Aggregate Sales and Operations Planning

Chapter 16 Bake a Cake

Sales and Operations Planning Activities

Long-range planning

Greater than one year planning horizon Usually performed in annual increments

Medium-range planning

Six to eighteen months Usually with weekly, monthly or quarterly increments

Short-range planning

One day to less than six months Usually with weekly or daily increments

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Process planning
Long range

Supply network planning Forecasting and demand management

Strategic capacity planning Sales and operations (aggregate) planning Sales plan
Aggregate operations plan

Medium range

Manufacturing Master scheduling

Material requirements planning

Logistics Vehicle capacity planning Vehicle loading Vehicle dispatching Warehouse receipt planning

Services

Order scheduling
Short range

Weekly workforce scheduling Daily workforce scheduling

Required Inputs to the Production Planning System

Competitors behavior External capacity

Raw material availability

Market demand Economic conditions

External to firm

Planning for production

Current physical capacity

Current workforce

Inventory levels

Activities required for production

Internal to firm

Aggregate Planning
Capacity has a cost, lead times are greater than zero Aggregate planning:
process by which a company determines levels of capacity, production, subcontracting, inventory, stockouts, and pricing over a specified time horizon goal is to maximize profit decisions made at a product family (not SKU) level time frame of 3 to 18 months how can a firm best use the facilities it has?

Role of Aggregate Planning in a Supply Chain

Specify operational parameters over the time horizon:
production rate workforce overtime machine capacity level subcontracting backlog inventory on hand

All supply chain stages should work together on an aggregate plan that will optimize supply chain performance

The Aggregate Planning Problem

Given the demand forecast for each period in the planning horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firm s (supply chain s) profit over the planning horizon Specify the planning horizon (typically 3-18 months) Specify the duration of each period Specify key information required to develop an aggregate plan

Objectives of Aggregate Planning

Objective of aggregate planning frequently is to minimize total cost over the planning horizon. Other objectives should be considered:
maximize customer service minimize inventory investment minimize changes in workforce levels minimize changes in production rates maximize utilization of plant and equipment

 Demand forecast in each period Production costs

Information Needed for an Aggregate Plan

labor costs, regular time ($/hr) and overtime ($/hr) subcontracting costs ($/hr or $/unit) cost of changing capacity: hiring or layoff ($/worker) and cost of adding or reducing machine capacity ($/machine)

Labor/machine hours required per unit Inventory holding cost ($/unit/period) Stockout or backlog cost ($/unit/period) Constraints: limits on overtime, layoffs, capital available, stockouts and backlogs

Outputs of Aggregate Plan

Production quantity from regular time, overtime, and subcontracted time: used to determine number of workers and supplier purchase levels Inventory held: used to determine how much warehouse space and working capital is needed Backlog/stockout quantity: used to determine what customer service levels will be Machine capacity increase/decrease: used to determine if new production equipment needs to be purchased A poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity

Aggregate Planning Strategies

Active strategy
Attempts to handle fluctuations in demand by focusing on demand management Use pricing strategies and/or advertising and promotion Develop counter-cyclical products Request customers to backorder or advance-order Do not meet demand Passive strategy (reactive strategy)
Attempts to handle fluctuations in demand by focusing on supply and capacity management Vary size work force size by hiring or layoffs Vary utilization of labour and equipment through overtime or idle time Build or draw from inventory Subcontract production Negotiate cooperative arrangements with other firms Allow backlogs, back orders, and/or stockouts

Aggregate Planning Strategies

Trade-off between capacity, inventory, backlog/lost sales Chase strategy using capacity as the lever Time flexibility from workforce or capacity strategy using utilization as the lever Level strategy using inventory as the lever Mixed strategy a combination of one or more of the first three strategies

Chase Strategy
Production rate is synchronized with demand by varying machine capacity or hiring and laying off workers as the demand rate varies However, in practice, it is often difficult to vary capacity and workforce on short notice Expensive if cost of varying capacity is high Negative effect on workforce morale Results in low levels of inventory Should be used when inventory holding costs are high and costs of changing capacity are low

Time Flexibility Strategy

Can be used if there is excess machine capacity Workforce is kept stable, but the number of hours worked is varied over time to synchronize production and demand Can use overtime or a flexible work schedule Requires flexible workforce, but avoids morale problems of the chase strategy Low levels of inventory, lower utilization Should be used when inventory holding costs are high and capacity is relatively inexpensive

Level Strategy
Maintain stable machine capacity and workforce levels with a constant output rate Shortages and surpluses result in fluctuations in inventory levels over time Inventories that are built up in anticipation of future demand or backlogs are carried over from high to low demand periods Better for worker morale Large inventories and backlogs may accumulate Should be used when inventory holding and backlog costs are relatively low

Suppose you have the following forecasts for demand to meet:

Month 1 Demand 1000 2 1200 3 1500 4 1900 5 1800 6 1600

Regular production cost Lost sales Inventory carrying costs Subcontracting costs Hiring costs Firing costs Beginning workforce level Capacity per worker Initial inventory level Closing inventory level

$35/unit $100/unit $10/unit/month $60/unit $1500/worker $3000/worker 20 workers 50 units/month 700 units 100 units

Demand Inventory-init Ending Inventory Prod. Hire Fire Sub. Contract Lost sales Costs

January February March April May June 1200 1500 1900 1800 1600 1000 700 1100 1400 8 0 0 0 72000 1100 1300 1400 0 0 0 0 62000 1300 1200 1400 0 0 0 0 61000 1200 700 1400 0 0 0 0 56000 700 300 1400 0 0 0 0 52000 300 100 1400 0 0 0 0 50000

9000

8400

Aggregate Planning at Red Tomato Tools

Month January February March April May June Demand Forecast 1,600 3,000 3,200 3,800 2,200 2,200

Fundamental Tradeoffs in Aggregate Planning

Capacity (regular time, overtime, subcontract) Inventory Backlog / lost sales Basic Strategies Chase strategy Time flexibility from workforce or capacity Level strategy

Aggregate Planning
Item Materials Inventory holding cost Marginal cost of a stockout Hiring and training costs Layoff cost Labor hours required Regular time cost Over time cost Cost of subcontracting Cost $10/unit $2/unit/month $5/unit/month $300/worker $500/worker 4/unit $4/hour $6/hour $30/unit

Aggregate Planning (Define Decision Variables)

Wt = Workforce size for month t, t = 1, ..., 6 Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6 Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6 Pt = Production in month t, t = 1, ..., 6 It = Inventory at the end of month t, t = 1, ..., 6 St = Number of units stocked out at the end of month t, t = 1, ..., 6 Ct = Number of units subcontracted for month t, t = 1, ..., 6 Ot = Number of overtime hours worked in month t, t = 1, ..., 6

Aggregate Planning (Define Objective Function)

Min 640W t  300 H t

t !1 t !1

 500 Lt  6 Ot  2 I t
t !1 6 t !1 t !1

 5 S t  10 Pt  30 C t
t !1 t !1 t !1

Aggregate Planning (Define Constraints Linking Variables)

Workforce size for each month is based on hiring and layoffs

W t ! W t 1  H t  Lt, or W t  W t 1  H t  Lt ! 0 for t ! 1,...,6, where W 0 ! 80.

Aggregate Planning (Constraints)

Production for each month cannot exceed capacity

Pt e 40W t  Ot 4 , 40W t  Ot 4  Pt u 0, for t ! 1,...,6.

Aggregate Planning (Constraints)

Inventory balance for each month

I t 1  Pt  C t ! Dt  S t 1  I t  S t , I t 1  Pt  C t  Dt  S t 1  I t  S t ! 0, for t ! 1,...,6,where I 0 ! 1,000, S 0 ! 0,and I 6 u 500.

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Aggregate Planning (Constraints)

Over time for each month

Ot e 10W t, 10W t  Ot u 0, for t ! 1,...,6.

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Scenarios
Increase in holding cost (from $2 to $6) Overtime cost drops to $4.1 per hour Increased demand fluctuation

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Increased Demand Fluctuation

Month January February March April May June Demand Forecast 1,000 3,000 3,800 4,800 2,000 1,400

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Aggregate Planning in Practice

Think beyond the enterprise to the entire supply chain Make plans flexible because forecasts are always wrong Rerun the aggregate plan as new information emerges Use aggregate planning as capacity utilization increases
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Summary of Learning Objectives

What types of decisions are best solved by aggregate planning? What is the importance of aggregate planning as a supply chain activity? What kinds of information are needed to produce an aggregate plan? What are the basic trade-offs a manager makes to produce an aggregate plan? How are aggregate planning problems formulated and solved using Microsoft Excel?
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