Outline
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Logistics and Supply Chain Management
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Aggregate Planning
Role of aggregate planning in a supply chain
Th aggregate
The
t planning
l i problem
bl
Aggregate planning strategies
Implementing aggregate planning in practice
Chopra and Meindl (2006) Supply Chain Management: Strategy, Planning and Operation. Prentice Hall.
© 2007 Pearson Education
Amir Samimi
Civil Engineering Department, Sharif University of Technology
Role of Aggregate Planning
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Capacity has a cost, lead times are greater than zero
A
Aggregate
t planning:
l i
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Role of Aggregate Planning
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Specify operational parameters over the time
horizon:
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process by which a company determines levels of
capacity, production, subcontracting, inventory, stockouts,
and pricing over a specified time horizon
goal is to maximize profit
decisions
dec
s o s made
de at a pproduct
oduc familyy (not
( o SKU)
S U) level
eve
time frame of 3 to 18 months
how can a firm best use the facilities it has?
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production rate
workforce
overtime
machine capacity level
subcontracting
backlog
inventory on hand
All stages should work together on an aggregate
plan that will optimize supply chain performance
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Aggregate Planning Problem
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Information Needed
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Given the demand forecast, determine the best
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production
d ti level,
l l
inventory level,
capacity level.
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Demand forecast in each period
P d ti costs
Production
t
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labor costs: regular time and overtime
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subcontracting costs
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cost of changing capacity: hiring or layoff
cost of adding or reducing machine capacity
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Specify the
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planning horizon
duration of each period
key required information
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Outputs
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Production quantity
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to determine required warehouse space and working capital
to determine what customer service levels will be
Machine capacity increase/decrease:
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using utilization as the lever
Level strategy
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using capacity as the lever
Time flexibility: workforce or capacity
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b t
between
capacity,
it inventory,
i
t
backlog/lost
b kl /l t sales
l
Chase strategy
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to find if new production equipment needs to be purchased
A poor aggregate plan can
Trade-off
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Backlog/stockout quantity:
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Strategies
Inventory
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regular time
time, overtime,
overtime and subcontracted time
to determine number of workers and supplier purchase levels
Labor/machine hours required
q
per
p unit
Inventory holding cost
Stockout or backlog cost
Constraints: limits on overtime, layoffs, capital
available, stockouts and backlogs
using inventory as the lever
Mixed strategy
lost sales, lost profits, excess inventory, or excess capacity
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Chase Strategy
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varying
i machine
hi capacity
it
hiring and laying off workers
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difficult to vary capacity and workforce on short notice
Expensive if cost of varying capacity is high
N ti effect
Negative
ff t on workforce
kf
confidence
fid
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low levels of inventory
Inventory costs are high and changing capacity is flexible
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Constant output rate
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Case Study: Red Tomato Tools
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Stable machine capacity and workforce levels
Produce gardening tools
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Better for worker confidence
High utilization
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peaking
ki in
i the
th spring
i
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Inventories are built up in anticipation of future demand
Backlogs are carried over from high to low demand periods
Used when
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Fluctuations in inventory levels over time
Large inventories and backlogs may accumulate
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Inventory holding and backlog costs are relatively low
To overcome the seasonality,
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Cons
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Inventory costs are high and capacity is inexpensive.
Pros
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Lower utilization
Used when
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Level Strategy
Use a flexible work schedule
Avoids morale problems
L levels
Low
l l off inventory,
i
t
Cons
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Fixedd workforce
Fi
kf
andd variable
i bl number
b off hours
h
worked
k d
Excess machine capacity is available
Pros
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Used when
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Working hours synchronize production and demand
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Pros
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Cons
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Production rate is synchronized with demand
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Time Flexibility Strategy
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add workers during the peak season,
subcontract out some of the work,
build up inventory during the slow months,
build up a backlog of orders that will be delivered later.
How to best use these options through an aggregate
plan?
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Demand
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Fundamental Tradeoffs
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Month
January
February
March
April
M
May
June
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Demand Forecast
1,600
3,000
3,200
3,800
2 200
2,200
2,200
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Capacity (regular time, overtime, subcontract)
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Inventory
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Backlog / lost sales
Basic Strategies
Basic Information
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Chase strategy
gy
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Time flexibility from workforce or capacity
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Level strategy
Decision Variables
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Item
Materials
Inventory holding cost
Marginal cost of a stockout
Hiring and training costs
Layoff cost
L b hours
Labor
h
required
i d
Regular time cost
Over time cost
Cost of subcontracting
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Cost
$10/unit
$2/unit/month
$5/unit/month
$300/worker
$500/worker
4/ it
4/unit
$4/hour
$6/hour
$30/unit
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t = Month (t = 1, …, 6)
Wt = Workforce
W kf
size
i for
f month
th
Ht = Number of employees hired
Lt = Number of employees laid off
Pt = Production
It = Inventoryy at the end of month
St = Number of units stocked out at the end of month
Ct = Number of units subcontracted for month t,
Ot = Number of overtime hours worked in month t,
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Objective Function
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Constraints
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Minimum
1.
6
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Regular-time labor cost
 640W
t 1
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 
t
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Workforce size for each month is based on hiring
and layoffs
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Overtime labor cost
 6O 
t
t 1
6
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Cost of hiring and layoffs
Cost of holding inventory
Cost of stocking out
6
2I
Cost of subcontracting
t
5S
t
Material cost
W W
W  80
t
t
6
 30 C
t

10 P
t
Constraints
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Production for each month cannot exceed capacity
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3.
Inventory balance for each month
I
I
S
I
t 1
P
t
 40W t  O t 4 ,
for t  1,..., 6
 P t  C t  D t  S t 1  I t  S t ,
0
 1000
0
0
6
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for t  1,..., 6
0
Constraints
2.
 H t  Lt
6
t 1
18
t 1

t 1
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t 1

6
t 1
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t
t 1
t 1
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6
 300 H   500 L 
for t  1,..., 6
 500
Each worker can produce
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40 units per month on regular time
1 unit for every four hours of overtime
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Constraints
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Scenarios
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 
4.
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Over time for each month
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 
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O t  10W t,
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for t  1,..., 6
No employee work more than 10 hours of overtime each
month.
in Practice
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 
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Increase in holding cost (from $2 to $6)
O ti costt drops
Overtime
d
to
t $4.1
$4 1 per hour
h
Increased demand fluctuation
Think beyond the enterprise to the entire supply
chain
Make plans flexible because forecasts are always
wrong
Rerun the aggregate plan as new information
emerges
Use aggregate planning
l i as capacity
i utilization
ili i
increases
Summary
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What types of decisions are best solved by
aggregate planning?
What is the importance of aggregate planning as a
supply chain activity?
What kinds of information are needed to produce
an aggregate plan?
What
h are the
h bbasic
i trade-offs
ff a manager makes
k to
produce an aggregate plan?
How are aggregate planning problems formulated
and solved using Microsoft Excel?
6
Homework 4
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Chapter 8
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E
Exercises:
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4
5
6
7