Aggregate Planning

AggregatePlanning

Agenda
g
PlanningFramework
Salesandoperationsplanning
Frameworkofmanufacturingresourceplanning

AggregatePlanning
A
t Pl
i
ProductionPlanning
ResourceRequirementPlanning
Case:FoldRiteFurnitureCo:PlanningtoMeeta
S
SurgeinDemand
i D
d

StrategicBusinessPlan
The business plan provides direction and coordination
among marketing, production, financial & engineering plans.

Production Plan
(satisfy demand, utilization of
plant resources)

Financial Plan
(decide source & use of funds;
cash flow profits, ROI,
budgets)

Strategic
Business
Plan

Marketing plan
(market, product, service level,
promotion, pricing)

Engineering Plan
(R & D, New product development)

Sales&OperationsPlanning
Monthly

process to align demand and supply over the tactical time horizon
Output is an operational plan agreed to by major functions
Frequency of updates
Led and approved by senior management

S
Strategic
i Business
B i
Plan
Pl
Sales
l and
d Operations Plan
l
Marketing plan

Detailed Sales
Plan

A
Annual
l

Monthly

Production Plan

Master
Production
Schedule

Weekly

-Updated marketing plan is communicated to manufacturing, engineering

and finance to adjust their plan

S&OPHighLevelGenericProcess
g
STEP 1:
RUN
SALES
FORECAST
REPORTS

Statistical forecasts
Field sales worksheets

STEP 2:
DEMAND
PLANNING
PROCESS

Management forecast
First pass spreadsheets

STEP 3:
SUPPLY
PLANNING
PROCESS
STEP 4:
PRE-S&OP
MEETING

Capacity constraints
Second pass spreadsheets
Recommendation & agenda
For executive SOP meeting
Beg. of month

Decisions
ii
Authorized game plans

STEP 5:
EXEC
S&OP
MEETING

End of month
5

ManufacturingResourcePlanning
g
g MRPII
Input from Higher Level Business Plan

PLANNING
HORIZON

MATERIAL PLAN
(PRIORITY PLAN)

CAPACITY PLAN
(RESOURCE USE PLAN)

Sales Planning
Master Plan

Long Term
Demand
Management

M di
Medium
Term
T

Short Term

Production
Planning

Resource Requirement
q
Plan
Aggregate Planing

Master Production
Scheduling (MPS)

Rough Cut Capacity

Planning (RCCP)

Material Requirement
Planning (mrp)

Capacity Requirement
Planning (CRP)

Production Activity
Control/Shop Floor Ctrl

Execution Plan

Hierarchy of Planning in MRP-II

6

WhyAggregatePlanningIsNecessary?
Wheneverthe
Whenever
the
conditionsaffecting
theproductionare
not stable in time
notstableintime
(e.g.,dueto
changesindemand,
cost components or
costcomponentsor
capacityavailability)
productionshould
be planned in
beplannedin
aggregatetoobtain
effectiveresource
utilization
utilization.

Sales (demand)

1 2 3 4 5 6 7 8 9 10 11 12

Month
Seasonal Demand

Aggregate Planning
AggregatePlanning
Whyconsiderinaggregate,notindetail?
Why consider in aggregate not in detail?
Itisimpossibletoconsidereveryfinedetailof
productionsystemwhilemaintainingalongplanning
horizon,itismandatorytoaggregatetheinformation
beingprocessed.Moreover,forecastismoreaccurate
at aggregate level
ataggregatelevel.
Plannercandeviseacourseofaction,consistentwith
businessgoalsandobjectiveswithouthavingtodeal
withalotofdetail

Dimensions ofAggregation
Product:Groupintoproducttypebasedonthesimilar

demandrequirementsandproductfamilycommon
requirementofprocessing,labor,materialorcustomer.
i
t f
i
l b
t i l
t
Marketregions:Groupcustomersbasedonsimilar
geographiclocations(usefulforplanningdistribution,or
multiplantproductiondistribution)
li l
d i di ib i )

Resources:
Labor
Laborcenters/types:differentlaborskills,Workforce
centers/types: different labor skills, Work force
flexibility,FocusedFactory.
Machinecenters:Groupsimilarmachines
Time:
Time: Month,quarterorseasons.
Month quarter or seasons

Examples of Aggregation
ExamplesofAggregation

Product/
RequirementsinEachQuarter
Labor
Labor

Category
Q1
Q2 Q3
Q4

20inchbike
5000 7500 3000 4000
26inchbike
3000 4000 2500 3000

Assemblylabor
100 120 70
80

10

AggregatePlanning
Aggregate
gg g
Plans ((6 to 18 months))
(1) Production Planning
(2) Resource [e.g., Labor] Plan
(Typically these two are generated simultaneously)

Purposeistospecifytheoptimalcombinationofproduction
rate,theworkforcelevel,andinventoryonhand
GiventhedemandforecastFt foreachperiodtintheplanning
horizonoverTperiods,determinetheproductionratePt,
Inventory level It,andworkforcelevelW
InventorylevelI
and workforce level Wt forperiodst=1,2,,
for periods t = 1 2
Tthatminimizestherelevantcostsovertheplanninghorizon.

11

Aggregate Planning Strategies

AggregatePlanningStrategies
Productionplanning

t 1
2
3
4
5
.
T

Dt 100
150
40
80
100

60
Pt ?
?
?
?
?

?
It ?
?
?
?
?

?
Wt ?
?
?
?
?

Ifdemandisuniformovertime.Thedecisionsonproductionrates,
staffing,andinventorylevelsaresimple.

However,demandoverdifferenttimeperiod(t)maynotbeuniform.
Tocopeupwiththisfluctuationdifferentstrategiescanbeused.

12

Aggregate Planning Strategies

AggregatePlanningStrategies
a) Manage Demand (Keep Level Production)
a)ManageDemand(KeepLevelProduction)
Introductionofnewproductswith
complementary demand profile
complementarydemandprofile
Salesorpromotionalactivity
Variationinpricing.
Variation in pricing

13

A
AggregatePlanningStrategies
t Pl
i St t i
ManageCapacity
(i) Chasestrategy. Matchthe
productionratetothe
y
g
demandratebyhiringand
layingoffemployeesasthe
demandratevaries.

A
AggregatePlanningStrategies
t Pl
i St t i
ManageCapacity
(ii)Levelstrategy.
Maintainastable
workforce
workingata
constantoutput
rate.

Combination (mixed) Strategy

Manage Capacity
iii) Mix strategy:Chase & level are extreme pure strategies
Only minimize one cost component.
component For example,
example
chase strategy minimizes inventory cost but may incur
higher costs due hiring/layoff. Thus need to use mix
strategies.
strategies

AggregatePlanningStrategies
gg g
g
g
b)ManageCapacity

(iii)Stableworkforcevariableworkhours/subcontract.
(iii)
Stable workforce variable work hours/subcontract
Varytheoutputbyvaryingnumberofhoursworked
throughflexibleworkschedule,overtimeor
subcontracting.
subcontracting.
(iv)Combinationofchaseandlevelstrategies.
c)ManagebothCapacityandDemand
Inreallifemostlikelycombinationofdemandand
capacitymanagementoptionsareused.
i
i
d

17

Production Planning Techniques

ProductionPlanningTechniques
A) Cutandtry
Cut and try Charting and Graphic Method:
This involves costing out various production
planning alternatives and selecting the one
with the lowest cost.
B) Linear Programming Based Method

18

A)CutandTryTechnique
Starlight Example
Month
Sales
Oct
200 000
200,000
Nov
220,000
Dec
310,000
Jan
300 000
300,000
Feb
240,000
Mar
230,000
Laborhours/unit=1.5
Wages=$2000/month
Layoffcost=$2500/emp
Septworkforce=1850
Marchworkforce=18001900

WorkDays/month
23
21
19
21
20
23
Laborhours/day=8
Invholdingcost=$10/unit
Hiringcost=$3000/emp
Septinventory=5000
Marchinventory=20002150

19

Employees Needed
EmployeesNeeded
Month
Oct
Nov
Dec
Jan
Feb
Mar

[A]
Net
Rqmt
195,000
220,000
310,000
300,000
240,000
232,000

[B]
Maxprodn
peremp
122.67
112.00
101.33
112.00
106.67
122.67

[C]=[A]/[B]
Noworkers
k
neededforA
1590
1965
3060
2679
2250
1892

Maxprodn/emp=[8hr/dayxNodays/mo]/[1.5personhr/unit]

20

Aggregate Plan ChaseStrategy

AggregatePlan
Chase Strategy
#
Month Workers
Sep
1 850
1,850
Oct
1,590
Nov
1,964
Dec
3,060
,
Jan
2,678
Feb
2,250
Mar
1,892
A il
April
1 892
1,892
Totals 13,434
(OctMar)

#
Hired

#
Layoff

Production

0
374
1,096
,
0
0
0

260
0
0
382
428
358

195,045
219,968
310,070
,
299,936
240,007
232,092

1,470

1,428

Ending
inventory
5 000
5,000
45
13
83
19
26
2,118
2,304

21

Costs of Chase Strategy

CostsofChaseStrategy
Wages = 13434 persmonths x $2000
Wages=13434persmonthsx$2000
=$26,868,000
Hiring
Hiring

= 1470 workers x $3000

=1470workersx$3000
=$4,410,000

Di i l 1428
Dismissal=1428workersx$2500
k
$2500
Inventory=2304itemsx$10
i
$

=$3,570,000
=$
$ 23,040

Totalcost=$

34,871,040
22

LevelStrategy
Starlight Example
Month

Sales

Oct
Nov
Dec
Jan
Feb
Mar

200,000
220,000
310,000
300,000
240,000
230,000

WorkDays/month
23
21
19
21
20
23

Total
150,000
127
S t
Septworkforce=1850
kf
1850
S ti
Septinventory=5000
t
5000
Marchworkforce=18001900
Marchinventory=20002150
Number of units to be produced = 1 500 000 5000+2000=1,497,000
Numberofunitstobeproduced=1,500,000
5000 + 2000=1 497 000
Noofworkerneeded=[1,497,000unitsx1.5hr/unit]/[127daysx8hr/day]
=2211

23

Level Strategy
LevelStrategy
#
Mont
h

Ending

Worker Hire Layof day Productio

s
d
f
s
n
Demand

Sep

1,850

Oct

2,211

361

23

271,216

200,000

76,216

Nov

2,211

21

247,632

220,000

103,848

Dec

2,211

19

224,048

310,000

17,896

Jan

2 211
2,211

21

247 632
247,632

300 000
300,000

-34,472
34 472

Feb

2,211

20

235,840

240,000

-38,632

Mar

2,211

271,216

230,000

2,584

April
Total
s

1,850
inventory

202,960

Shortage

-73,104

13,266

(Oct-Mar)

inventory

361

5,000

361 23

361

24

C t f L l St t
CostsofLevelStrategy
Wages
Hiring
Di i l
Dismissal
Inventory
Shortage
Total cost

= 13266 pers-months x $2000

= 361 workers x $3000
= 3616 workers
k x $2500
= 202,960 items x $10
= 73,104
73 104 items x $20

= $ 26,532,000
= $ 1,083,000
= $ 902,500
902 500
= $ 2,029,600
= $ 1,462,060
1 462 060
= $ 32,009,160

25

Case FoldRiteFurnitureCo:
Case
FoldRite Furniture Co:
PlanningtoMeeta Surgein
Demand

26

LinearProgrammingforAggregate
Planning
l
Chase&levelareextremepurestrategies
p
g
Onlyminimizeonecostcomponent.Thusneedto
usemixstrategies.
Manyaggregateplanningproblemscanuselinear
programmingtofindoptimalsolution
Wewillconsider2examplesofLPformulation

27

Example 1: Starlight LP Model

Example1:StarlightLPModel
Pt =#unitsproducedinmontht,t
# units produced in month t, t =1,...,6
1, ..., 6
Lt =#workersonstaffinmontht,t=1,...,7
Ht =#workershiredinmontht,t=1,...,7
= # workers hired in month t t = 1
7
Dt =#workersdismissedinmontht,t=1,...,7
It =#unitsininventoryatendmontht,t=1,...,
# it i i
t
t d
th t t 1
6
t 1 i O t b t 7 i A il
t=1isOctober,t=7isApril

28

6
7
7
6
Min TC 2000 Lt 3000 Ht 2500 Dt 10 It
t1
t1
t1
t1
Inventoryconstraints
production+beginv=amountshipped+endinv
P1 +5000 I1 =200,000orP1I1 =195,000
P2 +I1 I2 =200,000
P3 +I2 I3 =310,000
P4 +I3 I4 =300,000
P5 +I4 I5 =240,000
P6 +I5 I6 =230,000
I6 2000
I6 2150
29

P1 =122.67L1
P4 =112L
= 112 L4

;P2 =112L2
; P5 =106.67L
;P
= 106 67 L5

;P3 =101.33L3
; P6 =122.67L
;P
= 122 67 L6

Laborconstraints
L1 =1850+H
1850 H1 D1 orLL1 H1 +D
D1 =1850
1850
L2 L1 H2 +D2 =0
L3 L2 H3 +D
D3 =0
0
L4 L3 H4 +D4 =0
L5 L4 H5 +D5 =0
L6 L5 H6 +D6 =0
L7 L6 H7 +D7 =0
L7 1800
L7 1900
All i bl
Allvariablesarenonnegative
ti
30

LP Solution for Starlight

LPSolutionforStarlight
Var
P1
P2
P3
P4
P5
P6

Value
226,939.50
274,744.97
248,570.63
274,744.97
240 000 02
240,000.02
232,000.02

Var
L1
L2
L3
L4
L5
L6
L7

I1
31,939.50
31,939.50
I2
86,684.43
I3
25,255.05
I4 =I5 =0
I6
2000.00
Totalcost=31,373,440

Value
1850.00
2453.08
2453.08
2453.08
2249 93
2249.93
1891.25
1891.25

Var
H1
H2
H3
H4
H5
H6
H7

Value
0
603.08
0
0
0
0
0

Var
D1
D2
D3
D4
D5
D6
D7

Value
0
0
0
0
203 15
203.15
358.68
0

31

Aggregate Plan LPSolution

AggregatePlan
LP Solution
Month
Sep
Oct
Nov
Dec
Jan
Feb
Mar

#
Workers
1,850
1,850
2,453
2 453
2,453
2,454
2,250
1,891

April
1,891
Totals 13,351
(
(OctMar)
)

#
Hired

#
Layoff

Production

0
603
0
1
0
0

0
0
0
0
204
359

226,939
274,736
248 562
248,562
274,848
240,000
231,969

604

563

Ending
inventory
5,000
31,939
86,675
25 237
25,237
85
85
2,065
146,075

32

C t off LP Solution
Costs
S l ti
Wages
Hiring
Di i l
Dismissal
Inventory
Total cost

= 13351 pers-months x $2000

= 604 workers x $3000
= 563 workers
k x $2500
= 146,075 items x $10

= $ 26,702,000
= $ 1,812,000
= $ 1,407,500
1 407 500
= $ 1,460,750
= $ 31,382,250
31 382 250

33

Example2:UseofTransportationmodel
(Shortterm
(Short
termcapacityoptionsovertime&subcontracting)
capacity options overtime & subcontracting)
Notation:
Costs:

h= holding cost per unit per period

h=holdingcostperunitperperiod
s=costperunittosubcontract
c=costperunittoproduceonovertime
p
p
r=costperunittoproduceonregulartime

Inventory:

I0=beginninginventorylevel
It =desiredinventorylevelattheendofperiodt

Capacity:

Rt =regulartimecapacityinperiodt
OTt =overtimecapacityinperiodt
St =subcontractingcapacityinperiodt

Demand,

Dt =forcasteddemandforperiodt
34

Example
CapacityType

Capacity(expressedas000gallons)inQuarter
1
2
3
4
RegularTime
g
450
450
750
450
Overtime
90
90
150
90
Subcontracting 200
200
200
200
Requirements(expressedas000gallons)inQuarter
1
2
3
4
Demand300
850
1500
350
CurrentInventory=250,000gal
Desiredendinginventory=300,000gal
Maxallowableovertime/qrter=20%ofregtimecapacityinthatquarter.
Regulartimecostperunit=$1.00
Overtimecostperunit=$1.50
Subcontractcostperunit=$1.90
InventoryHoldingcost$0.30pergalper quarter

35

Demand Time period

Ending
Inventory

Unused
Capacity

Total
Capacity

Production
Alternatives

P i d
Period

B i i Inventory
Beginning
I
t

2h

3h

I0

Regular time

r+h

r+2h

r+3h

R1

Overtime

c+h

c+2h

c+3h

OT1

Subcontract

s+h

s+2h

s+3h

S1

Regular time

r+h

r+2h

R2

Overtime

c+h

c+2h

OT2

Subcontract

s+h

s+2h

S2

Regular time

r+h

R3

Overtime

c+h

OT3

Subcontract

s+h

S3

Regular time

R4

Overtime

OT4

Subcontract

S4

D1

D2

D3

D4+I4

Requirements

36

Production
Alternatives
Peri
od
1

Beginning
Inventory
Regular time
Overtime

Demand Time period

Ending
Inventory

Unused
Capacity

Total
Capacity

250

250 0
250,

250

0
250

0 30
0.30

0 60
0.60

0 90
0.90

1.00

1.30

1.60

1.90

450, 400, 0

450

50

400

1.50

1.80

2.10

2.40

90, 0

90

200, 180

200

90

Subcontract

1.90

2.20

2.50

2.80

20

Regular time
Overtime
Subcontract

Regular time
Overtime
S b
Subcontract

Regular time
Overtime
Subcontract

Requirements

1.00

1.50

1.90

1.00

1.50

1 90
1.90

1.00

1.50

1.90

300

850

1500

350+ 300

250+560-300 =
510

1.30

1.60

450, 0

450

1.80

2.10

90, 0

90

200, 0

200

1.30

750, 0

750

1.80

150, 0

150

200 0
200,

200

450, 0

450

90,, 0

90

0+650-350=300

200, 90

200

300

270

3570

450

90
2.20

2.50

200

510+740 850 =
400

750

150
2 20
2.20

400+1100 1500 0
400+1100-1500=0

200

450

90

110

37

Production Plan
ProductionPlan
Quar
ter

Regular-time
g
Production

Overtime
Production

Subcontract

Anticipated
p
Inventory

450

90

20

510

450

90

200

400

750

150

200

450

90

110

300

Total cost =
(250*0.0+50*1.00+400*1.30+450*1.00+90*2.10+20*2.50+90*1.80+200*2.20+
750*1.00+ 150*1.50+ 200*1.90 +450*1.00 + 90*1.50 + 110*1.90)*1000 = $4,010,000

38

DevelopingaMTO/ATOProductionPlan

Goodsareproducedtocustomerspecification
Customerwaitswhiletheorderisbeingmade
Orderbacklogneedstobecontrolledtoprovidegoodcustomerserviceand
g
p
g
havebetterutilizationofresources

Example:Forecasteddemand(givenintable),planningperiod=5
Existingbacklog=100Desiredendingbacklog=80
Totalproduction(finishing)=460 80+100=480
AssumeaLevelStrategy:productionperperiod=480/5=96

Period
0
1
2
3
4
5 Total
5Total

SalesForecast
80
80
100
100
100460
(new orders)
(neworders)
PlannedProduction

96

96

96

96

96480

ProjectedBacklog100
84
68
72
76
80
(pendingorders)

39