aggregate planning & mps

MAN 3520 – Spring 2012CP6 – Aggregate Planning and Master Scheduling: of 17

AGGREGATE PLANNING

Aggregate plan: Also called the production plan, it details the aggregate production rate decisions, work force decisions, and inventory scheduling decisions over an intermediate planning horizon. The aggregate plan is an intermediate range plan that typically spans one full year so that it can react to all the seasonal swings in the demand.

Aggregate plan units: At this level of planning, there is not a lot of detail. Individual end product identity is typically not present. Instead, planning is performed for a composite, or average unit of product in a particular family of similar products. For example, we may plan for units of hair dryers, without regard for whether they are 1500 watt dryers, 1600 watt dryers, 1875 watt dryers, travel dryers, etc. Decisions are typically aggregated into monthly time periods. Weekly or daily detail is not needed at this level of decision making. Eventually that finer detail will surface after the aggregate plan is further broken down (disaggregated).


NATURE OF THE AGGREGATE PLANNING PROBLEM

Time

Demand Forecast

1 year

Units of “Aggregate”

Product

Regular (or Normal) Capacity Limit


AGGREGATE PLANNING STRATEGIES

Options for coping with fluctuating demand are categorized as either capacity oriented options (operations oriented strategies) or demand oriented options (marketing oriented strategies). Operations oriented strategies can be further classified as either a leveling strategy or a chase strategy. Marketing tactics for dealing with demand seasonality include inducing demand shifts, utilizing back orders, or offering counter seasonal products

Aggregate Planning Strategies

Capacity Oriented Options Demand Oriented OptionsLeveling strategy

- Changing inventory levelsChase strategy

- Hire or layoff- Overtime or idle time - Subcontracting- Part-time workers

Influencing demand- Sales, discounts, rebates,

promotions, etc.Back ordering

- Take orders, ship laterCounter seasonal products


EXAMPLES OF OPERATIONS STRATEGIES

Leveling strategy: Maintain output at a constant (level) rate throughout the planning horizon. Accommodate seasonal variations in demand through the accumulation and depletion of inventories.

Chase strategy: Vary the output rate to match the seasonal variations in demand. Output rate can be varied by (1) hiring and firing workers, (2) utilizing overtime and idle time, (3) subcontracting, (4) using part time workers.

Mixed strategy: A cost effective aggregate plan may require the use of a combination of the various strategies listed above. Such a plan is referred to as a mixed strategy.


SIMPLE DATA SET TO DEMONSTRATE DIFFERENT STRATEGIES

Demand forecasts have been made for our composite product, and they appear in the following table (I have scaled the numbers down to a manageable size. Demands were originally in thousands of units, but I am knocking off three zeros to make it more compact):

MonthJAN FEB

MAR

APR MAY JUN JUL AUG SEP OCT NOV DEC

Demand Forecast 100 150 250 400 250 50 90 160 260 390 240 60

The total annual demand from the above set of forecasts is 2400 units.

Additional DataHiring cost: $200 per worker hiredFiring cost: $100 per worker firedRegular pay: $5000 per worker per monthOvertime pay: 1.5 times regular payInventory carrying cost: $10 per unit (based on end of month balances)Backorder cost: $20 per unit (based on end of month shortage)Productivity: 10 units per worker per month (this has also been scaled down from what was originally expressed in thousands of units per month)Beginning workforce size: 20 workers (available at the beginning of January)Beginning inventory: 0 units (no inventory available at the beginning of January)


LEVEL STRATEGY WITH INVENTORY AND BACKORDERS

This strategy will produce at a constant rate, and simply accumulate and deplete inventory throughout the year. A first step is to determine what the monthly production needs to be (in order to produce enough to satisfy the demand for the year), and determine whether our initial work force size is sufficient to produce at this rate.

Total annual demand = 2,400 units.Average monthly production needed = 2,400 units/12 months = 200 units per month.Current work force size is 20 workers. This is just enough (because productivity = 10 units per worker per month).

Month JAN FEB MAR APR MAY

JUN JUL AUG SEP OCT NOV DECDemand Forecast 100 150 250 400 250 50 90 160 260 390 240 60Production 200 200 200 200 200 200 200 200 200 200 200 200Beginning Inv. 0 100 150 100 -100 -150 0 110 150 90 -100 -140Ending Inv. 100 150 100 -100 -150 0 110 150 90 -100 -140 0Carrying Cost 1000 1500 1000 1100 1500 900Backorder Cost 2000 3000 2000 2800Regular Labor Cost 100,000 100,00

0100,000 100,000 100,000 100,000 100,00

0100,000 100,000 100,000 100,00

0100,000

Overtime Cost

Total Inventory Carrying Cost: $7,000Total Backorder Cost: $9,800Total Hiring Cost 0Total Firing Cost 0Total Regular Payroll Cost: $1,200,000Total Overtime Payroll Cost: 0Total Annual Cost: $1,216,800


CHASE STRATEGY WITH HIRING AND FIRING

This strategy will produce exactly what is demanded each month. It will adjust capacity by hiring and firing workers at the beginning of each month so that the work force is the proper size to produce just what is demanded each month.

Month JAN FEB MAR

APR MAY JUN JUL AUG SEP OCT NOV DECDemand Forecast 100 150 250 400 250 50 90 160 260 390 240 60

Workers Needed 10 15 25 40 25 5 9 16 26 39 24 6

Number Hired 5 10 15 4 7 10 13

Number Fired 10 15 20 15 18

Hiring Cost 1,000 2,000 3,000 800 1,400 2,000 2,600

Firing Cost 1,000 1,500 2,000 1,500 1,800

Labor Cost 50,000 75,000 125,000 200,000 125,000 25,000 45,000 80,000 130,000 195,000 120,000

30,000

Overtime Cost

Total Inventory Carrying Cost: 0Total Backorder Cost: 0Total Hiring Cost $12,800Total Firing Cost $7,800Total Regular Payroll Cost: $1,200,000Total Overtime Payroll Cost: 0Total Annual Cost: $1,220,600


CHASE STRATEGY WITH OVERTIME AND IDLE TIME

This strategy will produce exactly what is demanded each month by maintaining its current workforce size of 20 workers at a constant value. It will adjust capacity by using overtime when demand exceeds the regular time capacity, and allow workers to sit idle when demand is less than the regular time capacity.

Month JAN FEB MAR APR MAY

JUN JUL AUG SEP OCT NOV DECDemand Forecast 100 150 250 400 250 50 90 160 260 390 240 60Capacity * 20 20 20 20 20 20 20 20 20 20 20 20Capacity Needed * 10 15 25 40 25 5 9 16 26 39 24 6Overtime * 5 20 5 6 19 4Idle Time * 10 5 15 11 4 14

Regular Labor Cost 100,000 100,000

100,000 100,000 100,000 100,000 100,000

100,000 100,000 100,000 100,000

100,000

Overtime Cost 37,500 150,000 37,500 45,000 142,500 30,000

* These items are expressed in worker months of output. For example, In January we need 100 units of output. The productivity of one worker is 10 units per month, so we would need 10 fully active workers worth of output during January to get 100 units of output. Since we actually have 20 workers on the payroll, we have the equivalent of 10 worker months of idle time during January.

In March we have our first overtime, which is the equivalent of 5 worker months of overtime. One worker month of labor on a regular time basis costs $5,000. Since the overtime rate is given as time and a half, a worker month of overtime would cost $7,500.

Total Inventory Carrying Cost: 0Total Backorder Cost: 0Total Hiring Cost 0Total Firing Cost 0Total Regular Payroll Cost: $1,200,000Total Overtime Payroll Cost: $442,500Total Annual Cost: $1,642,500


COMMENTS ABOUT THE PURE STRATEGIES DEVELOPED

Although the least costly of the three strategies developed above is the level strategy, and the most costly is the chase strategy using overtime, don't try to draw any general conclusions from these results. The costs generated are purely a function of the relative costs of hiring, firing, overtime, inventory carrying, and backorders. If these costs were to have had different values, the results could have been quite different.

Also, no claims are being made about the practicality of these pure strategies. There could be plenty of reasons why one or more would be impractical. For example, if the skilled workers are in great demand and hard to find, one would probably think twice about firing workers whenever they were not immediately needed. It might be quite difficult to replace them when the need arose. Also, close examination of the overtime strategy would reveal that the month of April is a killer for the workforce (and October isn't much kinder). In April we need the equivalent of 40 worker months of output. Since we have a workforce size of 20, that is equivalent to needing 20 worker months of overtime. To put this in perspective, if our workers normally work 40 hours per week, then each will have to work 80 hours per week in the month of April!

In reality, a company's aggregate plan will probably be a hybrid plan that may have used a combination of several of the pure strategies mentioned. For example, to ease the burden on the work force during April, we probably would not have allowed our workers to sit idle during January and February, but instead had them using their full time capacity to produce in excess of January and February demand. Those excess units would have been held in inventory to lessen the need for overtime in the later months. Even with that, overtime needs might have been excessive, so it may have been necessary to hire some temporary workers during those peak months to help get by. (Or, we might have subcontracted out some of the work, or we might have accepted some backorders, with the unsatisfied demand being satisfied in some of the later months when demand tails off.)

In short, the pure strategies might provide a starting point in the development of an aggregate plan, but those will almost certainly have to be tweaked to get a plan that is practical.


CHECKING THE FEASIBILITY OF THE AGGREGATE PLAN

Once an aggregate plan has been developed, it is a good idea to perform a check to make sure the plan will not overtax some critical or limited resource for the organization. (This is very similar to what we saw in MRP, when we used capacity requirements planning to check the feasibility of the materials plan. If the planned order releases were going to overburden a department, work center, or machine, we found it necessary to adjust the planned order releases).

In a similar fashion, we use a process called resource requirements planning to see if we will have sufficient resources to carry out our aggregate plan. These resources can be many and varied. For example, there may be limitations on our storage space (which impacts inventory), limitations on our personnel department capabilities (which impacts hiring and firing), limitations on machine capacity (which impacts production scheduled), limitations on energy availability (which impacts production scheduled), etc., etc., etc.


BRIEF ILLUSTRATION OF RESOURCE REQUIREMENTS PLANNING

To get a flavor for the concept of resource requirements planning, consider the following small portion of an aggregate plan that was developed for some company: (the company had a beginning workforce of 120 workers at the start of January, and zero beginning inventory)

These first two columns reflect the demand

forecasts. We developed an aggregate plan that would accommodate

these forecasts

These last five columns represent the results of our aggregate planning process. We put together a plan that had production decisions in each month, some inventory accumulation and

depletion, and some workforce size adjustments (hiring and firing). Before we implement this plan, it will be necessary to check to see if

we have enough resources to make it work.

Month Demand ProductionEnding

InventoryWorkforce

SizeNumber Hired

Number Fired

January 800 1000 200 100 20February 1200 2000 1000 200 100March 1800 1500 700 150 50April 2000 1800 500 180 30Etc. Etc. Etc. Etc. Etc. Etc. Etc.

Suppose that the warehouse has a storage limitation of 800 units. This plan will overtax that resource in February. We will either have to scale down the production quota for February, or find some alternative place for inventory storage.

Suppose that the personnel department staff is only capable of recruiting, interviewing, and training at most 50 workers in a given month. This plan will overtax the personnel department in February, with its requirement to hire 100 workers.

Suppose that the machines that make the product have a design capacity of only 1800 units per month. This plan will overtax the equipment in February, with its production quota of 2000 units.

As a result of all these observations, we should be doing a little tweaking of this plan to get it in a form that is doable. Otherwise, if we simply try to implement it as it stands, we are in for some trouble down the road.


FACTS ABOUT THE MASTER PRODUCTION SCHEDULE

The master production schedule (MPS) is an anticipated build schedule for end products. While it is a plan to satisfy customer demand, it is a statement of production and not a statement of demand.

The master production schedule is a disaggregation (break down) of the aggregate plan. It contains more product detail than the aggregate plan (distinct end items rather than composite or average units of product), and it uses finer time intervals (weeks rather than months).

The master production schedule is the driving force behind the generation of the material requirements plan.


BREAKING DOWN THE AGGREGATE PLAN

In this illustration we manufacture two different models (Model A and Model B) of some product. The aggregate plan generated the following schedule of planned production for an average unit of our product (I am displaying only the first few months of the aggregate plan, which would have spanned at least a full year. In addition, I have scaled down the numbers by dropping several zeros.)

Aggregate Plan:Month Jan Feb Mar Apr

Planned Production 200 100 300 400

For the purpose of projecting the needs for individual models, we have looked at historical records and find that Model A accounts for 60% of the demand for product, while Model B accounts for 40% of the demand. We will use those percentages, and our knowledge that demand typically occurs uniformly throughout a month to project the week by week production needs for our two models.

Aggregate Plan:Month Jan Feb Mar Apr

Planned Production 200 100 300 400

January FebruaryWeek 1 2 3 4 5 6 7 8

Model A 30 30 30 30 15 15 15 15Model B 20 20 20 20 10 10 10 10

These numbers can be viewed as a projection of our master schedule needs (we can refer to them as a "forecast" of MPS needs).

In actual practice the process of developing a master production schedule is quite a bit more complex than what is pictured above. That was just a first pass. Additional factors (such as available inventories of finished products, lot sizing issues with production batches, etc.) result in further tweaking of the numbers to get to a final master production schedule.


TESTING THE FEASIBILITY OF THE MPS -ROUGH-CUT CAPACITY PLANNING

When a master production schedule is developed, it must be checked for feasibility (i.e., check to see if there is enough available capacity to do what the master production calls for). Rough-cut capacity planning (RCCP) is the mechanism that tests the feasibility of the master production schedule. RCCP can be performed in a variety of ways. Some are simple and straightforward (but perhaps less precise) while others are more cumbersome and complex (but perhaps more precise). The simplest of these approaches is illustrated here. It uses historical averages to project capacity loads in the system.

Continuing our simple illustration in which we have two models (Model A and Model B) for our finished product, historical records indicate that each model requires machine time on two different machines, as follows:

Hours per unit on Machine 1 Hours per unit on Machine 2Model A 2 1.5Model B 3 2.5

Assume that we have disaggregated our aggregate plan and we have done some further tweaking to account for available inventories and lot sizing issues, resulting in the following master production schedule (displayed for only 8 weeks due to space limitations here).

Week1 2 3 4 5 6 7 8

MPS - Model A 20 40 20 40 20 20 0 20MPS - Model B 30 30 30 0 0 30 0 0

These MPS quantities can be combined with the historical data from above to project the following machine time loads.

Machine 1 Load Week1 2 3 4 5 6 7 8

Due to Model A 40 80 40 80 40 40 0 40Due to Model B 90 90 90 0 0 90 0 0Total Machine 1 Load 130 170 130 80 40 130 0 40

Machine 2 Load Week1 2 3 4 5 6 7 8

Due to Model A 30 60 30 60 30 30 0 30Due to Model B 75 75 75 0 0 75 0 0Total Machine 2 Load 105 135 105 60 30 105 0 30


CONTINUATION OF ROUGH-CUT CAPACITY PLANNING EXAMPLE

We will assume that our factory operates 7 days per week, and runs three 7-hour shifts each day (21 hours of operating time each day for 7 days yields a weekly machine capacity of 147 hours on each machine).

These capacity limits suggest that the proposed master production schedule presents a problem. There is not sufficient capacity on Machine 1 during week 2 to complete the schedule. Modifications to the master production schedule will be required before we can proceed with production. If this observation is not obvious from the Machine 1 projected load table on the prior page, a graphical load profile (standard bar charts) would have provided a quick visual display of the problem, as noted below:

Load Profile for Machine 1

Machine Hours

180

160Weekly Capacity Limit for Machine 1

140

120

100

80

60

40

20

1 2 3 4 5 6 7 8


TIME FENCES IN THE MASTER PRODUCTION SCHEDULE

Things change over time (orders get cancelled, new orders are placed, items in inventory get damaged, quality problems cause us to scrap a batch of items, etc., etc.). Circumstances like these impact our projections for MPS quantities. Sometimes these circumstances suggest that we must change the MPS to reflect these new conditions. Not all portions of the MPS are readily changeable; what changes we can make depend upon how far out into the future they are. In that context, the MPS is often thought of as having the following three portions:

Liquid portion of the MPS: This is the portion of the MPS that is beyond the total cumulative lead time for manufacturing the item. We haven't yet even started to make or order the lowest level items in the bill of materials for those MPS quantities. Therefore, we can easily change those MPS values with little or no impact on our planning system.

Slushy portion of the MPS: This is the portion of the MPS that is inside the total cumulative lead time for manufacturing the item, but beyond the lead time for the final assembly of components into the finished product. We can make limited changes at this stage, for we have already begun building the pieces and parts that will make up our final product. We can make changes like product mix changes (changing models, or versions of the product by assembling slightly different configurations of the already manufactured components).

Frozen portion of the MPS: This is the portion of the MPS that is inside the final assembly lead time for the item. At this point, we have already begun assembling the MPS batches of the items in question, and it is difficult to undo this or make model switches at this point.

A time fence is simply a point in time that defines the dividing line between two adjacent portions of the MPS. The demand time fence is the point in time on the time horizon that separates the frozen portion of the MPS from the slushy portion of the MPS. Further out on the time horizon you will find the planning time fence, which is the point in time on the time horizon that separates the slushy portion of the MPS from the liquid portion of the MPS.

No

Yes

Revise

No

Yes

Revise

Yes

Revise

No

Master ProductionSchedule (MPS)

Material RequirementsPlanning (MRP)

Bill ofMaterials (BOM)

Inventory Records File (INV)

Planned Order Releases (POR)

Demand Forecasting

Aggregate Planning

Is Aggregate Plan Feasible? (check with Resource Requirements Planning, RRP)

Is Master Production Schedule Feasible? (check with Rough Cut Capacity Planning, RCCP)

Are Planned Order Releases Feasible? (check with Capacity Requirements Planning, CRP)

Release Orders According to this Schedule

Disaggregate the Aggregate Plan


THE BIG PICTURE

aggregate planning & mps

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