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Aggregate Planning


Aggregate Planning Strategies Maintain a level workforce Maintain a steady output rate Match demand period by period Use a combination of decision variables Level ... – PowerPoint PPT presentation

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Title: Aggregate Planning

Chapter 5
  • Aggregate Planning

Operations Analysis Using MS Excel
Chapter Outline
  • The Nature of Aggregate Planning
  • Tradeoffs between Production and Inventory
  • 3. Nonlinear cost and demand functions
  • Introducing Overtime
  • Introducing Double or Premium Time
  • Tradeoffs between Level and Chase Strategies

Aggregate Planning
  • Aggregate planning is an intermediate planning
    method used to determine the necessary resource
    capacity a firm will need in order to meet its
    expected demand.

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

Key Points
  • In the intermediate level of planning, there is
    not a lot of detail. Individual end product
    identity is typically not present. Instead,
    planning is performed for a composite, or average
    unit of product in a particular family of similar
  • For example, we may plan for units of hair
    dryers, without regard for whether they are 1500
    watt dryers, 1600 watt dryers, 1875 watt dryers,
    travel dryers, etc.

Key Points
  • With the aggregate planning
  • Decisions are typically aggregated into monthly
    time periods.
  • The planning horizon is usually stated as 6 to 18
    or 2-12 months, however, if there is seasonality
    in the demand for the output of the system, the
    plan should normally cover at least 12 months so
    that it can react to all the seasonal swings in
    the demand.
  • Weekly or daily detail is not needed at
    intermediate level of decision making.

Goal of Aggregate Planning
  • To develop a realistic production plan on an
    aggregate level that will satisfy organizational
    goals and customer demand needs at the lowest
    total cost.
  • Other objectives should be considered
  • maximize customer service
  • minimize inventory investment
  • minimize changes in workforce levels
  • minimize changes in production rates
  • maximize utilization of plant and equipment

Inputs to Aggregate Planning
  • Resources
  • Workforce
  • Facilities
  • Demand forecast
  • Policies
  • Subcontracting
  • Overtime/slack-time
  • Inventory levels
  • Back orders
  • Costs
  • Inventory carrying
  • Back orders
  • Hiring/firing
  • Overtime
  • Inventory changes
  • Subcontracting

Aggregate Planning Outputs
  • Total cost of a plan
  • Projected levels of inventory

Capacity and Demand in the aggregate planning
  • If capacity and demand are nearly equal, emphasis
    should be placed on meeting demand as efficiently
    as possible.
  • If capacity is greater than demand the firm might
    chose promotion and advertising in order to
    increase demand.
  • If capacity is less than demand the firm might
    consider subcontracting a portion of the work

Techniques for Aggregate Planning
  • Determine demand for each period
  • Determine capacities for each period
  • Identify policies that are relevant
  • Determine units costs
  • Develop alternative plans and costs (by using
    different strategies)
  • Select the best plan that satisfies objectives.
    Otherwise return to step 5.

Aggregate Planning Strategies
  • Maintain a level workforce
  • Maintain a steady output rate
  • Match demand period by period
  • Use a combination of decision variables

Aggregate Planning Strategies
  • Level capacity (production) strategy
  • Chase demand strategy

Aggregate Planning Strategies
Chase Approach
  • Maintaining a steady rate of regular-time output
    while meeting variations in demand by a
    combination of options.
  • The chase method helps firms match production and
    demand by hiring and firing workers as necessary
    to control output
  • Cost of strategy hiring and firing workers

Chase Approach
  • Advantages
  • Investment in inventory is low
  • Labor utilization is high
  • Disadvantages
  • The cost of adjusting output rates and/or
    workforce levels
  • Cost of fluctuating workforce levels.
  • Potential damage to employee morale
  • This strategy would not be feasible for
    industries which require highly skilled labor or
    where competition for labor is fierce.
  • This strategy would be cost effective during
    periods of high unemployment or when low-skilled
    labor is acceptable.

Level Strategy
  • The level method allows for a constant rate of
    production and uses inventory levels to absorb
    fluctuations in demand.
  • Matching capacity to demand the planned output
    for a period is set at the expected demand for
    that period.
  • Cost of strategy holding items in inventory
  • When demand is lower than production, inventory
  • When demand exceeds production, inventory

Level Strategy
  • Advantages
  • Stable output rates and workforce levels
  • Worker levels and production output are stable
  • Tends to be the preferred strategy of many
    organizations, including labor unions.
  • Disadvantages
  • Greater inventory costs
  • Increased labor costs in term of overtime and
    idle time
  • Resource utilizations change over time

The Nature of Aggregate Planning
  • The CHASE and the LEVEL strategies are rarely
    used in their pure form.
  • Hybrid of the two is usually more cost-effective
    and efficient
  • What-if scenario management is ideal for
    analyzing tradeoffs and determining the best
    aggregate plan

Tradeoffs between Production and Inventory
Bricks and Tiles Corporation is making plans for
the production of bricks for the coming year. The
total requirements are 3000 bricks, and the
corporation has enough facilities and labor to
make 250 bricks a month The corporation currently
following the level strategy and makes bricks at
a steady rate of 250 per month
Yesterday End Inventory
(Unit MakeStart inventory)- Demand
(Start inventoryEnd inventory) /2 inventory
Introducing Overtime
According to Chase Strategy When demand
forecast goes up ----------------------?
production must be increase ( working overtime)
To meet the large demand, The bricks and Tiles
Corporation will not build up inventories in
advance, but rather it will produce the extra
bricks using overtime.
If labor required lt 500, labor required 25,
else (500 25) (labor required 500) 37.3
Introducing Overtime using a nonlinear function
  • The effect of using Chase strategy based on
    introducing overtime
  • Nonlinear function of overtime
  • if (labor required lt max. labor/month,
    labor requiredlabor cost, max. labor/monthlabor
    cost (labor required - max. labor/month)overtim
    e labor cost)
  • Using solver to optimize the plans output of the
    Chase strategy

Introducing Overtime using a nonlinear function
Find the optimum solution (minimum cost) using
Solver with a constraint in the value of the
inventory which must be nonnegative
If labor required lt 500, labor required 25,
else (500 25) (labor required 500) 37.3
Introducing Double or Premium Time
  • The method of solution for nonlinear problems is
    not as reliable as that for linear problems.
  • Linear programming is a mathematical procedure
    for finding the best solution to a problem
    described by a linear equation and subject to
    linear constraints.
  • Not all overtime is treated the same. Often,
    overtime worked on the weekend, holidays, or on
    third shift has an extra cost. This overtime is
    called double time or premium time.

Introducing Double or Premium Time
How the Bricks and Tiles corporation will
responsd to the increasing in demand? Building
inventories -- following level strategy When
inventory cost are low Introducing overtime and
premium ---- following Chase strategy
When inventory costs are high
Introducing Double or Premium Time
Tradeoffs between Level and Chase Strategies
The Bricks and Tiles Corporation is currently
producing at a Level rate to meet current demand,
but production has been well automated and
workers do not need much training to run the
machines. Management is considering a reduction
in capacity when the demand is low, and an
expansion when demand is high that is,
management is considering a strategy to chase
demand. Such a strategy will reduce inventory
cost, but introduces the the issue of hiring and
firing workers Chase strategy can has a bad
effect on the morale of the worker The
corporation want to base their decision on a cost
Tradeoffs between Level and Chase Strategies
  • The yearly demand is 2,400 million tiles, and 200
    million are produced each month.
  • The current approach does not allow for hiring
    and firing
  • As a result, inventories balloon during the year,
    and inventory costs are more than twice the
    actual cost of production

Tradeoffs between Level and Chase Strategies
The problem is to minimize the total cost under
the constraints, including the constraint of
hiring and firing
Since production exactly matches demand, there is
no inventory cost. Modification on the model
involve lumps hiring and firing into one
categories This solution allows for too many
firings in any one period, so the model has to
Tradeoffs between Level and Chase Strategies
Modification on the the following model involve
place a limit on firings only because the
management do not desire to limit hiring.
Here, cost of firing is limited to 500, which
corresponds to ten firings.
Tradeoffs between Level and Chase Strategies
Here, cost of firing is limited to 500, which
corresponds to ten firings. The results can be
summarized as follows Aggregate
Plan Cost Steady Production 380,000 Unlimited
Firing 151,250 Limited Firing 243,625 ________