1. 13 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall 13 Aggregate Planning

2. 13 - 2© 2011 Pearson Education, Inc. publishing as Prentice Hall Outline  Aggregate Planning 0bjective Planning Horizon  Aggregate Planning Strategies  Capacity Options  Demand Options  Mixing Options to Develop a Plan

3. 13 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall Outline – Continued  Methods for Aggregate Planning  Chase Strategy  Level Strategy  Mixed Strategies  Aggregate Planning in Services

4. 13 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall Frito-Lay  More than three dozen brands, 15 brands sell more than $100 million annually, 7 sell over $1 billion  Planning processes covers 3 to 18 months  Unique processes and specially designed equipment  High fixed costs require high volumes of production and high utilization of equipment

5. 13 - 5© 2011 Pearson Education, Inc. publishing as Prentice Hall Aggregate Planning The objective of aggregate planning is to meet the forecasted demand while minimizing the total cost over the planning period

6. 13 - 6 Planning Horizon Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months. The goal of aggregate planning is to achieve a production plan that will effectively utilize the organization’s resources to satisfy expected demand. Short range Intermediate range Long range Now2 months1 Year

7. 13 - 7  Resources  Workforce/production rate  Facilities and equipment  Demand forecast  Policies  Subcontracting  Overtime  Inventory levels  Back orders  Costs  Inventory carrying  Back orders  Hiring/firing  Overtime  Inventory changes  subcontracting Aggregate Planning Inputs

8. 13 - 8  Total cost of a plan  Projected levels of:  Inventory  Output  Employment  Subcontracting  Backordering Aggregate Planning Outputs

9. 13 - 9 Lawn Mowers (aggregate unit) © 2011 Pearson Education, Inc. publishing as Prentice Hall

10. 13 - 10© 2011 Pearson Education, Inc. publishing as Prentice Hall Aggregate Planning Quarter 1 JanFebMar 150,000120,000110,000 Quarter 2 AprMayJun 100,000130,000150,000 Quarter 3 JulAugSep 180,000150,000140,000

11. 13 - 11© 2011 Pearson Education, Inc. publishing as Prentice Hall The Planning Process  Objective is to minimize cost over the planning period by adjusting  Production rates  Labor levels  Inventory levels  Overtime work  Subcontracting rates Determine the quantity and timing of production for the intermediate future

12. 13 - 12© 2011 Pearson Education, Inc. publishing as Prentice Hall Aggregate Planning  A logical overall (aggregate) unit for measuring sales and output  A forecast of demand for an intermediate planning period in these aggregate terms  A method for determining the costs  A model that combines forecasts and costs so that scheduling decisions can be made for the planning period Requirements for aggregate planning:

13. 13 - 13© 2011 Pearson Education, Inc. publishing as Prentice Hall Planning Horizons Figure 13.1 Long-range plans (over one year) Research and Development New product plans Capital investments Facility location/expansion Intermediate-range plans (3 to 18 months) Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans Short-range plans (up to 3 months) Job assignments Ordering Job scheduling Dispatching Overtime Part-time help Top executives Operations managers Operations managers, supervisors, foremen ResponsibilityPlanning tasks and horizon

14. 13 - 14 Hierarchy of Production Decisions Long-range Capacity Planning

15. 13 - 15© 2011 Pearson Education, Inc. publishing as Prentice Hall Aggregate Planning Figure 13.2

16. 13 - 16© 2011 Pearson Education, Inc. publishing as Prentice Hall Aggregate Planning Strategies 1.Level production: Use inventories to absorb changes in demand 2.Chase demand :Accommodate changes by varying workforce size 3.Use part-timers, overtime, or idle time to absorb changes 4.Use subcontractors and maintain a stable workforce 5.Influence the demand by changing prices

17. 13 - 17 Ch 11 - 10 © 2000 by Prentice-Hall Inc Russell/Taylor Oper Mgt 3/e Strategy Details  Subcontracting - useful if supplier meets quality & time requirements  Part-time workers - feasible for unskilled jobs or if labor pool exists  Backordering - only works if customer is willing to wait for product/services

18. 13 - 18 Ch 11 - 11 © 2000 by Prentice-Hall Inc Russell/Taylor Oper Mgt 3/e Level Production Time Production Demand Units

19. 13 - 19 Ch 11 - 12 © 2000 by Prentice-Hall Inc Russell/Taylor Oper Mgt 3/e Chase Demand Time Units Production Demand

20. 13 - 20 Aggregate Planning Strategies  Proactive  Involve demand options: Attempt to alter demand to match capacity  Reactive  Involve capacity options: attempt to alter capacity to match demand  Mixed  Some of each

21. 13 - 21© 2011 Pearson Education, Inc. publishing as Prentice Hall Capacity Options (Reactive) 1. Changing inventory levels  Increase inventory in low demand periods to meet high demand in the future  High inventory may increase costs associated with storage, insurance, handling, obsolescence, and capital investment  Low inventory may cause shortages which may mean lost sales due to long lead times and poor customer service

22. 13 - 22© 2011 Pearson Education, Inc. publishing as Prentice Hall Capacity Options 2. Varying workforce size by hiring or firing (layoffs)  Match production rate to demand  Training and separation costs (benefit severiance) for hiring and laying off workers  New workers may have lower productivity  Laying off workers may lower morale and productivity

23. 13 - 23© 2011 Pearson Education, Inc. publishing as Prentice Hall Capacity Options 3. Varying production rate through overtime or idle time  Allows constant workforce  May be difficult to meet large increases in demand  Overtime can be costly and may drive down productivity  Absorbing idle time may be difficult

24. 13 - 24© 2011 Pearson Education, Inc. publishing as Prentice Hall Capacity Options 4. Subcontracting  Temporary measure during periods of peak demand  May be costly  Assuring quality and timely delivery may be difficult  Exposes your customers to a possible competitor

25. 13 - 25© 2011 Pearson Education, Inc. publishing as Prentice Hall Capacity Options 5. Using part-time workers  Useful for filling unskilled or low skilled positions, especially in services

26. 13 - 26© 2011 Pearson Education, Inc. publishing as Prentice Hall Demand Options (Proactive) 1. Influencing demand  Use advertising or promotion to increase demand in low periods  Attempt to shift demand to slow periods

27. 13 - 27© 2011 Pearson Education, Inc. publishing as Prentice Hall Demand Options 2. Back ordering during high- demand periods  Requires customers to wait for an order without loss of goodwill or the order  Most effective when there are few if any substitutes for the product or service  Often results in lost sales

28. 13 - 28© 2011 Pearson Education, Inc. publishing as Prentice Hall Demand Options 3. Counterseasonal product and service mixing  Develop a product mix of counter- seasonal items (furnaces and air conditioners)  However, may lead to products or services outside the company’s areas of expertise

29. 13 - 29© 2011 Pearson Education, Inc. publishing as Prentice Hall Aggregate Planning Options Table 13.1 OptionAdvantagesDisadvantagesSome Comments Changing inventory levels No changes in human resources. Inventory holding cost may increase. Shortages may result in lost sales. Applies mainly to production, not service, operations. Varying workforce size by hiring or layoffs Avoids the costs of other alternatives (No inventory holding cost). Hiring, layoff, and training costs may be significant. Used where size of labor pool is large.

30. 13 - 30© 2011 Pearson Education, Inc. publishing as Prentice Hall Aggregate Planning Options Table 13.1 OptionAdvantagesDisadvantagesSome Comments Varying production rates through overtime or idle time Matches seasonal fluctuations without hiring/ training costs. Overtime premiums; tired workers; may not meet demand. Allows flexibility within the aggregate plan. Sub- contracting Permits flexibility and smoothing of the firm’s output. Loss of quality control; reduced profits; loss of future business. Applies mainly in production settings.

31. 13 - 31© 2011 Pearson Education, Inc. publishing as Prentice Hall Aggregate Planning Options Table 13.1 OptionAdvantagesDisadvantagesSome Comments Using part- time workers Is less costly and more flexible than full-time workers. High turnover/ training costs; quality suffers; scheduling difficult. Good for unskilled jobs in areas with large temporary labor pools. Influencing demand Tries to use excess capacity. Discounts draw new customers. Uncertainty in demand. Hard to match demand to supply exactly. Creates marketing ideas. Overbooking used in some businesses.

32. 13 - 32© 2011 Pearson Education, Inc. publishing as Prentice Hall Aggregate Planning Options Table 13.1 OptionAdvantagesDisadvantagesSome Comments Back ordering during high- demand periods May avoid overtime. Keeps capacity constant. Customer must be willing to wait, but goodwill is lost. Many companies back order. Counter- seasonal product and service mixing Fully utilizes resources; allows stable workforce. May require skills or equipment outside the firm’s areas of expertise. Risky finding products or services with opposite demand patterns.

33. 13 - 33© 2011 Pearson Education, Inc. publishing as Prentice Hall Methods for Aggregate Planning  A mixed strategy may be the best way to achieve minimum costs  There are many possible mixed strategies  Finding the optimal plan is not always possible

34. 13 - 34© 2011 Pearson Education, Inc. publishing as Prentice Hall Mixing Options to Develop a Plan  Chase strategy  Match output rates to demand forecast for each period  Vary workforce levels or vary production rate  Favored by many service organizations

35. 13 - 35© 2011 Pearson Education, Inc. publishing as Prentice Hall Mixing Options to Develop a Plan  Level strategy  Daily production is uniform  Use inventory or idle time as buffer  Stable production leads to better quality and productivity  Some combination of capacity options, a mixed strategy, might be the best solution

36. 13 - 36© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 1 (Graphical Apprach) Table 13.2 MonthExpected Demand Production Days Demand Per Day (computed) Jan9002241 Feb7001839 Mar8002138 Apr1,2002157 May1,5002268 June1,100 2055 6,200124 = = 50 units per day 6,200 124 Average requirement = Total expected demand Number of production days

37. 13 - 37© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 1 Figure 13.3 70 – 60 – 50 – 40 – 30 – 0 – JanFebMarAprMayJune=Month  221821212220=Number of working days Production rate per working day Level production using average monthly forecast demand Forecast Demand

38. 13 - 38© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 1 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $20 per unit Average pay rate (regular production) $10 per hour ($80 per day) Overtime pay rate $17 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Plan 1 – constant workforce

39. 13 - 39© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 1 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $20 per unit Average pay rate $10 per hour ($80 per day) Overtime pay rate $17 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Plan 1 – constant workforce Month Production Days Production at 50 Units per Day Demand Forecast Monthly Inventory Change Ending Inventory Jan221,100900+200200 Feb18900700+200400 Mar211,050800+250650 Apr211,0501,200-150500 May221,1001,500-400100 June201,0001,100-1000 1,850 Total units of inventory carried over from one month to the next= 1,850 units Workforce required to produce 50 units per day= 10 workers Workers Required =( 50 unit/day*1.6 hr/unit)/8 hr/worker/day =10 workers

40. 13 - 40© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 1 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $20 per unit Average pay rate $10 per hour ($80 per day) Overtime pay rate $17 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Plan 1 – constant workforce Month Production Days Production at 50 Units per Day Demand Forecast Monthly Inventory Change Ending Inventory Jan221,100900+200200 Feb18900700+200400 Mar211,050800+250650 Apr211,0501,200-150500 May221,1001,500-400100 June201,0001,100-1000 1,850 Total units of inventory carried over from one month to the next= 1,850 units Workforce required to produce 50 units per day= 10 workers CostsCalculations Inventory carrying$9,250(= 1,850 units carried x $5 per unit) Regular-time labor99,200 (= 10 workers x $80 per day x 124 days) or (6200 x 1.6 x10) Other costs (overtime, hiring, layoffs, subcontracting)0 Total cost$108,450

41. 13 - 41© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 1 Figure 13.4 Cumulative demand units 7,000 – 6,000 – 5,000 – 4,000 – 3,000 – 2,000 – 1,000 – – JanFebMarAprMayJune Cumulative forecast requirements Cumulative level production using average monthly forecast requirements Reduction of inventory Excess inventory 6,200 units

42. 13 - 42© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 2 Table 13.2 MonthExpected Demand Production Days Demand Per Day (computed) Jan9002241 Feb7001839 Mar8002138 Apr1,2002157 May1,5002268 June1,100 2055 6,200124 Minimum requirement = 38 units per day Constant work force=(38*1.6)/8=7.6 workers Plan 2 – Level the daily production to minimum requirement over the planning horizon and meet the excess demand with subcontracting

43. 13 - 43© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 2 70 – 60 – 50 – 40 – 30 – 0 – JanFebMarAprMayJune=Month  221821212220=Number of working days Production rate per working day Level production using lowest monthly forecast demand Forecast demand

44. 13 - 44© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 3 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $20 per unit Average pay rate $10 per hour ($80 per day) Overtime pay rate $17 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit

45. 13 - 45© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 3 Table 13.3 Cost Information Inventory carry cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit In-house production=38 units per day x 124 days =4,712 units Subcontract units=6,200 - 4,712 =1,488 units

46. 13 - 46© 2011 Pearson Education, Inc. publishing as Prentice Hall Table 13.3 Cost Information Inventory carry cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Roofing Supplier Example 3 In-house production=38 units per day x 124 days =4,712 units Subcontract units=6,200 - 4,712 =1,488 units CostsCalculations Regular-time labor$75,392 (7.6 workers x $80 per day x 124 days) or (4712 x 1.6 x 10) Subcontracting29,760(1,488 units x $20 per unit) Total cost$105,152

47. 13 - 47© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 3 Table 13.2 MonthExpected Demand Production Days Demand Per Day (computed) Jan9002241 Feb7001839 Mar8002138 Apr1,2002157 May1,5002268 June1,100 2055 6,200124 Production = Expected Demand Plan 3 – hiring and layoffs (Chase Strategy)

48. 13 - 48© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 4 70 – 60 – 50 – 40 – 30 – 0 – JanFebMarAprMayJune=Month  221821212220=Number of working days Production rate per working day Forecast demand and monthly production

49. 13 - 49© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 4 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $20 per unit Average pay rate $10 per hour ($80 per day) Overtime pay rate $17 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit

50. 13 - 50© 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 4 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Month Forecast (units) Daily Prod Rate Regular Production Cost (demand x 1.6 hrs/unit x $10/hr) Extra Cost of Increasing Production (hiring cost) Extra Cost of Decreasing Production (layoff cost) Total Cost Jan90041 $ 14,400 —— Feb7003911,200— $1,200 (= 2 x $600) 12,400 Mar8003812,800— $600 (= 1 x $600) 13,400 Apr1,2005719,200 $5,700 (= 19 x $300) —24,900 May1,5006824,000 $3,300 (= 11 x $300) —24,300 June1,1005517,600— $7,800 (= 13 x $600) 25,400 $99,200$9,000$9,600$117,800 Table 13.4

51. 13 - 51© 2011 Pearson Education, Inc. publishing as Prentice Hall Comparison of Three Plans Table 13.5 CostPlan 1Plan 2Plan 3 Inventory carrying$ 9,250$ 0 Regular labor99,20075,39299,200 Overtime labor000 Hiring009,000 Layoffs009,600 Subcontracting029,7600 Total cost$108,450$105,152$117,800 Plan 2 is the lowest cost option

52. 13 - 52© 2011 Pearson Education, Inc. publishing as Prentice Hall Mathematical Approaches  Useful for generating strategies  Transportation Method of Linear Programming  Produces an optimal plan  Management Coefficients Model  Model built around manager’s experience and performance  Other Models  Linear Decision Rule  Simulation

53. 13 - 53© 2011 Pearson Education, Inc. publishing as Prentice Hall Disaggregation of Aggregate Plan  Disaggregation breaks the aggregate plan down into greater detail  To put the aggregate production plan into operation, it is important to break down the aggregate plan into specific product requirements.  Disaggregation results in a Master Production Schedule (MPS) and MPS becomes input to Material Requirements Planning (MRP).

54. 13 - 54 Disaggregating the aggregate plan  For example, televisions manufacturer may have an aggregate plan that calls for 200 television in January, 300 in February, and 400 in March.  This company produces 21, 26, and 29 inch TVs, therefore this three-month aggregate plan must be translated into specific numbers of TVs of each type prior to actually purchasing the appropriate materials and parts, scheduling operations, and planning inventory requirements.

55. 13 - 55 Master scheduling  The result of disaggregating the aggregate plan is a master schedule showing the quantity and timing of specific end items for a scheduled horizon, which often covers about six to eight weeks ahead.  The master schedule contains important information for marketing as well as for production. It reveals when orders are scheduled for production and when completed orders are to be shipped.

56. 13 - 56 Aggregate Plan to Master Schedule JanFebMar. 200300400 Aggregate Planning Disaggregation Master Schedule Aggregate plan TypeJan.Feb.Mar 21 inch 100 26 inch 75150200 29 inch 2550100 total200300400 Master schedule

57. 13 - 57 Master Scheduling  Master schedule  Determines quantities needed to meet demand  Interfaces with  Marketing: it enables marketing to make valid delivery commitments to warehouse and final customers.  Capacity planning: it enables production to evaluate capacity requirements  Production planning  Distribution planning

58. 13 - 58 Master Scheduler The duties of the master scheduler generally include:  Evaluates impact of new orders  Provides delivery dates for orders  Deals with problems such as:  Production delays  Revising master schedule  Insufficient capacity

59. 13 - 59 Master Scheduling Process Master Scheduling Beginning inventory Forecast Customer orders Inputs Outputs Projected inventory Master Production Schedule Uncommitted inventory Figure 12.6

60. 13 - 60 Master scheduling process  Master production schedule (MPS): indicates the quantity and timing of planned production, taking into account desired delivery quantity and timing as well as on-hand inventory. The MPS is one of the primary outputs of the master scheduling process.  Rough-cut capacity Planning (RCCP): it involves testing the feasibility of a proposed master relative to available capacities, to assure that no obvious capacity constraints exist.

61. 13 - 61 Master schedule  Inputs:  Beginning inventory; which is the actual inventory on hand from the preceding period of the schedule  Forecasts for each period demand  Customer orders; which are quantities already committed to customers.  Outputs  Projected inventory  Production requirements

62. 13 - 62 Example: Master Schedule A company that makes industrial pumps wants to prepare a master production schedule for June and July. Marketing has forecasted demand of 120 pumps for June and 160 pumps for July. These have been evenly distributed over the four weeks in each month: 30 per week in June and 40 per week in July.

63. 13 - 63 Example: Master Schedule  Now suppose that there are currently 64 pumps in inventory (i.e., beginning inventory is 64 pumps), and that there are customer orders that have been committed for the first five weeks (booked) and must be filled which are 33, 20, 10, 4, and 2 respectively.  Suppose a production lot size of 70 pumps is used.  Prepare the master Schedule © 2011 Pearson Education, Inc. publishing as Prentice Hall

64. 13 - 64 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 The master schedule before MPS

65. 13 - 65 Solution: The master schedule  The first step you have to calculate the on hand inventory WeekInventory from previous week RequirementsNet inventory before MPS MPSProjected inventory 1643331 2 3011 31 -297041 4 3011 5 40-297041 6 4011 71 -397031 8 40-97061

66. 13 - 66 Aggregate Planning for Services 1. Most services can’t be inventoried 2. Demand for services is difficult to predict 3. Capacity is also difficult to predict 4. Service capacity must be provided at the appropriate place and time 5. Labor is usually the most constraining resource for services