IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 1 Learning Objectives:  Understand the concepts and methods of aggregate planning  Formulate and solve capacity planning problem IES 303 Chapter 14: Aggregate Planning Week 9 January 5, 2006

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 2 Aggregate Plan Aggregate Plan: A statement of a company’s __________ _________, _____________, and _________ holding based on estimates of customer requirements and capacity limitations Service Industry  _______________  Regarding staffs and labor related factors Service Industry  _______________  Regarding staffs and labor related factors Manufacturing Industry  _______________  Regarding production rates and inventory Manufacturing Industry  _______________  Regarding production rates and inventory

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 3 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  _______________ OR _______________

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 4 How should an aggregate plan fit with other plans? Figure 14.1 Business or annual plan MPS or workforce schedule Production or staffing Plan (Aggregate Plan)

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 5 Aggregate Plan – 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

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 6 Aggregate Plan – Outputs Aggregate plan Reactive Alternatives Complementary Products Complementary Products Competitive Pricing Aggressive Alternatives

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 7 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

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 8 Examples of Capacity Adjustment to Meet Demand 1. Producing at a constant rate and using inventory to absorb fluctuations in demand 2. Hiring and firing workers to match demand 3. Maintaining resources for high demand levels 4. Increase or decrease working hours (overtime and undertime) 5. Subcontracting work to other firms 6. Using part-time workers 7. Providing the service or product at a later time period (backordering) Demand Units Time

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 9 Planning Strategies  ____________________ Match demand during the planning horizon by either Vary workforce or vary output rate  ____________________ Maintain a constant workforce level or constant output rate during the planning horizon Constant workforce or constant output rate  ____________________ Combined several strategies PURE STRATEGIES

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 10 Pure Strategy What are pros / cons of these strategies? ______________ Production Demand Units Time ___________ Production Demand Units Time

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 11 TABLE 14.1PLANNING STRATEGIES FOR AGGREGATE PLANSPossible Alternatives Strategyduring Slack Seasonduring Peak Season 4.Level #2: constantLayoffs, building antici-Hiring, depleting antici- output rate pation inventory, pation inventory, over- undertime, vacations time, subcontracting, backorders, stockouts 1.Chase #1: vary workforceLayoffsHiring level to match demand 2.Chase #2: vary output Layoffs, undertime,Hiring, overtime, rate to match demand vacations subcontracting 3.Level #1: constant No layoffs, buildingNo hiring, depleting workforce level anticipation inventory, anticipation inventory, undertime, vacations overtime, subcontracting, backorders, stockouts

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 12 Aggregate Planning Costs  _______________________

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 13 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 QuarterSale Forecast (LB) Spring Summer Fall Winter 80,000 50, , ,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

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 14 Transportation Method  A method of LP  Gather all cost info into one matrix  Try to obtain the lowest cost alternative

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 15 Notations I t = inventory at the end of period t (I 0 = 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 R t = regular-time capacity in period t O t = overtime capacity in period t S t = subcontracting capacity in period t D t = forecasted demand for period t U = total unused capacities

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 16 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.

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 17  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. Tableau Method (Cont’d)

IES 303 Engineering Management & Cost Analysis | Dr. Karndee Prichanont, SIIT 18 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 Sale Forecast (unit) , , ,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