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# Aggregate Planning

The concept of aggregation Chase and level approaches LP approach Master Scheduling Summary Reading: Page 600 625

Learning Objectives
Explain what aggregate planning is and how it is useful. Identify the variables decision makers have to work with in aggregate planning and some of the possible strategies they can use. Describe some of the graphical and quantitative techniques planners use. Prepare aggregate plans and compute their costs.

Planning Horizon
Aggregate planning: Intermediate-range
capacity planning, usually covering 2 to 12 (18) months.
Long range Intermediate range

2 months

1 Year

## Overview of Planning Levels

Short-range plans (Detailed plans)

## Intermediate plans (General levels)

Employment Output

Long-range plans
Long term capacity Location / layout

Process Planning Longrange Intermediaterange Manufacturing Strategic Capacity Planning Aggregate Planning Services

Master Production Scheduling Material Requirements Planning Order Scheduling Shortrange Weekly Workforce & Customer Scheduling Daily Workforce & Customer Scheduling

## The Concept of Aggregation

Given the demand forecast Ft for each period t in the planning horizon that extends over T periods, determine the production level Pt, inventory level It, and work force Wt for periods t=1,2,,T that minimizes the relevant costs over the planning horizon. Aggregate planning is essentially a big picture approach to planning: try to avoid focusing on individual products or services.

## Example: An Aggregation Unit

A plant produces six models of washing machines. Model number A5532 K4242 L9898 L3800 M2624 M3880 Reqd worker-hours % Total no. sold 4.2 32 4.9 21 5.1 17 5.2 14 5.4 10 5.8 6

An aggregate unit is a fictitious washing machine requiring (.32)(4.2)+(.21)(4.9)+(.17)(5.1)+(.14)(5.2)+(.10)(5.4)+(0.06)(5. 8) = 4.86 labor hours.

Aggregate Planning
Begin with forecast of aggregate demand Forecast intermediate range General plan to meet demand by setting
Output levels Employment Finished goods inventory level

Production plan is the output of aggregate planning Update plan periodically rolling planning horizon always covers the next 12 18 months

## Aggregate Planning Inputs

Resources
Workforce Facilities

Costs
Inventory carrying Back orders Hiring/firing Overtime Inventory changes Subcontracting

## Demand forecast Policies

Subcontracting Overtime Inventory levels Back orders

## Aggregate Planning Outputs

Total cost of a plan Projected levels of inventory
Inventory Output Employment Subcontracting Backordering

## Aggregate Planning Strategies

Proactive
Alter demand to match capacity

Reactive
Alter capacity to match demand

Mixed
Some of each

Demand Options
Pricing Promotion Back orders New demand

Capacity Options
Hire and layoff workers Overtime/slack time Part-time workers Inventories Subcontracting

## Aggregate Planning Strategies

Maintain a level workforce Maintain a steady output rate Match demand period by period Use a combination of decision variables

Basic Strategies
Level capacity strategy:
Maintaining a steady rate of regulartime output while meeting variations in demand by a combination of options.

## Chase demand strategy:

Matching capacity to demand; the planned output for a period is set at the expected demand for that period.

Chase Approach
Investment in inventory is low Labor utilization in high

The cost of adjusting output rates and/or workforce levels

Level Approach
Stable output rates and workforce

Greater inventory costs Increased overtime and idle time Resource utilizations vary over time

## Techniques for Aggregate Planning

1. Determine demand for each period 2. Determine capacities for each period 3. Identify policies that are pertinent 4. Determine units costs 5. Develop alternative plans and costs 6. Select the best plan that satisfies objectives. Otherwise return to step 5.

Average Inventory
In practice, we may use either ending inventory criteria or average inventory level criteria
Average Beginning Inventory + Ending Inventory = inventory 2

Example 1
Suppose we have the following unit demand and cost information:
Demand/mo Jan 200 Feb 200 Mar 300 Apr 400 May 500 Jun 200 Total 1,800

Cost Output Regular time: Over time: Subcontract: Inventory Back orders:

\$2 per unit \$3 per unit \$6 per unit \$1 per unit per month \$5 per unit per period

Suppose the initial inventory is 0. Assuming a level of output rate of 300 units per month with regular time, what is the total cost?
20

Period Demand Output Regular Overtime subcontract Output-demand Inventory Beginning Ending Average Backorder Cost

## Total 1,800 1,800 0

\$4,700

21

Example 2
For the previous example, the company just learned that one person is going to retire. Rather than replace that person, the company would like to stay with the smaller workforce and use overtime to make up for the lost output. The reduced regulartime output is 280 units per month. The maximum amount of overtime output per period is 40 units. Develop a plan and compare it to the previous one.

22

Period Demand Output Regular Overtime subcontract Output-demand Inventory Beginning Ending Average Backorder Cost

## Total 1,800 1,680 120

80 \$4,640

23

Example 3
See the Excel file We assume: no overtime, no subcontracting, we may layoff or hire workers in each period; we consider two scenarios; backorder is allowed and not allowed

Mathematical Techniques
Linear programming: Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization. Simulation models: Computerized models that can be tested under different scenarios to problems.

LP Approach: an Example
Suppose no firing, no hiring

## Summary of Planning Techniques

Technique
Graphical/charting

Solution
Heuristic (trial and error)

Characteristics
Intuitively appealing, easy to understand; solution not necessarily optimal. Computerized; linear assumptions not always valid. Computerized models can be examined under a variety of conditions.

Optimizing

## Aggregate Planning in Services

Services occur when they are rendered Demand for service can be difficult to predict Capacity availability can be difficult to predict Labor flexibility can be an advantage in services

## Aggregate Plan to Master Schedule

Aggregate Planning

Disaggregation

Master Schedule

## Disaggregating the Aggregate Plan

Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon. Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.

Master Scheduling
Master schedule
Determines quantities needed to meet demand Interfaces with
Marketing Capacity planning Production planning Distribution planning

Master Scheduler
Evaluates impact of new orders Provides delivery dates for orders Deals with problems
Production delays Revising master schedule Insufficient capacity

## Master Scheduling Process

Inputs
Beginning inventory Forecast Customer orders

Outputs
Projected inventory

Master Scheduling

## Projected On-hand Inventory

Beginning Inventory

## 64 Forecast Customer Orders (committed) Projected on-hand inventory

Customer orders are larger than forecast in week 1

1 30 33 31

JUNE 2 3 30 30 20 1 10 -29

4 30 4

5 40 2

JULY 6 7 40 40

8 40

## Forecast is larger than Customer orders in week 2

MPS

Review Problems
Problems 1, 5, 8, 13, 15 at page 628 to 631 (use average inventory level to count inventory holding cost when this cost is involved) Problems 21, 22 at page 631