Agregate planing lecture
- 1. Chapter 2 – Aggregate Planning 1
- 2. Sales and Operations Planning Is a process: Lower inventory Shorten customer lead times Stabilize production rates To help give better customer service Give top management a handle on the business The process is designed to balance demand and supply over time. 2
- 3. Sales and Operations Planning The balance must occur at an aggregate level & also at the detailed individual product level. Aggregate we mean at the level of larger group of similar products. Often expressed in common units Example: Tones of steel Liters of paint 3
- 4. Aggregate Production Planning (Aggregate) Planning is Concerned With Determining the Quantity and Timing of Production for the Intermediate Future, Often From 3 To 18 Months Ahead. The main purpose is to specify the optimal combination of production rate, work force level, and inventory on hand. 4
- 5. Aggregate Production Planning The Goal is: To Minimize Costs Over The Planning Period by determining the optimal combination of workforce and inventory. To Minimize Fluctuations In The Work Force or Inventory Levels. Based on the planning horizon, We can divide plans into 3 general categories: 5
- 6. VARIABLES USED IN AGGREGATE PLANNING 6
- 7. Planning Horizons Responsible: Short-range plans Operations Job assignments managers Ordering Job scheduling Responsible: Intermediate-range plans Dispatching Top executives Sales planning Production planning and budgeting Responsible: Setting employment, inventory, Long-range plans Operations subcontracting levels R&D managers, Aggregate planning New product plans supervisors, Capital expenses foremen Facility location, expansion Today 3 Months 1 year 5 years Planning Horizon
- 8. Relationships of Aggregate Schedule Aggregate Forecast & Resource Production Firm Orders Availability Planning Work force Inventory Material Master Subcontractors Requirements Production Planning Scheduling No, modify CRP, MRP, or MPS Capacity Shop Requirements Realistic? Floor Planning Yes Schedules
- 9. Required Inputs to the Production Planning System Competitors’be Raw material Market havior availability demand External to firm External Economic capacity conditions Planning for production Current Current Inventory Activities Internal physical workforce levels required for to firm capacity production
- 10. Manufacturing options to meet fluctuating demand Build inventory Carry backorders or tolerate lost sales Over time or under time Hire & fire Vary capacity through changes in plant & equipment (long term) 10
- 11. Relevant costs 1. Basic production cost Direct & indirect labor costs & regular as well as overtime compensation 2. Costs associated with changes in the production rate Cost of hiring, firing & training 3. Inventory holding cost Cost of capital tied up, storing, insurance…etc 11
- 12. Relevant costs 4. Backordering costs Very hard to measure, loss of customer goodwill, loss of sales revenues resulting from backordering. 12
- 13. Types of Aggregate Plans Level Aggregate Plans Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products Disadvantage- builds inventory and/or uses back orders Chase Aggregate Plans Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage- constantly changing short term capacity 13
- 14. The Extremes Level Chase Strategy Strategy Production Production rate is equals constant demand
- 15. Level Plan Example Level production rate= 28,000 units/7 periods= 4000 units Level workforce= (4000 units x .64 std.)/160 = 16 people 15
- 16. Chase Plan Example Chase hires and fires staff to exactly meet each periods demand Period 1 = (500 units x .64 std.)/160 = 2 people, need to fire 16 people 16
- 17. Types of Aggregate Plans (Cont.) Hybrid Aggregate Plans Uses a combination of options Options should be limited to facilitate execution May use a level workforce with overtime & temps May allow inventory buildup and some backordering May use short term sourcing 17
- 18. Aggregate Planning Options Demand based options Reactive: uses finished goods inventories and backorders for fluctuations Proactive: shifts the demand patterns to minimize fluctuations Capacity based options Changes output capacity to meet demand Uses overtime, under time, subcontracting, hiring, firing, and part-timers – cost and operational implications 18
- 19. Evaluating the Current Situation Important to evaluate current situation in terms of; Point of Departure Current % of normal capacity Options are different depending on present situation Magnitude of change Larger changes need more dramatic measures Duration of change Is the length of time a brief seasonal change? Is a permanent change in capacity needed? 19
- 20. Developing the Aggregate Plan Step 1- Choose strategy: level, chase, or hybrid Step 2- Determine the aggregate production rate Step 3- Calculate the size of the workforce Step 4- Test the plan as follows: Calculate Inventory, expected hiring/firing, overtime needs Calculate total cost of plan Step 5- Evaluate performance: cost, service, human resources, and operations 20
- 21. Plan for Companies with Tangible Products – Plans A, B, C, D Plan A: Level aggregate plan using inventories and back orders Plan B: Level plan using inventories but no back orders Plan C: Chase aggregate plan using hiring and firing Plan D: Hybrid plan using initial workforce and overtime as needed 21
- 22. Problem Data for Plans A & B (Table 13-4) 22
- 23. Plan A - Level Using Inventory & Backorders (Table 13-5) First calculate the level production rate (14400/8=1800) 23
- 24. Plan A Evaluation Fill rate is 83.9% Fill rate is likely too low Inventory levels seem to be okay Human resources fires two employees 24
- 25. Plan B – Chase Aggregate Plan Using Hiring and Firing (Table 13-6) 25
- 26. Plan B Evaluation Plan B costs slightly less than the level plan. Hiring demands ranges from two in November to thirty-four in February Utilization is highest, 70.6%, in December and even lower in the other months Space and equipment are underutilized in every other month of the plan 26
- 27. Aggregate Plans for Service Companies with Non-Tangible Products- Plans E, F, G Options remain the same – level, chase, and hybrid plans Overtime and under time can be used Staff can be hired and fired Inventory cannot be used to level the service plan All demand must be satisfied or lose business to a competing service provider 27
- 28. Problem Data for Plans C, D, and E (Table 13-7) A B 4 Cost Data 5 Regular time labor cost per hour $8.00 6 Ov ertime labor cost per hour $12.00 7 Subcontracting cost per unit (labor only) $60.00 8 Hiring cost per employee $250.00 9 Firing cost per employee $150.00 10 11 Capacity Data 12 Beginning workforce (employees) 60 13 Serv ice standard per call (hours) 4 14 Regular time av ailable per period (hours) 160 15 Ov ertime av ailable per period (hours) 24 16 17 Demand Data (calls) 18 Period 1 2400 19 Period 2 1560 20 Period 3 1200 21 Period 4 2040 22 Period 5 2760 23 Period 6 1680 24 Period 7 1320 25 Period 8 2400 26 27 Total Number of Periods 8 28 28
- 29. Plan C – Level Aggregate Plan with No Back Orders, No Tangible Product (Table 13-8) D E F G H I J K L M 3 Plan E: Level Aggregate Plan with No Backorders, No Tangible Product 4 5 Compute Workforce Needed 6 Maximum Demand 2760 <-- Need to staff to meet the maximum number of calls 7 Calls per Worker per Period (Reg Time) 40 8 Workers Needed 69 9 Number to Hire 9 10 Number to Fire 0 11 12 Detailed Plan Computations Period 13 1 2 3 4 5 6 7 8 Total 14 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 15360 15 Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 61440 16 Regular time hours available 11040 11040 11040 11040 11040 11040 11040 11040 17 Undertime hours 1440 4800 6240 2880 0 4320 5760 1440 26880 18 19 Cost Calculations for Plan E 20 Regular time labor cost $706,560 21 Hiring cost $2,250 22 Firing cost $0 23 Total Cost $708,810 24 Staff of 69 people creates excessive UT (averages 30% UT) Cost per service call is $46.15 ($708,000 Divided by 15360 calls) 29
- 30. Plan D – Hybrid Aggregate Plan Using Initial Workforce and OT as Needed (Table 13-9) D E F G H I J K L M 26 Plan F: Hybrid Aggregate Plan Using Initial Workforce and Overtime as Needed 27 28 Detailed Plan Computations Period 29 1 2 3 4 5 6 7 8 Total 30 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 15360 31 Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 61440 32 Regular time hours of capacity 9600 9600 9600 9600 9600 9600 9600 9600 76800 33 Overtime hours needed 0 0 0 0 1440 0 0 0 1440 34 Undertime hours 0 3360 4800 1440 0 2880 4320 0 16800 35 36 Cost Calculations for Plan F 37 Regular time labor cost $614,400 38 Overtime labor cost $17,280 39 Total Cost $631,680 Costs reduced by $77K and under time to an average of 20% Cost per service call reduced to $41.13 (-$5.02) 30
- 31. Plan E – Chase Aggregate Plan for Nontangible Products Using Hiring and Firing (Table 13-10) D E F G H I J K L 42 Plan G: Chase Aggregate Plan Using Hiring and Firing 43 44 Beginning Number of Employees 60 45 46 Detailed Plan Computations Period 47 1 2 3 4 5 6 7 8 48 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 49 Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 50 Number of employees needed 60 39 30 51 69 42 33 60 51 Number of hires 0 0 0 21 18 0 0 27 52 Number of fires 0 21 9 0 0 27 9 0 53 54 Cost Calculations for Plan G 55 Regular time labor cost $491,520 56 Hiring cost $16,500 57 Firing cost $9,900 58 Total Cost $517,920 Total cost reduced by $114K over Plan F, utilization improved to 100%, and cost per service call now $33.72 (-$7.41) Workforce fluctuates from 30-69 people- morale problems Solution?? Compare smaller permanent workforce, more OT?? 31
- 32. Aggregate Planning Bottom Line The Aggregate plan must balance several perspectives Costs are important but so are: Customer service Operational effectiveness Workforce morale A successful AP considers each of these factors 32
- 33. Master Production Scheduling Master production schedule (MPS) is the anticipated build schedule MPS is often stated in produce or service specifications rather than dollars MPS is often built, managed, reviewed and maintained by the master scheduler 33
- 34. Planning Links to MPS 34
- 35. Role of the MPS Aggregate plan: Specifies the resources available (e.g.: regular workforce, overtime, subcontracting, allowable inventory levels & shortages) Master production schedule: Specifies the number & when to produce each end item (the anticipated build schedule) Disaggregates the aggregate plan 35
- 36. Objectives of Master Schedule The Master Scheduler must: Maintain the desired customer service level Utilize resources efficiently Maintain desired inventory levels The Master Schedule must: Satisfy customer demand Not exceed Operation’s capacity Work within the constraints of the Aggregate Plan 36
- 37. MPS as a Basis of Communication MPS is a basis for communication between operations and other functional areas Demand management and master scheduler communication is ongoing to incorporate Forecasts, order-entry, order-promising, and physical distribution activities Authorized MPS is critical input to the material requirements planning (MRP) 37
- 38. Developing an MPS The Master Scheduler: Develops a proposed MPS Checks the schedule for feasibility with available capacity Modifies as needed Authorizes the MPS Consider the following example: Make-to-stock environment with fixed orders of 125 units There are 110 in inventory to start When are new order quantities needed to satisfy the forecasted demand? 38
- 39. The MPS Record W eek BI 1 2 3 4 5 6 7 8 9 10 11 12 F orec as t 50 50 50 50 75 75 75 75 50 50 50 50 P rojec t ed ava ila ble 110 60 10 -4 0 MPS W eek BI 1 2 3 4 5 6 7 8 9 10 11 12 F orec as t 50 50 50 50 75 75 75 75 50 50 50 50 P rojec t ed ava ila ble 110 60 10 85 35 -40 MPS 12 5 Projected Available = beginning inventory + MPS shipments - forecasted demand The MPS row shows when replenishment shipments need to arrive to avoid a stock out (negative projected available) 39
- 40. Revised and Completed MPS Record W eek BI 1 2 3 4 5 6 7 8 9 10 11 12 Forec as t 50 50 50 50 75 75 75 75 50 50 50 50 P rojec ted available 110 60 10 85 35 85 10 -65 MPS 125 125 W eek BI 1 2 3 4 5 6 7 8 9 10 11 12 Forec as t 50 50 50 50 75 75 75 75 50 50 50 50 P rojec ted available 110 60 10 85 35 85 10 60 110 60 10 85 35 MPS 125 125 125 125 125 40
- 41. Evaluating the MPS Rough-cut capacity planning: An estimate of the plan’s feasibility Given the demonstrated capacity of critical resources (e.g.: direct labor & machine time), have we overloaded the system? Customer service issues: Does “available-to-promise” inventory satisfy customer orders? If not, can future MPS quantities be pulled in to satisfy new orders? 41
- 42. Stabilizing the MPS 42
- 43. Aggregate Planning Across the Organization Aggregate planning, MPS, and rough-cut capacity affection functional areas throughout the organization Accounting is affected because aggregate plan details the resources needed by operations Marketing uses the aggregate plan to support the marketing plan Information systems maintains the databases that support demand forecasts and other such information 43
- 44. Chapter 13 Highlights Planning begins with the development of the strategic business plan that provides your company’s direction and objectives for the next two to ten years. Sales and operations planning integrates plans from the other functional areas and regularly evaluates company performance. The level aggregate plan maintains the same size workforce and produces the same output each period. Inventories and backorders absorb fluctuations in demand. The chase aggregate plan changes the capacity each period to match the demand Demand patterns can be smoothed through pricing incentives, reduced prices for out-of-season purchases, or nonprime service times. 44
- 45. Chapter 13 Highlights (continued) The difference in aggregate planning for companies that do not provide a tangible product is that the option to use inventories is not available The MPS shows how the resources authorized by the AP will be used to satisfy the organizational objectives. The MPS specifies the products to be built in each time period. MPS is checked for feasibility using a rough-cut capacity planning technique. The objectives of master scheduling are to satisfy customer service objectives, use resources effectively, and minimize costs. 45
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