aggregate planning
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Aggregate Planning
By
Dr. Debadyuti Das
Aggregate Planning: An overview Intermediate range capacity planning that
usually covering 2 to 24 months (or 1 to 18 months)
Goal is to achieve a production plan that will effectively utilize the organization’s resources to satisfy expected demand.
Types of production plan
Type of plans
Planning objectives
Planning inputs
Planning horizon
Decision variables
Planning outputs
Long-term plan
To achieve specific organization-al objectivesTo enhance long-term viability and development
Corporate strategies & policies, Demand forecasts, Economic, technological & political scenario, Available capital etc.
5-10 years Long-term capacity resource allocation for: products, Processes and markets
Plans for capacity expansion (or contraction)Plans for
- new products,
-new technologies, -new markets,
-new plants and their location.
Types of production plan
Type of plans
Planning objectives
Planning inputs
Planning horizon
Decision variables
Planning outputs
Medium term plan
(or Aggregate plan)
To make the most effective use of available capacity through existing resources
Long-term plansLimits on present capacityPeriod by period annual demand forecastFeasible production alternatives and costs
1-18 months
Levels of use for available production alternatives:Work-force size,Production rate,Inventory,Sub-contracting
Aggregate production plans specifying how demand will be met from existing productive resources
Types of production plan
Type of plans
Planning objectives
Planning inputs
Planning horizon
Decision variables
Planning outputs
Short-term plan
To ensure customer satisfaction through prompt delivery timesTo achieve maximum effectiveness from the use of production factors
Aggregate production planOrders receivedDesired delivery times
1-30 days Size of work-forceProduction rateSequencing of orders
Production scheduleAssigning orders to specific Departments, Shifts, Personnel, Equipments etc.
Planning Sequence
Business PlanEstablishes operationsand capacity strategiesEstablishes operationsand capacity strategies
Aggregate plan Establishesoperations capacity
Establishesoperations capacity
Master schedule Establishes schedulesfor specific products
Establishes schedulesfor specific products
Corporatestrategies
and policies
Economic,competitive,and political conditions
Aggregatedemand
forecasts
Aggregate planning
Aggregate planning: process by which a company determines levels of
capacity, production, subcontracting, inventory, stock outs, and pricing over a specified time horizon
goal is to maximize profit decisions made at a product family (not SKU)
level time frame of 1 to 18 months how can a firm best use the facilities it has?
Operational parameters of APSpecify operational parameters over the time
horizon: production rate workforce Overtime/under time machine capacity level subcontracting backlog inventory on hand
The Aggregate Planning Problem
Given the demand forecast for each period in the planning horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firm’s profit over the planning horizon
Specify the planning horizon (typically 1-18 months) Specify the duration of each period Specify key information required to develop an
aggregate plan
Information Needed foran Aggregate Plan
Demand forecast in each period Production costs
labor costs, regular time ($/hr) and overtime ($/hr) subcontracting costs ($/hr or $/unit) cost of changing capacity: hiring or layoff ($/worker) and cost
of adding or reducing machine capacity ($/machine) Labor/machine hours required per unit Inventory holding cost ($/unit/period) Stock out or backlog cost ($/unit/period) Constraints: limits on overtime, layoffs, capital
available, stockouts and backlogs
Outputs of Aggregate Plan Production quantity from regular time, overtime, and
subcontracted time: used to determine number of workers and supplier purchase levels
Inventory held: used to determine how much warehouse space and working capital is needed
Backlog/stockout quantity: used to determine what customer service levels will be
Machine capacity increase/decrease: used to determine if new production equipment needs to be purchased
A poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity
Aggregate Planning Strategies
Proactive Alter demand to match capacity
Reactive Alter capacity to match demand
(Chase strategy: using capacity as the lever
Level strategy: using inventory as the lever
Time flexibility Strategy: using utilization as the lever) Mixed
Some of each
Pricing
Promotion
Back orders
New demand
Demand Options
Hire and layoff workers Overtime/under time Part-time workers Inventories Subcontracting
Capacity Options
Chase Strategy Production rate is synchronized with demand by
varying machine capacity or hiring and laying off workers as the demand rate varies
However, in practice, it is often difficult to vary capacity and workforce on short notice
Expensive if cost of varying capacity is high Negative effect on workforce morale Results in low levels of inventory Should be used when inventory holding costs
are high and costs of changing capacity are low
Time Flexibility Strategy Can be used if there is excess machine capacity Workforce is kept stable, but the number of hours worked
is varied over time to synchronize production and demand Can use overtime or a flexible work schedule Requires flexible workforce, but avoids morale problems of
the chase strategy Low levels of inventory, lower utilization Should be used when inventory holding costs are high and
capacity is relatively inexpensive
Level Strategy Maintain stable machine capacity and workforce
levels with a constant output rate Shortages and surpluses result in fluctuations in
inventory levels over time Inventories are built up in anticipation of future
demand or backlogs are carried over from high to low demand periods
Better for worker morale Large inventories and backlogs may accumulate Should be used when inventory holding and
backlog costs are relatively low
Fundamental Tradeoffs in Aggregate Planning Capacity (regular time, overtime, subcontract)
Inventory
Backlog / lost sales
Techniques and general procedure for APPTechniques:
Trial and error method Linear programmingProcedure: Determine demand for each period. Determine capacities (regular time, O/T,
Subcontracting) for each period. Identify company policies Determine unit costs for regular time, O/T,
subcontracting, inventories, back orders, layoffs and other relevant costs.
Develop alternative plans and compute the costs for each.
Select the one that best satisfies the objectives.
Example 1: Trial & Error method
Planners of a company have obtained information regarding the forecasted demand of a product as follows:
Period 1 2 3 4 5 6 TotalForecast 200 200 300 400 500 200 1800
Costs Regular time: $2/unitOvertime: $3/unitSubcontract: $6/unitInventory: $1/unitBackorder:$5/unitThey 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. Overtime and subcontracting are not used because they want steady output. They intend to start with zero inventory on hand in the first period. Prepare an aggregate plan and determine its cost using the preceding information. Assume a level output rate of 300 units per period with regular time. Note that the planned inventory is zero. There are 15 workers, each can produce 20 units per period.
Example 2: Trial & Error methodSuppose that the regular output rate will drop to 290 units per
period due to an expected change in production requirements. Costs will not change. Prepare an aggregate plan and compute its total cost for each of these alternatives:
1. Use overtime at a fixed rate of 20 units per period as needed. Plan an ending inventory of zero for period 6. Backlogs cannot exceed 90 units per period.
2. Use subcontracting at a maximum rate of 50 units per period; the usage need not be the same in every period. Have an ending inventory of zero in the last period. Again backlogs cannot exceed 90 units in any period. Compare these two plans.
Example 3: LP
Month Demand ForecastJanuary 1,600February 3,000
March 3,200April 3,800May 2,200June 2,200
Example 3: Aggregate Planning
Item CostMaterials $10/unitInventory holding cost $2/unit/monthMarginal cost of a stockout $5/unit/monthHiring and training costs $300/workerLayoff cost $500/workerLabor hours required 4/unitRegular time cost $4/hourOver time cost $6/hourCost of subcontracting $30/unit
Aggregate Planning (Define Decision Variables)
Wt = Workforce size for month t, t = 1, ..., 6
Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6
Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6
Pt = Production in month t, t = 1, ..., 6
It = Inventory at the end of month t, t = 1, ..., 6
St = Number of units stocked out at the end of month t, t = 1, ..., 6
Ct = Number of units subcontracted for month t, t = 1, ..., 6
Ot = Number of overtime hours worked in month t, t = 1, ..., 6
Aggregate Planning(Define Objective Function)
6
1
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6
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6
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6
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6
1
6
1
30105
26500
300640
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CPS
IOL
HWMin
Aggregate Planning (Define Constraints Linking Variables)
Workforce size for each month is based on hiring and layoffs
.80,6,...,1
0
,
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orLHWW
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Aggregate Planning (Constraints) Production for each month cannot exceed
capacity
.6,...,1
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tforPOWOWP
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Aggregate Planning (Constraints)
Inventory balance for each month
.500,0
,000,1,6,...,1
,0
,
60
0
11
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IandS
IwheretforSISDCPI
SISDCPI
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Aggregate Planning (Constraints)
Over time for each month
.6,...,1
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tforOW
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