Aggregate Planning

Aggregate Planning Chapter 11 MIS 373: Basic Operations Management

Learning Objectives • After this lecture, students will be able to • Explain what aggregate planning is and how it is useful. • Identify the variables decision makers have to work with in aggregate planning. • Describe some of the graphical and quantitative techniques planners use. • Prepare aggregate plans and compute their costs. • Discuss aggregate planning in services. MIS 373: Basic Operations Management

Motivations McDonald's Do you need to know the demand for each burger to plan your labor force?

The Planning Sequence Long-term planning Intermediate-term planning Short-term detailed planning MIS 373: Basic Operations Management

The Concept of Aggregation • Aggregate planning is essentially a “big-picture” approach to planning. • avoid focusing on individual products or services • focus on a group of similar products or services • For purposes of aggregate planning, it is often convenient to think of capacity in terms of labor hours or machine hours per period, or output rates (barrels per period, units per period), without worrying about how much of a particular item will actually be involved. MIS 373: Basic Operations Management

Aggregate Planning • The main idea behind aggregate planning: Aggregate planning translates business plans into rough labor schedules and production plans • Issues to consider for aggregate planning • Production rate: “aggregate units” per worker per unit time • Workforce level: available workforce in terms of hours • Actual production: Production rate x Workforce level • Inventory: Units carried over from previous periods • Costs: production, changing workforce, inventory MIS 373: Basic Operations Management

Aggregate Planning • What does aggregate planning do? • Given an aggregate demand forecast , determine production levels, inventory levels, and workforce levels, in order to minimize total relevant costs over the planning horizon • Why do organizations need to do aggregate planning? • It takes time to implement plans (e.g. hiring). • It is not possible to predict with accuracy the timing and volume of demand for individual items. • Planning is connected to the budgeting process which is usually done annually on an aggregate (e.g., departmental) level. • It can help synchronize flow throughout the supply chain; it affects costs, equipment utilization; employment levels; and customer satisfaction MIS 373: Basic Operations Management

Matching Demand and Supply • Proactive • Alter demand to match supply (capacity) • Among other approaches, we can alter demand by simply changing the price. • Reactive • Alter supply (capacity) to match demand • Through capacity planning and aggregate planning • Mixed • Some of each MIS 373: Basic Operations Management

Demand Options • Pricing • Used to shift demand from peak to off-peak periods • Price elasticity is important • Promotion • Advertising and other forms of promotion • Issue: response rate and response patterns. Less control over timing of demand (may worsen the problem by bringing demand at the wrong time). • Back orders (delaying order filling) • Orders are taken in one period and deliveries promised for a later period • Possible loss of sales, increased record keeping, lowered customer service level • New demand • Offer different products/services during off-peak periods. • Yield (Revenue) Management • Maximizing revenue by using a variable pricing strategy. Prices are set relative to capacity availability. MIS 373: Basic Operations Management

Supply Options • Hire and layoff workers • May have upper or lower limit • Unions/internal policies may prohibit layoffs • Skill levels • Associated costs (e.g., recruiting, training, severance-pay, morale) • Overtime • Overtime may result in lower productivity, poorer quality, more accidents, increased payroll costs • Part-time workers • Usually low-to-moderate job skills • Independent-contractors • Inventories • Produce in one period and sell in another • Costs: holding and carrying cost, money tied up in inventory, insurance, obsolescence, deterioration, spoilage, breakage etc. • Subcontracting • Less control over output. Quality problems. • Higher costs MIS 373: Basic Operations Management

Aggregate Planning Supply Strategies • Levelcapacity strategy: • Maintaining a steady rate of regular-time output; variations in demand are met by using inventories or other options such as overtime, part-time workers, subcontracting, and backorders • Chasedemand strategy: • Matching capacity to demand; the planned output for a period is set at the expected demand for that period. MIS 373: Basic Operations Management

Level strategy • Capacities are kept constant over the planning horizon • Advantages • Stable output rates and workforce • Disadvantages • Greater inventory (or other) costs MIS 373: Basic Operations Management

Chase strategy • Capacities are adjusted to match demand requirements over the planning horizon • Advantages • Investment in inventory is low • Labor utilization in high • Disadvantages • The cost of adjusting output rates and/or workforce levels MIS 373: Basic Operations Management

Choosing a Strategy • Important factors: • Company policy • Constraints on the available options • e.g., discourage layoffs, no subcontracting to protects secrets, union policies regarding over time • Flexibility • Chase flexibility may not be present for companies designed for high steady output (e.g., refineries, auto assembly) • Cost • Alternatives are evaluated in term of cost (while matching demand within the constraints). MIS 373: Basic Operations Management

Example #1: Chase demand • Beginning Inventory: 0 units • Beginning Workforce: 5 workers • Production Rate: 10 units/worker/period • Regular Production Costs: $10/unit • Inventory Costs: $5/unit/period • Hiring Cost: $200/worker • Firing Cost: $100/worker MIS 373: Basic Operations Management

Example #1: Chase demand Time Periods Beginning Inventory # Hired in the beginning of a period Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker # Fired in the beginning of a period MIS 373: Basic Operations Management

Example #1: Chase demand Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker Recall the chase strategy: Capacities are adjusted to match demand requirements over the planning horizon MIS 373: Basic Operations Management

Example #1: Chase demand Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

Example #1: Chase demand Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker • One defining characteristics of the chase strategy is that we don’t have end inventory. • All we produced are/were sold. • No holding cost MIS 373: Basic Operations Management

Example #1: Chase demand Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker TC=Production + Holding + Hiring + Firing = 200*10 + 0 + 4*200 + 3*100 = $3,100 MIS 373: Basic Operations Management

Exercise Problem • Perform aggregate planning using the chase strategy: • Beginning Inventory: 10 units • Beginning Workforce: 5 workers • Production Rate: 10 units/worker/period • Regular Production Costs: $10/unit • Inventory Costs: $10/unit/period • Hiring Cost: $100/worker • Firing Cost: $200/worker

Solution: chase strategy Beginning Inventory Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

Solution: chase strategy Beginning Inventory Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker We only produce 40 units because there are 10 units beginning inventory that we can use. So, we can still meet the demand of 50 units.

Solution: chase strategy Beginning Inventory Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker The beginning workforce is 5 workers. Since we only produce 40 units in this period and each worker can handle 10 units in a period, we only need 4 works here.  We hence fire 1 at the beginning of this period.

Solution: chase strategy Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

Solution: chase strategy Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker TC=Production + Holding + Hiring + Firing = 180*10 + 5*10 + 1*100 + 2*200

Example #2: Level Capacity Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

Example #2: Level Capacity Recall the level strategy: Capacities are kept constant over the planning horizon. So, Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker Total demand=40+30+20+50+60=200 Production per period=200/5=40 MIS 373: Basic Operations Management

Example #2: Level Capacity Fire 1 worker in this period because 4 workers are sufficient to produce 40 units in a period. Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

Example #2: Level Capacity One defining characteristics of the level strategy is that we don’t need to adjust capacity (here, labor force), except for the initial period. Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

Example #2: Level Capacity TC=Production + Holding + Hiring + Firing But, how to calculate the holding cost?  Average inventory in a period Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

Example #2: Level Capacity Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker =(0+10)/2 =(10+30)/2 We can estimate the holding cost by considering the average inventory in each period. MIS 373: Basic Operations Management

Example #2: Level Capacity Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker =(0+10)/2 =(10+30)/2 TC=Production + Holding + Hiring + Firing TC= 200*10 + 60*5 + 0*200 + 1*100 = $2,400 MIS 373: Basic Operations Management

Exercise Problem • Perform aggregate planning using the level strategy: • Beginning Inventory: 10 units • Beginning Workforce: 5 workers • Production Rate: 10 units/worker/period • Regular Production Costs: $10/unit • Inventory Costs: $10/unit/period • Hiring Cost: $100/worker • Firing Cost: $200/worker Two additional assumptions: Unmet demands in a period can be held and fulfilled in a future period. There is no cost associated with unmet demands.

Solution: chase strategy Beginning Inventory Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

Aggregate Planning