Topics to be Covered
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Capacity Planning
Aggregate Planning in Perspective
Scope of Aggregate Planning
Factors Impacting the Supply Capacity
Strategies for Aggregate Planning
Techniques for Aggregate Planning
Mathematical Techniques
Disaggregating the Aggregate Plan
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How Does Capacity Planning Fit In The
Production Cycle.
Make or Buy
Forecasting
Facility Definition
Resource Planning
Aggregate Plan
Master Production Schedule
Rough Cut Capacity
Planning
Detailed Capacity
Planning
Purchasing
MRP
Shop Floor Control
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Capacity VS Utilization
Capacity
- Peak quantity created over a period of time
- Peak Capacity does not include scheduled breaks & planned maintenance
- Effective Capacity does include scheduled breaks & planned maintenance &
other planned events.
Utilization
-the relationship between what is actually produced vs what can be produced.
(Actual/Capacity x 100%)
Capacity Cushion
- The difference between full capacity and Utilization
(Cushion = 100% - Utilization)
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Facility Planning
Need to be part of the total operations strategy and not a series of
capital budget decisions
Amount of capacity; size of unit; timing of capacity changes; long
run needs
Factors:
Predicted demand
Costs of facilities
Economies of scale
vs
Diseconomies of scale
Likely behavior of competitors
Business strategy
International Considerations
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Facilities Strategy
Styles:
Try not to run out
Cushion?
Build to average demand
Maximize utilization
Timing:
Preempt the competition
Wait and see
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Strategy & Facility Types
Product Focus (55%):
One product family; large market
Transportation costs low & high economies of scale
Market Focused (30%):
located in singular or few market served; service oriented
High transportation cost & quick service needed
Process Focused (10%):
1 or 2 key technologies; component parts
General Purpose (5%)
several product types; several different processes
low volumes of any one product type
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Aggregate Planning in Perspective
• Capacity Decisions are on Three Levels.
• Long Term
Intermediate Term
Short Term
• Long Term Decisions - Decisions necessary to decide the absolute max capacity.
• Product or Service Selection
• Facility Size & Layout
• Location
• Equipment Type
• Intermediate or Aggregate Decisions - Decisions necessary to meet expected
demand not in the immediate future.
• General levels of employment
• Output per year
• Inventories (Average Target)
• Long Term decisions set the baseline or constraints for the intermediate decisions.
• Short Term Decisions
• This month’s output
• Machine loading
• Job sequencing
• Aggregate decisions set the constraints for short term decisions
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Minimizing Costs thru Balancing
Aggregate Planning seeks to balance Demand and Capacity
by minimizing total costs. (Big Picture)
Capacity
Demand
Pricing
Promotion
Backorders
New Demand
$
Costs When:
Demand > Capacity
Capacity > Demand
Labor
Equipment
Capital
Inventory
Subcontracting
Backordering
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Factors Impacting the Supply Capacity
• Hire & Fire Workers
• Low Morale;
Costs;
• Overtime
• Good Short term solution;
Restrictions
Burn-out;
Lower Production
• Part-Time Workers
• Good for certain industries
• Possible restrictions
• Inventories
• Good Supply Control
• Costs: Warehousing; Obsolesce; Deterioration; Breakage; Spoilage; Cost of Capital
• Subcontracting
• Make or Buy
• Sometimes cheaper for one of your non-core capabilities
• Constraints: Quality Control; schedule control; transportation
• Backorders
• Cost depends on Product, market position & customer loyalty
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Scope of Aggregate Planning
Aggregate Planning combines the capacity requirements for
the demand of all products or services provided by the company.
• Why do we Use Aggregate Planning?
• Match Supply and Demand.
• Plan for adequate production capability is available. (Rough Cut Capacity Planning)
• Plan for adequate input resources. (labor & raw materials)
• Plan for adequate product demand.
• Aggregate Planning begins with a Forecast of Demand.
• Time horizon is typically 1 year.
• Combine individual product demand forecast.
• Forecast aggregate demand directly.
• What do we need to Know to Begin Aggregate Planning?
• Facility Capacity.
• Available Resources, Raw Materials, Labor, etc.
• Forecast Demand For each period.
• Any Special Company Constraints.
• labor policies; Inventory policies
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Strategies for Aggregate Planning
• The Operations Manager generally has control only over capacity.
• Several Strategies are Available
• Maintain a Level Work Force.
• Maintain a Steady Output Rate
• Match Demand period by period
• Abrupt changes in Output and Workforce required.
• Use a combination of decision strategies
• The most common and flexible is to use a combination of strategies.
• The specific strategy will depend on the market trend.
• If there is only a short term change in demand then maintaining a steady
workforce is preferred.
• If there is a long term change in demand then a change in Output and workforce
may be required.
• Use variations in inventories, subcontracting, backlog, & overtime to supplement
short term changes.
The preferred strategy is sufficiently flexible to feasibly match supply and demand
within legal constraints, Company policy and at a minimal cost when faced with
varying conditions.
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Aggregate Planning Problem
Demand:
Jan
Feb
Mar
Apr
May
Jun
650
700
850
700
650
500
Supply:
Regular Workers: 120 units per worker per month
Inventory: 200 units at beginning; need 100 at end
Overtime: 15% max
Subcontract: 10%
Backorder: Not allowed
Costs:
Regular Time : $15/hour per worker
Inventory: $1/unit /month
OT :150% of Regular
Subcontract: $20 per unit
Hiring = $100
Firing = $250
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Techniques for Aggregate Planning
• Aggregate Planning techniques fall within two categories: Informal & Mathematical
• Informal is used most, as Mathematical requires some model development.
• General Procedure for Developing an Aggregate Plan:
1. Determine demand for each period.
2. Determine capacities for each period. (Regular time, overtime, subcontracting)
3. Determine company policies that are pertinent.
(Safety stock, max inventory, allowable overtime)
4. Determine unit costs for regular time, overtime, subcontracting, holding costs,
backorders, and other relevant costs.
5. Develop alternative plans and compute the cost for each.
6. Select the most satisfactory feasible solution.
• Informal Approach
• Consists of developing simple tables or graphs that enable the planners to visually
compare projected demand requirements with existing capacity. (spreadsheets)
• Alternatives are usually evaluated in terms of their overall costs.
• The chief disadvantage is the significant amount of time to achieve an optimal solution.
• Alternatives are not always feasible nor optimal based on company constraints.
• The main advantages are the simplicity and the visual nature.
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• Persistence, experience and luck are part of defining a good plan
Informal Method
Period
Forecast
OUTPUT
Regular
Overtime
Subcontract
Output - Forecast
Inventory
Ending
Average
Backlog
Costs($)
Output
Regular
Overtime
Subcontract
Hire/Layoff
Inventory
BackOrders
Total ($)
1
2
3
4
5
6
TOTAL
Reg = $10
OT = $15
SC = $13
Inv = $ 1
BL = $ 5
Hire = $ 17
Fire = $22
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Mathematical Techniques
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Linear Decision Rule (Holt, Modigliani, & Simon)
Management Coefficient
Parametric Production Planning
Search Decision Rule
Production Switching Heurestic
Linear Programming
Transportation Method
Goal Programming’
Mixed Integer Programming
Simulation
Linear Programming
• Objective Equation:
• Minmize Z = Reg Prod Costs + Hiring Costs + Firing Costs + Holding Costs + Subcontracting Costs + Overtime Costs
• Minimize Z= (Cw Wt
+ Ch Ht + Cf Ft
+ C i It
+ Cs S t
+ Co Ot)
• Constraints:
W t-1 + H t - F t = W t
(Balance Work Force)
I t-1 + k W t + S t + O t - D t = I t ( Balance of Inventory)
Dt-kWt+It =Pt
(Balance Production)
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Disaggregating the Aggregate Plan
• As the short term plan is dependent upon the aggregate plan, it is necessary to
translate this plan into meaningful numbers in the short term.
• Breakdown the aggregate plan into specific product requirements.
• To determine labor, material and inventory requirements
• A general plan was developed in units that applied across product lines. Now how
do we convert those units into specific product lines?
• This can be difficult.
• This disaggregation results in a Master Production Schedule.
• Shows quantity and timing of specific goods
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Review of Aggregation
• The Purpose of Aggregate Planning is to develop a feasible Production Plan on an
aggregate level that achieves a balance of expected demand and supply, while
considering the minimization of cost.
• Because the Supply of resources and the Demand for product can vary, Aggregate
Planning tries to provide a leveling effect to reduce abrupt changes to the factors of
production.
• Aggregate Planning is medium range capacity planning
• typically 3 to 18 months horizon
• Aggregate Planning is essentially a big-picture approach to planning.
• The focus is on capacity
• Think in terms of units that are common across product lines
• Labor hours
• Machine Hours/ month
• Output rates of similar products
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