Aggregate/Production Planning
Aggregate / Production
Planning
Y.-H. Chen, Ph.D.
International College
Ming-Chuan University
Aggregate/Production Planning
Overview
• Introduction
• Demand and Supply/Capacity Options
• Aggregate/Production Planning
Techniques
• Master Production Schedule
Aggregate/Production Planning
Planning
Organizations make supply and capacity
decisions on three levels.
Aggregate/Production Planning
Aggregate/Production Planning
• Why do we need it?
– Time
– Level of accuracy
• What decisions are involved?
– output rates
– employment
– inventory
– back orders
– subcontracting
Aggregate/Production Planning
Aggregate/Production Planning
• A “big picture” approach to
planning.
• Balance supply and demand by
minimizing the production cost,
adjustment cost, and
opportunity cost of a system.
• Concerned with the quantity
and the timing of both the
supply and demand.
Aggregate/Production Planning
Aggregate/Production Planning
• A rolling planning horizon covers a time
horizon of 2 to 18 months.
• Special challenge comes from uneven
demand within the planning horizon.
• Example: Department store space
allocation.
Long range
Short
range
Now
Intermediate
range
2 months
1 Year
Aggregate/Production Planning
Aggregate Planning Inputs
• Resources
– Workforce
– Facilities
• Demand forecast
• Policy statements
– Subcontracting
– Overtime
– Inventory levels
– Back orders
• Costs
– Inventory carrying
– Back orders
– Hiring/firing
– Overtime
– Inventory
changes
– subcontracting
Aggregate/Production Planning
Aggregate Planning Outputs
• Total cost of a plan
• Production/operation plan
– Projected levels of
•
•
•
•
•
Inventory
Output
Employment
Subcontracting
Backordering
Aggregate/Production Planning
Demand Options
• Pricing: Influence demand pattern.
– Problems: insufficient capacity and missing demand.
– Examples: discount rates on hotels, airlines, movies, etc.
• Promotion: Influence demand quantity.
– Problems: worse than initial intention.
• Back orders: Take orders in a period but
deliver them later.
– Problems: lost sales, disappointed customers, and
paperwork.
• New demand: Develop demand for a
complementary product.
– Examples: trips of schools, clubs, and seniors; fast food
breakfast; landscaping during snow season.
Aggregate/Production Planning
Capacity Options
• Hire and layoff workers: union contracts,
worker availability, worker morale, quality, and
cost.
– Recruitment, screening, training, severance pay, workforce
realignment.
• Overtime/slack time
– Overtime: Seasonal demand, crew overtime, productivity, quality,
accident, payroll.
– Slack time: training, process improvement, problem solving.
• Inventories: carrying, holding, insurance,
obsolescence, deterioration, spoilage,
breakage.
• Part-time workers: skill set, union, benefit.
• Subcontracting / outsourcing: skill set,
availability, quality, cost, demand stability,
confidentiality.
Aggregate/Production Planning
Aggregate Planning Strategies
• Level capacity strategy with inventories,
overtime, part-time workers,
subcontracting, and back orders.
• Chase demand strategy with overtime,
part-time workers, and subcontracting.
• Use a combination of both strategies.
Aggregate/Production Planning
Aggregate Planning Strategies
Aggregate/Production Planning
Aggregate Planning Procedures
1.
2.
3.
4.
Determine demand for each period
Determine capacities for each period
Identify policies that are pertinent
Determine units costs
–
regular time, overtime, subcontracting, holding
inventories, back orders, layoffs, and other
relevant costs.
5. Develop alternative plans and compute
costs
6. Select the best plan that satisfies objectives
Aggregate/Production Planning
Aggregate Planning Example
Aggregate/Production Planning
Aggregate Planning Example: Case 1
Case 1: Use a steady rate of output and
use inventory to absorb the uneven
demand but allowing some backlog.
Assume there are 15 workers. Each
worker has an output rate of 20 units
per period. Start with zero inventory and
determine an aggregate plan and its
cost.
Aggregate/Production Planning
Aggregate Planning Example: Case 1
Aggregate/Production Planning
Aggregate Planning Example: Case 2
Case 2: After Case 1, planners learned
that one worker is about to retire from
the company. Rather than replacing that
person, they would like to stay with the
smaller workforce and use overtime to
make up for the lost output. With the
maximum amount of overtime output
per period to be 40 units, develop a plan
and compare it to Case 1
Aggregate/Production Planning
Aggregate Planning Example: Case 2
Aggregate/Production Planning
Aggregate Planning Example: Case 3
Case 3: Another option for Case 2 is to
use temporary workers to fill in during
months of high demand. Suppose that it
costs an additional $100 to hire and
train a temporary worker, and that a
temporary worker can produce at the
rate of 15 units per period (compared to
20 units per period for regular workers).
Develop a plan and compare it to Case
1 and Case 2.
Aggregate/Production Planning
Aggregate Planning Example: Case 3
Aggregate/Production Planning
Aggregate Planning Techniques
•
•
•
•
Graphical / Charting
Linear Programming
Linear Decision Rule
Simulation
Aggregate/Production Planning
Cumulative output/demand
Graphical / Charting
1
Cumulative
production
Cumulative
demand
2
3
4
5
6
7
8
9
10
Aggregate/Production Planning
Linear Programming
• Goal: minimize the sum of costs related to
regular labor time, overtime, subcontracting,
inventory holding costs, and costs associated
with changing the size of the workforce.
• Constraints: capacities of the workforce,
inventories, and subcontracting.
• Limitations
– linear relationships among variables
– inability to continuously adjust output rates
– single objective
Aggregate/Production Planning
Linear Programming
Aggregate/Production Planning
Linear Programming Example
Given the following information, set up the problem
in a transportation table:
Aggregate/Production Planning
Linear Programming Formulation
Aggregate/Production Planning
Linear Decision Rule and Simulation
• Linear Decision Rule
– Minimized combined costs using a set of costapproximating functions to obtain a single
quadratic equation.
– Limitations:
• A specific type of cost function is assumed.
• Considerable effort needed to obtain relevant cost data
and develop cost functions for each organization.
• Solutions may be unfeasible.
• Simulation Models
– Develop and test computer models under different
scenarios to identify acceptable solutions to
problems. Examples: grocery checkouts, banking.
Aggregate/Production Planning
Summary of Planning Techniques
Technique
Solution
Characteristics
Graphical/
charting
Trial and
error
Linear
programming
Linear
decision rule
Optimizing
Simulation
Trial and
error
Intuitively appealing, easy to
understand; solution not
necessarily optimal.
Computerized; linear assumptions
not always valid.
Complex, requires considerable
effort to obtain pertinent cost
information and to construct
model; cost assumptions not
always valid.
Computerized models can be
examined under a variety of
conditions.
Optimizing
Aggregate/Production Planning
Aggregate Planning in Services
• Services occur when they are rendered.
– Inventory may not apply to services.
• Demand for service can be difficult to predict.
– Some customers request prompt service or go
elsewhere, if there is a waiting line.
• Capacity availability can be difficult to predict.
– Depend on skills details required.
• Labor flexibility can be an advantage in
services.
– Can handle wide variety of service requirements.
Aggregate/Production Planning
Disaggregation
Breaking the aggregate plan into specific
product requirements in order to
determine
– labor requirements (skills, size of work
force),
– materials, and
– inventory requirements.
Aggregate/Production Planning
Disaggregation Example
Aggregate/Production Planning
Disaggregation
• Master schedule
– Result of disaggregating an aggregate plan
– Show quantity, timing, and orders of specific end
items for a scheduled horizon.
– Shorter time horizon.
– Planned unit may be different.
• Rough-cut capacity planning: Approximate
balancing of capacity and demand to test the
feasibility of a master schedule.
– Production, warehouse facilities, labor, vendors,
and raw materials.
Aggregate/Production Planning
Master Production Schedule (MPS)
Indicate the quantity and timing of planned
production, taking into account desired
delivery quantity and timing as well as onhand inventory. (what, when, how much)
Inputs
Outputs
Beginning inventory
Forecast
Customer orders
Projected inventory
Master
Scheduling
Master production schedule
Uncommitted inventory
Aggregate/Production Planning
MPS Example
• A company that makes industrial pumps wants to
prepare a master production schedule for June and
July.
• Marketing has forecasted demand of 120 pumps for
June and 160 pumps for July.
– By evenly distributing over the four weeks in each month, we
have 30 per week in June and 40 per week in July.
• Now, suppose that there are currently 64 pumps in
inventory and there are customer orders that have
been committed and must be filled. These inputs
result in the following table.
• Production batch size is 70 units.
Aggregate/Production Planning
MPS Example: Step 1
If no production is planed, projected inventory
becomes negative from week 3. This is a
signal that production is needed to replenish
inventory.
Aggregate/Production Planning
MPS Example: Step 2
Aggregate/Production Planning
MPS Example: Step 2
Aggregate/Production Planning
MPS Example: Step 3
Aggregate/Production Planning
Time Fences in MPS
Period
1
2
3
frozen
4
5
6
firm
7
8
9
full
10
11
open
12