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Aggregate Planning Chapter 12
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Learning Objectives
Review of forecasting
Forecast errors
Aggregate planning
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Phases of Decisions
Strategy or design: ForecastPlanning: ForecastOperation Actual demand
Since actual demands differs from forecasts so doesthe 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 andmeasure of error.Long-term forecasts are less accurate than short-term forecasts. Toolong 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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Time 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 threesections 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 thecapacity and the demand.
Shortrange
Intermediaterange
Long range
Now 2 months 1 Year
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Short-range plans (Detailed plans) Machine loading Job assignmentsIntermediate plans (General levels)
Employment OutputLong-range plans Long term capacity Location / layout
Product/Process design
Overview of Planning Levels
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Listen to Tom Thumbs 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 planningDetails are hard to gather for longer horizons Demand for Christmas turkeys at Tom Thumbs 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 willchange 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 = machineSingle capacity
Time periods = time buckets Consider all the demand and production of a given month togetherQuite a few time bucketsWhen 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 forecastPolicy 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 planProjected 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 demandPromotion 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 Optionsto 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 plantsOvertime/slack time How too use slack time constructively? Training. Overtime is expensive, low quality, prone to accidentsPart-time workers
35 hour work week of EuropeInventories, To smooth demandsSubcontracting. Low quality. Reveals technological secrets
Capacity Optionsto Match demand and Capacity
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Fundamental tradeoffs in Aggregate PlanningCapacity (regular time, over time, subcontract)
Inventory
Backlog / lost sales: Customer patience?
Basic Strategies
Chase (the demand) strategy; Matching capacity to demand; the planned outputfor 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 meetingvariations in demand by a combination of options. swim wear
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Matching the Demand withLevel or Time flexibility strategies
U s e
i n v e n
t o r y
Use delivery time
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 idletime
Resource utilizations vary overtime
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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
Cumulativedemand C
u m u l a
t i v e o u
t p u
t / d e m a n
d
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Technique 2: Mathematical Techniques
Linear programming : Methods for obtaining optimalsolutions to problems involving allocation of scarceresources in terms of cost minimization.
Minimize Costs
Subject to: Demand, capacity, initial inventoryrequirements
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Summary of Planning Techniques
Technique Solution CharacteristicsGraphical/charting
Trial anderror
Intuitively appealing, easy tounderstand; solution notnecessarily optimal.
Linearprogramming Optimizing Computerized; linear assumptionsnot always valid.Simulation Trial and
errorComputerized models can beexamined under a variety ofconditions.
Linear decision rule???
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Example - RelationshipsBasic Relationships
Workforce
Number ofworkers in a
period =
Number ofworkers at end of
previous period +
Number ofnew workersat start of the
period -
Number oflaid offworkers atstart of the period
Inventory
Inventory atthe end ofa period =
Inventory at endof the
previous period +
Production incurrent
period -
Amount used tosatisfydemand incurrent
period
Cost
Cost for a period =
Output Cost(Reg+OT+Sub) +
Hire/Lay OffCost + Inventory Cost +
Back-orderCost
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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 $5Costs
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 $6Output-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 predictLabor 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 ofdisaggregating an aggregate plan;shows quantity and timing of specificend items for a scheduled horizon.
Rough-cut capacity planning :
Approximate balancing of capacityand demand to test the feasibility of amaster schedule.
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Master Scheduling
Master schedule Determines quantitiesneeded to meet demand
Interfaces with Marketing Capacity planning Production planning Distribution planning
Master Scheduler Evaluates impact ofnew orders
Provides delivery dates fororders
Deals with problems Production delays
Revising master schedule Insufficient capacity
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Master Scheduling Process
MasterScheduling
Beginning inventory
Forecast
CommittedCustomer orders
Inputs Outputs
Projected 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 8
Customer Orders(committed) 33 30 30 30 40Projected on-handinventory 31 1 -29
JUNE JULY
BeginningInventory
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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 promiseInventory until next
production(uncommitted) 11 57 79 71 ???
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Summary
Aggregate planning:conception, demand and capacity optionBasic strategy:
level capacity strategy, chase demand strategyTechniques:
Trial and Error, mathematical techniquesMaster scheduling
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Practice Questions
1. The goal of aggregate planning is to achieve a production plan thatattempts to balance the organization's resources and meet expecteddemand.
Answer: True Page: 5412. A chase strategy in aggregate planning would attempt to matchcapacity and demand.
Answer: True Page: 5483. 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 termoperating decisions
B) a collection of objective planning tools
C) make or buy decisionsD) an attempt to respond to predicted demand within theconstraints set by product, process and location decisions
E) manpower planning
Answer: D Page: 541
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Practice Questions
2.Which of the following is an input to aggregate planning?A) beginning inventoryB) forecasts for each period of the schedule
C) customer ordersD) all of the aboveE) none of the above
Answer: D Page: 561
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Practice Questions
3.Which of the following is not an input to the aggregate planning process:A) resources
B) demand forecastC) policies on work force changesD) master production schedules
E) cost informationAnswer: D Page: 545
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Practice Questions
4. Which one of the following is not a basic option foraltering demand?
A) promotion
B) backorderingC) pricingD) 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) subcontractB) vary the size of the workforceC) vary the intensity of workforce utilizationD) allow inventory levels to varyE) 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) disaggregationC) sub-optimizationD) strategy formulation
E) chase strategiesAnswer: B Page: 559