03 aggregate planning (2)

Aggregate Planning

1 Sasadhar Bera, IIM Ranchi

Outline


Production Planning Framework

Understanding Aggregate Planning

Demand Management and Capacity Options

Aggregate Planning Strategies

Aggregate Planning Input and Output

Different Solution Approaches to Aggregate

Planning Problems

Production Planning System

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Sasadhar Bera, IIM Ranchi

A production plan requires both external and internal inputs. It cannot be determined by only manufacturing person alone. Production plan includes external inputs such as competitors behavior (new product introduction, promotional price and special offers), raw material availability, market demand, subcontracting capacity and economic conditions of regions or country. The internal inputs are workforce size and skills, available machine capacity, and anticipated inventory level.

Inputs in Production Planning

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Planning

for

production

External capacity

Competitors behavior

Raw material availability

Market demand

Economic conditions

Current physical capacity

Current workforce

Inventory levels

Activities required

for production

External to firm

Internal to firm

What is Manufacturing Requirement Planning ?

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Manufacturing Requirement Planning (MRP II) involves a hierarchy of decisions. Its planning framework provides both production and capacity decisions in different levels as described below.

Sales and operations planning (S&OP) translates corporate strategic and capacity plans to meet the demand in plant level.

The second level is master production schedule (MPS), in which production plans are specified by individual product.

Third level material requirement plan (MRP) determines subparts and material needed to produce a product. It provides a procurement schedule.

Shop floor scheduling schedules the manufacturing operations required to make each component.

Manufacturing Requirement Planning MRP II

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Items

Product lines or families

Individual product

Components

Manufacturing operations

Resource Level

Plants

Individual machine

Critical work

centers

Production Planning

Capacity Planning

Resource requirements

plan

Rough-cut capacity plan

(RCCP)

Capacity requirements plan (CRP)

Input/ output control

Sales and operation planning (S&OP)

Master production schedule

(MPS)

Material requirements plan (MRP)

Shop floor

schedule

All work centers

Capacity Planning

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In capacity planning, a resource requirement plan is developed to verify that sales and operations plan can be performed or achieved. Rough-cut-capacity plan (RCCP) is quick check to see if the master production schedule is feasible in terms of resource requirements. Capacity requirement plan (CRP) provides more details plan that matches and adjusts the factorys machine and labour resources to the material requirements plan. Finally, input/output control monitors the production that takes place at individual machine or work center.

Overview of Planning Levels

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Long-range planning: Planning is done annually and focusing on a horizon of a year or more. Adjustments are made usually quarterly or monthly. Long range planning are product selection, determining facility size and location, equipment decisions, and layout of facilities. Intermediate-range planning: Covers a period of 6 to 12 months with weekly or monthly adjustments. Examples: Material requirement planning (MRP), Capacity requirement planning (CRP). Short-range planning: Covers less than 6 months with either daily or weekly monitoring activities. Examples: machine loading, job assignment.

What is Aggregate Planning ?

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In operations and supply chain management, sales and operations planning is called Aggregate Planning. An aggregate planning is process for coordinating supply and demand. The new terminology, aggregate planning, captures both the cross functional activities viz. sales and operations plan, and resource requirements plan in MRP II framework. It is an intermediate-range planning, usually covering 6 to 12 months. The term aggregate refers to groups of product or product families. The plans are developed for groups of product rather than individual product. Choosing meaningful groups require a thorough knowledge of the products as well as manufacturing processes.

What is Aggregate Planning ? (Contd.)

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For example, an aggregate operation plan regarding motor bikes manufacturng might specify how many bikes are to be produced in each quarter in a year but not segregated by colour, engine cylinder, and tires. In this case, product families can be divided into two groups such as mountain bikes, and road bikes. Resource capacity is also expressed in aggregate terms, typically as labour or machine hours. Labour hours would not be specified by types of labour (full time or part time), nor machine hours by types of machine.

Dimension of Aggregation

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Product families: Families are defined considering process operations, workforce requirements and material requirements. Sometimes product families is related to market groupings such as location and customer segments. Resource availability: Workforce skills and types, types of machine. Time: The planning horizon covered by aggregate planning typically is one year, although it can differ in various situations. Adjustments are made usually quarterly or monthly. Hence company looks in aggregation in terms of month, or quarter, or season.

Why Aggregate Planning is Necessary?

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Aggregate level forecasts are generally more accurate than individual item forecast. Hence to cope up with demand fluctuation, production should be planned in aggregate to obtain effective resource utilization.

It is easy to incorporate corporate level strategy considering aggregate level capacity and resources.

Objective of Aggregate Planning

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The main purpose of the aggregate plan is to specify the optimal combination of production levels, workforce levels and inventory levels in a time horizon. The objective function is to minimize the total cost over a multi-period planning horizon. Given a demand forecast Ft for each period t in the planning horizon that extends over T periods, determine the production level Pt, workforce level Wt , and inventory level It for periods t = 1, 2, . . ., T that minimizes total cost over the planning horizon.

Demand Management

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The process of changing demand pattern using one or more demand options is known as demand management. The demand options to manage uneven demand are:

Pricing: Differentials pricing is commonly used to shift demand from peak periods to the off-peak periods.

Promotion: Promotional campaigns such as advertising, displays, and direct marketing, discount coupons.

Complementary product: Products that have similar resource requirements but different demand cycles make demand even.

Backorder: Taken customer order that is temporarily out of stock and cannot be filled immediately but is filled as soon as possible.

Capacity Options

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Anticipation inventory: The finished goods inventory in one period can be used to absorb fluctuation of demand in another period.

Workforce adjustment: Hire or layoff of workers to match demand by producing more or less.

Overtime and under time: Increase or decrease working hours during the day or fewer days per week in case of high or low demand situation.

Subcontracting: Outsource from another firm to get supply of components, subassemblies, or even an entire product in case of high demand.

Part time workers: Hire part-time employees when they are needed.

Aggregate Planning Strategies

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Aggregate planning evaluates alternative capacity sources to find an economic strategy for satisfying demand. There are two major strategies as described below: Pure strategy: When one of the capacity options is used to absorb demand fluctuation is known as pure strategy. Mixed strategy: Two or more capacity options are used in combination to constitute a mixed strategy. It may consider combinations of all capacity options such as anticipation inventory, workforce adjustments, part-time worker, subcontract, and backorder to determine a feasible production plan.

Aggregate Planning Strategies (Contd.)

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Level strategy: It is come under pure strategy. The production rate kept constant and uses inventory to absorb variations in demand. During period of low demand, overproduction is stored as inventory. This inventory is to be depleted in high demand period.

Demand

Un

its

Time

Average Production

Aggregate Planning Strategies (Contd.)

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Chase strategy: It is come under pure strategy. The chase strategy involves in hiring and laying off workforce size to match the demand over the planning horizon. Additional workers are hired during high demand period and workers are laid off in low demand period. This strategy is applicable for low skill jobs.

Demand

Un

its

Time

Production

Advantages and Disadvantages

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Level strategy: Workforce levels and production output are stable Involve high inventory and labour costs Chase strategy: Reduce inventory costs High level of workforce utilization Cost involves in fluctuating workforce levels Potential damage to employee morale

Example: Toy Production Planning

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Demand for Quantum Corporations action toy series follows a seasonal pattern growing through the fall months and culminating in December, with smaller peaks in January.

MONTH DEMAND (CASES)

MONTH DEMAND (CASES)

January 1000 July 500

February 400 August 500

March 400 September 1000

April 400 October 1500

May 400 November 2500

June 400 December 3000

Example: Toy Production Planning (contd.)

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Each worker can produce on an average 100 cases of action toys each month. Overtime is limited to 300 cases, and subcontracting is unlimited. No action toys are currently in inventory. The wage rate is $10 per case for regular production, $15 for overtime production, and $25 for subcontracting. No stock outs are allowed. Holding cost is $1 per case per month. Increasing the workforce costs approximately $1,000 per worker. Decreasing the workforce costs $500 per worker.

Management wishes to test the following scenarios for planning production

i. Level production over the 12 months

ii. Produce to meet demand each month

Example: Level Strategy

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Month Demand Reg OT Subk Inv #Wkrs #Hired #Fired Reg

Prod Cost

Inv

Cost

Jan 1000 1,000 0 0 0 10 0 0 10,000 0

Feb 400 1,000 0 0 600 10 0 0 10,000 600

Mar 400 1,000 0 0 1,200 10 0 0 10,000 1,200

Apr 400 1,000 0 0 1,800 10 0 0 10,000 1,800

May 400 1,000 0 0 2,400 10 0 0 10,000 2,400

Jun 400 1,000 0 0 3,000 10 0 0 10,000 3,000

Jul 500 1,000 0 0 3,500 10 0 0 10,000 3,500

Aug 500 1,000 0 0 4,000 10 0 0 10,000 4,000

Sept 1000 1,000 0 0 4,000 10 0 0 10,000 4,000

Oct 1500 1,000 0 0 3,500 10 0 0 10,000 3,500

Nov 2500 1,000 0 0 2,000 10 0 0 10,000 2,000

Dec 3000 1,000 0 0 0 10 0 0 10,000 0

Total 12,000 12,000 0 0 26,000 0 0 120,000 26,000

Input: Beg. Wkrs 10 Regular $10 Hiring $1,000

Units/Wkr 100 Overtime $15 Firing $500 Cost: $146,000

Beg. Inv. 0 Subk $25 Inventory $1

Example: Chase Strategy



Units/Wkr 100 Overtime $15 Firing $500 Cost: $149,000


Month Demand Reg OT Subk Inv #Wkrs #Hired #Fired Reg

Prod

Cost

Hiring/

Firing

Cost

Jan 1000 1000 0 0 0 10 0 0 10,000 0

Feb 400 400 0 0 0 4 0 6 4,000 3,000

Mar 400 400 0 0 0 4 0 0 4,000 0

Apr 400 400 0 0 0 4 0 0 4,000 0

May 400 400 0 0 0 4 0 0 4,000 0

Jun 400 400 0 0 0 4 0 0 4,000 0

Jul 500 500 0 0 0 5 1 0 5,000 1,000

Aug 500 500 0 0 0 5 0 0 5,000 0

Sept 1000 1000 0 0 0 10 5 0 10,000 5,000

Oct 1500 1500 0 0 0 15 5 0 15,000 5,000

Nov 2500 2500 0 0 0 25 10 0 25,000 10,000

Dec 3000 3000 0 0 0 30 5 0 30,000 5,000

Total 12,000 12,000 0 0 0 26 6 120,000 29,000

Example: Subcontracting

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Suppose that Quantum Corporation has decided to produce 600 units per month and meet rest of the demand by subcontracting. It is also decided no overtime to the workers and hiring/firing of workers. What should be the total cost in such situation?

Example: Subcontracting (Contd.)



Units/Wkr 100 Overtime $15 Firing $500 Cost: $1,98,100


Month Demand Reg OT Subk Inv #Wkrs

Reg

Prod Cost

Inv

Cost

Subk

Cost

Jan 1000 600 0 400 0 6 6,000 0 10,000

Feb 400 600 0 0 200 6 6,000 200 0

Mar 400 600 0 0 400 6 6,000 400 0

Apr 400 600 0 0 600 6 6,000 600 0

May 400 600 0 0 800 6 6,000 800 0

Jun 400 600 0 0 1,000 6 6,000 1,000 0

July 500 600 0 0 1,100 6 6,000 1,100 0

Aug 500 600 0 0 1,200 6 6,000 1,200 0

Sept 1000 600 0 0 800 6 6,000 800 0

Oct 1500 600 0 100 0 6 6,000 0 2,500

Nov 2500 600 0 1,900 0 6 6,000 0 47,500

Dec 3000 600 0 2,400 0 6 6,000 0 60,000

Total 12,000 7,200 0 4,800 6,100 72,000 6,100 1,20,000

Aggregate Planning Input

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Demand forecast Resources

Workforce Facilities

Policy statements

Overtime Subcontracting Inventory levels Back orders

Costs

Regular time cost

Overtime cost

Hiring cost

layoff cost

Under-time cost

Subcontracting cost

Inventory carrying cost

Shortage cost/Back order cost

Set-up cost

Aggregate Planning Output

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Total cost of a plan

Projected level of

Workforce

Inventory

Subcontracting

Back orders

Solution Approaches to Aggregate Planning Problems

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The below mentioned solution approaches use combinations of all capacity options (i. e. mixed strategy) to determine optimal production plan. I. Linear programming approach II. Transportation model based approach III. Dynamic programming approach IV. Quadratic model HMMS Rule

LP approach: Candy Production Planning

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The Good and Rich candy company makes a variety of candies in three factories worldwide. Given the quarterly sales forecasts and costs, determine optimum production level, workforce level, and inventory level.

Quarter Sales forecast (lbs) Spring 80,000

Summer 50,000 Fall 120,000

Winter 150,000

Hiring cost = $100 per worker , Layoff cost = $500 per worker Inventory carrying cost = $0.50 per pound per quarter Regular production cost per pound = $2 Production per employee = 1000 pound per quarter Beginning workforce = 100 workers

Problem Formulation: Candy Production Planning

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Dt : demand at time t, where t = 1, 2, 3, 4 (four quarters) Wt : workforce size at time t Rt : regular quarterly production Ht : Number of workers hired for time t Ft : Number of workers layoff/fired for time t It : Inventory (in units) at the end of time t

Zmin = 100 (H1 + H2 + H3 + H4)

+ 500 (F1 + F2 + F3 + F4)

+ 0.50 (I1 + I2 + I3 + I4)

+ 2 (R1 + R2 + R3 + R4)

Problem Formulation: Candy Production Planning

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Subject to

Demand constraint: It-1 + Rt - Dt = It => It-1 + Rt - It = Dt

R1 - I1 = 80,000 (1)

I1 + R2 - I2 = 50,000 (2)

I2 + R3 - I3 = 120,000 (3)

I3 + R4 - I4 = 150,000 (4)

Production constraint: k Wt = Rt

1000 W1 = R1 (5)

1000 W2 = R2 (6)

1000 W3 = R3 (7)

1000 W4 = R4 (8)

Workforce constraint: Wt-1 + Ht Ft = Wt

100 + H1 - F1 = W1 (9)

Work force W1 + H2 - F2 = W2 (10)

constraints W2 + H3 - F3 = W3 (11)

W3 + H4 - F4 = W4 (12)

Solution: Candy Production Planning

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Total cost = 4,00,000*2 + 30,000*0.5 + 70*100 + 20*500 = $8,32,000 Note: Overtime and subcontracting is not considered in this formulation

Quarter Demand Production Inventory Worker Needed

Worker Hired

Worker Fired

Spring 80,000 80,000 0 80 0 20 Summer 50,000 80,000 30,000 80 0 0 Fall 1,20,000 90,000 0 90 10 0 Winter 1,50,000 1,50,000 0 150 60 0 Total 4,00,000 4,00,000 30,000 70 20

Beg Wkforce 100 Prod. Cost $2.00 Firing cost $500

Units/wker 1000 Inv. Cost $0.50 Hiring cost $100

Beg Inv. 0

Transportation model based Approach

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This approach is restricted version of linear programming approach. Transportation model based approach considers six different cost components viz. regular time, and overtime cost, subcontracting, and under-time cost, inventory and shortage cost. This approach does not consider variable workforce costs (hiring/layoff). Another cost component, set-up cost, cannot be incorporated in this model. But linear programming approach can consider set-up cost component. Computation time is less in case of transportation model due to the special structure of the model.

Transportation Model based Approach (Contd.)

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r, o, and c regular, overtime, and subcontracting cost. i is inventory holding cost /period. M indicates very large value, no allocation is possible in this cell.

Transportation Model based Approach (Contd.)


In this tableau back order is allowed. Cell having cost (r +2b) indicates that cost at period 3 for demand of period 1. b is back order cost/period.

Example: Transportation Model based Approach

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37



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It is to be noted that Northwest corner rule is used to get initial solution with minimum cost allocation. It may not be optimal solution. The optimal solution is generated by using stepping stone method or modified distribution method.

Dynamic Programming Solution Approach

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In this approach, generally three costs are considered viz. set-up cost, regular production cost and inventory carrying cost. Decision variable is the amount of quantity that should be produced in each time period in a planning horizon. The state variable is the amount of inventory available at the beginning of each period. Objective function is total cost (set-up + production + inventory). Wagner and Whitin algorithm (1958) used to get optimal solution.

Quadratic Model HMMS Rule

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Quadratic model was developed by Holt, Modigliani, Muth, and Simon (1960) is known as HMMS rule. The decision variables considered in this model are production levels, workforce size, and inventory levels.

The objective function is quadratic, not linear but constraints are linear. The cost components considered in objective function are regular production cost, hiring and layoff cost, overtime and under-time cost, inventory and shortage cost. All cost components are in quadratic form.

The optimization technique is similar to quadratic optimization problem. This model gives closer results towards actual situation because in actual practice cost component are not linear.

References

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i. Production Planning and Inventory Control, Narasimhan, McLeavey, Billington, 2th edition, Prentice Hall India.

ii. Operations Management: Processes and Supply Chains, Krajewski, Ritzman, Malhotra, and Srivastava, 9th edition, Pearson publication.

iii. Operations Management, Russell and Taylor, 7th edition, International student edition.

iv. Operations Management: Concepts, Techniques, and Applications, Evans and Collier, Cengage learning India edition.

v. Introduction to Material Management, Arnold, Chapman, and Clive, 6th edition, Pearson publication.

03 aggregate planning (2)

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