Aggregate Production Planning

Rohit kapoor

Aggregate Production Planning

• Production Planning is a complex problem!• Macro-production planning

– Deciding about how many employees the firm should retain

– Product mix to be produced by a manufacturing firm– In service industry

• Airlines (staffing level of flight attendants and pilots)• Hospitals (staffing level of nurses)

Planning Levels and Activities

• Short range (now to 3 months)– Detailed scheduling, routings, alternate work centers

(lower level management) • Intermediate range (3 – 18 months)

– Aggregate planning or workforce, overtime, inventory, subcontracting, minor capacity changes (midlevel management)

• Long range (18 months - ???)– Major capacity decisions, product – process decisions

(top level management)

Some Views

• Costs can be controlled only by making frequent changes in the size and/or composition of workforce– Airlines industry

• Other firms have a reputation of retaining employees, even in the bad times

– AT & T, IBM, Japanese firms

Master Schedule

• Forecasting • Aggregate production planning• Master production schedule

Month Jan Feb Mar Apr May Jun Jul Aug SepNumber of Motors 40 25 55 30 30 50 30 60 40

Month Jan Feb Mar Apr May Jun Jul Aug SepAC Motors:

5 hp 15 - 30 - - 30 - - 1025 hp 20 25 25 15 15 15 20 30 20

DC Motors20 hp - - - - - - 10 10 -

WR Motors10 hp 5 - - 15 15 5 - 20 10

Aggregate Plan

Master Schedule

Variables used in Aggregate Planning

Decision Variable Associated CostVarying size of work force Hiring, training and layoff costsUsing overtime or accepting idle time Wage premiums and non-productive time costsVarying inventory levels Carrying and storage costsAccepting backorders Stockout costs of lost ordersSubcontracting work to others Higher labor and material costsChanging the use of existing capacity Delayed response & higher fixed costs

An Example

• Densepack is to plan workforce and production level for the six month period January to June. The firm produces a line of disk drivers for mainframe computers. Forecast demands over the next six months for a particular line of drives produced in plant are 1280, 640, 900, 1200, 2000 and 1400. There are currently (end of December) 300 workers employed in the plant. Ending inventory in December is expected to be 500 units, and the firm would like to have 600 units on hand at the end of June. Cost of hiring is $500, Cost of firing is $1000 & Cost of Holding one unit of inventory for one month is $80.

Example … Contd.

• In the past, the plant manager observed that over 22 working days, with the work force level constant at 76 workers, the firm produced 245 disk drives. Evaluate the following two plans: 1) Changing the work force to meet the demand2) Maintain the minimum constant work force

Month Number of Working Days

January 20February 24

March 18April 26May 22June 15

Analysis• Planning horizon = 6 months• Planning period = 1 month• Forecast (6 mth): 1280, 640, 900, 1200,

2000, 1400• Current worker level = 300• Initial inventory = 500 units• Required ending inventory = 600 units• cH = $ 500, cF = $ 1000; cI = $ 80

(unit/mth); no shortages• K = 0.14653 drives/day

Option 1: Zero Inventory Plan

Month Days/Month Forecast Worker Level Hire FireA B C D E F G

Jan 20 2.9306 780 266Feb 24 3.51672 640 182Mar 18 2.63754 900 341Apr 26 3.80978 1200 315May 22 3.22366 2000 620Jun 15 2.19795 2000 910

APP Exercise• A manufacturer of electrical switchgears is in the process of preparing

the aggregate production plan for the next year. Let us assume that a good measure of capacity is the number of working hours available per month. Table 1 presents details pertaining to the forecast demand for the “equivalent” model of switchgears and the number of working days available during the planning horizon. The following relevant details are also available:

– The manufacturer currently works on a single shift basis and employs 125 workers.

– One unit of switchgear requires 100 hours of production time. – It is expected that at the beginning of the planning horizon, there will be

a finished goods inventory of 200 switchgears.Inventory carrying costs are INR 1000 per switchgear per month and unit

shortage/backlogging costs are 200 percent of unit carrying cost.

Table 1Month Demand (in Units) Number of Working Days

April 250 23 May 220 22 June 300 21 July 290 24 August 260 22 September 180 22 October 200 19 November 220 23 December 250 21 January 200 23 February 240 20 March 270 24

Devise a level production strategy with constant workforce and constant working hours. Compute the cost of the plan.

Part II• Consider the previous example. Assume the switchgear

manufacturer has no opening stock of inventory and chooses to devise a chase production strategy. The following additional information is available:– Overtime costs are INR 40 per hour and under-time costs are INR

20 per hour– Hiring and training expenses are INR 7500 per worker and laying-

off costs are INR 5000 per workerEvaluate the following options for chase strategy and offer your

suggestions to the switchgear manufacturer:Utilizing overtime and under-time alternativesUsing hiring and laying-off alternatives for capacity adjustment

Part IIIConsider Part II example. Assume that on the basis of these

computations, the switchgear manufacturer has come up with a plan that employs the following alternatives:Hire 25 more workers at the beginning of April.Lay off the 25 workers at the end of August. Maintain constant working hours (1 shift of 8 hours) throughout the year. Absorb the demand-supply mismatch by building inventory during periods of lean demand and by resorting to OT during periods of excess demand.

Evaluate the cost of this plan and compare it with the earlier alternatives. What are the key inferences?