Supply Chain Management (SCM) Aggregate Planning Dr. Husam Arman

Today’s Outline Introduction Hierarchy of production planning decisions Overview of the Aggregate Planning Problem Planning relationship Prototype example: Chase strategy / Constant workforce plan / mix strategies / LP

Aggregate Planning: introduction Macro and micro planning decisions Macro: planning workforce, production levels Micro: what job do we work on today Aggregate planning addresses the problem of determining the workforce levels to meet certain production requirements (produce what, when and how much forecast demand) Competing objectives React quickly to changes: hire & fire workers (smoothing) Stability (stable workforce) build up of inventory during low demand periods minimize inventory Maximize profit, under capacity restrictions Key concept: manage groups of items rather than single items – aggregate units of production

Hierarchy of production planning decisions Forecast of aggregate demand for t period horizon Aggregate Production Plan Determination of aggregate production and workforce levels for t period planning horizon Master Production Schedule Production levels by item by time period Materials Requirements Planning System Detailed timetable for production and assembly of components and subassemblies

Aggregate units of production Aggregate planning assumes the existence of aggregate units of production ‘Average unit’ (in case types of items are similar) Aggregate units in terms of weights (tons of steel), volume, amount of work required sales ₤ volume …for different types of items Families: Group of items that share a common manufacturing setup cost; i.e., they have similar production requirements. Aggregate Unit: A fictitious item representing an entire product family. Aggregate Unit Production Requirements: The amount of (labor) time required for the production of one aggregate unit.

Computing the Aggregate Unit Production Requirements - example Aggregate unit labor time = (.32)(4.2)+(.21)(4.9)+(.17)(5.1)+(.14)(5.2)+ (.10)(5.4)+(.06)(5.8) = 4.856 hrs

Overview of the aggregate planning problem What do we need? Demand (aggregate forecasts): assumption ‘known’ Aggregate units: considered ‘available’ Planning horizon (6-12 months) Costs Constraints (e.g. bottlenecks, max capacity etc)

Planning Relationships Business or annual plan 3

Planning Relationships Business or annual plan Production or staffing 4

Planning Relationships MPS or workforce schedule Business or annual plan Production or staffing 5

Planning Relationships MPS or workforce schedule Business or annual plan Production or staffing This slide and the next add in the information flows. 6

Planning Relationships MPS or workforce schedule Business or annual plan Production or staffing 7

Managerial Inputs Supplier capabilities Storage capacity Materials availability Materials Current machine capacities Plans for future capacities Workforce capacities Current staffing level Operations New products Product design changes Machine standards Engineering Labor-market conditions Training capacity Human resources Cost data Financial condition of firm Accounting and finance Aggregate plan Customer needs Demand forecasts Competition behavior Distribution and marketing 15

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 Following Figure 11.1 this list builds the typical objectives of a planning process. 25

Why Aggregate Planning Is Necessary Fully load facilities & minimize overloading and underloading Make sure enough capacity is available to satisfy expected demand Plan for orderly & systematic change of production capacity to meet peaks & valleys of expected customer demand Get most output for amount of resources available

Role of Aggregate Planning in a Supply Chain Given the demand forecast for each period in the planning horizon, we can 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 All supply chain stages should work together on an aggregate plan that will optimize supply chain performance

Inputs A forecast of aggregate demand covering selected planning horizon (6-18 months) Alternative means available to adjust short- to medium-term capacity, to what extent each alternative could impact capacity & related costs Current status of system in terms of workforce level, inventory level & production rate

Outputs Production plan: aggregate decisions for each period in planning horizon about workforce level inventory level production rate Projected costs if production plan was implemented

Pure Strategies for Informal Approach Matching Demand (Chase Strategy) Level Capacity Buffering With Inventory Buffering With Backlog Buffering With Overtime or Subcontracting Matching anticipated demand requires varying the size of the workforce. Does not insure actual demand is met. Level capacity requires buffering. Carrying additional inventory—Make to Stock Allowing backlog to grow (Good for Make to Order) Overtime, part-time, or contracting (Either MTS or MTO)

Matching Demand Strategy Capacity (production) in each time period is varied to exactly match forecasted aggregate demand in that time period Capacity is varied by changing workforce level Finished-goods inventories are minimal Labor & materials costs tend to be high due to frequent changes

Chase Demand Demand Units Time Production

Developing & Evaluating the Matching Production Plan Production rate is dictated by forecasted aggregate demand Convert forecasted aggregate demand into required workforce level using production time information Primary costs of this strategy are costs of changing workforce levels from period to period, i.e.., hirings & layoffs

Level Capacity Strategy Capacity (production rate) is held level (constant) over planning horizon Difference between constant production rate & demand rate is made up (buffered) by inventory, backlog, overtime, part-time labor and/or subcontracting

Level Production Demand Units Time Production

Developing & Evaluating Level Production Plan Assume that amount produced each period is constant, no hiring or layoffs Gap between amount planned to be produced & forecasted demand is filled with either inventory or backorders, i.e., no overtime, no idle time, no subcontracting Primary costs of this strategy are inventory carrying & backlogging costs

Aggregate Planning Strategies Possible Alternatives Possible Alternatives Strategy during Slack Season during Peak Season Chase #1: vary workforce Layoffs Hiring level to match demand Chase #2: vary output Layoffs, undertime, Hiring, overtime, rate to match demand vacations subcontracting Level #1: constant No layoffs, building No hiring, depleting workforce level anticipation inventory, anticipation inventory, undertime, vacations overtime, subcontracting, backorders, stockouts Level #2: constant Layoffs, building antici- Hiring, depleting antici- output rate pation inventory, pation inventory, over- undertime, vacations time, subcontracting, backorders, stockouts This series of slides builds the table in the text that identifies four basic planning strategies. This slide advances automatically. 16

Aggregate Planning Process Determine requirements for planning horizon Identify alternatives, constraints, and costs Prepare prospective plan for planning horizon Move ahead to next planning session Implement and update the plan Is the plan acceptable? No Yes Figure 14.3 23

Aggregate Planning Costs Regular-time Costs Overtime Costs Hiring and Layoff Costs Inventory Holding Costs Backorder and Stockout Costs This slide builds the important points on the relevant costs in the planning process. 25

Pure Strategies QUARTER SALES FORECAST (LB) Spring 80,000 Example: QUARTER SALES FORECAST (LB) Spring 80,000 Summer 50,000 Fall 120,000 Winter 150,000 Hiring cost = $100 per worker Firing cost = $500 per worker Inventory carrying cost = $0.50 pound per quarter Regular production cost per pound = $2.00 Production per employee = 1,000 pounds per quarter Beginning work force = 100 workers

Level Production Strategy = 100,000 pounds (50,000 + 120,000 + 150,000 + 80,000) 4 Spring 80,000 100,000 20,000 Summer 50,000 100,000 70,000 Fall 120,000 100,000 50,000 Winter 150,000 100,000 0 400,000 140,000 Cost of Level Production Strategy (400,000 X $2.00) + (140,00 X $.50) = $870,000 SALES PRODUCTION QUARTER FORECAST PLAN INVENTORY

Chase Demand Strategy Cost of Chase Demand Strategy SALES PRODUCTION WORKERS WORKERS WORKERS QUARTER FORECAST PLAN NEEDED HIRED FIRED Spring 80,000 80,000 80 0 20 Summer 50,000 50,000 50 0 30 Fall 120,000 120,000 120 70 0 Winter 150,000 150,000 150 30 0 100 50 Cost of Chase Demand Strategy (400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

Mixed Strategy Combination of level production and chase demand strategies Examples of management policies no more than x% of the workforce can be laid off in one quarter inventory levels cannot exceed x dollars Many industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time

General Linear Programming (LP) Model LP gives an optimal solution, but demand and costs must be linear Let Wt = workforce size for period t Pt =units produced in period t It =units in inventory at the end of period t Ft =number of workers fired for period t Ht = number of workers hired for period t

Minimize Z = $100 (H1 + H2 + H3 + H4) + $500 (F1 + F2 + F3 + F4) LP MODEL Minimize Z = $100 (H1 + H2 + H3 + H4) + $500 (F1 + F2 + F3 + F4) + $0.50 (I1 + I2 + I3 + I4) + $2 (P1 + P2 + P3 + P4) Subject to P1 - I1 = 80,000 (1) Demand I1 + P2 - I2 = 50,000 (2) constraints I2 + P3 - I3 = 120,000 (3) I3 + P4 - I4 = 150,000 (4) Production 1000 W1 = P1 (5) constraints 1000 W2 = P2 (6) 1000 W3 = P3 (7) 1000 W4 = P4 (8) 100 + H1 - F1 = W1 (9) Work force W1 + H2 - F2 = W2 (10) constraints W2 + H3 - F3 = W3 (11) W3 + H4 - F4 = W4 (12)

Other Quantitative Techniques Linear decision rule (LDR) Search decision rule (SDR) Management coefficients model

Hierarchical Nature of Planning Items Product lines or families Individual products Components Manufacturing operations Resource Level Plants Individual machines Critical work centers Production Planning Capacity Planning Resource requirements plan Rough-cut capacity plan Capacity requirements plan Input/ output control Sales and Operations Plan Master production schedule Material requirements plan Shop floor schedule All work centers Disaggregation: process of breaking an aggregate plan into more detailed plans