Aggregate Planning
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•
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The concept of aggregation
Chase and level approaches
LP approach
Master Scheduling
Summary
Reading: Page 600 – 625
Learning Objectives
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Explain what aggregate planning is and how it
is useful.
Identify the variables decision makers have to
work with in aggregate planning and some of
the possible strategies they can use.
Describe some of the graphical and
quantitative techniques planners use.
Prepare aggregate plans and compute their
costs.
Planning Horizon
Aggregate planning: Intermediate-range
capacity planning, usually covering 2 to 12
(18) months.
Long range
Short
range
Now
Intermediate
range
2 months
1 Year
Overview of Planning Levels
• Short-range plans (Detailed plans)
– Machine loading
– Job assignments
• Intermediate plans (General levels)
– Employment
– Output
• Long-range plans
– Long term capacity
– Location / layout
Process Planning
Longrange
Strategic Capacity Planning
Intermediaterange
Manufacturing
Aggregate Planning
Services
Master Production Scheduling
Material Requirements Planning
Order Scheduling
Shortrange
Weekly Workforce &
Customer Scheduling
Daily Workforce &
Customer Scheduling
The Concept of Aggregation
• Given the demand forecast Ft for each period t
in the planning horizon that extends over T
periods, determine the production level Pt,
inventory level It, and work force Wt for periods
t=1,2,…,T that minimizes the relevant costs over
the planning horizon.
• Aggregate planning is essentially a “big picture”
approach to planning: try to avoid focusing on
individual products or services.
Example: An Aggregation Unit
A plant produces six models of washing machines.
Model number
A5532
K4242
L9898
L3800
M2624
M3880
Req’d worker-hours % Total no. sold
4.2
32
4.9
21
5.1
17
5.2
14
5.4
10
5.8
6
An aggregate unit is a fictitious washing machine requiring
(.32)(4.2)+(.21)(4.9)+(.17)(5.1)+(.14)(5.2)+(.10)(5.4)+(0.06)(5.
8) = 4.86 labor hours.
Aggregate Planning
• Begin with forecast of aggregate demand
• Forecast intermediate range
• General plan to meet demand by setting
– Output levels
– Employment
– Finished goods inventory level
• Production plan is the output of aggregate
planning
• Update plan periodically – rolling planning
horizon always covers the next 12 – 18 months
Aggregate Planning Inputs
• Resources
– Workforce
– Facilities
• Demand forecast
• Policies
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–
–
–
Subcontracting
Overtime
Inventory levels
Back orders
• Costs
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–
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–
Inventory carrying
Back orders
Hiring/firing
Overtime
Inventory changes
Subcontracting
Aggregate Planning Outputs
• Total cost of a plan
• Projected levels of inventory
– Inventory
– Output
– Employment
– Subcontracting
– Backordering
Aggregate Planning Strategies
• Proactive
– Alter demand to match capacity
• Reactive
– Alter capacity to match demand
• Mixed
– Some of each
Demand Options
• Pricing
• Promotion
• Back orders
• New demand
Capacity Options
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Hire and layoff workers
Overtime/slack time
Part-time workers
Inventories
Subcontracting
Aggregate Planning Strategies
• Maintain a level workforce
• Maintain a steady output rate
• Match demand period by period
• Use a combination of decision
variables
Basic Strategies
• Level capacity strategy:
– Maintaining a steady rate of regulartime output while meeting variations in
demand by a combination of options.
• Chase demand strategy:
– Matching capacity to demand; the
planned output for a period is set at the
expected demand for that period.
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
Techniques for Aggregate Planning
1. Determine demand for each period
2. Determine capacities for each period
3. Identify policies that are pertinent
4. Determine units costs
5. Develop alternative plans and costs
6. Select the best plan that satisfies objectives.
Otherwise return to step 5.
Average Inventory
• In practice, we may use either ending inventory criteria
or average inventory level criteria
Average Beginning Inventory + Ending Inventory
=
inventory
2
Example 1
Suppose we have the following unit demand and cost
information:
Demand/mo
Jan
Feb
Mar
Apr
May
Jun
Total
200
200
300
400
500
200
1,800
Cost
Output
Regular time:
Over time:
Subcontract:
Inventory
Back orders:
$2 per unit
$3 per unit
$6 per unit
$1 per unit per month
$5 per unit per period
Suppose the initial inventory is 0. Assuming a level of output rate of 300
units per month with regular time, what is the total cost?
20
Period
Demand
Output
Regular
Overtime
subcontract
Output-demand
Inventory
Beginning
Ending
Average
Backorder
Cost
Jan
200
Feb
200
Mar
300
Apr
400
May
500
Jun
200
Total
1,800
300
100
300
100
300
0
300
-100
300
-200
300
100
1,800
0
0
100
50
0
650
100
200
150
0
750
200
200
200
0
800
200
100
150
0
750
100
0
50
100
1,150
0
0
0
0
600
$4,700
21
Example 2
For the previous example, the company just learned
that one person is going to retire. Rather than
replace that person, the company would like to stay
with the smaller workforce and use overtime to
make up for the lost output. The reduced regulartime output is 280 units per month. The maximum
amount of overtime output per period is 40 units.
Develop a plan and compare it to the previous one.
22
Period
Demand
Output
Regular
Overtime
Jan
200
Feb
200
Mar
300
Apr
400
May
500
Jun
200
Total
1,800
280
0
280
0
280
40
280
40
280
40
280
0
1,680
120
subcontract
Output-demand
Inventory
Beginning
Ending
Average
Backorder
Cost
80
80
20
-80
-180
80
0
0
80
40
0
600
80
160
120
0
680
160
180
170
0
850
180
100
140
0
820
100
0
50
80
1,130
0
0
0
0
560
80
$4,640
23
Example 3
• See the Excel file
• We assume: no overtime, no subcontracting,
we may layoff or hire workers in each period;
• we consider two scenarios; backorder is
allowed and not allowed
Mathematical Techniques
Linear programming: Methods for obtaining
optimal solutions to problems involving
allocation of scarce resources in terms of
cost minimization.
Simulation models: Computerized models
that can be tested under different
scenarios to problems.
LP Approach: an Example
Suppose no firing, no hiring
Summary of Planning Techniques
Technique
Solution
Characteristics
Graphical/charting
Heuristic (trial
and error)
Intuitively appealing, easy to
understand; solution not
necessarily optimal.
Linear
programming
Optimizing
Computerized; linear assumptions
not always valid.
Simulation
Heuristic (trial
and error)
Computerized models can be
examined under a variety of
conditions.
Aggregate Planning in Services
• Services occur when they are rendered
• Demand for service can be difficult to
predict
• Capacity availability can be difficult to
predict
• Labor flexibility can be an advantage in
services
Aggregate Plan to Master Schedule
Aggregate
Planning
Disaggregation
Master
Schedule
Disaggregating the Aggregate Plan
• 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.
Master Scheduling
• Master schedule
– Determines quantities needed to meet
demand
– Interfaces with
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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
Master Scheduling Process
Inputs
Outputs
Beginning inventory
Forecast
Customer orders
Projected inventory
Master
Scheduling
Master production schedule
Uncommitted inventory
Projected On-hand Inventory
Projected on-hand
=
inventory
Inventory from
previous week
-
Current week’s
requirements
Projected On-hand Inventory
Beginning
Inventory
64
Forecast
Customer Orders
(committed)
Projected on-hand
inventory
Customer orders are
larger than forecast in
week 1
1
30
JUNE
2
3
30 30
4
30
5
40
33
20
10
4
2
31
1
-29
JULY
6
7
40 40
8
40
Forecast is larger than
Customer orders in week 3
Forecast is larger than
Customer orders in week 2
MPS
Review Problems
• Problems 1, 5, 8, 13, 15 at page 628 to
631 (use average inventory level to count
inventory holding cost when this cost is
involved)
• Problems 21, 22 at page 631