Aggregate Planning

Learning Objectives: Understand the concepts and methods of aggregate planning Formulate and solve capacity planning problem

Demand Management

Demand management is the interface between manufacturing planning and control and the marketplace. Activities include: Forecasting. Order Processing. Making delivery promises.

Operations Planning Overview

Long-range planning

Greater than one year planning horizon

Intermediate-range planning

Six to nine months

Short-range planning

One day to less than six months

The Planning Process

Long-range plans (over one year)
Research & Development New product plans Capital investment Facility location/expansion Top executives

Intermediate-range plans (3 to 18 months)

Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing cooperating plans

Operations managers

Short-range plans (up to 3 months)

Operations managers, supervisors, foremen Responsibility Job assignments Ordering Job scheduling Dispatching Overtime Part-time help Planning tasks and horizon

Figure 13.1

Process Planning

Long Range

Strategic Capacity Planning

Medium Aggregate Planning Range Manufacturing Master Production Scheduling

Material Requirements Planning Order Scheduling

Services

Weekly Workforce & Customer Scheduling Daily Workforce & Customer Scheduling

Short Range

Hierarchical Production Planning

Decision Level Corporate Decision Process
Allocates production among plants

Forecasts needed
Annual demand by item and by region

Plant manager

Determines seasonal plan by product type

Monthly demand for 15 months by product type

Shop superintendent

Determines monthly item production schedules

Monthly demand for 5 months by item

5

Aggregate Planning
Marketplace and demand Product decisions Research and technology

Demand forecasts, orders

Process planning and capacity decisions Workforce Aggregate plan for production Raw materials available Inventory on hand

Master production schedule and MRP systems

External capacity (subcontractors)

Detailed work schedules

Figure 13.2

How should an aggregate plan fit with other plans?

Business or annual plan Production or staffing Plan (Aggregate Plan) MPS or workforce schedule
Figure 14.1
8

Aggregate Planning

Goal: Specify the optimal combination of

production rate workforce level inventory on hand

Product group or broad category (Aggregation)

Medium-Range: 6-18 months

Aggregate Plan
Aggregate Plan: A statement of a companys production rates, workforce levels, and inventory holding based on estimates of customer requirements and capacity limitations

Service Industry

Manufacturing Industry

Staffing Plan Regarding staffs and labor related factors

Production Plan Regarding production rates and inventory

10

Aggregate Planning: Attempts to match the supply of and demand for a product or service by determining the appropriate quantities and timing of inputs, transformation, and outputs. Decisions made on production, staffing, inventory and backorder levels. Characteristics of aggregate planning: Considers a "planning horizon" from about 3 to 18 months, with periodic updating Looks at aggregate product demand, stated in common terms Looks at aggregate resource quantities, stated in common terms Possible to influence both supply and demand by adjusting production rates, workforce levels, inventory levels, etc., but facilities cannot be expanded.

11

Aggregate Production Planning (APP)

Determines resource capacity to meet demand For intermediate time horizon, 6-12 months Not feasible to build new facility May be feasible to hire/lay off workers, overtime, or subcontract Adjusting capacity OR managing demand

12

Aggregate Plan Managerial Inputs

Operations
Current machine capacities Plans for future capacities Workforce capacities Current staffing level
Distribution and marketing Customer needs Demand forecasts Competition behavior

Materials Supplier capabilities Storage capacity Materials availability

Aggregate plan

Accounting and finance Cost data Financial condition of firm

Engineering New products Product design changes Machine standards

Human resources Labor-market conditions Training capacity

13

Aggregate Plan Outputs

Aggressive Alternatives Complementary Products Reactive Alternatives Size of Workforce and Workforce Adjustment
Aggregate plan

Competitive Pricing

Units or dollars Of Backlogs, backorders , or stockout

Inventory Levels

Production per month (in units or $)

Units or dollars subcontracted

14

Aggregate Planning Objectives

Minimize Costs/Maximize Profits

Maximize Customer Service Minimize Inventory Investment Minimize Changes in Production Rates Minimize Changes in Workforce Levels

Maximize Utilization of Plant and Equipment

15

Aggregate Planning Determine the quantity and timing of production for the immediate future
Objective is to minimize cost over the planning period by adjusting
Production rates Labor levels Inventory levels Overtime work Subcontracting Other controllable variables
16

Aggregate Planning
Required for aggregate planning
A logical overall unit for measuring sales and output A forecast of demand for intermediate planning period in these aggregate units

A method for determining costs

A model that combines forecasts and costs so that scheduling decisions can be made for the planning period
17

Aggregate Planning
Combines appropriate resources into general terms

Part of a larger production planning system

Disaggregation breaks the plan down into greater detail Disaggregation results in a master production schedule
18

ABC Company
ABC Co produces nearly 40% of the industrial paints consumed in the India
Matches fluctuating demand by brand to plant, labor, and inventory capacity to achieve high facility utilization High facility utilization requires
Meticulous cleaning between batches
Effective maintenance Efficient employees Efficient facility scheduling
19

Aggregate Planning
Quarter 1 Feb 120,000

Jan 150,000

Mar 110,000 Quarter 2 May 130,000

Apr 100,000

Jun 150,000 Quarter 3 Aug 150,000

Jul 180,000

Sep 140,000
20

Aggregate Planning Strategies

1. Use inventories to absorb changes in demand 2. Accommodate changes by varying workforce size 3. Use part-timers, overtime, or idle time to absorb changes 4. Use subcontractors and maintain a stable workforce 5. Change prices or other factors to influence demand

21

Capacity Options Changing inventory levels

Increase inventory in low demand periods to meet high demand in the future Increases costs associated with storage, insurance, handling, obsolescence, and capital investment Shortages can mean lost sales due to long lead times and poor customer service

22

Capacity Options Varying workforce size by hiring or layoffs

Match production rate to demand
Training and separation costs for hiring and laying off workers

New workers may have lower productivity

Laying off workers may lower morale and productivity
23

Capacity Options Varying production rate through overtime or idle time

Allows constant workforce
May be difficult to meet large increases in demand

Overtime can be costly and may drive down productivity

Absorbing idle time may be difficult
24

Capacity Options Subcontracting

Temporary measure during periods of peak demand May be costly Assuring quality and timely delivery may be difficult Exposes your customers to a possible competitor
25

Capacity Options Using part-time workers

Useful for filling unskilled or low skilled positions, especially in services

26

Demand Options Influencing demand

Use advertising or promotion to increase demand in low periods Attempt to shift demand to slow periods

May not be sufficient to balance demand and capacity

27

Demand Options Back ordering during highdemand periods

Requires customers to wait for an order without loss of goodwill or the order Most effective when there are few if any substitutes for the product or service
Often results in lost sales
28

Demand Options Counterseasonal product and service mixing

Develop a product mix of counterseasonal items
May lead to products or services outside the companys areas of expertise

29

Aggregate Planning Options

Option Changing inventory levels Advantages Changes in human resources are gradual or none; no abrupt production changes Disadvantages Inventory holding cost may increase. Shortages may result in lost sales. Some Comments Applies mainly to production, not service, operations

Varying workforce size by hiring or layoffs

Avoids the costs of other alternatives

Hiring, layoff, and training costs may be significant

Used where size of labor pool is large

Table 13.1

30

Aggregate Planning Options

Option Varying production rates through overtime or idle time Advantages Matches seasonal fluctuations without hiring/ training costs Disadvantages Overtime premiums; tired workers; may not meet demand Some Comments Allows flexibility within the aggregate plan

Subcontracting

Permits flexibility and smoothing of the firms output

Loss of quality control; reduced profits; loss of future business

Applies mainly in production settings

Table 13.1

31

Aggregate Planning Options

Option Using part-time workers Advantages Is less costly and more flexible than full-time workers Disadvantages High turnover/ training costs; quality suffers; scheduling difficult Some Comments Good for unskilled jobs in areas with large temporary labor pools

Influencing demand

Tries to use excess capacity. Discounts draw new customers.

Uncertainty in demand. Hard to match demand to supply exactly.

Creates marketing ideas. Overbooking used in some businesses.

Table 13.1

32

Aggregate Planning Options

Option Back ordering during highdemand periods Advantages May avoid overtime. Keeps capacity constant. Disadvantages Customer must be willing to wait, but goodwill is lost. Some Comments Allows flexibility within the aggregate plan

Counterseasonal product and service mixing

Fully utilizes resources; allows stable workforce

May require skills or equipment outside the firms areas of expertise

Risky finding products or services with opposite demand patterns

Table 13.1

33

Methods for Aggregate Planning

A mixed strategy may be the best way to achieve minimum costs

There are many possible mixed strategies

Finding the optimal plan is not always possible
34

Mixing Options to Develop a Plan Chase strategy

Match output rates to demand forecast for each period Vary workforce levels or vary production rate

Favored by many service organizations

35

Mixing Options to Develop a Plan Level strategy

Daily production is uniform Use inventory or idle time as buffer Stable production leads to better quality and productivity

Some combination of capacity options, a mixed strategy, might be the best solution
36

Graphical and Charting Methods Popular techniques Easy to understand and use

Trial-and-error approaches that do not guarantee an optimal solution

Require only limited computations

37

Graphical and Charting Methods

1. Determine the demand for each period 2. Determine the capacity for regular time, overtime, and subcontracting each period 3. Find labor costs, hiring and layoff costs, and inventory holding costs 4. Consider company policy on workers and stock levels 5. Develop alternative plans and examine their total costs
38

Planning Example 1
Month Jan Expected Demand 900 Production Days 22 Demand Per Day (computed) 41

Feb
Mar

700
800

18
21

39
38

Apr
May

1,200
1,500

21
22

57
68

June

1,100
6,200

20
124

55

Table 13.2

Total expected demand Average requirement = Number of production days 6,200 = = 50 units per day 124

39

Planning Example 1
Production rate per working day Forecast demand

70 60 50 40 30

Level production using average monthly forecast demand

Jan

Feb

Mar

Apr

May

June

= Month
= Number of working days
40

22
Figure 13.3

18

21

21

22

20

Planning Example 1
Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs)

$ 5 per unit per month

$10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit $600 per unit

Table 13.3
41

Planning Example 1
Cost Information Production at Month 50 Units per Day Inventory carry cost Jan 1,100 Subcontracting cost per unit
Average pay rate Overtime pay rate

Demand Forecast 900 700 800

Monthly Inventory Ending Change Inventory $ 5 per unit per month +200 $10 per unit +250 200 650 100 0 1,850 +200 400 $ 5 per hour ($40 per day )
$ 7 per hour (above 8 hours per day ) -150 500 1.6 hours per unit

Feb

900 1,050

Mar

Apr

1,050

1,200
1,500

Labor-hours to produce a unit May 1,100

-400 -100

Cost of increasing daily production rate (hiring June 1,000 1,100 and training) Cost of decreasing daily production rate (layoffs)

$300 per unit $600 per unit

Total units of inventory carried over from one month to the next = 1,850 units Table 13.3 Workforce required to produce 50 units per day = 10 workers
42

Planning Example 1
Costs Cost Information Production at Month carrying 50 Units per Day Inventory carry cost Inventory Jan 1,100 Subcontracting cost per unit Feb Regular-time labor 900 Average pay rate Mar 1,050
Overtime pay rate

Monthly Calculations Demand Inventory Ending Forecast Change Inventory 5 per unit per month $9,250 (= $ 1,850 units carried x $5 per ) per 900 unit +200 $10 unit 200 700 (= $ +200 400 49,600 10 x $40 per day x 5 workers per hour ($40 per day ) ) 800 124 days +250 650
$ 7 per hour (above 8 hours per day ) -150 500 1.6 hours per unit

Aprcosts (overtime, 1,050 1,200 Other hiring, layoffs, Labor-hours to produce a unit May 1,100 1,500 subcontracting) 0 Cost of increasing daily production rate (hiring June 1,000 1,100 Total cost $58,850
and training) Cost of decreasing daily production rate (layoffs)

-400 -100

100 0

$300 per unit $600 per unit

1,850

Total units of inventory carried over from one month to the next = 1,850 units Table 13.3 Workforce required to produce 50 units per day = 10 workers
43

Planning Example 1
7,000
6,000 Cumulative demand units 5,000 4,000 3,000 Reduction of inventory Cumulative level production using average monthly forecast requirements

2,000
1,000 Jan Feb Mar

Cumulative forecast requirements

Excess inventory
Apr May June
44

Figure 13.4

Planning Example 2
Month Jan Expected Demand 900 Production Days 22 Demand Per Day (computed) 41

Feb
Mar

700
800

18
21

39
38

Apr
May

1,200
1,500

21
22

57
68

June

1,100
6,200

20
124

55

Table 13.2

Minimum requirement = 38 units per day

45

Planning Example 2
Production rate per working day Forecast demand

70 60 50 40 30
Level production using lowest monthly forecast demand

Jan

Feb

Mar

Apr

May

June

= Month
= Number of working days
46

22

18

21

21

22

20

Planning Example 2
Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs)

$ 5 per unit per month

$10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit $600 per unit

Table 13.3
47

Planning Example 2
Cost Information
Inventory carry cost

$ 5 per unit per month

In-house production = 38 units $10 per unit per day x$ 124 days 5 per hour ($40 per day) Average pay rate $ 7 per hour = 4,712 units Overtime pay rate
Subcontracting cost per unit (above 8 hours per day) 1.6 hours per unit Subcontract units = 6,200 - 4,712 Cost of increasing daily production rate (hiring $300 per unit = 1,488 units and training) Labor-hours to produce a unit Cost of decreasing daily production rate (layoffs) $600 per unit

Table 13.3
48

Planning Example 2
Cost Information
Inventory carry cost

$ 5 per unit per month

In-house production = 38 units $10 per unit per day x$ 124 days 5 per hour ($40 per day) Average pay rate $ 7 per hour = 4,712 units Overtime pay rate
Subcontracting cost per unit (above 8 hours per day) 1.6 hours per unit Subcontract units = Calculations 6,200 - 4,712 Cost of increasing daily production rate (hiring (= $300 per unit x $40 per day Regular-time labor $37,696 7.6 workers = 1,488 units and training) x 124 days) Labor-hours to produce a unit Costs Cost of decreasing daily production rate (layoffs) $600 per unit

Subcontracting

14,880

(= 1,488 units x $10 per unit)

Table 13.3 Total cost

$52,576
49

Planning Example 3
Month Jan Expected Demand 900 Production Days 22 Demand Per Day (computed) 41

Feb
Mar

700
800

18
21

39
38

Apr
May

1,200
1,500

21
22

57
68

June

1,100
6,200

20
124

55

Table 13.2

Production = Expected Demand

50

Planning Example 3
Production rate per working day

70 60 50 40 30

Forecast demand and monthly production

Jan

Feb

Mar

Apr

May

June

= Month
= Number of working days
51

22

18

21

21

22

20

Planning Example 3
Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs)

$ 5 per unit per month

$10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit $600 per unit

Table 13.3
52

Planning Example 3
Cost Information
Month Jan Forecast (units) 900 700

Inventory carrying cost

Daily Prod Rate 41 39

Basic Production Cost (demand x 1.6 hrs/unit x $5/hr) $ 7,200 5,600

Extra Cost of Increasing Production (hiring cost) $ 5

Extra Cost of Decreasing Production (layoff ) month Total Cost per unitcost per $ 7,200

Subcontracting cost per unit Average pay rate

Mar 800 Overtime pay rate Feb

$10 per unit

6,800 (= 2 x($40 $600) per day) $ 5 per hour $600 $ 7 per hour 7,000 (= 1 x $600) (above 8 hours per day)

$1,200

38

6,400

Apr 1,200 57 a unit Labor-hours to produce

9,600

$5,700 1.6 (= 19 x $300)

hours per unit

15,300

Cost of increasing daily production rate (hiring $3,300 $300 per unit May 1,500 68 12,000 (= 11 x $300) and training) Cost daily rate (layoffs) June of decreasing 1,100 55 production 8,800
$49,600 $9,000

15,300

$600 per unit $7,800

$9,600

(= 13 x $600)

16,600 $68,200

Table 13.3
53

Comparison of Three Plans

Cost Inventory carrying Regular labor Overtime labor
Hiring Layoffs Subcontracting Total cost

Plan 1 $ 9,250 49,600 0

0 0 0 $58,850

Plan 2 $ 0 $

Plan 3 0

37,696 0
0 0 0 $52,576

49,600 0
9,000 9,600 0 $68,200

Plan 2 is the lowest cost option

Table 13.5 54

Mathematical Approaches

Useful for generating strategies

Transportation Method of Linear Programming
Produces an optimal plan

Management Coefficients Model

Model built around managers experience and performance

Other Models
Linear Decision Rule Simulation
55

Transportation Method
Sales Period Mar Apr May 800 1,000 750 700 50 150 100 per tire per tire per tire per tire 700 50 150 tires 700 50 130

Demand Capacity: Regular Overtime Subcontracting Beginning inventory Costs Regular time Overtime Subcontracting Carrying $40 $50 $70 $2

Table 13.6

56

Transportation Example

Important points
1. Carrying costs are $2/tire/month. If goods are made in one period and held over to the next, holding costs are incurred 2. Supply must equal demand, so a dummy column called unused capacity is added 3. Because back ordering is not viable in this example, cells that might be used to satisfy earlier demand are not available

57

Transportation Example

Important points
4. Quantities in each column designate the levels of inventory needed to meet demand requirements

5. In general, production should be allocated to the lowest cost cell available without exceeding unused capacity in the row or demand in the column
58

Transportation Example

Table 13.7

59

Management Coefficients Model

Builds a model based on managers experience and performance A regression model is constructed to define the relationships between decision variables

Objective is to remove inconsistencies in decision making

60

Other Models
Linear Decision Rule
Minimizes costs using quadratic cost curves Operates over a particular time period

Simulation
Uses a search procedure to try different combinations of variables Develops feasible but not necessarily optimal solutions
61

Summary of Aggregate Planning Methods

Techniques Graphical/charting methods Solution Approaches Trial and error Important Aspects Simple to understand and easy to use. Many solutions; one chosen may not be optimal. LP software available; permits sensitivity analysis and new constraints; linear functions may not be realistic Simple, easy to implement; tries to mimic managers decision process; uses regression

Transportation method of linear programming

Optimization

Management coefficients model

Heuristic

Table 13.8

62

Law Firm Example

(1) Category of Legal Business Trial work Legal research Corporate law Real estate law Criminal law Total hours Lawyers needed (2) Best Case (hours) 1,800 4,500 8,000 1,700 3,500 19,500 39 (3) Likely Case (hours) 1,500 4,000 7,000 1,500 3,000 17,000 34 (4) Worst Case (hours) 1,200 3,500 6,500 1,300 2,500 15,000 30 (5) Maximum Demand in People 3.6 9.0 16.0 3.4 7.0 (6) Number of Qualified Personnel 4 32 15 6 12

Table 13.9
63

Yield Management

Allocating resources to customers at prices that will maximize yield or revenue

1. Service or product can be sold in advance of consumption 2. Demand fluctuates 3. Capacity is relatively fixed 4. Demand can be segmented 5. Variable costs are low and fixed costs are high
64

Yield Management Example

Room sales
100

Demand Curve Potential customers exist who are willing to pay more than the $15 variable cost of the room

Passed-up contribution
50

Some customers who paid $150 were actually willing to pay more for the room

$ margin = (Price) x (50 rooms) = ($150 - $15) x (50) = $6,750 $15 Variable cost of room

Money left on the table $150 Price charged for room Price
Figure 13.5 65

Yield Management Example

Room sales
100

Demand Curve
Total $ margin = (1st price) x 30 rooms + (2nd price) x 30 rooms = ($100 - $15) x 30 + ($200 - $15) x 30 = $2,550 + $5,550 = $8,100

60

30

$15 Variable cost of room

$100 Price 1 for room

$200 Price 2 for room

Price
Figure 13.6 66

Yield Management Matrix

Price
Tend to be fixed Predictable Quadrant 1: Movies Stadiums/arenas Convention centers Hotel meeting space Quadrant 3: Restaurants Golf courses Internet service providers Tend to be variable Quadrant 2: Hotels Airlines Rental cars Cruise lines Quadrant 4: Continuing care hospitals

Duration of use

Unpredictable

Figure 13.7

67

Making Yield Management Work 1. Multiple pricing structures must be feasible and appear logical to the customer 2. Forecasts of the use and duration of use 3. Changes in demand
68

Aggregate Planning Example

ABC Co, a small manufacturing company (200 employees), produces umbrellas. The company, founded in 1991 produces the following three product lines: 1) the Executive Line, 2) the Durable Line and 3) the Compact line shown in the following figure.

Executive Line

Compact Line Durable Line

8

Units

Examples of Capacity Adjustment to Meet Demand

Demand

Time
1.

Producing at a constant rate and using inventory to absorb

fluctuations in demand Hiring and firing workers to match demand Maintaining resources for high demand levels

2. 3.

4.
5. 6. 7.

Increase or decrease working hours (overtime and undertime) Subcontracting work to other firms Using part-time workers Providing the service or product at a later time period (backordering)
70

Planning Strategies

Chase Strategies

PURE STRATEGIES

Match demand during the planning horizon by either Vary workforce or vary output rate

Level Strategies

Maintain a constant workforce level or constant output rate during the planning horizon Constant workforce or constant output rate

Mixed Strategies

Combined several strategies

71

Pure Strategy
Level Production
Demand

Chase Demand
Demand Production Units

Production
Units

Time

Time

What are pros / cons of these strategies?

72

TABLE 14.1

PLANNING STRATEGIES FOR AGGREGATE PLANS Possible Alternatives during Slack Season
Layoffs Layoffs, undertime, vacations No layoffs, building anticipation inventory, undertime, vacations Layoffs, building anticipation inventory, undertime, vacations

Strategy
1. Chase #1: vary workforce level to match demand 2. Chase #2: vary output rate to match demand 3. Level #1: constant workforce level

Possible Alternatives during Peak Season

Hiring Hiring, overtime, subcontracting No hiring, depleting anticipation inventory, overtime, subcontracting, backorders, stockouts Hiring, depleting anticipation inventory, overtime, subcontracting, backorders, stockouts
73

4. Level #2: constant output rate

Aggregate Planning Costs

Regular-Time Costs Overtime Costs Hiring and Layoff Costs Inventory Holding Costs Backorder and Stockout Costs

74

Aggregate Planning Methods: Intuitive Methods Intuitive methods use management intuition, experience, and rules-of-thumb, frequently accompanied by graphical and/or spreadsheet analysis.

Advantage:

Disadvantage:

easy to use and explain many solutions are possible, most of which are not optimal

75

Ex 1 Candy Company
Given the following costs and quarterly sales forecasts of a candy company, compare the two strategies: Strategy 1: Level production with constant workforce level Strategy 2: Chase production by varying workforce level
Quarter
Spring Summer Fall Winter

Sale Forecast (LB)

80,000 50,000 120,000 150,000

Hiring cost Firing cost Inventory carrying cost

Production rate per employee Beginning workforce

$100 per worker $500 per worker $0.50 per pound per quarter 1000 pounds per quarter 100 workers
76

Transportation Method

Alternatives
Quarter

Quarter 1
0

2
h

3
2h

4
3h

Unused Total Capacity Capacity

4h

Beginning inventory Regular time

I0
r r+h r+2h r+3h u

R1
c c+h c+2h c+3h 0

A method of LP Gather all cost info into one matrix Try to obtain the lowest cost alternative

Overtime s r+b s+h r s+2h r+h s+3h r+2h 0

O1 S1
u

Subcontract Regular time 2 Overtime

R2
c+b c c+h c+2h 0

O2
s+b s s+h s+2h 0

Subcontract Regular time 3 Overtime

S2
r+2b r+b r r+h u

R3
c+2b c+b c c+h 0

O3
s+2b r+3b s+b r+2b s r+b s+h r 0

Subcontract Regular time 4 Overtime

S3
u

R4
c+3b c+2b c+b c 0

O4
s+3b s+2b s+b s 0

Subcontract

77

S4

Requirements

D1

D2

D3

D4 + I4

Notations
It = inventory at the end of period t (I0 = beginning inventory) h = holding cost per unit per period, r = regular production cost per unit, o = overtime cost per unit, u = undertime cost per unit s = subcontracting cost per unit, b = backordering cost per unit per period Rt = regular-time capacity in period t Ot = overtime capacity in period t St = subcontracting capacity in period t Dt = forecasted demand for period t U = total unused capacities
78

Tableau Method

Step 1: Put all capacities from the total capacity column into the unused capacity column. Next, put unit costs in each of the small boxes Step 2: In column 1 (period 1), allocate as much production as you can to the cell with the lowest cost but do not exceed the unused capacity in that row or the demand in that column. Step 3: Subtract your allocation from the unused capacity for the row. This quantity must never be negative.

79

Tableau Method

(Contd)

Step 4: If there is still some demand left, repeat step 2, allocating as much production as possible to the cell with the next-to-lowest cost. Repeat until the demand is satisfied. Step 5: Repeat steps 2 through 4 for periods 2 and beyond. Take each column separately before proceeding to the next. Be sure to check all cells with unused capacity for the cell with the lowest cost in a column.

80

Ex 2: Transportation Method
Given the following costs and quarterly sales forecasts, use the transportation method to design a production plan. What is the total cost of the plan?

Quarter 1 2 3 4

Sale Forecast (unit) 50,000 150,000 200,000 52,000

Inventory carrying cost = $3 per unit per quarter Production/worker = 1000 units/quarter Regular workforce = 50 workers Overtime capacity = 50,000 units Subcontracting capacity = 40,000 units Regular production cost = $50/unit Overtime production cost = $75/unit Subcontracting cost = $85/unit
81

Linear Programming Model (LP)

Pure/Mixed Strategy: not guarantee optimal solution LP: can get optimal solution LP: Excel, LINGO, CPLEX, LP Formulation**

Objective function Constraints

Ex 2: Formulate LP model for Ex 1 Candy Company and Ex 2

82

Production Plan (manufacturing aggregate plan): A managerial statement of the period-by-period (timephased) production rates, work-force levels, and inventory investment, given customer requirements and capacity limitations. Staffing Plan (service aggregate plan): A managerial statement of the period-by-period staff sizes and labour-related capacities, given customer requirements and capacity limitations.

83

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

84

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

85

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 Mixed strategy: Combines elements of both an active strategy and a passive (reactive) strategy Firms will usually use some combination of the two

86

Basic Approaches

Chase approach

capacities (workforce levels, production schedules, output rates, etc.) are adjusted to match demand requirements over the planning horizon. Advantages: anticipation inventory is not required, and investment in inventory is low labour utilization is kept high Disadvantages: expense of adjusting output rates and/or workforce levels alienation of workforce Capacities (workforce levels, production schedules, output rates, etc.) are kept constant over the planning horizon. Advantages: stable output rates and workforce levels Disadvantages: greater inventory investment is required increased overtime and idle time resource utilizations vary over time

Level Approach

87