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Chapter 2 – Aggregate Planning
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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
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
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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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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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VARIABLES USED IN AGGREGATE PLANNING
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Planning Horizons
Today 3 Months 1 year 5 years
Planning Horizon
Short-range plansJob assignmentsOrderingJob schedulingDispatching Intermediate-range plans
Sales planningProduction planning and budgetingSetting employment, inventory, subcontracting levelsAggregate planning
Long-range plansR&DNew product plansCapital expensesFacility location, expansion
Responsible: Operations managers, supervisors, foremen
Responsible: Operations managers
Responsible: Top executives
Relationships of Aggregate ScheduleRelationships of Aggregate Schedule
Forecast &Firm Orders
MaterialRequirements
Planning
AggregateProductionPlanning
ResourceAvailability
MasterProductionScheduling
ShopFloor
Schedules
CapacityRequirements
PlanningRealistic?
Yes
No, modify CRP, MRP, or MPS
Work forceInventorySubcontractors
Required Inputs to the Production Planning System
Planning for
production
External capacity
Competitors’behavior
Raw material availability
Market demand
Economic conditions
Currentphysical capacity
Current workforce
Inventory levels
Activities required for production
External to firm
Internal to firm
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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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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Relevant costs
4. Backordering costs Very hard to measure, loss of customer
goodwill, loss of sales revenues resulting from backordering.
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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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The Extremes
Level Strategy
Chase Strategy
Production equals
demand
Production rate is constant
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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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
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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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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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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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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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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
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Problem Data for Plans A & B (Table 13-4)
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Plan A - Level Using Inventory & Backorders (Table 13-5)
First calculate the level production rate (14400/8=1800)
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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
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Plan B – Chase Aggregate Plan Using Hiring and Firing (Table 13-6)
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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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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
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Problem Data for Plans C, D, and E (Table 13-7)
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A BCost Data
Regular time labor cost per hour $8.00Overtime labor cost per hour $12.00
Subcontracting cost per unit (labor only) $60.00Hiring cost per employee $250.00Firing cost per employee $150.00
Capacity DataBeginning workforce (employees) 60Service standard per call (hours) 4
Regular time available per period (hours) 160Overtime available per period (hours) 24
Demand Data (calls)Period 1 2400Period 2 1560Period 3 1200Period 4 2040Period 5 2760Period 6 1680Period 7 1320Period 8 2400
Total Number of Periods 8 28
Plan C – Level Aggregate Plan with No Back Orders, No Tangible Product (Table 13-8)
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D E F G H I J K L M
Plan E: Level Aggregate Plan with No Backorders, No Tangible Product
Compute Workforce NeededMaximum Demand 2760 <-- Need to staff to meet the maximum number of calls
Calls per Worker per Period (Reg Time) 40Workers Needed 69
Number to Hire 9Number to Fire 0
Detailed Plan Computations1 2 3 4 5 6 7 8 Total
Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 15360Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 61440
Regular time hours available 11040 11040 11040 11040 11040 11040 11040 11040Undertime hours 1440 4800 6240 2880 0 4320 5760 1440 26880
Cost Calculations for Plan ERegular time labor cost $706,560
Hiring cost $2,250Firing cost $0Total Cost $708,810
Period
Staff of 69 people creates excessive UT (averages 30% UT) Cost per service call is $46.15 ($708,000 Divided by 15360 calls)
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Plan D – Hybrid Aggregate Plan Using Initial Workforce and OT as Needed (Table 13-9)
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D E F G H I J K L M
Plan F: Hybrid Aggregate Plan Using Initial Workforce and Overtime as Needed
Detailed Plan Computations1 2 3 4 5 6 7 8 Total
Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 15360Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 61440
Regular time hours of capacity 9600 9600 9600 9600 9600 9600 9600 9600 76800Overtime hours needed 0 0 0 0 1440 0 0 0 1440
Undertime hours 0 3360 4800 1440 0 2880 4320 0 16800
Cost Calculations for Plan FRegular time labor cost $614,400
Overtime labor cost $17,280Total Cost $631,680
Period
Costs reduced by $77K and under time to an average of 20% Cost per service call reduced to $41.13 (-$5.02)
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Plan E – Chase Aggregate Plan for Nontangible Products Using Hiring and Firing (Table 13-10)
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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D E F G H I J K L
Plan G: Chase Aggregate Plan Using Hiring and Firing
Beginning Number of Employees 60
Detailed Plan Computations1 2 3 4 5 6 7 8
Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600
Number of employees needed 60 39 30 51 69 42 33 60Number of hires 0 0 0 21 18 0 0 27Number of fires 0 21 9 0 0 27 9 0
Cost Calculations for Plan GRegular time labor cost $491,520
Hiring cost $16,500Firing cost $9,900Total Cost $517,920
Period
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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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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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Planning Links to MPS
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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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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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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)
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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?
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The MPS Record
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)
Week BI 1 2 3 4 5 6 7 8 9 10 11 12
Forecast 50 50 50 50 75 75 75 75 50 50 50 50
Projected available 110 60 10 -40
MPS
Week BI 1 2 3 4 5 6 7 8 9 10 11 12
Forecast 50 50 50 50 75 75 75 75 50 50 50 50
Projected available 110 60 10 85 35 -40
MPS 125
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Revised and Completed MPS Record
Week BI 1 2 3 4 5 6 7 8 9 10 11 12
Forecast 50 50 50 50 75 75 75 75 50 50 50 50
Projected available 110 60 10 85 35 85 10 -65
MPS 125 125
Week BI 1 2 3 4 5 6 7 8 9 10 11 12
Forecast 50 50 50 50 75 75 75 75 50 50 50 50
Projected available 110 60 10 85 35 85 10 60 110 60 10 85 35
MPS 125 125 125 125 125
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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?
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Stabilizing the MPS
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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
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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.
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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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The End Copyright © 2007 John Wiley & Sons, Inc. All rights
reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
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