Chapter 12 Aggregate Planning 1 utdallas/~metin

Chapter 12 Aggregate Planning 1 utdallas.edu/ metin

Learning Objectives Review of forecasting Forecast errors Aggregate planning 2 utdallas.edu/ metin

Phases of Decisions Strategy or design: Forecast Planning: Forecast Operation Actual demand Since actual demands differs from forecasts so does the execution from the plans. – E.g. Supply Chain concentration plans 40 students per year whereas the actual is ?. 3 utdallas.edu/ metin

Characteristics of forecasts Forecasts are always wrong. Should include expected value and measure of error. Long-term forecasts are less accurate than short-term forecasts. Too long term forecasts are useless: Forecast horizon – Forecasting to determine » Raw material purchases for the next week » Annual electricity generation capacity in TX for the next 30 years Aggregate forecasts are more accurate than disaggregate forecasts – Variance of aggregate is smaller because extremes cancel out » Two samples: {3,5} and {2,6}. Averages of samples: 4 and 4. » Variance of sample averages 0 » Variance of {3,5,2,6} 5/2 Several ways to aggregate – Products into product groups – Demand by location – Demand by time utdallas.edu/ metin 4

Forecast Variability implies time zones Frozen and Flexible zones Volume Firm Orders Frozen Zone Forecasts Flexible Zone Time 5 utdallas.edu/ metin

Time Fences in MPS 1 2 “frozen” (firm or fixed) 3 4 Period 5 6 “slushy” somewhat firm 7 8 9 “liquid” (open) Time Fences divide a scheduling time horizon into three sections or phases, referred as frozen, slushy, and liquid. Strict adherence to time fence policies and rules. 6 utdallas.edu/ metin

Planning Horizon Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months. In other words, it is matching the capacity and the demand. Long range Short range Now Intermediate range 2 months 1 Year 7 utdallas.edu/ metin

Overview of Planning Levels Short-range plans (Detailed plans) – Machine loading – Job assignments Intermediate plans (General levels) – Employment – Output Long-range plans – Long term capacity – Location / layout – Product/Process design 8 utdallas.edu/ metin

Listen to Tom Thumb’s manager - Need more space in 2005 to expand the store Allocate 25% of the floor space to fresh produce During the winter months employ 6 cashiers during rush hours On Wed before Thanksgiving, employ 12 cashiers throughout the day In the next two weeks, no Italian parsley will be delivered. Shelve Dill instead of parsley 9 utdallas.edu/ metin

Why aggregate planning Details are hard to gather for longer horizons – Demand for Christmas turkeys at Tom Thumb’s vs Thanksgiving turkeys Details carry a lot of uncertainty: aggregation reduces variability – Demand for meat during Christmas has less variability than the total variability in the demand for chicken, turkey, beef, etc. If there is variability why bother making detailed plans, inputs will change anyway – Instead make plans that carry a lot of flexibility – Flexibility and aggregation go hand in hand 10 utdallas.edu/ metin

Aggregate Planning Aggregate planning: General plan – Combined products aggregate product » Short and long sleeve shirts shirt Single product – Pooled capacities aggregated capacity » Dedicated machine and general machine machine Single capacity – Time periods time buckets » Consider all the demand and production of a given month together Quite a few time buckets When does the demand or production take place in a time bucket? 11 utdallas.edu/ metin

Planning Sequence Corporate strategies and policies Economic, competitive, and political conditions Business Plan utdallas.edu/ metin Aggregate demand forecasts Establishes production and capacity strategies Production plan Establishes production capacity Master schedule Establishes schedules for specific products 12

Aggregate Planning Inputs Resources – Workforce – Facilities Demand forecast Policy statements – – – – Subcontracting Overtime Inventory levels Back orders Costs – – – – – – Inventory carrying Back orders Hiring/firing Overtime Inventory changes subcontracting 13 utdallas.edu/ metin

Aggregate Planning Outputs Total cost of a plan Projected levels of inventory – – – – – Inventory Output Employment Subcontracting Backordering 14 utdallas.edu/ metin

Strategies Proactive – Alter demand to match capacity Reactive – Alter capacity to match demand Mixed – Some of each 15 utdallas.edu/ metin

Demand Options to Match Demand and Capacity Pricing – Price reduction leads to higher demand Promotion – Not necessarily via pricing – Free delivery, free after sale service » Some Puerto Rico hotels pay for your flight Back orders – Short selling: Sell now, deliver later New demand – Finding alternative uses for the product 16 utdallas.edu/ metin

Capacity Options to Match demand and Capacity Hire and layoff workers, unions are pivotal – Layoff: Emotional stress » Fired Moulinex (appliances producer in France) workers start fire at the plant – Hire: Availability of qualified work force » Operators at semiconductor plants Overtime/slack time – How too use slack time constructively? Training. – Overtime is expensive, low quality, prone to accidents Part-time workers – 35 hour work week of Europe Inventories, To smooth demands Subcontracting. Low quality. Reveals technological secrets 17 utdallas.edu/ metin

Fundamental tradeoffs in Aggregate Planning Capacity (regular time, over time, subcontract) Inventory Backlog / lost sales: Customer patience? Basic Strategies Chase (the demand) strategy; Matching capacity to demand; the planned output for a period is the expected demand for that period – fast food restaurants Time flexibility from high levels of workforce or capacity; – machining shops, army Level strategy; Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options. – swim wear 18 utdallas.edu/ metin

Use inventory Matching the Demand with Level or Time flexibility strategies Demand Demand U se ca pa ci ty Use delivery time utdallas.edu/ metin Demand 19

Chase vs. Level Chase Approach Advantages Level Approach – Stable output rates and workforce – Investment in inventory is low – Labor utilization in high Disadvantages – The cost of adjusting output rates and/or workforce levels Advantages Disadvantages – Greater inventory costs – Increased overtime and idle time – Resource utilizations vary over time 20 utdallas.edu/ metin

Techniques for Aggregate Planning Inputs: – – – – Determine demand for each period Determine capacities for each period Identify policies that are pertinent Determine units costs Analysis – Develop alternative plans and costs – Select the best plan that satisfies objectives 21 utdallas.edu/ metin

Cumulative output/demand Technique 1: Cumulative Graph 1 Cumulative production Cumulative demand 2 3 4 5 6 7 8 9 10 22 utdallas.edu/ metin

Technique 2: Mathematical Techniques Linear programming: Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization. Minimize Costs Subject to: Demand, capacity, initial inventory requirements 23 utdallas.edu/ metin

Summary of Planning Techniques Technique Solution Characteristics Graphical/ charting Trial and error Linear programming Simulation Optimizing 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. Trial and error Linear decision rule? 24 utdallas.edu/ metin

Basic Relationships Example - Relationships Workforce Number of workers in a period Number of workers at end of previous period Number of new workers at start of the period - Number of laid off workers at start of the period - Amount used to satisfy demand in current period Inventory Inventory at the end of a period Inventory at end of the previous period Output Cost (Reg OT Sub) Production in current period Hire/Lay Off Cost Cost Cost for a period Inventory Cost Back-order Cost 25 utdallas.edu/ metin

Technique 3: Simulation Example Level Output Period Forecast Policy: 1 2 3 4 5 6 200 200 300 400 500 200 Total 1800 Level Output Rate of 300 per period Output Cost Regular 300 300 300 300 300 300 1800 2 Overtime 3 Subcontract 6 Output-Forecast 100 100 0 -100 -200 100 0 Beginning 0 100 200 200 100 0 Ending 100 200 200 100 0 0 Average 50 150 200 150 50 0 600 1 0 0 0 0 100 0 100 5 Regular 600 600 600 600 600 600 3,600 Inventory 50 150 200 150 50 0 600 Back Orders 0 0 0 0 500 0 500 Total Cost of Plan 650 750 800 750 1,150 600 4,700 Inventory Backlog Costs 26 utdallas.edu/ metin Average Inventory (Beginning Inventory Ending Inventory)/2

Technique 3: Simulation Example Level Output Overtime Period Forecast Policy: 1 2 3 4 5 6 200 200 300 400 500 200 Total 1800 Level Output Rate Overtime Output Cost Regular 280 280 Overtime 280 280 280 280 1680 2 40 40 40 0 120 3 Subcontract Output-Forecast 6 80 80 20 -80 -200 -180 0 Beginning 0 80 160 180 100 0 Ending 80 160 180 100 0 0 Average 40 120 170 140 50 0 520 1 0 0 0 0 80 0 80 5 Regular 560 560 560 560 560 560 3,360 Overtime 0 0 120 120 120 0 360 Inventory 40 120 170 50 0 0 520 Back Orders 0 0 0 0 400 0 400 Total Cost of Plan 600 680 850 730 1,080 560 4,640 Inventory Backlog Costs utdallas.edu/ metin 27

Aggregate Planning in Services Services occur when they are rendered – Limited time-wise aggregation Services occur where they are rendered – Limited location-wise aggregation Demand for service can be difficult to predict – Personalization of service Capacity availability can be difficult to predict Labor flexibility can be an advantage in services – Human is more flexible than a machine, well at the expense of low efficiency. 28 utdallas.edu/ metin

Aggregate Plan to Master Schedule For a short planning range 2-4 months: Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon. Disaggregation Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a Master master schedule. Aggregate Planning Schedule 29 utdallas.edu/ metin

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 30 utdallas.edu/ metin

Master Scheduling Process Inputs Outputs Beginning inventory Forecast Committed Customer orders Projected inventory Master Scheduling Master production schedule ATP: Uncommitted inventory 31 utdallas.edu/ metin

Preview of Materials Requirement Planning Terminology Net Inventory After Production Requirements Forecast Assuming that the forecasts include committed orders Net inventory before production Projected on hand inventory in the previous period - Requirements Produce in lots if Net inventory is less than zero Net inventory after production Net inventory before production Production 32 utdallas.edu/ metin

Projected On-hand Inventory Beginning Inventory 1 JUNE 2 3 4 5 Customer Orders (committed) 33 30 30 30 40 Projected on-hand inventory 31 1 -29 64 JULY 6 7 8 33 utdallas.edu/ metin

Example: Find ATP with lot size of 70 June 64 July 1 2 3 4 5 6 7 8 Forecast 30 30 30 30 40 40 40 40 Customer Orders (Committed) 33 20 10 4 2 Projected on Hand Inventory - MPS: Production 70 Projected on Hand Inventory 31 Available to promise Inventory until next production (uncommitted) 11 utdallas.edu/ metin - 1 41 57 - 70 11 41 79 1 70 70 31 61 71 ? 34

Summary Aggregate planning: conception, demand and capacity option Basic strategy: level capacity strategy, chase demand strategy Techniques: Trial and Error, mathematical techniques Master scheduling 35 utdallas.edu/ metin

Practice Questions 1. The goal of aggregate planning is to achieve a production plan that attempts to balance the organization's resources and meet expected demand. Answer: True Page: 541 2. A “chase” strategy in aggregate planning would attempt to match capacity and demand. Answer: True Page: 548 3. Ultimately the overriding factor in choosing a strategy in aggregate planning is overall cost. Answer: True Page: 550 36 utdallas.edu/ metin

Practice Questions 1. Which of the following best describes aggregate planning? A) the link between intermediate term planning and short term operating decisions B) a collection of objective planning tools C) make or buy decisions D) an attempt to respond to predicted demand within the constraints set by product, process and location decisions E) manpower planning Answer: D Page: 541 37 utdallas.edu/ metin

Practice Questions 2.Which of the following is an input to aggregate planning? A) beginning inventory B) forecasts for each period of the schedule C) customer orders D) all of the above E) none of the above Answer: D Page: 561 38 utdallas.edu/ metin

Practice Questions 3.Which of the following is not an input to the aggregate planning process: A) resources B) demand forecast C) policies on work force changes D) master production schedules E) cost information Answer: D Page: 545 39 utdallas.edu/ metin

Practice Questions 4. Which one of the following is not a basic option for altering demand? A) promotion B) backordering C) pricing D) subcontracting E) All are demand options. Answer: D Page: 545 40 utdallas.edu/ metin

Practice Questions 5. Which of the following would not be a strategy associated with adjusting aggregate capacity to meet expected demand? A) subcontract B) vary the size of the workforce C) vary the intensity of workforce utilization D) allow inventory levels to vary E) use backorders Answer: E Page: 546-547 41 utdallas.edu/ metin

Practice Questions 6. Moving from the aggregate plan to a master production schedule requires: A) rough cut capacity planning B) disaggregation C) sub-optimization D) strategy formulation E) chase strategies Answer: B Page: 559 42 utdallas.edu/ metin