Aggregate / Production Planning

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Aggregate / Production Planning
Y.-H. Chen, Ph.D. International
College Ming-Chuan University
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Overview

• Introduction
• Demand and Supply/Capacity Options
• Aggregate/Production Planning Techniques
• Master Production Schedule

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Planning

• Organizations make supply and capacity decisions
  on three levels.

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Aggregate/Production Planning

• Why do we need it?
• Time
• Level of accuracy
• What decisions are involved?
• output rates
• employment
• inventory
• back orders
• subcontracting

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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.

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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.

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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

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Aggregate Planning Outputs

• Total cost of a plan
• Production/operation plan
• Projected levels of
• Inventory
• Output
• Employment
• Subcontracting
• Backordering

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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.

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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.

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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.

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Aggregate Planning Strategies
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Aggregate Planning Procedures

• 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.
• Develop alternative plans and compute costs
• Select the best plan that satisfies objectives

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Aggregate Planning Example
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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.

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Aggregate Planning Example Case 1
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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

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Aggregate Planning Example Case 2
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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.

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Aggregate Planning Example Case 3
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Aggregate Planning Techniques

• Graphical / Charting
• Linear Programming
• Linear Decision Rule
• Simulation

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Graphical / Charting
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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

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Linear Programming
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Linear Programming Example

• Given the following information, set up the
  problem in a transportation table

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Linear Programming Formulation
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Linear Decision Rule and Simulation

• Linear Decision Rule
• Minimized combined costs using a set of
  cost-approximating 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.

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Summary of Planning Techniques
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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.

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Disaggregation

• Breaking the aggregate plan into specific product
  requirements in order to determine
• labor requirements (skills, size of work force),
• materials, and
• inventory requirements.

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Disaggregation Example
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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.

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Master Production Schedule (MPS)

• Indicate the quantity and timing of planned
  production, taking into account desired delivery
  quantity and timing as well as on-hand inventory.
  (what, when, how much)

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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.

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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.

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MPS Example Step 2
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MPS Example Step 2
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MPS Example Step 3
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Time Fences in MPS
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