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Aggregate Planning Provides the quantity and timing of
production for intermediate future Usually 3 to 18 months into future
Combines (‘aggregates’) production Often expressed in common units: hours,
dollars, equivalents Involves capacity and demand variables
Aggregate Planning Goals Meet demand Use capacity efficiently Meet inventory policy Minimize cost
Labor Inventory Plant & equipment Subcontract
Options to Consider Changing inventory levels (with backorders) Varying workforce size by hiring or layoffs Varying production rates through overtime
or idle time Subcontracting Using part-time workers Influencing demand
Option Advantages DisadvantagesSome
Comments
Changing inventory levels
Changes in human resources are gradual or none; no abrupt production changes.
Inventory holding cost may increase. Shortages may result in lost sales.
Applies mainly to production, not service, operations.
Varying workforce size by hiring or layoffs
Avoids the costs of other alternatives.
Hiring, layoff, and training costs may be significant.
Used where size of labor pool is large.
Options
Option Advantages DisadvantagesSome
Comments
Changing inventory levels
Changes in human resources are gradual or none; no abrupt production changes.
Inventory holding cost may increase. Shortages may result in lost sales.
Applies mainly to production, not service, operations.
Varying workforce size by hiring or layoffs
Avoids the costs of other alternatives.
Hiring, layoff, and training costs may be significant.
Used where size of labor pool is large.
Option Advantages DisadvantagesSome
Comments
Varying production rates through overtime or idle time
Matches seasonal fluctuations without hiring/ training costs.
Overtime premiums; tired workers; may not meet demand.
Allows flexibility within the aggregate plan.
Subcontracting
Permits flexibility and smoothing of the firm’s output.
Loss of quality control; reduced profits; loss of future business.
Applies mainly in production settings.
Options
Option Advantages DisadvantagesSome
Comments
Using part-time workers
Is less costly and more flexible than full-time workers.
High turnover/ training costs; quality suffers; scheduling difficult.
Good for unskilled jobs in areas with large temporary labor pools.
Influencing demand
Tries to use excess capacity. Discounts draw new customers.
Uncertainty in demand. Hard to match demand to supply exactly.
Creates marketing ideas. Overbooking used in some businesses.
Options
Option Advantages DisadvantagesSome
Comments
Back ordering during high-demand periods
May avoid overtime. Keeps capacity constant.
Customer must be willing to wait, but goodwill is lost.
Many companies back order.
Counter-seasonal product and service mixing
Fully utilizes resources; allows stable workforce.
May require skills or equipment outside the firm’s areas of expertise.
Risky finding products or services with opposite demand patterns.
Options
Aggregate Planning Strategies Chase Strategy
Matching the production rate to exactly meet the demand by hiring and laying off workers.
Level Strategy Maintain a stable workforce working at constant
output rate; absorb demand variations with inventory, backlogs, or lost sales.
Mixed Strategy A combination of chase and level strategies to
match supply and demand.
Aggregate Planning Methods
Spreadsheet techniques Popular & easy-to-understand Trial & error approach
Mathematical approaches Linear programming models Simulation
Example A manufacturer of roofing supplies has
monthly forecasts for the 6-month period
MonthExpected Demand
Production Days
Demand per Day
Jan. 900 22 41
Feb. 700 18 39
Mar. 800 21 38
Apr. 1200 21 57
May. 1500 22 68
Jun. 1100 20 55
Total 6200 124 50
Continued
70 70 –
60 60 –
50 50 –
40 40 –
30 30 –
0 0 –JanJan FebFeb MarMar AprApr MayMay JuneJune == MonthMonth
2222 1818 2121 2121 2222 2020 == Number ofNumber ofworking daysworking days
Pro
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ate
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ayP
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ork
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Level production using average Level production using average monthly forecast demandmonthly forecast demand
Forecast demandForecast demand
Continued inventory cost: $5/unit, backorder cost:
$10/unit wage: $40/day, hiring cost: $1500, layoff
cost: $3000 production rate: 5 units/day
Chase Strategy Jan. Feb. Mar. Apr. May. Jun. Total
Forecast 900 700 800 1200 1500 1100 6200
Working days 22 18 21 21 22 20 124
Demand per day 40.9 38.9 38.1 57.1 68.2 55.0 50.0
Workers available 8
Hired/Fired
H/F cost
Labor cost
Units Produced
Net inventory
Inventory cost
Total cost
Level Strategy Jan. Feb. Mar. Apr. May. Jun. Total
Forecast 900 700 800 1200 1500 1100 6200
Working days 22 18 21 21 22 20 124
Demand per day 40.9 38.9 38.1 57.1 68.2 55.0 50.0
Workers available 8
Hired/Fired
H/F cost
Labor cost
Units Produced
Net inventory
Inventory cost
Total cost
Mixed Strategy Jan. Feb. Mar. Apr. May. Jun. Total
Forecast 900 700 800 1200 1500 1100 6200
Working days 22 18 21 21 22 20 124
Demand per day 40.9 38.9 38.1 57.1 68.2 55.0 50.0
Workers available 8
Hired/Fired
H/F cost
Labor cost
Units Produced
Net inventory
Inventory cost
Total cost
Workforce Planning Model Decision variables
Wt = number of workers available in period t
Ht = number of workers hired in period t
Lt = number of workers laid off in period t
Pt = number of units produced in period t
It = number of units in inventory at the end of period t
Bt = number of units backordered at the end of period t
Continued Given parameters
Dt = demand forecast in period t
nt = number of units made by one worker in period t
CtW = cost of one worker in period t
CtH, Ct
L = cost to hire or lay off one worker in period t
CtP = cost to produce one unit in period t
CtI, Ct
B = cost to hold or backorder one unit for period t
Continued Objective function
Constraints
Possible extensions
t
tBtt
Itt
Ptt
Ltt
Htt
Wt BCICPCLCHCWCmin
tttttt
ttt
tttt
DPBIBI
WnP
LHWW
11
1
tttUtt
Lt
Utt WLBIIIII 05.0,0,,
Production Planning Model
MarMar AprApr MayMay
DemandDemand 800800 1,0001,000 750750CapacityCapacity 850850 850850 850850Beginning inventoryBeginning inventory 100100
Production costProduction cost 4040 4141 4545 Inventory costInventory cost 2 2 22 22
Another Example
CostsCostsRegular timeRegular time $40$40 per tireper tireOvertimeOvertime $50$50 per tireper tireSubcontractingSubcontracting $70$70 per tireper tireInventoryInventory $ 2$ 2 per tire per monthper tire per month
MarMar AprApr MayMay
DemandDemand 800800 1,0001,000 750750Capacity:Capacity: RegularRegular 700700 700700 700700 OvertimeOvertime 5050 5050 5050 SubcontractingSubcontracting 150150 150150 130130Beginning inventoryBeginning inventory 100100 tirestires