Aggregate Planning Aggregate Planning

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Aggregate PlanningAggregate Planning

Goal: Specify the optimal combination ofGoal: Specify the optimal combination of production rateproduction rate workforce levelworkforce level inventory on handinventory on hand

Product group or broad category (Aggregation)Product group or broad category (Aggregation)

Medium-Range: 6-18 months Medium-Range: 6-18 months

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Aggregate PlanningAggregate PlanningTerminologyTerminology

Production RateProduction Rate

Workforce LevelWorkforce Level

Inventory on Hand Inventory on Hand

InputsInputsInputsInputs

A forecast of aggregate demand covering the selected A forecast of aggregate demand covering the selected planning horizon (6-18 months)planning horizon (6-18 months)

The alternative means available to adjust short- to The alternative means available to adjust short- to medium-term capacity, to what extent each medium-term capacity, to what extent each alternative could impact capacity and the related costsalternative could impact capacity and the related costs

The current status of the system in terms of The current status of the system in terms of workforce level, inventory level and production rate workforce level, inventory level and production rate

OutputsOutputsOutputsOutputs

A production plan: aggregate decisions for each A production plan: aggregate decisions for each period in the planning horizon aboutperiod in the planning horizon about workforce levelworkforce level inventory levelinventory level production rateproduction rate

Projected costs if the production plan was Projected costs if the production plan was implementedimplemented

StrategiesStrategiesStrategiesStrategies

Matching Demand (Chase Demand)Matching Demand (Chase Demand) Level Capacity (Constant Production Rate)Level Capacity (Constant Production Rate)

Buffering with inventoryBuffering with inventory Buffering with backlogBuffering with backlog Buffering with overtime or subcontractingBuffering with overtime or subcontracting

Hybrid strategies ( Mixed Policy)Hybrid strategies ( Mixed Policy)

Matching Demand StrategyMatching Demand StrategyMatching Demand StrategyMatching Demand Strategy

Capacity (Production) in each time period is varied to Capacity (Production) in each time period is varied to exactly match the forecasted aggregate demand in exactly match the forecasted aggregate demand in that time periodthat time period

Capacity is varied by changing the workforce levelCapacity is varied by changing the workforce level Finished-goods inventories are minimalFinished-goods inventories are minimal Labor and materials costs tend to be high due to the Labor and materials costs tend to be high due to the

frequent changesfrequent changes

Level Capacity StrategyLevel Capacity StrategyLevel Capacity StrategyLevel Capacity Strategy

Capacity (production rate) is held level (constant) Capacity (production rate) is held level (constant) over the planning horizonover the planning horizon

The difference between the constant production rate The difference between the constant production rate and the demand rate is made up (buffered) by and the demand rate is made up (buffered) by inventory, backlog, overtime, part-time labor and/or inventory, backlog, overtime, part-time labor and/or subcontractingsubcontracting

Developing and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production Plan

Developing and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production Plan

Assume that the amount produced each period is Assume that the amount produced each period is constant, no hirings or layoffsconstant, no hirings or layoffs

The gap between the amount planned to be produced The gap between the amount planned to be produced and the forecasted demand is filled with either and the forecasted demand is filled with either inventory or backorders, i.e., no overtime, no idle inventory or backorders, i.e., no overtime, no idle time, no subcontractingtime, no subcontracting

Developing and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production Plan

Developing and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production Plan

The primary costs of this strategy are inventory The primary costs of this strategy are inventory carrying and backlogging costscarrying and backlogging costs

Period-ending inventories or backlogs are determined Period-ending inventories or backlogs are determined using the inventory balance equation:using the inventory balance equation:

EIEItt = EI = EIt-1t-1 + (P + (Ptt - D - Dt t ))

Aggregate Plans for ServicesAggregate Plans for ServicesAggregate Plans for ServicesAggregate Plans for Services

For standardized services, aggregate planning may be For standardized services, aggregate planning may be simpler than in systems that produce productssimpler than in systems that produce products

For customized services,For customized services, there may be difficulty in specifying the nature and there may be difficulty in specifying the nature and

extent of services to be performed for each extent of services to be performed for each customercustomer

customer may be an integral part of the production customer may be an integral part of the production systemsystem

Absence of finished-goods inventories as a buffer Absence of finished-goods inventories as a buffer between system capacity and customer demandbetween system capacity and customer demand

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Aggregate Planning ExampleAggregate Planning Example

Keepdry, a small manufacturing company (200 employees), produces umbrellas. The company, founded in 1991 produces the following three product lines: 1) the Executive Line, 2) the Durable Line and 3) the Compact line shown in the following figure.

Executive Line

Durable Line

Compact Line

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Aggregate DemandAggregate Demand(Executive Line)(Executive Line)

0

2000

4000

6000

8000

10000

J a n Fe b Ma r Apr Ma y J un

45005500

7000

10000

8000

6000

Number of working days:Jan 22Feb 19Mar 21Apr 21May 22Jun 20

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ExamplesExamplesCost InformationCost Information

Materials $5/unitHolding costs $1/unit per mo.Marginal cost of stockout $1.25/unit per mo.Hiring and training cost $200/workerLayoff costs $250/workerLabor hours required .15 hrs/unitStraight time labor cost $8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8

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Determining Straight Labor Costs and OutputDetermining Straight Labor Costs and Output

Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67$/worker $1,408 1,216 1,344 1,344 1,408 1,280

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Chase StrategyChase Strategy(Hiring & Firing--meet demand)(Hiring & Firing--meet demand)

Beginning workforce level: 7 employees

JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408

JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0

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Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1,063 918 1,015 1,015 1,063 967$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

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Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

Jan Feb Mar Apr May Jun CostsMaterial $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62Hiring cost 400.00 200.00 600.00 1,200.00Firing cost 750.00 500.00 250.00 1,500.00

$260,408.62

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Level WorkforceLevel Workforce(Surplus and Shortage Allowed)(Surplus and Shortage Allowed)

Workforce level: 6 employees

JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6Production 6,380Ending inventory 2,130Surplus 2,130Shortage

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Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250 2,130 10 -910 -3,910 -1,620Net req. 4,250 5,500 7,000 10,000 8,000 6,000Workers 6 6 6 6 6 6Production 6,380 5,510 6,090 6,090 6,380 5,800Ending inventory 2,130 10 -910 -3,910 -1,620 -200Surplus 2,130 10Shortage 910 3,910 1,620 200

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Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250 2,130 10 -910 -3,910 -1,620Net req. 4,250 5,500 7,000 10,000 8,000 6,000Workers 6 6 6 6 6 6Production 6,380 5,510 6,090 6,090 6,380 5,800Ending inventory 2,130 10 -910 -3,910 -1,620 -200Surplus 2,130 10Shortage 910 3,910 1,620 200

Jan Feb Mar Apr May JunLabor $8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.00Material 31,900 27,550 30,450 30,450 31,900 29,000 181,250.00Carrying 2,130 10 2,140.00Stockout 1,138 4,888 2,025 250 8,300.00

$239,690.00