Chapter 13 – Aggregate Planning Operations Management by R. Dan Reid & Nada R. Sanders 3rd Edition © Wiley 2007 PowerPoint Presentation by R.B. Clough – UNH M. E. Henrie - UAA © Wiley 2007

Learning Objectives Explain business planning Explain sales and operations planning Identify different aggregate planning strategies and options for changing demand and/or capacity in aggregate plans Develop aggregate plans, calculate associated costs, and evaluate the plan in terms of operations, marketing, finance, and human resources Describe differences between aggregate plans for service and manufacturing companies © Wiley 2007

Learning Objectives (continued) Explain role and objectives of the master production schedule (MPS) and describe the objectives of master production scheduling Develop a MPS and project the capacity needed using rough-cut capacity planning Calculate available-to-promise quantities (ATP) Describe time fence policies © Wiley 2007

The Role of Aggregate Planning Integral to part of the business planning process Supports the strategic plan Also known as the production plan Identifies resources required for operations for the next 6 -18 months Details the aggregate production rate and size of work force required © Wiley 2007

The Role of the Aggregate Plan © Wiley 2007

Types of Aggregate Plans Level Aggregate Plans Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products like appliances Disadvantage- builds inventory and/or uses back orders Chase Aggregate Plans Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage- constantly changing short term capacity © Wiley 2007

Level Plan Example Level production rate= 28,000 units/7 periods= 4000 units Level workforce= (4000 units x .64 std.)/160 = 16 people © Wiley 2007

Chase Plan Example Chase hires and fires staff to exactly meet each periods demand Period 1 = (500 units x .64 std.)/160 = 2 people, need to fire 16 people © Wiley 2007

Types of Aggregate Plans (Cont.) Hybrid Aggregate Plans Uses a combination of options Options should be limited to facilitate execution May use a level workforce with overtime & temps May allow inventory buildup and some backordering May use short term sourcing © Wiley 2007

Aggregate Planning Options Demand based options Reactive: uses finished goods inventories and backorders for fluctuations Proactive: shifts the demand patterns to minimize fluctuations e.g. early bird dinner prices at a restaurant Capacity based options Changes output capacity to meet demand Uses overtime, under time, subcontracting, hiring, firing, and part-timers – cost and operational implications © Wiley 2007

Evaluating the Current Situation Important to evaluate current situation in terms of; Point of Departure Current % of normal capacity Options are different depending on present situation Magnitude of change Larger changes need more dramatic measures Duration of change Is the length of time a brief seasonal change? Is a permanent change in capacity needed? © Wiley 2007

Developing the Aggregate Plan Step 1- Choose strategy: level, chase, or Hybrid Step 2- Determine the aggregate production rate Step 3- Calculate the size of the workforce Step 4- Test the plan as follows: Calculate Inventory, expected hiring/firing, overtime needs Calculate total cost of plan Step 5- Evaluate performance: cost, service, human resources, and operations © Wiley 2007

Plan for Companies with Tangible Products – Plans A, B, C, D Plan A: Level aggregate plan using inventories and back orders Plan B: Level plan using inventories but no back orders Plan C: Chase aggregate plan using hiring and firing Plan D: Hybrid plan using initial workforce and overtime as needed © Wiley 2007

Problem Data for Plans A & B (Table 13-4) © Wiley 2007

Plan A - Level Using Inventory & Backorders (Table 13-5) First calculate the level production rate (14400/8=1800) © Wiley 2007

Plan A Evaluation Fill rate is 83.9% Fill rate is likely to low Inventory levels seem to be okay Human resources fires two employees © Wiley 2007

Plan B – Chase Aggregate Plan Using Hiring and Firing (Table 13-6) © Wiley 2007

Plan B Evaluation Plan B costs slightly less than the level plan. Hiring demands ranges from two in November to thirty-four in February Utilization is highest, 70.6%, in December and even lower in the other months Space and equipment are underutilized in every other month of the plan © Wiley 2007

Aggregate Plans for Service Companies with Non-Tangible Products- Plans E, F, G Options remain the same – level, chase, and hybrid plans Overtime and under time can be used Staff can be hired and fired Inventory cannot be used to level the service plan All demand must be satisfied or lose business to a competing service provider © Wiley 2007

Problem Data for Plans C, D, and E (Table 13-7) © Wiley 2007

Plan C – Level Aggregate Plan with No Back Orders, No Tangible Product (Table 13-8) Staff of 69 people creates excessive UT (averages 30% UT) Cost per service call is $46.15 ($708,000 Divided by 15360 calls) © Wiley 2007

Plan D – Hybrid Aggregate Plan Using Initial Workforce and OT as Needed (Table 13-9) Costs reduced by $77K and under time to an average of 20% Cost per service call reduced to $41.13 (-$5.02) © Wiley 2007

Plan E – Chase Aggregate Plan for Nontangible Products Using Hiring and Firing (Table 13-10) Total cost reduced by $114K over Plan F, utilization improved to 100%, and cost per service call now $33.72 (-$7.41) Workforce fluctuates from 30-69 people- morale problems Solution?? Compare smaller permanent workforce, more OT?? © Wiley 2007

Aggregate Planning Bottom Line The Aggregate plan must balance several perspectives Costs are important but so are: Customer service Operational effectiveness Workforce morale A successful AP considers each of these factors © Wiley 2007

Master Production Scheduling Master production schedule (MPS) is the anticipated build schedule MPS is often stated in produce or service specifications rather than dollars MPS is often built, managed, reviewed and maintained by the master scheduler © Wiley 2007

Planning Links to MPS © Wiley 2007

Role of the MPS Aggregate plan: Master production schedule: Specifies the resources available (e.g.: regular workforce, overtime, subcontracting, allowable inventory levels & shortages) Master production schedule: Specifies the number & when to produce each end item (the anticipated build schedule) Disaggregates the aggregate plan © Wiley 2007

Objectives of Master Schedule The Master Scheduler must: Maintain the desired customer service level Utilize resources efficiently Maintain desired inventory levels The Master Schedule must: Satisfy customer demand Not exceed Operation’s capacity Work within the constraints of the Aggregate Plan © Wiley 2007

MPS as a Basis of Communication MPS is a basis for communication between operations and other functional areas Demand management and master scheduler is communication is ongoing to incorporate Forecasts, order-entry, order-promising, and physical distribution activities Authorized MPS is critical input to the material requirements planning (MRP) © Wiley 2007

Developing an MPS The Master Scheduler: Develops a proposed MPS Checks the schedule for feasibility with available capacity Modifies as needed Authorizes the MPS Consider the following example: Make-to-stock environment with fixed orders of 125 units There are 110 in inventory to start When are new order quantities needed to satisfy the forecasted demand? © Wiley 2007

The MPS Record Projected Available = beginning inventory + MPS shipments - forecasted demand The MPS row shows when replenishment shipments need to arrive to avoid a stock out (negative projected available) © Wiley 2007

Revised and Completed MPS Record © Wiley 2007

Evaluating the MPS Rough-cut capacity planning: An estimate of the plan’s feasibility Given the demonstrated capacity of critical resources (e.g.: direct labor & machine time), have we overloaded the system? Customer service issues: Does “available-to-promise” inventory satisfy customer orders? If not, can future MPS quantities be pulled in to satisfy new orders? © Wiley 2007

Step 1: Determine the Planning factors: Rough Cut Capacity Problem: a shoe company produces two models of dance shoes. Over the past 3 years 72,000 pairs of Model M have been produced using 21,600 direct labor hours and 5760 machine hours, and 108,000 pairs of Model W using 43,200 hours of labor and 12,960 hours of machine time. Step 1: Determine the Planning factors: Labor Factors Machine Factors © Wiley 2007

Step 2:Calculate the Workload Generated by This Schedule © Wiley 2007

Step 3: Calculate the Capacity Needs for Each Resource for Each Time Period © Wiley 2007

Step 4: Calculate Individual Workcenter Capacity Needs Based on Historical Percentage Allocation © Wiley 2007

Using the MPS to “Order Promise” The authorized MPS is used to promise orders to customers The MPS table is expanded to add customer orders and available-to-promise rows (inventory to satisfy new orders) ATPAction Bucket = (beginning inventory + MPS shipment) less (customer orders before next replenishment). Available in period 1 ATP=MPS shipment – Customer orders between current MPS shipment and next scheduled replenishment in periods 3,5,7,8, & 11 © Wiley 2007

Example of Revising the ATP MPS Record: A customer calls marketing willing to purchase 200 units if they can be delivered in period 5. The two tables below show how the system logic would first slot the 200 into period 5 and then how the order would be allocated across periods 1, 3, and 5 and adjusting the ATP row. © Wiley 2007

Stabilizing the MPS © Wiley 2007

Aggregate Planning Across the Organization Aggregate planning, MPS, and rough-cut capacity affection functional areas throughout the organization Accounting is affected because aggregate plan details the resources needed by operations Marketing as the aggregate plan supports the marketing plan Information systems maintains the databases that support demand forecasts and other such information © Wiley 2007

Chapter 13 Highlights Planning begins with the development of the strategic business plan that provides your company’s direction and objectives for the next two to ten years. Sales and operations planning integrates plans from the other functional areas and regularly evaluates company performance. The level aggregate plan maintains the same size workforce and produces the same output each period. Inventories and backorders absorb fluctuations in demand. The chase aggregate plan changes the capacity each period to match the demand Demand patterns can be smoothed through pricing incentives, reduced prices for out-of-season purchases, or nonprime service times. © Wiley 2007

Chapter 13 Highlights (continued) The difference in aggregate planning for companies that do not provide a tangible product is that the option to use inventories is not available The MPS shows how the resources authorized by the AP will be used to satisfy the organizational objectives. The MPS specifies the products to be built in each time period. MPS is checked for feasibility using a rough-cut capacity planning technique. The objectives of master scheduling are to satisfy customer service objectives, use resources effectively, and minimize costs. An MPS is developed by looking at individual MPS records and calculating when replenishment quantities are needed. The MPS records are summed together to show the total proposed workload. © Wiley 2007

Chapter 13 Highlights (continued) Available-to-promise logic is used when promising order delivery dates to customers, ATP logic allows the company to make viable delivery promises Time fence policies stabilize the MPS. The demand time fence and the planning time fence divide the MPS into three portions: frozen, slushy, and liquid. © Wiley 2007

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