase vs. Level strategy



SOLUTION a. Chase Strategy This strategy simply involves adjusting the workforce as needed to meet demand, as shown in Figure 14.5. Rows in the spreadsheet that do not apply (such as inventory and vacations) are hidden. The workforce level row is identical to the forecasted demand row. A large number of hirings and layoffs begin with laying off 4 part-time employees immediately because the current staff is 10 and the staff level required in period 1 is only 6. However, many employees, such as college students, prefer part-time work. The total cost is $173,500, and most of the cost increase comes from frequent hiring and layoffs, which add $17,500 to the cost of utilized regular-time costs.


a. Chase Strategy

Start with 10 workers



b. Level Strategy Peak!


EXAMPLE 2 Chase and Level strategy


Quarter Aggregate demand 1 10,000 2 12,000 3 9,000 4 11,000

A General Motors Buick plant manufactures several Buick models. The company has forecast its quarterly demands during the next four quarters, which is listed below. The plant can produce approximately 25 autos per quarter for each worker on staff. Workers receive an average of $15,000 per quarter in wages and benefits, and it costs $7,000 to hire and train a new worker and $10,000 to lay off a worker. Workers can be hired or laid off at the beginning of any quarter. GM expects to have 480 workers on staff and 2000 autos in inventory at the end of the current quarter. Any auto held in inventory at the end of a quarter incurs a holding cost of $1,000. Construct an aggregate plan for the next four quarters using the chase and level strategies and compute their total costs.


Quarter Aggregate demand 1 10,000 2 12,000 3 9,000 4 11,000

Chase strategy:

Quarter Aggregate demand (units)

Planned output (units)

Workers on staff Workers hired Workers laid off Inventory (units)

0 480 2000 1 10,000 8,000 320 0 160 0 2 12,000 12,000 480 160 0 0 3 9,000 9,000 360 0 120 0 4 11,000 11,000 440 80 0 0 Total (quarters 1-‐4) 1600 240 280 0

1.  Determine the number of workers needed to meet the demand in each quarter (in this example: 25 autos per worker and quarter).

2.  Then , adjust the workforce accordingly.

1 2

Salaries: 1600 workers x $15,000/Q = $ 24,000,000 Hiring cost: 240 workers x $ 7,000 = $ 1,680,000 Layoff cost: 280 workers x $ 10,000 = $ 2,800,000 Inventory cost: 0 units x $ 1,000 / unit = $ 0 Total cost: = $ 28.480,000


Q Net CumulaJve Requirements

Workers needed to make CumulaJve Requirements

1 8,000 320 2 20,000 400 3 29,000 386.67 4 40,000 400

Level strategy:

Quarter Aggregate demand (units)

Planned output (units)

Workers on staff Workers hired Workers laid off Inventory (units)

0 480 2000 1 10,000 10,000 400 0 80 2000 2 12,000 10,000 400 0 0 0 3 9,000 10,000 400 0 0 1000 4 11,000 10,000 400 0 0 0 Total (quarters 1-‐4) 1600 0 80 3000

1.  Determine the maximum number of workers needed to meet the Cumulative Requirements.

2.  Set the workforce to the maximum number required.

1

2

Salaries: 1600 workers x $15,000/Q = $ 24,000,000 Hiring cost: 0 workers x $ 7,000 = $ 0 Layoff cost: 80 workers x $ 10,000 = $ 800,000 Inventory cost: 3000 units x $ 1,000 / unit = $ 3,000,000 Total cost: = $ 27,800,000


EXAMPLE 3 Mixed strategy


A company makes several models of DVD-players, which form a product type at its faciclity. The predicted sales for these products for the next six months are shown in the table.

Each unit of product requires approximately 1.5 person-hours of labor to make. Workers work an eigh-hour day, and they recieve an average of €2000 per month in wages and benefits. It costs approximately €2500 to lay off an employee and approximately €3000 to recruit and train a new employee. DVDs produced in one month can be held in inventory and shipped in subsequent months, but it costs €10 per month to hold the item in inventory.

For simplicity we assume that at the beginning of each month a decision to hire/dismiss workers is made. Then production occurs during the month and all shipments are made at the end of the month. Any item on hand at the end of the month that is not shipped incurs the €10 holding cost. The decisions facing the company are to select the number of employees to have on staff each of the next six months (and the number to hire and dismiss). The number of DVDs to produce each month, and then indirectly how many to have in inventory at the end of each month.

The company expects to have 1850 production workers on staff during september, and it expects to end september with 5000 units of inventory available for use. In addition, the company wants to complete March with between 1800 and 1900 production workers on staff and with between 2000 and 2150 units of product in inventory.

Month Sales Work days

Oct 200000 23

Nov 220000 21

Dec 310000 19

Jan 300000 21

Feb 240000 20

Mar 230000 23


Chase Strategy

Month Sales Work days

Oct 200000 23

Nov 220000 21

Dec 310000 19

Jan 300000 21

Feb 240000 20

Mar 230000 23

The company’s net requirements for October are 200000 – 5000 (in inventory) = 195000. The net requirements for later months equal the demand except for March, which requires an additional 2000 units for ending inventory. The number of units that can be produced by an employee each month equals (8h/day x number of work days/month) / (1.5 person-hour/unit) assuming that all workers produce the maximum number of units each month.

Month A: Net requirements

B: Prod./employee

C = A/B Employees

Oct 195000 122.67 1590

Nov 220000 112 1965

Dec 310000 101.33 3060

Jan 300000 112 2679

Feb 240000 106.67 2250

Mar 232000 122.67 1892

A

B

C Note that the required number of employees is rounde up to the next integer.


Month No. Of workers

No. Hired

No. Dismissed Net Requirements

Production Ending inventory

Sep 1850 - - - - 5000

Oct 1590 0 260 195000 195045 45

Nov 1965 375 0 220000 220080 125

Dec 3060 1096 0 310000 310070 195

Jan 2679 0 381 300000 300048 243

Feb 2250 0 428 240000 240007 250

Mar 1892 0 358 232000 232092 2342

Apr 1892 - - - - -

Total: (Oct-Mar)

13434 1470 1428 - 3200

Aggregate plan

Total cost for this strategy: Wages: 13436 x 2000=26872000 Hiring: 1471 x 3000 = 4413000 Dismissal: 1427 x 2500 = 3567500 Inventory: 3200 x 10 = 32000 Total cost: 34884500

Chase Strategy



No. Hired



Sep 1850 - - - - 5000

Oct 1590 0 260 195000 195045 45

Nov 1965 375 0 220000 220080 125

Dec 3060 1096 0 310000 310070 195

Jan 2679 0 381 300000 300048 243

Feb 2250 0 428 240000 240007 250

Mar 1892 0 358 232000 232092 2342

Apr 1892 - - - - -

Total: (Oct-Mar)

13434 1470 1428 - 3200

Aggregate plan


Chase Strategy


Since this number exceeds the capacity of one worker, the number of workers can be

adjusted downwards.


No. Hired



Sep 1850 - - - - 5000

Oct 1590 0 260 195000 195045 45

Nov 1964 374 0 220000 219968 13

Dec 3060 1096 0 310000 310070 83

Jan 2678 0 382 300000 299936 19

Feb 2250 0 428 240000 240007 26

Mar 1892 0 358 232000 232092 2118

Apr 1892 - - - - -

Total: (Oct-Mar)

13434 1470 1428 - 2304

Aggregate plan


Chase Strategy


Also this is adjusted downwards.

Mixed Level/Chase Strategy

A simple way to construct an aggregate plan that keeps personnel adjustments to a minimum is to first compute the net cumulative requirements for each period; the net requirements summed for all periods in the planning horizon up to that period.

Then, for each month we compute the minimum stable workforce that would be required to produce the net cumulative requirements up to that point.

Last, we identify the Peak requirements of employees for handling the cumulative production requirements.

Month A: Net cumulative requirements

B: Cumulative Prod./employee

C = A/B Employees

Oct 195000 122.67 1590

Nov 415000 234.67 1769

Dec 725000 336 2158

Jan 1025000 448 2288

Feb 1265000 554.67 2281

Mar 1497000 677.33 2211

Peak



No. Hired



Sep 1850 - - - - 5000

Oct 2288 438 0 195000 280669 85669

Nov 2288 0 0 220000 256256 121925

Dec 2288 0 0 310000 231843 43768

Jan 2288 0 0 300000 256256 24

Feb 2250 0 38 240000 240007 31

Mar 1892 0 358 232000 232092 2123

Apr 1892 - - - - -

Total: (Oct-Mar)

13294 438 396 - 253540

Aggregate plan


Mixed Level/Chase Strategy


Scheduling

Scheduling will be covered in a comming lecture…


Relevant book chapters

•  Chapter: “Planning and scheduling operations”:

–  Operations planning and scheduling across the organization –  Stages in operations planning and scheduling –  Managing demand –  Sales and operations plans


Questions?

[email protected]

Next lecture on Thursday 2015-12-03

Inventory management KPP227 36 Antti Salonen