Chapter 13 – Aggregate
Planning
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010
PowerPoint Presentation by R.B. Clough – UNH
M. E. Henrie - UAA
© Wiley 2010
The Role of Aggregate
Planning
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Integral to part of the business planning
process
Supports the strategic plan
Also known as the production plan
Identifies resources required for
operations for the next 6 -18 months
Details the aggregate production rate
and size of work force required
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The Role of the Aggregate Plan
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Planning Links to MPS
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Types of Aggregate Plans
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Level Aggregate Plans
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Maintains a constant workforce
Sets capacity to accommodate average demand
Often used for make-to-stock products like appliances
Disadvantage- builds inventory and/or uses back orders
Chase Aggregate Plans
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Produces exactly what is needed each period
Sets labor/equipment capacity to satisfy period demands
Disadvantage- constantly changing short term capacity
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Types of Aggregate Plans
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(Cont.)
Hybrid Aggregate Plans
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Uses a combination of options
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Options should be limited to facilitate execution
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May use a level workforce with overtime & temps
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May allow inventory buildup and some backordering
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May use short term sourcing
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Best way to develop a hybrid plan is by Linear Programming or
Integer Linear Programming, see notes given in class and
http://bcs.wiley.com/he-bcs/Books?action=mininav&bcsId=3598&itemId=0471794481&assetId=112492&resourceId=10280&newwindow=true
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Aggregate Planning Options
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Demand based options
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Reactive: uses finished goods inventories and
backorders for fluctuations
Proactive: shifts the demand patterns to minimize
fluctuations e.g. early bird dinner prices at a restaurant
Capacity based options
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Changes output capacity to meet demand
Uses overtime, under time, subcontracting, hiring, firing,
and part-timers – cost and operational implications
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Developing the Aggregate Plan
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Step
Step
Step
Step
1234-
Choose strategy: level, chase, or Hybrid
Determine the aggregate production rate
Calculate the size of the workforce
Test the plan as follows:
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Calculate Inventory, expected hiring/firing, overtime needs
Calculate total cost of plan
Step 5- Evaluate performance: cost, service,
human resources, and operations
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Aggregate Planning Bottom Line
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The Aggregate plan must balance several
perspectives
Costs are important but so are:
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Customer service
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Operational effectiveness
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Workforce morale
A successful AP considers each of these factors
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Master Production Scheduling
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Master production schedule (MPS) is the
anticipated build schedule
MPS is often stated in produce or
service specifications rather than dollars
MPS is often built, managed, reviewed
and maintained by the master scheduler
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Planning Links to MPS
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Role of the MPS
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Aggregate plan:
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Specifies the resources available (e.g.: regular
workforce, overtime, subcontracting, allowable
inventory levels & shortages)
Master production schedule:
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Specifies the number & when to produce each
end item (the anticipated build schedule)
Disaggregates the aggregate plan
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Objectives of Master Schedule
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The Master Scheduler must:
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Maintain the desired customer service level
Utilize resources efficiently
Maintain desired inventory levels
The Master Schedule must:
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Satisfy customer demand
Not exceed Operation’s capacity
Work within the constraints of the Aggregate Plan
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MPS as a Basis of
Communication
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MPS is a basis for communication between
operations and other functional areas
Demand management and master scheduler
is communication is ongoing to incorporate
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Forecasts, order-entry, order-promising, and
physical distribution activities
Authorized MPS is critical input to the
material requirements planning (MRP)
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Developing an MPS
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The Master Scheduler:
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Develops a proposed MPS
Checks the schedule for feasibility with available capacity
Modifies as needed
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Authorizes the MPS
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Consider the following example:
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Make-to-stock environment with fixed orders of 125 units
There are 110 in inventory to start
When are new order quantities needed to satisfy
the forecasted demand?
© Wiley 2010
The MPS Record
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F o re c a s t
P ro je c t e d a va ila b le
MPS
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F o re c a s t
P ro je c t e d a va ila b le
MPS
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110
125
Projected Available = beginning inventory + MPS shipments forecasted demand
The MPS row shows when replenishment shipments need to arrive to avoid a
stock out (negative projected available)
© Wiley 2010
Revised and Completed MPS Record
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F o re c a s t
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MPS
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MPS
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Evaluating the MPS
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Rough-cut capacity planning:
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An estimate of the plan’s feasibility
Given the demonstrated capacity of critical
resources (e.g.: direct labor & machine time),
have we overloaded the system?
Customer service issues:
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Does “available-to-promise” inventory satisfy
customer orders? If not, can future MPS quantities
be pulled in to satisfy new orders?
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Stabilizing the MPS
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Aggregate Planning Across the
Organization
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Aggregate planning, MPS, and rough-cut
capacity affection functional areas throughout
the organization
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Accounting is affected because aggregate plan
details the resources needed by operations
Marketing as the aggregate plan supports the
marketing plan
Information systems maintains the databases that
support demand forecasts and other such
information
© Wiley 2010
Chapter 13 Highlights
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Planning begins with the development of the strategic
business plan that provides your company’s direction and
objectives for the next two to ten years.
Sales and operations planning integrates plans from the
other functional areas and regularly evaluates company
performance.
The level aggregate plan maintains the same size workforce
and produces the same output each period. Inventories and
backorders absorb fluctuations in demand. The chase
aggregate plan changes the capacity each period to match
the demand
Demand patterns can be smoothed through pricing
incentives, reduced prices for out-of-season purchases, or
nonprime service times.
© Wiley 2010
Chapter 13 Highlights
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(continued)
The difference in aggregate planning for companies that do
not provide a tangible product is that the option to use
inventories is not available
The MPS shows how the resources authorized by the AP will
be used to satisfy the organizational objectives. The MPS
specifies the products to be built in each time period. MPS is
checked for feasibility using a rough-cut capacity planning
technique.
The objectives of master scheduling are to satisfy customer
service objectives, use resources effectively, and minimize
costs. An MPS is developed by looking at individual MPS
records and calculating when replenishment quantities are
needed. The MPS records are summed together to show
the total proposed workload. © Wiley 2010
Chapter 13 Highlights
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(continued)
Available-to-promise logic is used when
promising order delivery dates to customers,
ATP logic allows the company to make viable
delivery promises
Time fence policies stabilize the MPS. The
demand time fence and the planning time
fence divide the MPS into three portions:
frozen, slushy, and liquid.
© Wiley 2010
The End
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Copyright © 2007 John Wiley & Sons, Inc. All rights reserved.
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contained herein.
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Aggregate Production Planning
Extra Credit: Linear Programming Formulation
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Parameters: found in or computed from the data
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Decision variables: unknowns to be determined
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Objective function: the bottom line
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Constraints: Satisfy demands and state relationships
among variables
Single Product model here; can be generalized
Parameters: find these in the data!
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dt = amount of product demanded in period t
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pt = productivity per worker in period t
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Lt = unit labor cost per worker in period t
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ht = unit hiring cost per worker in period t
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ft = unit firing cost per worker in period t
Parameters: find these in the data!
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ct = inventory holding cost per
unit per period in period t
at = backorder cost per item
per period in period t
Decision Variables:
find values by solving the model
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wt = number of workers employed in period t
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ut = number of workers hired between periods t-1
and t
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vt = number of workers fired between periods t-1
and t
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it = amount of product in inventory at the end of
period t
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bt = amount backordered at the end of period t
Initial values:
“fixed variables”; find in data
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io = initial inventory level
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wo = initial workforce level
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bo = initial backorder, i.e., left
over from previous period.
The LP Model
Minimize t (Ltwt + htut + ftvt + ctit + atbt)
s.t.
ut - vt = wt – wt-1 for each period t : workforce change
ptwt + it-1 - it + bt – bt-1 = dt for each period t: demand
balance
iT==0, bT = 0 for last period T; closing out
wt, ut, vt, it, bt  0 for each time period t: nonnegativity
© Wiley 2007
The LP model for the example
Minimize 1280w1+1280w2 +…+ 500u1+500u2
+…+ 1000v1+1000v2+…+10 i1 + 10 i2 +…+
100 b1 + 100 b2+…
s.t.
u1 – v1 = w1 – 210 (period 1)
…
26.67w1 + io – i1 + b1 – bo = 6000 (period 1)
26.67w1 + io – i1 + b1 – bo = 4800 (period 2)
…
All variables nonnegative
© Wiley 2007
Some loose ends: SCM
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Supply Chain Strategy
http://money.cnn.com/2008/05/28/magazines/fortun
e/kapner_walmart.fortune/index.htm
Wal-Mart puts the squeeze on food costs The retailer
is using its clout with vendors to hold onto its
everyday low prices
A company’s supply chain strategydetermines the
nature of procurement and transportation of
materials as well as manufacture and distribution of
the product.
© Wiley 2007
Some loose ends: SQC
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the primary reason for abandonment of the
inspection system and the adoption of the Statistical
Process Control system for achieving quality in the
was that customer expectations were raised by
Japanese quality during the late 70s.
© Wiley 2007
Heuristic #1:
Choose the Cheapest Warehouse to Source
Demand
D = 50,000
$2 x 50,000
$5 x 140,000
Cap = 60,000
$2 x 60,000
D = 100,000
$1 x 100,000
$2 x 50,000
D = 50,000
Total Costs = $1,120,000
Source: Simchi-Levi, Kaminsky & Simchi-Levi, Designing and Managing the Supply Chain 3/e
© Wiley 2007
Heuristic #2: Choose the warehouse where the
total delivery costs to and from the warehouse are
the lowest [Consider inbound and outbound
distribution costs]
$0 x 50,000
D = 50,000
$3 x 50,000
Cap = 200,000
P1 to WH1
P1 to WH2
P2 to WH1
P2 to WH 2
$5 x 90,000
D = 100,000
P1 to WH1
P1 to WH2
P2 to WH1
P2 to WH 2
$1 x 100,000
Cap = 60,000
$3
$7
$7
$4
$2 x 60,000
$2 x 50,000
D = 50,000
Total Cost = $920,000
Source: Simchi-Levi, Kaminsky & Simchi-Levi, Designing and Managing the Supply Chain 3/e
© Wiley 2007
$4
$6
$8
$3
P1 to WH1
P1 to WH2
P2 to WH1
P2 to WH 2
$5
$7
$9
$4