1. Chapter 14
Aggregate Planning

2. 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

3. 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

4. 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

5. 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

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

7. Demand Options
Pricing
Promotion
Back orders
New demand

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

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

10. 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.

11. 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

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

13. Average Inventory Average Beginning Inventory + Ending Inventory2 =

14. 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.

15. 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.

16. 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: 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.

17. 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.

18. Aggregate Planning: Problem 1

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

20. Aggregate Planning: Problem 1 Solution

21. Aggregate Planning: Problem 1 Solution

22. 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

23. Aggregate Planning: Problem 1 Solution

24. 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.

25. 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: worker hours per gallon

26. Aggregate Planning: Problem 2 Solution

27. 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.

28. Summary of Planning Techniques

29. 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

30. 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.

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

32. 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

33. Time Fences in MPS Figure 14-12 Period frozen firm full open 1 2 3 4 56 7 8 9 10 11 12