Chapter 5 Aggregate Planning Operations Analysis Using MS Excel

Chapter Outline The Nature of Aggregate Planning Tradeoffs between Production and Inventory 3. Nonlinear cost and demand functions Introducing Overtime Introducing Double or Premium Time Tradeoffs between Level and Chase Strategies

Aggregate Planning Aggregate planning is an intermediate planning method used to determine the necessary resource capacity a firm will need in order to meet its expected demand. Demand Units Time Intermediate range implies a period of 6-12 months. Resource capacity refers to resources such as labor, raw materials, production facilities, etc. The term “aggregate” is used because this method of planning is developed for a group of products vice an individual product.

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

Key Points In the intermediate level of planning, there is not a lot of detail. Individual end product identity is typically not present. Instead, planning is performed for a composite, or average unit of product in a particular family of similar products. For example, we may plan for units of hair dryers, without regard for whether they are 1500 watt dryers, 1600 watt dryers, 1875 watt dryers, travel dryers, etc.

Key Points With the aggregate planning: Decisions are typically aggregated into monthly time periods. The planning horizon is usually stated as 6 to 18 or 2-12 months, however, if there is seasonality in the demand for the output of the system, the plan should normally cover at least 12 months so that it can react to all the seasonal swings in the demand. Weekly or daily detail is not needed at intermediate level of decision making.

Goal of Aggregate Planning To develop a realistic production plan on an aggregate level that will satisfy organizational goals and customer demand needs at the lowest total cost. 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 Some other goals of AP include maximizing customer service and the utilization of plant and equipment. Minimizing inventory costs, changes in workforce levels, and changes in production levels. (Source: Aggregate Planning)

Inputs to Aggregate Planning Resources Workforce Facilities Demand forecast Policies Subcontracting Overtime/slack-time 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

Capacity and Demand in the aggregate planning If capacity and demand are nearly equal, emphasis should be placed on meeting demand as efficiently as possible. If capacity is greater than demand the firm might chose promotion and advertising in order to increase demand. If capacity is less than demand the firm might consider subcontracting a portion of the work load. When attempting to efficiently meet demand the firm should focus on minimizing costs at all levels of the production process. Demand Units Time

Techniques for Aggregate Planning Determine demand for each period Determine capacities for each period Identify policies that are relevant Determine units costs Develop alternative plans and costs (by using different strategies) Select the best plan that satisfies objectives. Otherwise return to step 5.

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

Aggregate Planning Strategies Level capacity (production) strategy Chase demand strategy

Aggregate Planning Strategies

Chase Approach Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options. The chase method helps firms match production and demand by hiring and firing workers as necessary to control output Cost of strategy – hiring and firing workers When demand increases, production must be increased, therefore additional workers are hired in order to meet this new demand. When demand decreases production will be reduced, therefore, workers are laid off or fired.

Chase Approach Advantages Disadvantages Investment in inventory is low Labor utilization is high Disadvantages The cost of adjusting output rates and/or workforce levels Cost of fluctuating workforce levels. Potential damage to employee morale This strategy would not be feasible for industries which require highly skilled labor or where competition for labor is fierce. This strategy would be cost effective during periods of high unemployment or when low-skilled labor is acceptable.

Level Strategy The level method allows for a constant rate of production and uses inventory levels to absorb fluctuations in demand. Matching capacity to demand; the planned output for a period is set at the expected demand for that period. Cost of strategy – holding items in inventory When demand is lower than production, inventory increases When demand exceeds production, inventory decreases When demand is low excess production will be stored in inventory. When demand exceeds production the firm can pull from inventory to meet customer demand. When using a level strategy production is usually set at average demand.

Level Strategy Advantages Disadvantages Stable output rates and workforce levels Worker levels and production output are stable Tends to be the preferred strategy of many organizations, including labor unions. Disadvantages Greater inventory costs Increased labor costs in term of overtime and idle time Resource utilizations change over time

The Nature of Aggregate Planning The CHASE and the LEVEL strategies are rarely used in their pure form. Hybrid of the two is usually more cost-effective and efficient What-if scenario management is ideal for analyzing tradeoffs and determining the best aggregate plan

Tradeoffs between Production and Inventory Bricks and Tiles Corporation is making plans for the production of bricks for the coming year. The total requirements are 3000 bricks, and the corporation has enough facilities and labor to make 250 bricks a month The corporation currently following the level strategy and makes bricks at a steady rate of 250 per month Yesterday End Inventory (Unit Make+Start inventory)- Demand (Start inventory+End inventory) /2 * inventory cost

Introducing Overtime According to Chase Strategy: When demand forecast goes up ---------------------- production must be increase ( working overtime) To meet the large demand, The bricks and Tiles Corporation will not build up inventories in advance, but rather it will produce the extra bricks using overtime. If labor required <= 500, labor required * 25, else (500 * 25)+ (labor required –500) * 37.3

using a nonlinear function Introducing Overtime using a nonlinear function The effect of using Chase strategy based on introducing overtime Nonlinear function of overtime if (labor required <= max. labor/month, labor required*labor cost, max. labor/month*labor cost + (labor required - max. labor/month)*overtime labor cost) Using solver to optimize the plan’s output of the Chase strategy

using a nonlinear function Introducing Overtime using a nonlinear function Find the optimum solution (minimum cost) using Solver with a constraint in the value of the inventory which must be nonnegative If labor required < 500, labor required * 25, else (500 * 25)+ (labor required –500) * 37.3

Introducing Double or Premium Time The method of solution for nonlinear problems is not as reliable as that for linear problems. Linear programming is a mathematical procedure for finding the best solution to a problem described by a linear equation and subject to linear constraints. Not all overtime is treated the same. Often, overtime worked on the weekend, holidays, or on third shift has an extra cost. This overtime is called double time or premium time.

Introducing Double or Premium Time When inventory cost are low How the Bricks and Tiles corporation will responsd to the increasing in demand? Building inventories -- following level strategy When inventory cost are low Introducing overtime and premium ---- following Chase strategy When inventory costs are high

Introducing Double or Premium Time

Tradeoffs between Level and Chase Strategies The Bricks and Tiles Corporation is currently producing at a Level rate to meet current demand, but production has been well automated and workers do not need much training to run the machines. Management is considering a reduction in capacity when the demand is low, and an expansion when demand is high; that is, management is considering a strategy to chase demand. Such a strategy will reduce inventory cost, but introduces the the issue of hiring and firing workers Chase strategy can has a bad effect on the morale of the worker The corporation want to base their decision on a cost analysis

Tradeoffs between Level and Chase Strategies The yearly demand is 2,400 million tiles, and 200 million are produced each month. The current approach does not allow for hiring and firing As a result, inventories balloon during the year, and inventory costs are more than twice the actual cost of production

Tradeoffs between Level and Chase Strategies The problem is to minimize the total cost under the constraints, including the constraint of hiring and firing Since production exactly matches demand, there is no inventory cost. Modification on the model involve lumps hiring and firing into one categories This solution allows for too many firings in any one period, so the model has to modify

Tradeoffs between Level and Chase Strategies Modification on the the following model involve place a limit on firings only because the management do not desire to limit hiring. Here, cost of firing is limited to $500, which corresponds to ten firings.

Tradeoffs between Level and Chase Strategies Here, cost of firing is limited to $500, which corresponds to ten firings. The results can be summarized as follows: Aggregate Plan Cost Steady Production $380,000 Unlimited Firing $151,250 Limited Firing $243,625 ___________________________________________________________________