Chapter 14 Aggregate Planning

Planning Horizon Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months. Short range Intermediate range Long range Now 2 months 1 Year

Overview of Planning Levels Short-range plans (Detailed plans) Machine loading Job assignments Intermediate plans (General levels) Employment Output Long-range plans Long term capacity Location / layout

Establishes schedules Planning Sequence Corporate strategies and policies Economic, competitive, and political conditions Aggregate demand forecasts Business Plan Production plan Master schedule Establishes production and capacity strategies Establishes production capacity Establishes schedules for specific products

Aggregate Planning Inputs Resources Workforce Facilities Demand forecast Policy statements Subcontracting Overtime Inventory levels Back orders Costs Inventory carrying Back orders Hiring/firing Overtime Inventory changes subcontracting

Aggregate Planning Outputs Total cost of a plan Projected levels of inventory Inventory Output Employment Subcontracting Backordering

Demand Options Pricing Promotion Back orders New demand

Capacity Options Hire and layoff workers Overtime/slack time Part-time workers Inventories Subcontracting

Aggregate Planning Strategies Maintain a level workforce Maintain a steady output rate Match demand period by period Use a combination of decision variables

Basic Strategies Level capacity: Chase demand: Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options. Chase demand: Matching capacity to demand; the planned output for a period is the expected demand for that period.

Techniques for Aggregate Planning Determine demand for each period Determine capacities for each period Identify policies that are pertinent Determine units costs Develop alternative plans and costs Select the best plan that satisfies objectives

Cumulative Graph Figure 14-3 1 2 3 4 5 6 7 8 9 10 Cumulative production demand Cumulative output/demand

Average Inventory Average Beginning Inventory + Ending Inventory 2 =

Aggregate Planning: Problem 1 The Sherman-Brown Chemical Company is about to finalize its aggregate capacity plan for next year. The company produces three paint products: latex interior, latex enamel, and latex stain, on a produce-to-stock basis. The production plant is located in Cleveland, Ohio, where there is an abundance of workers who perform the duties of material preparation, mixing, and canning; the principal operations of the production line. The latex carrier, pigments, cans, boxes, and other materials required to produce Sherman-Brown's products are also readily available from tried and proven suppliers in abundant quantities. The processing equipment in the production department is operated on only one shift because Sherman-Brown's management bought out a competitor last year, and so an excess of machine capacity is available. Similarly, ample warehouse space for holding finished-goods inventory is available.

Aggregate Planning: Problem 1 (cont.) The capacity situation at Sherman-Brown is this: Because the only limiting factor in capacity planning is the size of the work force, the only production capacity issue to be resolved is determining the number of workers to be employed during each time period to support the sales forecasts of the three paint products. Two plans for providing production capacity are currently being considered by Sherman-Brown's plant manager: (1) level production and (2) matching capacity with demand. These two alternatives must be evaluated in terms of which plan results in the lowest total annual cost while considering three elements of cost: (1) cost of hiring workers from time period to time period over the entire year, (2) cost of laying off workers over the same period, (3) cost of carrying the finished-goods inventory for the entire year.

Aggregate Planning: Problem 1 (cont.) The pertinent data for this analysis are: working days per quarter: 65; labor standard per gallon for all types of paint: 2.311 worker-hours per gallon; working hours per shift: 8 hours per shift per worker; maximum machine capacity on one shift: 100,000 gallons per quarter for all types of paint; annual hiring cost per worker: $250; annual layoff cost per worker: $300; annual inventory carrying cost: $5 per gallon per year. Assume that the pattern of quarterly demand repeats from year to year and that the beginning inventory is zero.

Aggregate Planning: Problem 1 (cont.) The key analyses that must be performed by Sherman-Brown in developing an aggregate capacity plan are:  1. Develop an aggregate demand forecast from the three individual product forecasts.  2. Compare the two alternatives for providing production capacity in the number of workers hired, the number of workers laid off, and the average finished-goods inventory levels for the entire year.  3. Develop an analysis of the two alternatives for providing production capacity in terms of their impact on worker employment levels and finished-goods inventories.  4. Select the capacity plan alternative with the lowest annual cost.

Aggregate Planning: Problem 1

Aggregate Planning: Problem 1 Solution Working Days per Quarter per Worker: 65 Number of Hours per day: 8 Labor Standard: 2.311 Number of workers = Output per Quarter * Labor Standard_________ Working Days per Quarter per Worker * Number of Hours per Day

Aggregate Planning: Problem 1 Solution

Aggregate Planning: Problem 1 Solution

Carrying Cost: $5 per gallon per year Hiring Cost: $250 per worker Aggregate Planning: Problem 1 Solution Carrying Cost: $5 per gallon per year Hiring Cost: $250 per worker Layoff Cost: $300 per worker

Aggregate Planning: Problem 1 Solution

Aggregate Planning: Problem 2 The Sherman-Brown Chemical Company has been considering keeping only enough workers employed on straight time per quarter to produce 40,000 gallons. Either subcontracting or overtime would be used to supply the difference between the straight-time production capacity of 40,000 gallons per quarter and the highly variable quarterly demand. Sherman-Brown will finish the materials and has a quote from a subcontractor for a price of $19.50 per gallon for each gallon supplied, and the subcontractor has guaranteed that it could supply up to 20,000 gallons a quarter. Sherman-Brown's labor union is willing to work as much overtime as necessary to avoid the use of the subcontractor. The cost of overtime pay is $9.50 per hour of overtime worked. Compute the overtime cost and the subcontracting cost per quarter for the two aggregate plans.

Cost of Overtime Pay: $9.50 per hour of overtime Aggregate Planning: Problem 2 Solution Cost of Overtime Pay: $9.50 per hour of overtime Cost of Subcontracting: $19.50 per gallon Labor Standard: 2.311 worker hours per gallon

Aggregate Planning: Problem 2 Solution

Mathematical Techniques Linear programming: Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization. Linear decision rule: Optimizing technique that seeks to minimize combined costs, using a set of cost-approximating functions to obtain a single quadratic equation.

Summary of Planning Techniques

Aggregate Planning in Services Services occur when they are rendered Demand for service can be difficult to predict Capacity availability can be difficult to predict Labor flexibility can be an advantage in services

Disaggregating Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon. Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.

Master Scheduling Process Figure 14-5 Master Scheduling Beginning inventory Forecast Customer orders Inputs Outputs Projected inventory Master production schedule Uncommitted inventory

Projected On-hand Inventory Beginning Inventory Customer orders are larger than forecast in week 1 Forecast is larger than Customer orders in week 2 Forecast is larger than Customer orders in week 3 Figure 14-8

Time Fences in MPS Figure 14-12 Period frozen firm full open 1 2 3 4 5 6 7 8 9 10 11 12