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utdallas.edu/~metin 1 Aggregate Planning Chapter 12
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Aggregate PlanningChapter 12
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Learning Objectives
Review of forecasting Forecast errors
Aggregate planning
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Phases of Decisions
Strategy or design: Forecast Planning: Forecast Operation Actual demand
Since actual demands differs from forecasts so does the execution from the plans. – E.g. Supply Chain concentration plans 40 students per year
whereas the actual is ??.
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Characteristics of forecasts Forecasts are always wrong. Should include expected value and
measure of error. Long-term forecasts are less accurate than short-term forecasts. Too
long term forecasts are useless: Forecast horizon– Forecasting to determine
» Raw material purchases for the next week» Annual electricity generation capacity in TX for the next 30 years
Aggregate forecasts are more accurate than disaggregate forecasts– Variance of aggregate is smaller because extremes cancel out
» Two samples: {3,5} and {2,6}. Averages of samples: 4 and 4.» Variance of sample averages=0» Variance of {3,5,2,6}=5/2
Several ways to aggregate– Products into product groups– Demand by location– Demand by time
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Forecast Variability implies time zones Frozen and Flexible zones
Volume
Time
Firm Orders Forecasts
Frozen Zone Flexible Zone
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Time Fences in MPSTime Fences in MPS
Period
“frozen”(firm orfixed)
“slushy”somewhat
firm
“liquid”(open)
1 2 3 4 5 6 7 8 9
Time Fences divide a scheduling time horizon into three sections or phases, referred as frozen, slushy, and liquid.
Strict adherence to time fence policies and rules.
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Planning Horizon
Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months. In other words, it is matching the capacity and the demand.
Shortrange
Intermediate range
Long range
Now 2 months 1 Year
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Short-range plans (Detailed plans)– Machine loading– Job assignments
Intermediate plans (General levels)– Employment– Output
Long-range plans– Long term capacity– Location / layout– Product/Process design
Overview of Planning Levels
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Listen to Tom Thumb’s manager
- Need more space in 2005 to expand the store - Allocate 25% of the floor space to fresh produce- During the winter months employ 6 cashiers during rush hours- On Wed before Thanksgiving, employ 12 cashiers throughout
the day- In the next two weeks, no Italian parsley will be delivered.
Shelve Dill instead of parsley
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Why aggregate planning Details are hard to gather for longer horizons
– Demand for Christmas turkeys at Tom Thumb’s vs Thanksgiving turkeys Details carry a lot of uncertainty: aggregation reduces variability
– Demand for meat during Christmas has less variability than the total variability in the demand for chicken, turkey, beef, etc.
If there is variability why bother making detailed plans, inputs will change anyway– Instead make plans that carry a lot of flexibility– Flexibility and aggregation go hand in hand
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Aggregate Planning
Aggregate planning: General plan– Combined products = aggregate product
» Short and long sleeve shirts = shirt Single product
– Pooled capacities = aggregated capacity» Dedicated machine and general machine = machine
Single capacity
– Time periods = time buckets» Consider all the demand and production of a given month together
Quite a few time buckets When does the demand or production take place in a time bucket?
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Planning Sequence
Corporatestrategies
and policies
Economic,competitive,and political conditions
Aggregatedemand
forecasts
Business Plan
Production plan
Master schedule
Establishes productionand capacity strategies
Establishesproduction capacity
Establishes schedulesfor specific products
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Resources– Workforce– Facilities
Demand forecast Policy statements
– Subcontracting– Overtime– Inventory levels– Back orders
Costs– Inventory carrying– Back orders– Hiring/firing– Overtime– Inventory changes– subcontracting
Aggregate Planning Inputs
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Total cost of a plan Projected levels of inventory
– Inventory– Output– Employment– Subcontracting– Backordering
Aggregate Planning Outputs
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Strategies
Proactive– Alter demand to match capacity
Reactive– Alter capacity to match demand
Mixed– Some of each
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Pricing– Price reduction leads to higher demand
Promotion– Not necessarily via pricing– Free delivery, free after sale service
» Some Puerto Rico hotels pay for your flight Back orders
– Short selling: Sell now, deliver later New demand
– Finding alternative uses for the product
Demand Options to Match Demand and Capacity
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Hire and layoff workers, unions are pivotal– Layoff: Emotional stress
» Fired Moulinex (appliances producer in France) workers start fire at the plant– Hire: Availability of qualified work force
» Operators at semiconductor plants Overtime/slack time
– How too use slack time constructively? Training.– Overtime is expensive, low quality, prone to accidents
Part-time workers– 35 hour work week of Europe
Inventories, To smooth demands Subcontracting. Low quality. Reveals technological secrets
Capacity Options to Match demand and Capacity
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Fundamental tradeoffs in Aggregate Planning Capacity (regular time, over time, subcontract) Inventory Backlog / lost sales: Customer patience?
Basic Strategies Chase (the demand) strategy; Matching capacity to demand; the planned output
for a period is the expected demand for that period– fast food restaurants
Time flexibility from high levels of workforce or capacity; – machining shops, army
Level strategy; Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options.
– swim wear
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Matching the Demand with Level or Time flexibility strategies
Use
inve
ntor
y
Use delivery time
Use cap
acity
Demand
Demand
Demand
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Chase vs. Level
Chase Approach Advantages
– Investment in inventory is low
– Labor utilization in high
Disadvantages– The cost of adjusting output rates
and/or workforce levels
Level Approach Advantages
– Stable output rates and workforce
Disadvantages– Greater inventory costs
– Increased overtime and idle time
– Resource utilizations vary over time
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Inputs:– Determine demand for each period– Determine capacities for each period– Identify policies that are pertinent– Determine units costs
Analysis– Develop alternative plans and costs– Select the best plan that satisfies objectives
Techniques for Aggregate Planning
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Technique 1: Cumulative Graph
1 2 3 4 5 6 7 8 9 10
Cumulativeproduction
CumulativedemandC
umul
ativ
e ou
tput
/dem
and
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Technique 2: Mathematical Techniques
Linear programming: Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization.
Minimize Costs
Subject to: Demand, capacity, initial inventory requirements
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Summary of Planning Techniques
Technique Solution Characteristics Graphical/ charting
Trial and error
Intuitively appealing, easy to understand; solution not necessarily optimal.
Linear programming
Optimizing Computerized; linear assumptions not always valid.
Simulation Trial and error
Computerized models can be examined under a variety of conditions.
Linear decision rule???
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Example - RelationshipsBasic Relationships
Workforce
Number of workers in a period =
Number of workers at end of previous period +
Number of new workers at start of the period -
Number of laid off workers at start of the period
Inventory
Inventory at the end of a period =
Inventory at end of the previous period +
Production in current period -
Amount used to satisfy demand in current period
Cost
Cost for a period =
Output Cost (Reg+OT+Sub) +
Hire/Lay Off Cost + Inventory Cost +
Back-order Cost
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Technique 3: Simulation ExampleLevel Output
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1800
Policy: Level Output Rate of 300 per period
Output Cost
Regular 300 300 300 300 300 300 1800 $2
Overtime $3
Subcontract $6
Output-Forecast 100 100 0 -100 -200 100 0
Inventory
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0 600 $1
Backlog 0 0 0 0 100 0 100 $5
Costs
Regular $600 $600 $600 $600 $600 $600 $3,600
Inventory $50 $150 $200 $150 $50 $0 $600
Back Orders $0 $0 $0 $0 $500 $0 $500
Total Cost of Plan $650 $750 $800 $750 $1,150 $600 $4,700
Average Inventory= (Beginning Inventory + Ending Inventory)/2
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Technique 3: Simulation ExampleLevel Output + Overtime
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1800
Policy: Level Output Rate+Overtime
Output Cost
Regular 280 280 280 280 280 280 1680 $2
Overtime 40 40 40 0 120 $3
Subcontract $6
Output-Forecast 80 80 20 -80 -200 -180 0
Inventory
Beginning 0 80 160 180 100 0
Ending 80 160 180 100 0 0
Average 40 120 170 140 50 0 520 $1
Backlog 0 0 0 0 80 0 80 $5
Costs
Regular $560 $560 $560 $560 $560 $560 $3,360
Overtime $0 $0 $120 $120 $120 $0 $360
Inventory $40 $120 $170 $50 $0 $0 $520
Back Orders $0 $0 $0 $0 $400 $0 $400
Total Cost of Plan $600 $680 $850 $730 $1,080 $560 $4,640
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Services occur when they are rendered– Limited time-wise aggregation
Services occur where they are rendered– Limited location-wise aggregation
Demand for service can be difficult to predict– Personalization of service
Capacity availability can be difficult to predict Labor flexibility can be an advantage in services
– Human is more flexible than a machine, well at the expense of low efficiency.
Aggregate Planning in Services
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Aggregate Plan to Master Schedule
AggregatePlanning
Disaggregation
MasterSchedule
For a short planning range 2-4 months: Master schedule: The result of
disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon.
Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.
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Master Scheduling
Master schedule– Determines quantities needed to meet demand– Interfaces with
» Marketing» Capacity planning» Production planning» Distribution planning
Master Scheduler– Evaluates impact of new orders– Provides delivery dates for
orders– Deals with problems
» Production delays» Revising master schedule» Insufficient capacity
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Master Scheduling Process
MasterScheduling
Beginning inventory
Forecast
CommittedCustomer orders
Inputs OutputsProjected inventory
Master production schedule
ATP: Uncommitted inventory
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Preview of Materials Requirement Planning Terminology Net Inventory After Production
Requirements=Forecast
Assuming that the forecasts include committed orders
Net inventory before production=Projected on hand inventory in the previous period- Requirements
Produce in lots if Net inventory is less than zero
Net inventory after production=Net inventory before production+ Production
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Projected On-hand Inventory
64 1 2 3 4 5 6 7 8Customer Orders (committed) 33 30 30 30 40Projected on-hand inventory 31 1 -29
JUNE JULY
Beginning Inventory
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Example: Find ATP with lot size of 70
June July
64 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders (Committed) 33 20 10 4 2
Projected on Hand Inventory + + - + - + - -MPS: Production 70 70 70 70
Projected on Hand Inventory 31 1 41 11 41 1 31 61
Available to promise Inventory until next production (uncommitted) 11 57 79 71 ???
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Summary
Aggregate planning: conception, demand and capacity option Basic strategy: level capacity strategy, chase demand strategy Techniques: Trial and Error, mathematical techniques Master scheduling
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Practice Questions 1. The goal of aggregate planning is to achieve a production plan that
attempts to balance the organization's resources and meet expected demand.
Answer: True Page: 541 2. A “chase” strategy in aggregate planning would attempt to match
capacity and demand. Answer: True Page: 548 3. Ultimately the overriding factor in choosing a strategy in aggregate
planning is overall cost. Answer: True Page: 550
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Practice Questions1. Which of the following best describes aggregate planning?
A) the link between intermediate term planning and short term operating decisions
B) a collection of objective planning tools C) make or buy decisions D) an attempt to respond to predicted demand within the
constraints set by product, process and location decisions E) manpower planning Answer: D Page: 541
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Practice Questions2.Which of the following is an input to aggregate planning? A) beginning inventory B) forecasts for each period of the schedule C) customer orders D) all of the above E) none of the above Answer: D Page: 561
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Practice Questions3.Which of the following is not an input to the aggregate
planning process: A) resources B) demand forecast C) policies on work force changes D) master production schedules E) cost information Answer: D Page: 545
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Practice Questions4. Which one of the following is not a basic option for
altering demand? A) promotion B) backordering C) pricing D) subcontracting E) All are demand options. Answer: D Page: 545
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Practice Questions5. Which of the following would not be a strategy associated with
adjusting aggregate capacity to meet expected demand? A) subcontract B) vary the size of the workforce C) vary the intensity of workforce utilization D) allow inventory levels to vary E) use backorders Answer: E Page: 546-547
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Practice Questions
6. Moving from the aggregate plan to a master production schedule requires:
A) rough cut capacity planning B) disaggregation C) sub-optimization D) strategy formulation E) chase strategies Answer: B Page: 559
