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Aggregate Planning

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AGGREGATE PLANNING
I. Introduction A. Intermediate Planning B. The Concept of Aggregation II. The Purpose and Scope of Aggregate Planning A. Demand and Capacity B. Inputs of Aggregate Planning

C. Demand and Capacity Options

AGGREGATE PLANNING
III. Basic Strategies for Meeting Uneven Demand

IV. Techniques for Aggregate Planning
A. Informal Techniques B. Mathematical Techniques V. Aggregate Planning in Services VI. Disaggregating the Aggregate Plan VII. Master Scheduling A. Inputs

B. Outputs
C. Stabilizing the Master Schedule

AGGREGATE PLANNING
DEFINITION: • Aggregate planning is intermediate-range capacity planning that typically covers a time horizon of 2 to 12 months. • It deals with translating annual business and marketing plans into a production plan for all products. • It is particularly useful for organizations that experience seasonal or other fluctuations in demand or capacity. GOAL: The goal of aggregate planning is to achieve a production plan that will effectively utilize the organization’s resources to satisfy expected demand.

3 LEVELS WHICH ORGANIZATIONS MAKE CAPACITY DECISIONS:
1. Long-term decisions - relate to product and service selection, facility size and location, equipment decisions, and layout of facilities. 2. Intermediate decisions - relate to general levels of employment, output and inventories, which in turn define the boundaries within which short-range capacity decisions must be made.

3. Short-term decisions - consists of deciding the best way to achieve desired results within the constraints resulting from long-term and intermediate-term decisions.

OVERVIEW OF PLANNING LEVELS
Short-range plans
Detailed Plans: Machine Loading Job assignments Job sequencing Production lot size Order quantities Work Schedules

Intermediate Plans
General levels of: Employment Output Finished-goods Inventories Subcontracting Backorders

Long-range plans
Long-term capacity Location Layout Product design Work system design

Long-range Intermediate
Short-range

New

2 months

1 year

Planning Horizon

MANUFACTURING PLANNING ACTIVITIES
Long-Range Planning -- begins with a statement of organization objectives and goals to be achieved over the next two to ten years.  Corporate Strategic Planning -- articulates how these objectives and goals are to be achieved in light of the company’s capabilities and its economic and political environment.  Product and Market Planning -- translates these into individual market and product line objectives.  Financial Planning -- analyzes the financial feasibility of these objectives relative to capital requirements and return on investment goals.  Resource planning -- identifies the equipment, facilities, and personnel needs to accomplish long-range production plan.

Medium-Range Planning  Aggregate Production Planning -- specifies output requirements by major product groups either in labor hours required or in units of production for monthly periods up to 18 months in the future.  Item Forecasting -- provides an estimate of specific products, which when integrated with aggregate production plan, become the output requirement for the m,aster production schedule.  Master Production Scheduling -- (MPS), generates the amounts and need dates for the manufacture of specific end products.  Rough-cut Capacity Planning -- reviews the MPS to make sure that there are no obvious capacity constraints that would require the schedule to be changed.

Short-range Planning –Materials Planning -- (MRP), takes the end product requirements from MPS and breaks it into component parts or subassemblies. – Capacity Requirements Planning -- (CRP), provides detailed schedule of when each operation is to be run on each work center. –Final Assembly Scheduling -- provides operations required to put the product in its final form. –Input/Output Planning and Control – refers to a variety of reports and procedures focusing on schedule demands and capacity constraints deriving from the materials plan. –Production Activity Control – (PAC), describes scheduling and shop floor control activities. –Purchase Planning and Control – deals with the acquisition and control of purchased items specified by the materials plan. .

BUSINESS PLAN
· The Business Plan establishes guidelines for the organization, taking into account the organization’s strategies and policies; forecasts of demand for the organization’s products or services, and economic, competitive and political conditions.

OBJECTIVE OF THE BUSINESS PLAN
· To coordinate the intermediate plans of various organizational functions, such as marketing, operations, and finance.

PLANNING SEQUENCE

Corporate strategies and policies

Economic competitive, & political conditions

Aggregate demand forecasts

BUSINESS PLAN PRODUCTION PLAN MASTER SCHEDULE

THE CONCEPT OF AGGREGATION


Aggregate planning is essentially a “big picture” approach to planning 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, without worrying about how much of a particular item will actually be involved.



WHY DO ORGANIZATIONS NEED TO DO AGGREGATE PLANNING?


Planning - it takes time to implement plans.



Aggregation - is important because it is not possible to predict with any degree of accuracy, the timing and volume of demand for individual items.

THE PURPOSE AND SCOPE OF AGGREGATE PLANNING
1.

Demand and Capacity

2. Inputs to Aggregate Planning

3. Demand and Capacity Options

Demand Options
The basic demand options are the following:

a. b. c. d.

Pricing Promotion Back Orders New demand

CAPACITY OPTIONS
The basic capacity options are the following:

a. b. c. d. e.

Hire and lay off workers Overtime/Slack time Part-time workers Inventories Subcontracting

INFORMAL TECHNIQUE
Informal

approaches consist of developing simple tables or graphs that enable planners to visually compare projected demand requirements with existing capacity.
Commonly

used

They

do not necessarily result in the optimum aggregate plan

ASSUMPTIONS IN AGGREGATE PLANNING
1. The regular output capacity is the same in all periods. 2. Cost is a linear function composed of unit cost and number of units.

3. Plans are feasible; that is’ sufficient inventory capacity exists to accommodate a plan, subcontractors with appropriate quality and capacity are standing by, and changes in output can be made as needed.

4. All costs associated with a decision option can be represented by a lump sum or by unit cost that are independent of the quantity involved. 5. Cost figures can be reasonably estimated and are constant for the planning horizon. 6. Inventories are built up and drawn down at a uniform rate and output occurs at a uniform rate throughout each period

APPROPRIATE COSTS CALCULATION
TYPE OF COST
Output

HOW TO CALCULATE

Regular
Overtime Subcontract Hire/lay off Hire Lay off Inventory Back order

Regular cost/unit X Quantity regular output
Overtime cost/unit X Quantity overtime Subcontract cost/unit X Subcontract quantity

Cost per hire X Number Hired Cost per fire X Number Fired Carrying cost per unit X Average inventory Back order cost / unit X Number of backorder units

EXAMPLE
Planners for a company are about to prepare the aggregate plan that will cover six periods. They have assembled the following information

Period
Forecast Costs Output

1
200

2

3

4
400

5
500

6
200

Total
1800

200 300

Regular time = $ 2/unit Overtime = $ 3/ unit

Subcontract = $ 6/ unit

Inventory = $ 1 per unit per period on average inventory
Back orders = $ 5 per unit per period

They now want to evaluate a plan that calls for a steady rate of regular-time output, mainly using inventory to absorb the uneven demand but allowing some backlog. They intend to start with zero inventory on hand in the 1st period. Assume a level output rate of 300 units /period with regular time. Note that the planned ending inventory is zero. There are 15 workers

Period Forecast Output Regular Overtime Subcontract Output - Forecast Inventory Beginning Ending Average Backlog Costs Output Regular Overtime Subcontract Hire/ lay off Inventory Back orders Total

1 200 300 100 0 100 50 0

2 200 300 100 100 200 150 0

3 300 300 0 200 200 200 0

4 400 300 (100) 200 100 150 0

5 500 300 (200) 100 0 50 100

6 200 300 100 0 0 0 0

Total 1,800 1,800

0

600 100

$600 $50 $0 $650

600 150 0 750

600 200 0 800

600 150 0 750

600 50 500 1,150

600 $3,600 0 $600 0 $500 600 $4,700

After reviewing the plan developed in the preceding example, planners have decided to develop an alternative plan. They have learned that one person is about to retire from the company. Rather than replace that person, they would like to stay with the smaller workforce and use overtime to make up for lost output. The reduced regular- time output is 280 units per period. The maximum amount of overtime output per period is 40 units. Develop a plan and compare it to the previous one.

Period Forecast Output Regular Overtime Subcontract Output - Forecast Inventory Beginning Ending Average Backlog Costs Output Regular Overtime Subcontract Hire/ lay off Inventory Back orders Total

1 200 280 0 80 0 80 40 0

2 200 280 0 80 80 160 120 0

3 300 280 40 20 160 180 170 0

4 400 280 40 (80) 180 100 140 0

5 500 280 40 (180) 100 0 50 80

6 200 280 0 80 0 0 0 0

Total 1,800 1,680 120 0

520 80

$560 $0 $40 $0 $600

560 0 120 0 $680

560 120 170 0 $850

560 120 -

560 120 -

140 50 0 400 $820 $1,130

560 $3,360 0 $360 0 $520 0 $400 $560 $4,640

MATHEMATICAL TECHNIQUES LINEAR PROGRAMMING

LP models are methods for obtaining optimal solutions to problems involving the allocation of of scarce resources in terms of cost minimization or profit maximization.
With AGGREGATE PLANNING, the goal is usually to minimize the sum of costs related to regular labor time, over time, subcontracting, inventory holding costs, and costs associated with changing size of the work force. Contstraints involve the capacities of the workforce, inventories and subcontracting. E.H. BOWMAN - proposed formulating the problem in terms of transportation type programming model as a way to obtain aggregate plans that would match capacities with demand requirements and minimize cost. In order to use this approach, planners must identify capacity (supply) of regular time, over time, subcontracting and inventory on a period by period basis as well as related costs of each variable.

LINEAR DECISION RULE It was developed by Charles Holt, Franco Modigliani, John Muth, and Herbert Simon. It is an optimizing technique that seeks to minimize combined cost using a set of cost approximating functions to obtain single quadratic equation SIMULATION MODELS Computerized models that can be tested under different scenarios to identify acceptable solutions to problems.

AGGREGATE PLANNING IN SERVICES
-

It is an overall forecast for the planning horizon and ends with the preparation for applying the plans to specific products and services.

IMPORTANT DIFFERENCES RELATED IN GENERAL TO THE DIFFERENCES BETWEEN MANUFACTURING AND SERVICES
>

Services occurred when they are rendered. Demand for service can be difficult to predict. Capacity availability can be difficult to predict.

>

>

>

Labor flexibility can be advantage in services.

DISAGGREGATING THE AGGREGATE PLAN
-

Involves breaking down the aggregate plan into specific product requirements in order to determine labor requirements such as skills and size of workforce, materials, and inventory requirements. This process is described in Materials Requirements Planning (MRP).

AN OVERVIEW OF MRP
Materials Requirements
Dependent Demand

Planning (MRP) is a computer based information system designed to handle ordering and scheduling of dependent demand inventories (e.g. raw materials, componentparts,and subassembles) Involves planning periods (e.g., weeks) so that ordering, fabrication and assembly can be scheduled for timely completion of end items.

Amount on Hand

Time

RESULTS OF DISAGGREGATING THE AGGREGATE PLAN


MASTER SCHEDULE



ROUGH-CUT CAPACITY PLANNING

MASTER SCHEDULING
It indicates the quantity and timing for a product, or a group of products, but it does not show planned production.

For example:
AGGREGATE PLAN Month Planned Output (Aggregate Units) NOKIA CELLPHONES

Month

January

February

March

Planned Output 500,000units 700,000units 800,000units

MASTER SCHEDULE ( Disaggregate Plan ) Month Planned Output (Actual Units)

NOKIA CELLPHONES
Month M-3210 M-3310 M-8210 January 200,000 200,000 100,000 February 300,000 350,000 50,000 March 250,000 500,000 50,000

TOTAL 500,000 units 700,000 units 800,000 units

ROUGH-CUT CAPACITY PLANNING
This is done to test the feasibility of a proposed master schedule relative to available capacities to assure that no obvious capacity constraints exist. This means checking capacities of production and warehouse facilities, labor, and vendors to ensure that no gross deficiencies exist that will render the master schedule unworkable

Master Schedule


Indicates the quantity and timing for a product, or a group of products

Master Scheduling Process

Inputs

Outputs

Beginning inventory Forecast Customer order Master Scheduling

Projected inventory Master production schedule Uncommitted inventory

INPUTS
Beginning inventory - actual quantity on hand from the preceding period. Forecast - statement about the future. Customer Orders - quantities already committed to customer.

OUTPUTS
Projected inventory on hand - Inventory from previous week – Current weeks requirement. Master Production Schedule - indicates the quantity and timing of planned production. Uncommitted Inventory - also known as Available to promise inventory.

Weekly forecast requirements for industrial pumps

June
1

July 4 5 6 7 8

2

3

Forecast

30 30 30 30 40 40 40 40

Eight Week schedule showing forecast, customer orders, and beginning inventory

Beginning Inventory

June 64 1
Forecast
Customers orders ( committed)

July 4 5 6 7 8

2

3

30 30 30 30 40 40 40 40 33 20 10 4
2

Projected on – hand inventory is computed week by week until it becomes negative

Beginning Inventory

June
64 1
Forecast
Customer orders (committed)
Projected on – hand Inventory

July
4 5 6 7 8

2

3

30 30 30 30 40 40 40 40

33 20 10
31
1 -29

4

2

Determining the MPS and projected on – hand inventory
Week Inventory from previous week

Require ments

Net Inventor y before MPS

(70) MPS

Projected Inventory

1 2
3 4 5 6 7 8

64 31
1 41 11 41 1 31

33 30
30 30 40 40 40 40

31 1
-29 11 -29 1 -39 -9 + + 70 70 = = + 70 = + 70 =

31 1
41 11 41 1 31 61

Projected on – hand inventory and MPS are added to the master schedule

June 64
Forecast
Customer orders (committed) Projected on – hand inventory

July 3 4 5 6 7 8

1

2

30 30 30 30 40 40 40 40 33 20 10 31
1 4 2 1 31 61 70 70

41 11 41 70 70

MPS

The available – to – promise inventory quantities have been added to the master schedule

64
Forecast
Customer orders (committed) Projected on – hand inventory

1

June 2 3

4

5

July 6 7

8

30 30 30 30 40 40 40 40 33 20 10 31
1 4 2 1 31 61 70 70 70 70

41 11 41 70 70 68

MPS
Available to promise inventory (uncommitted)

11

56…...

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Is-Lm, Aggregate Demand and Aggregate Supply

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