Class 15 - Aggregate Planning 2

Industrial Engineering
Aggregate Planning Strategies
The Extremes
Aggregate Planning Strategies Chase Strategy Production equals demand
Level Strategy Production rate is constant
Example
Chase strategy
Match output rates to demand forecast for each period Vary workforce levels or vary production rate Favoured by many service organizations Combines 2 or more aggregate scheduling options
Example
Level scheduling strategy

Produce same amount every day Keep work force level constant Vary non-work force capacity or demand options Often results in lowest production costs Use inventory or idle time as buffer
Mixed strategy
Combines 2 or more aggregate scheduling options
The Graphical Approach to Aggregate Planning

Forecast the demand for each period Determine the capacity for regular time, overtime, and subcontracting, for each period Determine the labour costs, hiring and firing costs, and inventory holding costs Consider company policies which may apply to the workers or to stock levels Develop alternative plans, and examine their total costs
Example
Example
Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55
Example
Month Jan Feb Mar Apr May June
Expected Demand 900 700 800 1,200 1,500 1,100 6,200
Average requirement
= =
Total expected demand Number of production days

6,200 = 50 units per day 124
4
Example
Example
Example
Cost Information
Inventory carrying cost Subcontracting cost per unit $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit
Average pay rate

Example Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs)
$600 per unit
Example
Monthly Inventory Change
Level Strategy
Month Jan Feb Mar Apr May June
Production at 50 Units per Day
Demand Forecast
Ending Inventory
Example
1,100 900 1,050 1,050 1,100 1,000
900 700 800 1,200 1,500 1,100
+200 +200 +250 -150 -400 -100
200 400 650 500 100 0

1,850
Total units of inventory carried over from one month to the next = 1,850 units Workforce required to produce 50 units per day = 10 workers
7
Example
Level Strategy
Costs Inventory carrying

Regular-time labor
Calculations $9,250
49,600
(= 1,850 units carried x $5 per unit)

(= 10 workers x $40 per day x 124 days)
Example
Other costs (overtime, hiring, layoffs, subcontracting) Total cost
0 $58,850
Example
Subcontract
Aggregate Planning Strategies Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55
Example
Minimum requirement = 38 units per day
Example
Subcontract
Example
10
Example
Subcontract
Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit $600 per unit
Example
Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs)
11
Example
Subcontract
In-house production
= =
38 units per day x 124 days 4,712 units 6,200 - 4,712 1,488 units
Subcontract units
Example
= =
Costs Regular-time labor

Subcontracting
Calculations $37,696
14,880
(= 7.6 workers x $40 per day x 124 days)

(= 1,488 units x $10 per unit)
Total cost
$52,576
12
Example
Chase Strategy
Aggregate Planning Strategies Month Jan Feb Example Expected Demand 900 700 Production Days 22 18 Demand Per Day (computed) 41 39
Mar Apr May June
800 1,200 1,500 1,100

6,200
21 21 22 20
124
38 57 68 55
Production = Expected Demand
13
Example
Chase Strategy
Example
14
Example
Chase Strategy
Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit
Example
Overtime pay rate Labor-hours to produce a unit
Cost of increasing daily production rate $300 per unit (hiring and training) Cost of decreasing daily production rate $600 per unit (layoffs)
15
Example
Chase Strategy
Month Jan Forecast (units) 900 700 800 1,200 1,500 Daily Prod Rate 41 39 38 57 68 Basic Production Cost (demand x 1.6 hrs/unit x $5/hr) $ 7,200 5,600 6,400 9,600 12,000 Extra Cost of Increasing Production (hiring cost) $5,700 (= 19 x $300) $3,300 (= 11 x $300) Extra Cost of Decreasing Production (layoff cost) $1,200 (= 2 x $600) $600 (= 1 x $600) $7,800 (= 13 x $600) $9,600
Total Cost $ 7,200 6,800 7,000 15,300 15,300
Example
Feb Mar Apr May
June
1,100
55
8,800
$49,600
$9,000
16,600
$68,200
16
Example
Results Comparison
Cost Inventory carrying
Plan 1
Plan 2
Plan 3
$ 9,250
49,600 0 0 0
Example
Regular labor Overtime labor Hiring Layoffs
37,696 0 0 0
49,600 0 9,000 9,600
Subcontracting
Total cost
0
$58,850
0
$52,576
0
$68,200
Plan 2 is the lowest cost option

17

Class 15 - Aggregate Planning 2

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Class 15 - Aggregate Planning 2

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Industrial Engineering

Aggregate Planning Strategies

Level Strategy Production rate is constant

Aggregate Planning Strategies

Level scheduling strategy

Aggregate Planning Strategies

The Graphical Approach to Aggregate Planning

Aggregate Planning Strategies

Month Jan Feb Mar Apr May June

Expected Demand 900 700 800 1,200 1,500 1,100 6,200

Total expected demand Number of production days

Aggregate Planning Strategies

Aggregate Planning Strategies

Average pay rate

$600 per unit

Month Jan Feb Mar Apr May June

Production at 50 Units per Day

1,100 900 1,050 1,050 1,100 1,000

900 700 800 1,200 1,500 1,100

+200 +200 +250 -150 -400 -100

200 400 650 500 100 0

Costs Inventory carrying

(= 1,850 units carried x $5 per unit)

Other costs (overtime, hiring, layoffs, subcontracting) Total cost

Minimum requirement = 38 units per day

Costs Regular-time labor

(= 7.6 workers x $40 per day x 124 days)

Mar Apr May June

800 1,200 1,500 1,100

Production = Expected Demand

Overtime pay rate Labor-hours to produce a unit

Total Cost $ 7,200 6,800 7,000 15,300 15,300

Feb Mar Apr May

Cost Inventory carrying

Regular labor Overtime labor Hiring Layoffs

49,600 0 9,000 9,600

Plan 2 is the lowest cost option

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