Aggregate Planning

transcript

I. Introduction

A. Intermediate Planning

B. The Concept of Aggregation

II. The Purpose and Scope of Aggregate Planning

A. Demand and Capacity

B. Inputs of Aggregate Planning

C. Demand and Capacity Options

AGGREGATE PLANNING

III. Basic Strategies for Meeting Uneven Demand

IV. Techniques for Aggregate Planning

A. Informal Techniques

B. Mathematical Techniques

V. Aggregate Planning in Services

VI. Disaggregating the Aggregate Plan

VII. Master Scheduling

A. Inputs

B. Outputs

C. Stabilizing the Master Schedule

AGGREGATE PLANNING

DEFINITION:

• Aggregate planning is intermediate-range capacity planning that typically covers a time horizon of 2 to 12 months.

• It deals with translating annual business and marketing plans into a production plan for all products.

• It is particularly useful for organizations that experience seasonal or other fluctuations in demand or capacity.

The goal of aggregate planning is to achieve a production plan that will effectively utilize the organization’s resources to satisfy expected demand.

3 LEVELS WHICH ORGANIZATIONS MAKE CAPACITY DECISIONS:

1. Long-term decisions - relate to product and service selection, facility size and location, equipment decisions, and layout of facilities.

2. Intermediate decisions - relate to general levels of employment, output and inventories, which in turn define the boundaries within which short-range capacity decisions must be made.

3. Short-term decisions - consists of deciding the best way to achieve desired results within the constraints resulting from long-term and intermediate-term decisions.

Short-range plans

Detailed Plans: Machine LoadingJob assignmentsJob sequencingProduction lot sizeOrder quantitiesWork Schedules

Intermediate Plans

General levels of:EmploymentOutputFinished-goodsInventoriesSubcontractingBackorders

Long-range plans

Long-term capacityLocationLayoutProduct designWork system design

Long-range

Intermediate

Short-range

OVERVIEW OF PLANNING LEVELS

New 2 months

1 year Planning Horizon

MANUFACTURING PLANNING ACTIVITIES

Long-Range Planning -- begins with a statement of organization objectives and goals to be achieved over the next two to ten years. Corporate Strategic Planning -- articulates how these

objectives and goals are to be achieved in light of the company’s capabilities and its economic and political environment.

Product and Market Planning -- translates these into individual market and product line objectives.

Financial Planning -- analyzes the financial feasibility of these objectives relative to capital requirements and return on investment goals.

Resource planning -- identifies the equipment, facilities, and personnel needs to accomplish long-range production plan.

Medium-Range Planning Aggregate Production Planning -- specifies output

requirements by major product groups either in labor hours required or in units of production for monthly periods up to 18 months in the future.

Item Forecasting -- provides an estimate of specific products, which when integrated with aggregate production plan, become the output requirement for the m,aster production schedule.

Master Production Scheduling -- (MPS), generates the amounts and need dates for the manufacture of specific end products.

Rough-cut Capacity Planning -- reviews the MPS to make sure that there are no obvious capacity constraints that would require the schedule to be changed.

Short-range Planning–Materials Planning -- (MRP), takes the end product requirements from MPS and breaks it into component parts or subassemblies.– Capacity Requirements Planning -- (CRP), provides detailed schedule of when each operation is to be run on each work center.–Final Assembly Scheduling -- provides operations required to put the product in its final form.–Input/Output Planning and Control – refers to a variety of reports and procedures focusing on schedule demands and capacity constraints deriving from the materials plan.–Production Activity Control – (PAC), describes scheduling and shop floor control activities.–Purchase Planning and Control – deals with the acquisition and control of purchased items specified by the materials plan.

BUSINESS PLAN· The Business Plan establishes guidelines for the organization, taking into account the organization’s strategies and policies; forecasts of demand for the organization’s products or services, and economic, competitive and political conditions.

OBJECTIVE OF THE BUSINESS PLAN

· To coordinate the intermediate plans of various organizational functions, such as marketing, operations, and finance.

Corporate

strategies and

policies

Aggregate demand forecasts

PLANNING SEQUENCE

BUSINESS PLAN

PRODUCTION PLAN

MASTER SCHEDULE

Economic competitive, & political conditions

THE CONCEPT OF AGGREGATION

• Aggregate planning is essentially a “big picture” approach to planning

• For purposes of Aggregate planning, it is often convenient to think of capacity in terms of labor hours or machine hours per period, or output rates, without worrying about how much of a particular item will actually be involved.

WHY DO ORGANIZATIONS NEED TO DO AGGREGATE

PLANNING?

• Planning - it takes time to implement plans.

• Aggregation - is important because it is not possible to predict with any degree of accuracy, the timing and volume of demand for individual items.

THE PURPOSE AND SCOPE OF AGGREGATE PLANNING

1. Demand and Capacity

2. Inputs to Aggregate Planning

3. Demand and Capacity Options

Demand Options

The basic demand options are the following:

a. Pricing

b. Promotion

c. Back Orders

d. New demand

CAPACITY OPTIONS

The basic capacity options are the following:

a. Hire and lay off workers

b. Overtime/Slack time

c. Part-time workers

d. Inventories

e. Subcontracting

INFORMAL TECHNIQUE

Informal approaches consist of developing simple tables or graphs that enable planners to visually compare projected demand requirements with existing capacity.

Commonly used

They do not necessarily result in the optimum aggregate plan

1. The regular output capacity is the same in all periods.

2. Cost is a linear function composed of unit cost and number of units.

3. Plans are feasible; that is’ sufficient inventory capacity exists to accommodate a plan, subcontractors with appropriate quality and capacity are standing by, and changes in output can be made as needed.

ASSUMPTIONS IN AGGREGATE PLANNING

4. All costs associated with a decision option can be represented by a lump sum or by unit cost that are independent of the quantity involved.

5. Cost figures can be reasonably estimated and are constant for the planning horizon.

6. Inventories are built up and drawn down at a uniform rate and output occurs at a uniform rate throughout each period

TYPE OF COST HOW TO CALCULATE

Output

Regular Regular cost/unit X Quantity regular output

Overtime Overtime cost/unit X Quantity overtime

Subcontract Subcontract cost/unit X Subcontract quantity

Hire/lay off

Hire Cost per hire X Number Hired

Lay off Cost per fire X Number Fired

Inventory Carrying cost per unit X Average inventory

Back order Back order cost / unit X Number of backorder

APPROPRIATE COSTS CALCULATION

Planners for a company are about to prepare the aggregate plan that will cover six periods. They have assembled the following information

Period 1 2 3 4 5 6 Total

Forecast 200 200 300 400 500 200 1800

Output

Regular time = $ 2/unit

Overtime = $ 3/ unit

Subcontract = $ 6/ unit

Inventory = $ 1 per unit per period on average inventory

Back orders = $ 5 per unit per period

They now want to evaluate a plan that calls for a steady rate of regular-time output, mainly using inventory to absorb the uneven demand but allowing some backlog. They intend to start with zero inventory on hand in the 1st period. Assume a level output rate of 300 units /period with regular time. Note that the planned ending inventory is zero. There are 15 workers

EXAMPLE

Period 1 2 3 4 5 6 TotalForecast 200 200 300 400 500 200 1,800Output

Regular 300 300 300 300 300 300 1,800Overtime - - - - - -Subcontract - - - - - -

Output - Forecast 100 100 0 (100) (200) 100 0Inventory

Beginning 0 100 200 200 100 0Ending 100 200 200 100 0 0Average 50 150 200 150 50 0 600

Backlog 0 0 0 0 100 0 100Costs

OutputRegular $600 600 600 600 600 600 $3,600Overtime - - - - - -Subcontract - - - - - -Hire/ lay off - - - - - -

Inventory $50 150 200 150 50 0 $600Back orders $0 0 0 0 500 0 $500

Total $650 750 800 750 1,150 600 $4,700

After reviewing the plan developed in the preceding example, planners have decided to develop an alternative plan. They have learned that one person is about to retire from the company. Rather than replace that person, they would like to stay with the smaller workforce and use overtime to make up for lost output. The reduced regular- time output is 280 units per period. The maximum amount of overtime output per period is 40 units. Develop a plan and compare it to the previous one.

Period 1 2 3 4 5 6 TotalForecast 200 200 300 400 500 200 1,800Output

Regular 280 280 280 280 280 280 1,680Overtime 0 0 40 40 40 0 120Subcontract - - - - - -

Output - Forecast 80 80 20 (80) (180) 80 0Inventory

Beginning 0 80 160 180 100 0Ending 80 160 180 100 0 0Average 40 120 170 140 50 0 520

Backlog 0 0 0 0 80 0 80Costs

OutputRegular $560 560 560 560 560 560 $3,360Overtime $0 0 120 120 120 0 $360Subcontract - - - - - -Hire/ lay off - - - - - -

Inventory $40 120 170 140 50 0 $520Back orders $0 0 0 0 400 0 $400

Total $600 $680 $850 $820 $1,130 $560 $4,640

MATHEMATICAL TECHNIQUES

LINEAR PROGRAMMING

LP models are methods for obtaining optimal solutions to problems involving the allocation of of scarce resources in terms of cost minimization or profit maximization.

With AGGREGATE PLANNING, the goal is usually to minimize the sum of costs related to regular labor time, over time, subcontracting, inventory holding costs, and costs associated with changing size of the work force. Contstraints involve the capacities of the workforce, inventories and subcontracting.

E.H. BOWMAN - proposed formulating the problem in terms of transportation type programming model as a way to obtain aggregate plans that would match capacities with demand requirements and minimize cost. In order to use this approach, planners must identify capacity (supply) of regular time, over time, subcontracting and inventory on a period by period basis as well as related costs of each variable.

LINEAR DECISION RULE

It was developed by Charles Holt, Franco Modigliani, John Muth, and Herbert Simon.

It is an optimizing technique that seeks to minimize combined cost using a set of cost approximating functions to obtain single quadratic equation

SIMULATION MODELS

Computerized models that can be tested under different scenarios to identify acceptable solutions to problems.

AGGREGATE PLANNING IN SERVICES

- It is an overall forecast for the planning horizon and ends with the preparation for applying the plans to specific products and services.

> Services occurred when they are rendered.

> Demand for service can be difficult to predict.

> Capacity availability can be difficult to predict.

> Labor flexibility can be advantage in services.

IMPORTANT DIFFERENCES RELATED IN GENERAL TO THE DIFFERENCES BETWEEN MANUFACTURING AND

SERVICES

DISAGGREGATING THE AGGREGATE PLAN

- Involves breaking down the aggregate plan into specific product requirements in order to determine labor requirements such as skills and size of workforce, materials, and inventory requirements. This process is described in Materials Requirements Planning (MRP).

AN OVERVIEW OF MRP

Materials Requirements

Planning (MRP) is a computer

based information system

designed to handle ordering and

scheduling of dependent

demand inventories (e.g. raw

materials, componentparts,and

subassembles) Involves

planning periods (e.g., weeks)

so that ordering, fabrication and

assembly can be scheduled for

timely completion of end items.

Dependent Demand

Amount on Hand

RESULTS OF DISAGGREGATING THE AGGREGATE PLAN

MASTER SCHEDULE

ROUGH-CUT CAPACITY PLANNING

MASTER SCHEDULINGIt indicates the quantity and timing for a product,or a group of products, but it does not show planned production. For example:

AGGREGATE PLAN Month Planned Output (Aggregate Units)

NOKIA CELLPHONES

Month J anuary February March

Planned Output 500,000units 700,000units 800,000units

MASTER SCHEDULE ( Disaggregate Plan )

Month Planned Output (Actual Units)

NOKIA CELLPHONESMonth J anuary February March

M-3210 200,000 300,000 250,000

M-3310 200,000 350,000 500,000

M-8210 100,000 50,000 50,000

TOTAL 500,000 units 700,000 units 800,000 units

ROUGH-CUT CAPACITY PLANNING

This is done to test the feasibility of a proposed master schedule relative to available capacities to assure that no obvious capacity constraints exist. This means checking capacities of production and warehouse facilities, labor, and vendors to ensure that no gross deficiencies exist that will render the master schedule unworkable

Master Schedule

Indicates the quantity and timing for a product, or a group of products

Master production schedule

Uncommitted inventory

MasterScheduling

Beginning inventory

Forecast

Customer order

Inputs Outputs

Projected inventory

Master Scheduling Process

INPUTS

Beginning inventory - actual quantity on hand from the preceding period. Forecast - statement about the future. Customer Orders - quantities already committed to customer.

Projected inventory on hand - Inventory from previous week – Current weeks requirement. Master Production Schedule - indicates the quantity and timing of planned production. Uncommitted Inventory - also known as Available to promise inventory.

OUTPUTS

Weekly forecast requirements for industrial pumps

June July

Forecast

1 2 3 4 5 6 7 8

30 30 30 30 40 40 40 40

June July

Forecast

1 2 3 4 5 6 7 8

30 30 30 30 40 40 40 40Customers orders

( committed)33 20 10 4 2

Eight Week schedule showing forecast,customer orders, and beginning inventory

Beginning Inventory

June July

Forecast

1 2 3 4 5 6 7 8

30 30 30 30 40 40 40 40Customer orders

(committed) 33 20 10 4 2

Projected on – hand Inventory 31 1 -29

Projected on – hand inventory is computed week by week until it becomes negative

Beginning Inventory

Determining the MPS and projected on – hand inventory

Inventory from previous week

Requirements

Net Inventory before MPS

(70)MPS

Projected Inventory

1 64 33 31 31

2 31 30 1 1

3 1 30 -29 + 70 = 41

4 41 30 11 11

5 11 40 -29 + 70 = 41

6 41 40 1 1

7 1 40 -39 + 70 = 31

8 31 40 -9 + 70 = 61

June July

Forecast

1 2 3 4 5 6 7 8

30 30 30 30 40 40 40 40

Customer orders (committed)

33 20 10 4 2

Projected on – hand inventory

31 1 41 11 41 1 31 61

MPS 70 70 70 70

Projected on – hand inventory and MPS are added to the master schedule

June July

Forecast

1 2 3 4 5 6 7 8

30 30 30 30 40 40 40 40

Customer orders (committed)

33 20 10 4 2

Projected on – hand inventory

31 1 41 11 41 1 31 61

MPS 70 70 70 70Available to promise inventory (uncommitted)

11 56 68 70 70

The available – to – promise inventory quantities have been added to the master schedule

Aggregate Planning

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