Aggregate Planning

Aggregate Planning Operations Management Dr. Ron Tibben-Lembke

Learning Objectives • Describe planning • Distinguish the types of plans • Define aggregate scheduling • Relate aggregate scheduling to the overall planning process • Explain aggregate scheduling options • Develop aggregate schedules

Example You’ve started a new company. You’ve developed 2 production plans: Month Forecast Plan 1 Plan 2 Jan 900 900 800 Feb 700 700 800 Mar 800 800 800 You estimate 1 worker can make 100 units per month. Which plan do you use? How many workers do you hire? How do you meet demand?

Planning • Setting goals & objectives • Example: Meet demand within the limits of available resources at the least cost • Determining steps to achieve goals • Example: Hire more workers • Setting start & completion dates • Example: Begin hiring in Jan.; finish, Mar. • Assigning responsibility

Types of Plans Management Level High Long-Range Facility location Top Executives Intermediate-Range Aggregate plans Operations Managers Short-Range Dispatching Supervisors Low Today 3 months 1 year 18 months 5 years

Aggregate Scheduling • Production quantity & timing of production for intermediate future • Usually 3 to 18 months into future • Combines (‘aggregates’) production • Expressed in common units • Example: Hours, dollars, equivalents (e.g., FTE students) • Time to make ‘average’ product

Relationships of Aggregate Schedule Aggregate Forecast & Resource Production Firm Orders Availability Planning Work force Inventory Material Master Subcontractors Requirements Production Planning Scheduling No, modify CRP, MRP, or MPS Capacity Shop Requirements Realistic? Floor Yes Planning Schedules

Aggregate Schedule Example Aggregate Schedule:Month Jan Feb Mar Apr MayNo. of Chips 600 650 620 630 640 Master Production Schedule:MonthJan Feb Mar Apr MayP4 1.5 ghz 300 200 310 300 340P4 1.7 ghz 300 450 310 330 300

Aggregate Scheduling Goals • Meet demand • Use capacity efficiently • Meet inventory policy • Minimize cost • Labor • Inventory • Plant & equipment • Subcontract

Promotion & price Back ordering Counterseasonal product mixing Aggregate Scheduling Options Capacity Demand • Inventory • Hire or layoff • Overtime or idle • Subcontract • Part-time workers • Outsource

Costs • “Smoothing” costs: • Hiring: advertise, interview, train • Firing: severance, bad morale, future hiring • Holding costs - charged on inv At end • Shortage costs • Labor costs / overtime, materials • Subcontracting / outsourcing

Aggregate Scheduling Strategies • Level scheduling strategy • Produce same amount every day • Keep work force level constant • Vary non-work force capacity or demand • Often results in lowest production costs • Chase strategy • Hire / Fire workers to make production capacity meet necessary production

Aggregate Scheduling Strategies • Mixed strategy • Combines 2 or more aggregate scheduling options Overtime Price MixedStrategy Sub-contract Inventory

Aggregate Scheduling Methods • Graphical & charting techniques • Popular & easy-to-understand • Trial & error approach • Mathematical approaches • Linear Programming • Simulation • More involved, but usually better answers

JC Company p. 292 • Materials Cost: $100/unit • Labor: 5 hours per unit, $4/hr RT, $6/hr OT • Subcontract $20/unit ($120 - $100 matl savings) • Holding cost $1.5/unit/mo • Stockout cost $5/unit/mo • Hiring cost $200 • Firing cost $250 • Starting inventory 400 units, safety stock 25%

Exhibit 11.3 • Goal of 25% of sales as “safety stock” • For planning, assume safety stock never used

Hire and Fire, no OT: Plan 1 • Start with workers needed for month 1 • May have too many at end

Constant Workforce: Plan 2 • Total D = 8,000 units • 5*8,000 = 40,000 hours • 125 days total = 1,000 hrs • 40,000/1,000 = 40 workers • No penalty missing safety stock

Subcontract: Plan 3 • April has lowest demand • 21 days * 8 hrs = 168 • 850*5/168 = 25.3 workers • Subcontract rest

Constant Workers with OT: 4 • Find # workers to do all except biggest mos in RT • Trial and error • Not enough safety stock

Linear Programming Parameters CH = hiring cost CF = firing cost CI = Inv. Cost CR = reg production CO = Ovt. Cost CI = idle cost CS = subcontract nt = days in period t K = daily prod. I0 = Inventory to start W0 = workers to start Dt = Demand for t

Variables It = Inventory for t Ot = Overtime Wt = workers for t Ut = idle time Ht = hired in t St = subcontracted Ft = fired in t Pt= production for t • All must be >= 0

Constraints • Workforce conservation Wt = Wt-1 + Ht - Ft • Units Conervation It = It-1 + Pt + St - Dt • Production and workforce level Pt= K*nt*Wt + Ot - Ut Each of these must be satisfied for all t

LP Formulation

LP Considerations • LP can be modified to include minimum inv. level each period • Negative inventory can be allowed • Care needed when rounding

Conclusion • Described role of aggregate planning • Described types of plans • Explained aggregate scheduling options • Developed aggregate schedules • Chase, Level, and Hybrid • Linear Programming

Aggregate Planning