power point presentation on agregate planning

1. Chapter 2 – Aggregate
Planning
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2. Sales and Operations Planning
 Is a process:
 Lower inventory
 Shorten customer lead times
 Stabilize production rates
 To help give better customer service
 Give top management a handle on the business
 The process is designed to balance demand
and supply over time.
2

3. Sales and Operations Planning
 The balance must occur at an aggregate
level & also at the detailed individual
product level.
 Aggregate we mean at the level of larger
group of similar products.
 Often expressed in common units
 Example: Tones of steel
Liters of paint
3

4. Aggregate Production
Planning
 (Aggregate) Planning is Concerned With
Determining the Quantity and Timing of
Production for the Intermediate Future, Often
From 3 To 18 Months Ahead.
 The main purpose is to specify the optimal
combination of production rate, work force level,
and inventory on hand.
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5. Aggregate Production
Planning
 The Goal is:
 To Minimize Costs Over The Planning
Period by determining the optimal
combination of workforce and inventory.
 To Minimize Fluctuations In The Work
Force or Inventory Levels.
 Based on the planning horizon, We can
divide plans into 3 general categories:
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6. VARIABLES USED IN
AGGREGATE PLANNING
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7. Planning Horizons
Responsible:
Short-range plans Operations
Job assignments managers
Ordering
Job scheduling Responsible:
Intermediate-range plans
Dispatching Top executives
Sales planning
Production planning and
budgeting
Responsible: Setting employment, inventory, Long-range plans
Operations subcontracting levels R&D
managers, Aggregate planning New product plans
supervisors,
Capital expenses
foremen
Facility location, expansion
Today 3 Months 1 year 5 years
Planning Horizon

8. Relationships of Aggregate
Schedule
Aggregate
Forecast & Resource
Production
Firm Orders Availability
Planning
Work force
Inventory
Material Master Subcontractors
Requirements Production
Planning Scheduling
No, modify CRP, MRP, or MPS
Capacity Shop
Requirements Realistic? Floor
Planning Yes Schedules

9. Required Inputs to the Production Planning
System
Competitors’be Raw material Market
havior availability demand
External to
firm
External Economic
capacity conditions
Planning for
production
Current Current Inventory Activities Internal
physical workforce levels required for to firm
capacity production

10. Manufacturing options to meet
fluctuating demand
 Build inventory
 Carry backorders or tolerate lost sales
 Over time or under time
 Hire & fire
 Vary capacity through changes in plant
& equipment (long term)
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11. Relevant costs
1. Basic production cost
 Direct & indirect labor costs & regular as well
as overtime compensation
2. Costs associated with changes in the
production rate
 Cost of hiring, firing & training
3. Inventory holding cost
 Cost of capital tied up, storing, insurance…etc
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12. Relevant costs
4. Backordering costs
 Very hard to measure, loss of customer
goodwill, loss of sales revenues resulting from
backordering.
12

13. Types of Aggregate Plans
 Level Aggregate Plans
 Maintains a constant workforce
 Sets capacity to accommodate average demand
 Often used for make-to-stock products
 Disadvantage- builds inventory and/or uses back orders
 Chase Aggregate Plans
 Produces exactly what is needed each period
 Sets labor/equipment capacity to satisfy period demands
 Disadvantage- constantly changing short term capacity
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14. The Extremes
Level Chase
Strategy Strategy
Production
Production rate is
equals
constant
demand

15. Level Plan Example
 Level production rate= 28,000 units/7 periods= 4000 units
 Level workforce= (4000 units x .64 std.)/160 = 16 people
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16. Chase Plan Example
 Chase hires and fires staff to exactly meet each periods
demand
 Period 1 = (500 units x .64 std.)/160 = 2 people, need to fire
16 people
16

17. Types of Aggregate Plans (Cont.)
 Hybrid Aggregate Plans
 Uses a combination of options
 Options should be limited to facilitate execution
 May use a level workforce with overtime & temps
 May allow inventory buildup and some backordering
 May use short term sourcing
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18. Aggregate Planning Options
 Demand based options
 Reactive: uses finished goods inventories and
backorders for fluctuations
 Proactive: shifts the demand patterns to minimize
fluctuations
 Capacity based options
 Changes output capacity to meet demand
 Uses overtime, under time, subcontracting, hiring, firing,
and part-timers – cost and operational implications
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19. Evaluating the Current Situation
 Important to evaluate current situation
in terms of;
 Point of Departure
 Current % of normal capacity
 Options are different depending on present situation
 Magnitude of change
 Larger changes need more dramatic measures
 Duration of change
 Is the length of time a brief seasonal change?
 Is a permanent change in capacity needed?
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20. Developing the Aggregate Plan
 Step 1- Choose strategy: level, chase, or hybrid
 Step 2- Determine the aggregate production rate
 Step 3- Calculate the size of the workforce
 Step 4- Test the plan as follows:
 Calculate Inventory, expected hiring/firing, overtime needs
 Calculate total cost of plan
 Step 5- Evaluate performance: cost, service,
human resources, and
operations
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21. Plan for Companies with Tangible
Products – Plans A, B, C, D
 Plan A: Level aggregate plan using
inventories and back orders
 Plan B: Level plan using inventories but
no back orders
 Plan C: Chase aggregate plan using
hiring and firing
 Plan D: Hybrid plan using initial
workforce and overtime as needed
21

22. Problem Data for Plans A & B
(Table 13-4)
22

23. Plan A - Level Using Inventory &
Backorders (Table 13-5)
 First calculate the level production rate (14400/8=1800)
23

24. Plan A Evaluation
 Fill rate is 83.9%
 Fill rate is likely too low
 Inventory levels seem to be okay
 Human resources fires two employees
24

25. Plan B – Chase Aggregate Plan
Using Hiring and Firing (Table 13-6)
25

26. Plan B Evaluation
 Plan B costs slightly less than the level plan.
 Hiring demands ranges from two in November
to thirty-four in February
 Utilization is highest, 70.6%, in December and
even lower in the other months
 Space and equipment are underutilized in every
other month of the plan
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27. Aggregate Plans for Service Companies
with Non-Tangible Products- Plans E, F, G
 Options remain the same – level, chase, and
hybrid plans
 Overtime and under time can be used
 Staff can be hired and fired
 Inventory cannot be used to level the service plan
 All demand must be satisfied or lose business to a
competing service provider
27

28. Problem Data for Plans C, D, and E
(Table 13-7)
A B
4 Cost Data
5 Regular time labor cost per hour $8.00
6 Ov ertime labor cost per hour $12.00
7 Subcontracting cost per unit (labor only) $60.00
8 Hiring cost per employee $250.00
9 Firing cost per employee $150.00
10
11 Capacity Data
12 Beginning workforce (employees) 60
13 Serv ice standard per call (hours) 4
14 Regular time av ailable per period (hours) 160
15 Ov ertime av ailable per period (hours) 24
16
17 Demand Data (calls)
18 Period 1 2400
19 Period 2 1560
20 Period 3 1200
21 Period 4 2040
22 Period 5 2760
23 Period 6 1680
24 Period 7 1320
25 Period 8 2400
26
27 Total Number of Periods 8 28
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29. Plan C – Level Aggregate Plan with
No Back Orders, No Tangible Product
(Table 13-8)
D E F G H I J K L M
3 Plan E: Level Aggregate Plan with No Backorders, No Tangible Product
4
5 Compute Workforce Needed
6 Maximum Demand 2760 <-- Need to staff to meet the maximum number of calls
7 Calls per Worker per Period (Reg Time) 40
8 Workers Needed 69
9 Number to Hire 9
10 Number to Fire 0
11
12 Detailed Plan Computations Period
13 1 2 3 4 5 6 7 8 Total
14 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 15360
15 Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 61440
16 Regular time hours available 11040 11040 11040 11040 11040 11040 11040 11040
17 Undertime hours 1440 4800 6240 2880 0 4320 5760 1440 26880
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19 Cost Calculations for Plan E
20 Regular time labor cost $706,560
21 Hiring cost $2,250
22 Firing cost $0
23 Total Cost $708,810
24
 Staff of 69 people creates excessive UT (averages 30% UT)
 Cost per service call is $46.15 ($708,000 Divided by 15360 calls)
29

30. Plan D – Hybrid Aggregate Plan Using
Initial Workforce and OT as Needed
(Table 13-9)
D E F G H I J K L M
26 Plan F: Hybrid Aggregate Plan Using Initial Workforce and Overtime as Needed
27
28 Detailed Plan Computations Period
29 1 2 3 4 5 6 7 8 Total
30 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 15360
31 Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 61440
32 Regular time hours of capacity 9600 9600 9600 9600 9600 9600 9600 9600 76800
33 Overtime hours needed 0 0 0 0 1440 0 0 0 1440
34 Undertime hours 0 3360 4800 1440 0 2880 4320 0 16800
35
36 Cost Calculations for Plan F
37 Regular time labor cost $614,400
38 Overtime labor cost $17,280
39 Total Cost $631,680
 Costs reduced by $77K and under time to an average of 20%
 Cost per service call reduced to $41.13 (-$5.02)
30

31. Plan E – Chase Aggregate Plan for
Nontangible Products Using Hiring
and Firing (Table 13-10)
D E F G H I J K L
42 Plan G: Chase Aggregate Plan Using Hiring and Firing
43
44 Beginning Number of Employees 60
45
46 Detailed Plan Computations Period
47 1 2 3 4 5 6 7 8
48 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400
49 Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600
50 Number of employees needed 60 39 30 51 69 42 33 60
51 Number of hires 0 0 0 21 18 0 0 27
52 Number of fires 0 21 9 0 0 27 9 0
53
54 Cost Calculations for Plan G
55 Regular time labor cost $491,520
56 Hiring cost $16,500
57 Firing cost $9,900
58 Total Cost $517,920
 Total cost reduced by $114K over Plan F, utilization improved to
100%, and cost per service call now $33.72 (-$7.41)
 Workforce fluctuates from 30-69 people- morale problems
 Solution?? Compare smaller permanent workforce, more OT??
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32. Aggregate Planning Bottom Line
 The Aggregate plan must balance several
perspectives
 Costs are important but so are:
 Customer service
 Operational effectiveness
 Workforce morale
 A successful AP considers each of these factors
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33. Master Production Scheduling
 Master production schedule (MPS) is the
anticipated build schedule
 MPS is often stated in produce or
service specifications rather than dollars
 MPS is often built, managed, reviewed
and maintained by the master scheduler
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34. Planning Links to MPS
34

35. Role of the MPS
 Aggregate plan:
 Specifies the resources available (e.g.: regular
workforce, overtime, subcontracting, allowable
inventory levels & shortages)
 Master production schedule:
 Specifies the number & when to produce each
end item (the anticipated build schedule)
 Disaggregates the aggregate plan
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36. Objectives of Master Schedule
 The Master Scheduler must:
 Maintain the desired customer service level
 Utilize resources efficiently
 Maintain desired inventory levels
 The Master Schedule must:
 Satisfy customer demand
 Not exceed Operation’s capacity
 Work within the constraints of the Aggregate Plan
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37. MPS as a Basis of
Communication
 MPS is a basis for communication between
operations and other functional areas
 Demand management and master scheduler
communication is ongoing to incorporate
 Forecasts, order-entry, order-promising, and
physical distribution activities
 Authorized MPS is critical input to the material
requirements planning (MRP)
37

38. Developing an MPS
 The Master Scheduler:
 Develops a proposed MPS
 Checks the schedule for feasibility with available capacity
 Modifies as needed
 Authorizes the MPS
 Consider the following example:
 Make-to-stock environment with fixed orders of 125 units
 There are 110 in inventory to start
 When are new order quantities needed to satisfy
the forecasted demand?
38

39. The MPS Record
W eek BI 1 2 3 4 5 6 7 8 9 10 11 12
F orec as t 50 50 50 50 75 75 75 75 50 50 50 50
P rojec t ed ava ila ble 110 60 10 -4 0
MPS
W eek BI 1 2 3 4 5 6 7 8 9 10 11 12
F orec as t 50 50 50 50 75 75 75 75 50 50 50 50
P rojec t ed ava ila ble 110 60 10 85 35 -40
MPS 12 5
 Projected Available = beginning inventory + MPS shipments -
forecasted demand
 The MPS row shows when replenishment shipments need to arrive to avoid a
stock out (negative projected available)
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40. Revised and Completed MPS Record
W eek BI 1 2 3 4 5 6 7 8 9 10 11 12
Forec as t 50 50 50 50 75 75 75 75 50 50 50 50
P rojec ted available 110 60 10 85 35 85 10 -65
MPS 125 125
W eek BI 1 2 3 4 5 6 7 8 9 10 11 12
Forec as t 50 50 50 50 75 75 75 75 50 50 50 50
P rojec ted available 110 60 10 85 35 85 10 60 110 60 10 85 35
MPS 125 125 125 125 125
40

41. Evaluating the MPS
 Rough-cut capacity planning:
 An estimate of the plan’s feasibility
 Given the demonstrated capacity of critical
resources (e.g.: direct labor & machine time),
have we overloaded the system?
 Customer service issues:
 Does “available-to-promise” inventory satisfy
customer orders? If not, can future MPS quantities
be pulled in to satisfy new orders?
41

42. Stabilizing the MPS
42

43. Aggregate Planning Across the
Organization
 Aggregate planning, MPS, and rough-cut
capacity affection functional areas throughout
the organization
 Accounting is affected because aggregate plan
details the resources needed by operations
 Marketing uses the aggregate plan to support the
marketing plan
 Information systems maintains the databases that
support demand forecasts and other such
information
43

44. Chapter 13 Highlights
 Planning begins with the development of the strategic
business plan that provides your company’s direction and
objectives for the next two to ten years.
 Sales and operations planning integrates plans from the
other functional areas and regularly evaluates company
performance.
 The level aggregate plan maintains the same size workforce
and produces the same output each period. Inventories and
backorders absorb fluctuations in demand. The chase
aggregate plan changes the capacity each period to match
the demand
 Demand patterns can be smoothed through pricing
incentives, reduced prices for out-of-season purchases, or
nonprime service times.
44

45. Chapter 13 Highlights (continued)
 The difference in aggregate planning for companies that do
not provide a tangible product is that the option to use
inventories is not available
 The MPS shows how the resources authorized by the AP will
be used to satisfy the organizational objectives. The MPS
specifies the products to be built in each time period. MPS is
checked for feasibility using a rough-cut capacity planning
technique.
 The objectives of master scheduling are to satisfy customer
service objectives, use resources effectively, and minimize
costs.
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46. The End
 Copyright © 2007 John Wiley & Sons, Inc. All rights reserved.
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