Aggregate Planning

Aggregate Planning

Industrial Facilities Design (7th Term, Batch 2009) 28/3/2012 lectur # 31 & 32 1 Lecture Outline 28/3/2012 Production + Planning Common of Objectives Of P Planning P Planning (Classification) Aggregate P Planning Capacity Decision Hierarchy Aggregate Planning Process Methods of Influencing Demand & Supply APP Variables Strategies for Adjusting Capacity Aggregate P Planning Example lectur # 31 & 32

13-2 13-2 Production Production is a function in which raw materials or human efforts (inputs) are transformed into finished good or services (outputs) 28/3/2012 lectur # 31 & 32 13-3 13-3 Planning An organizational process of creating and maintaining a plan; Or The psychological process of thinking about the activities required to create a desired goal on some scale 28/3/2012 lectur # 31 & 32 13-4 13-4 Common objectives of production planning... MINIMIZE:

cost, inventory levels, changes in work force levels, use of overtime, use of subcontracting, changes in production rates, plant/personnel idle time MAXIMIZE: profits, customer service Slide 28/3/2012 11.5 11.5 lectur # 31 & 32 Production Planning Long Range Planning Strategic planning (1-5 years) Medium Range Planning Employment, output, and inventory levels (2- 18 months) Short Range Planning Job scheduling, machine loading, and job sequencing (0-2 months) Slide 28/3/2012

11.6 11.6 lectur # 31 & 32 Aggregate production planning is medium-term capacity planning over a two to eighteen month planning horizon. It involves determining the lowestcost method of providing the adjustable capacity for meeting production requirements. Slide 28/3/2012 11.7 11.7 lectur # 31 & 32 Capacity Decisions Hierarchy Linkages Facilities Planning Aggregate Planning Scheduling Time Frame Time Slide 28/3/2012

11.8 11.8 Scheduling lectur # 31 & 32 Facilities Planning Aggregate Planning Aggregation refers to the idea of focusing on overall capacity, rather than individual products or services. Aggregation is done according to: Products Labor Time Slide 28/3/2012 11.9 11.9 lectur # 31 & 32 Aggregate production planning involves managing... Slide 28/3/2012 11.10 11.10

Work force levels - the number of workers required for production. Production rates - the number of units produced per time period. Inventory levels - the balance of unused units carried forward from the previous period. lectur # 31 & 32 Aggregate Planning Process 28/3/2012 lectur # 31 & 32 13-11 13-11 Methods of Influencing Demand Slide 28/3/2012 11.12 11.12 Price Incentives

Reservations Backlogs Complementary Products or Services Advertising/promotion lectur # 31 & 32 Methods of Influencing Supply Slide 28/3/2012 11.13 11.13 Hiring/firing workers Overtime/slack time Part time/temporary labor Subcontracting Cooperative arrangements Inventories lectur # 31 & 32 Aggregate Production Planning Variable Costs

Slide 28/3/2012 11.14 11.14 Hiring/firing costs Overtime/slack time costs Part time/temporary labor costs Subcontracting costs Cooperative arrangements costs Inventory carrying costs Backorder or stock out costs lectur # 31 & 32 Strategies for Adjusting Capacity Level production Overtime and under-time Producing at a constant rate and using inventory to absorb fluctuations in demand

Chase demand Increasing or decreasing working hours Subcontracting Let outside companies Hiring and firing workers to match demand complete the work Peak demand Part-time workers Hiring part time workers to Maintaining resources for high-demand levels complete the work Backordering

Providing the service or product at a later time period 28/3/2012 lectur # 31 & 32 13-15 13-15 Level Production Demand Units Production Time 28/3/2012 lectur # 31 & 32 13-16 13-16 Chase Demand Demand Units Production Time 28/3/2012

lectur # 31 & 32 13-17 13-17 Level Production Strategy Level production (50,000 + 120,000 + 150,000 + 80,000) = 100,000 pounds 4 SALES FORECAST 80,000 50,000 120,000 150,000 PRODUCTION QUARTER PLAN INVENTORY Spring 100,000 20,000 Summer 100,000 70,000 Fall 100,000 50,000 Winter 100,000 0

400,000 140,000 Cost of Level Production Strategy (400,000 X $2.00) + (140,00 X $.50) = $870,000 28/3/2012 lectur # 31 & 32 13-18 13-18 Chase Demand Strategy QUARTER SALES PRODUCTION FORECAST PLAN Spring Summer Fall Winter 80,000 50,000 120,000 150,000 WORKERS WORKERS WORKERS NEEDED HIRED FIRED 80,000 50,000

120,000 150,000 80 50 120 150 0 0 70 30 20 30 0 0 100 50 Cost of Chase Demand Strategy (400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000 28/3/2012 lectur # 31 & 32 13-19 13-19 Mixed Strategy

Combination of Level Production and Chase Demand strategies Examples of management policies no more than x% of the workforce can be laid off in one quarter inventory levels cannot exceed x dollars 28/3/2012 Many industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time lectur # 31 & 32 13-20 13-20 Aggregate Planning Example A small manufacturing company with 200 employees produces umbrellas. The company produces the following three product lines: 1) the Executive Line, 2) the Durable Line and 3) the Compact line, as shown in the below Executive Line 28/3/2012 Compact

Line Durable Line lectur # 31 & 32 13-21 13-21 Aggregate Planning Example: Demand for Executive Umbrellas 10000 10000 8000 6000 Number of working days: 8000 7000 6000 5500 4500 4000 2000 0 Jan 28/3/2012

Fe b Ma r Ap r Ma y lectur # 31 & 32 J un Jan: Feb: Mar: Apr: May: Jun: 22 19 21 21 22 20 13-22 13-22 Aggregate Planning Example: Cost Information for Executive Umbrellas Materials

Holding costs Marginal cost of stockout Hiring & training cost Layoff costs Labor hours required $5.00 $1.00 $1.25 $200.00 $250.00 0.15 Straight time labor cost Beginning inventory Productive hours Paid straight hours Beginning # of workers 28/3/2012 lectur # 31 & 32 $8.00 250 7.25 8 7 /unit /unit/month /unit/month /worker /worker hrs/unit /hr

units hrs/worker/day hrs/day workers 13-23 13-23 Aggregate Planning Example: Determining Straight Labor Costs and Output for Executive Umbrellas Days/mo Hrs/worker/mo Units/worker $/worker J an 22 159.5 1063.33 $1,408 Feb 19 137.75 918.33 1,216 Mar 21 152.25 1015 1,344 Apr

21 152.25 1015 1,344 May 22 159.5 1063.33 1,408 J un 20 145 966.67 1,280 January 159.5 1063.33 $1,408 28/3/2012 = 22 [days/month] * 7.25 [productive hrs/worker] = 159.5 [hrs/worker/month] / .15 [hrs/unit] = 8 [$/hr] * 8 [paid hrs/day] * 22 [days/month] lectur # 31 & 32 13-24 13-24 Aggregate Planning Example:

Determining Straight Labor Costs and Output for Executive Umbrellas Aggregate Planning Problem Days/month Hrs/worker/month Units/worker Labor cost/worker 28/3/2012 Jan Feb Mar Apr May Jun 22 19 21 21 22 20 160 138 152 152 160 145 1,063 918 1,015 1,015 1,063 967 $1,408.00 $1,216.00 $1,344.00 $1,344.00 $1,408.00 $1,280.00

lectur # 31 & 32 13-25 13-25 Aggregate Planning Example Chase Strategy for Executive Umbrellas Days/mo Hrs/worker/mo Units/worker $/worker Demand Beg. inv. Net req. Req. workers Hired Fired Workforce Ending inventory 28/3/2012 J an 22 159.5 1,063.33 $1,408 J an 4,500 250 4,250 3.997

3 4 0 Objective: Adjust workforce level so as to eliminate the need to carry inventory from period to period 4,500 units is the demand in January (any combination of firm orders and forecast 250 is the starting inventory position 4,250 = 4,500 250 3.997 = 4,250 / 1,063.33 7 = workforce level at the beginning of January 3 = 7 4 = workers fired 4 = workforce level at end of January 13-26 lectur 31 & 32 0 =# ending inventory level 13-26 Aggregate Planning Example Chase Strategy for Executive Umbrellas Chase Strategy Demand Beginning inventory Net requirements Beginning # of workers Required workers Workforce adjustment Production quantity

Ending inventory 28/3/2012 Jan 4,500 250 4,250 7 4 -3 4,250 0 Feb 5,500 0 5,500 4 6 2 5,500 0 lectur # 31 & 32 Mar 7,000 0 7,000 6 7 1 7,000 0

Apr 10,000 0 10,000 7 10 3 10,000 0 May 8,000 0 8,000 10 8 -2 8,000 0 Jun 6,000 0 6,000 8 6 -1 6,000 0 13-27 13-27 Aggregate Planning

Example Chase Strategy Chase Strategy Costs for Executive Umbrellas Material cost Labor cost Hiring cost Firing cost Inventory holding cost Inventory stockout cost Jan Feb Mar Apr May Jun $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 $203,750.00 $5,628.00 $7,283.00 $9,269.00 $13,242.00 $10,594.00 $7,945.00 $53,961.00 $0.00 $400.00 $200.00 $600.00 $0.00 $0.00 $1,200.00 $750.00 $0.00 $0.00 $0.00 $500.00 $250.00 $1,500.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

$0.00 $0.00 $0.00 $0.00 $0.00 $0.00 TOTAL: $260,411.00 28/3/2012 January costs: $21,250.00 = 4,250 [units] * $5 [$/unit] $ 5,627.59 = 3.997 [workers] * 1,408 [$/worker] $ 750.00 = 3 [workers fired] * 250 [$/worker fired] lectur # 31 & 32 13-28 13-28 Aggregate Planning Example Level Strategy for Executive Umbrellas Demand Beg. inv. Net req. Workers Production Ending inventory Surplus Shortage 28/3/2012 J an

4,500 250 4,250 6 6,380 2,130 2,130 lectur # 31 & 32 Objective: Adjust inventory level so as to eliminate the need to hire or fire workers from period to period Assume that January is started with 6 employees 6,380 = 6 [employees] * 1,063.33 [units/worker] 2,130 = 6,380 4,250 (surplus) 13-29 13-29 Aggregate Planning Example Level Strategy for Executive Umbrellas Level Capacity Strategy Demand Beginning inventory Net requirements Beginning # of workers Required workers Workforce adjustment

Production quantity Ending inventory 28/3/2012 Jan 4,500 250 4,250 6 4 0 6,380 2,130 Feb 5,500 2,130 3,370 6 4 0 5,510 2,140 lectur # 31 & 32 Mar 7,000 2,140 4,860 6 5 0 6,090

1,230 Apr 10,000 1,230 8,770 6 9 0 6,090 -2,680 May 8,000 -2,680 10,680 6 10 0 6,380 -4,300 Jun 6,000 -4,300 10,300 6 11 0 5,800 -4,500 13-30 13-30

Aggregate Planning Example Level Strategy for Executive Umbrellas Level Capacity Strategy Costs Material cost Labor cost Hiring cost Firing cost Inventory holding cost Inventory stockout cost Jan Feb Mar Apr May Jun Total $31,900.00 $27,550.00 $30,450.00 $30,450.00 $31,900.00 $29,000.00 $181,250.00 $8,448.00 $7,296.00 $8,064.00 $8,064.00 $8,448.00 $7,680.00 $48,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $2,130.00 $2,140.00 $1,230.00

$0.00 $0.00 $0.00 $5,500.00 $0.00 $0.00 $0.00 $3,350.00 $5,375.00 $5,625.00 $14,350.00 TOTAL: $249,100.00 28/3/2012 January costs: $8,448 = 6 [workers] * $1,408 [$/worker] $ 31,900 = 6,380 [units] * $5 [$/unit] $ 2,130 = 2,130 [surplus units] * $1 [$/unit held/month] lectur # 31 & 32 13-31 13-31 Aggregate Planning Example Which Plan is Cheaper? Level Capacity Chase $249,100.00 $260,411.00 Clearly, the level capacity plan is cheaper over the selected time horizon Note: Be cautious in using the chase strategy as many

intangibles, such as employee loyalty and commitment to the organization are adversely affected 28/3/2012 lectur # 31 & 32 13-32 13-32

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