Aggregate Planning

Chapter 14Sales and Capacity PlanningLecture OutlineThe Sales and Operations Planning ProcessStrategies for Adjusting CapacityAggregate Planning (AP) is one such strategyStrategies for Managing DemandQuantitative Techniques for Aggregate PlanningHierarchical Nature of PlanningAggregate Planning for ServicesCopyright 2011 John Wiley & Sons, Inc.14-2Sales and Operations PlanningDetermines resource capacity to meet demand over an intermediate time horizonAggregate refers to sales and operations planning for product lines or familiesSales and Operations planning (S&OP) matches supply and demandObjectivesEstablish a company wide plan for allocating resourcesDevelop an economic strategy for meeting demandCopyright 2011 John Wiley & Sons, Inc.14-3Sales and Operations Planning ProcessCopyright 2011 John Wiley & Sons, Inc.14-4

Strategies for Managing DemandShifting demand into other time periodsIncentivesSales promotionsAdvertising campaignsOffering products or services with counter-cyclical demand patternsPartnering with suppliers to reduce information distortion along the supply chain14-5Copyright 2011 John Wiley & Sons, Inc.Monthly S&OP Planning ProcessCopyright 2011 John Wiley & Sons, Inc.14-6

Medium Time-horizon Capacity PlanningAdjusting capacityResources to meet demand are acquired and maintained over the time horizon of the planMinor variations in demand are handled with overtime or under-time

We are not making long-term capital investment decisions

This is called Aggregate Planning (AP) because it looks at product families, not individual products Products are treated in aggregateAggregate Planning is Operations Planning with a medium time horizon 6 mos to 24 mos.Copyright 2011 John Wiley & Sons, Inc.14-7Strategies for Adjusting CapacityLevel productionProducing at a constant rate and using inventory to absorb fluctuations in demandChase demandHiring and firing workers to match demandPeak demandMaintaining resources for high-demand levelsCopyright 2011 John Wiley & Sons, Inc.14-8Strategies for Adjusting CapacityOvertime and under-timeIncrease or decrease working hoursSubcontractingLet outside companies complete the workPart-time workersHire part-time workers to complete the workBackorderingProvide the service or product at a later time periodCopyright 2011 John Wiley & Sons, Inc.14-9Level ProductionCopyright 2011 John Wiley & Sons, Inc.14-10DemandUnitsTimeProductionChase DemandCopyright 2011 John Wiley & Sons, Inc.14-11DemandUnitsTimeProductionQuantitative Techniques For APPure StrategiesLevel productionChase demandMixed StrategiesLinear ProgrammingTransportation MethodOther Quantitative Techniquesthese are nonlinear programming techniquesWe wont look at these much

Copyright 2011 John Wiley & Sons, Inc.14-1212Pure StrategiesCopyright 2011 John Wiley & Sons, Inc.14-13Hiring cost= $100 per workerFiring cost= $500 per worker Inventory carrying cost= $0.50 pound per quarter Regular production cost per pound= $2.00 Production per employee= 1,000 pounds per quarter Beginning work force= 100 workersQUARTERSALES FORECAST (LB)

Spring80,000Summer50,000Fall120,000Winter150,000Level Production StrategyCopyright 2011 John Wiley & Sons, Inc.14-14Level production= 100,000 pounds(50,000 + 120,000 + 150,000 + 80,000)4Spring80,000100,00020,000Summer50,000100,00070,000Fall120,000100,00050,000Winter150,000100,0000400,000140,000Cost of Level Production Strategy(400,000 X $2.00) + (140,000 X $.50) = $870,000SALESPRODUCTIONQUARTERFORECASTPLANINVENTORYChase Demand StrategyCopyright 2011 John Wiley & Sons, Inc.14-15Spring80,00080,00080020Summer50,00050,00050030Fall120,000120,000120700Winter150,000150,000150300

10050 SALESPRODUCTIONWORKERSWORKERSWORKERSQUARTERFORECASTPLANNEEDEDHIREDFIREDCost of Chase Demand Strategy(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000 Level Production with ExcelCopyright 2011 John Wiley & Sons, Inc.14-16

Inventory atend of summerInput by user=400,000/4Cost of level production= inventory costs + production costsChase Demand with ExcelCopyright 2011 John Wiley & Sons, Inc.14-17

Workforce requirementscalculated by systemNo. of workershired in fallProduction input by user;production =demandCost of chasedemand = hiring +firing + productionMixed StrategyCombination of Level Production and Chase Demand strategiesExample policiesno more than x% of workforce can be laid off in one quarterinventory levels cannot exceed x dollarsSome industries may shut down manufacturing during the low demand season and schedule employee vacations during that timeCopyright 2011 John Wiley & Sons, Inc.14-18General Linear Programming (LP) ModelLP gives an optimal solution, but demand and costs must be linearLetWt = workforce size for period tPt =units produced in period tIt =units in inventory at the end of period tFt =number of workers fired for period tHt = number of workers hired for period t

Copyright 2011 John Wiley & Sons, Inc.14-19LP MODELCopyright 2011 John Wiley & Sons, Inc.14-20Minimize Z =$100 (H1 + H2 + H3 + H4)+ $500 (F1 + F2 + F3 + F4)+ $0.50 (I1 + I2 + I3 + I4)+ $2 (P1 + P2 + P3 + P4)Subject toP1 - I1= 80,000(1)DemandI1 + P2 - I2= 50,000(2)constraintsI2 + P3 - I3= 120,000(3)I3 + P4 - I4= 150,000(4)Production1000 W1= P1(5)constraints1000 W2= P2(6)1000 W3= P3(7)1000 W4= P4(8)100 + H1 - F1= W1(9) Work forceW1 + H2 - F2= W2(10) constraintsW2 + H3 - F3= W3(11)W3 + H4 - F4= W4(12)Setting up the SpreadsheetCopyright 2011 John Wiley & Sons, Inc.14-21

Target cell;cost of solutiongoes hereSolver will put thesolution hereWhen model is complete, SolveClick here nextDemand ConstraintWorkforce ConstraintProduction ConstraintCells where solution appearsSetting up the SpreadsheetCopyright 2011 John Wiley & Sons, Inc.14-22

Click these boxesThe LP SolutionCopyright 2011 John Wiley & Sons, Inc.14-23

Optimal production planCost of optimal solutionSolution is a mixof inventory, hiringand firingExtra report optionsLevel Production for QuantumCopyright 2011 John Wiley & Sons, Inc.14-24

Level = 12,000/12 = 1,000Input by userExcel calculates theseCost of level productionChase Demand for QuantumCopyright 2011 John Wiley & Sons, Inc.14-25

Input by userExcel calculates theseCost of chase demandNo. workershired in Feb.LP Solution for QuantumCopyright 2011 John Wiley & Sons, Inc.14-26

Solver foundthis solutionConstraintequationsin thesecellsOptimal solutionTransportation MethodCopyright 2011 John Wiley & Sons, Inc.14-2719001000100500215001200150500316001300200500430001300200500Regular production cost $20/unitOvertime production cost $25/unitSubcontracting cost $28/unitInventory holding cost$3/unit-periodBeginning inventory300 unitsEXPECTEDREGULAROVERTIMESUBCONTRACTQUARTERDEMANDCAPACITYCAPACITYCAPACITY27Transportation TableauCopyright 2011 John Wiley & Sons, Inc.14-28

28Transportation TableauCopyright 2011 John Wiley & Sons, Inc.14-29

29Burruss Production PlanCopyright 2011 John Wiley & Sons, Inc.14-3019001000100050021500120015025060031600130020050010004300013002005000Total7000480065012502100REGULARSUB-ENDINGPERIODDEMANDPRODUCTIONOVERTIMECONTRACTINVENTORY30Copyright 2011 John Wiley & Sons, Inc.

Period 2s endinginventoryRegular productionfor period 1Cost of solutionExcel and Transportation Method14-31Other Quantitative TechniquesLinear decision rule (LDR)Search decision rule (SDR)Management coefficients modelCopyright 2011 John Wiley & Sons, Inc.14-32Hierarchical Nature of PlanningCopyright 2011 John Wiley & Sons, Inc.14-33ItemsProduct lines or familiesIndividual productsComponentsManufacturing operationsResource LevelPlantsIndividual machinesCritical work centersProduction PlanningCapacity PlanningResource requirements plan Rough-cut capacity planCapacity requirements planInput/ output controlSales and Operations PlanMaster production scheduleMaterial requirements planShop floor scheduleAll work centersDisaggregationCopyright 2011 John Wiley & Sons, Inc.14-34Breaking an aggregate plan into more detailed plansCreate Master Production Schedule for Material Requirements Planning Collaborative PlanningSharing information and synchronizing production across supply chainPart of CPFR (collaborative planning, forecasting, and replenishment)involves selecting products to be jointly managed, creating a single forecast of customer demand, and synchronizing production across supply chainCopyright 2011 John Wiley & Sons, Inc.14-35Available-to-Promise (ATP)Quantity of items that can be promised to customerDifference between planned production and customer orders already receivedCopyright 2011 John Wiley & Sons, Inc.14-36AT in period 1 = (On-hand quantity + MPS in period 1) (CO until the next period of planned production)ATP in period n = (MPS in period n) (CO until the next period of planned production) Capable-to-promisequantity of items that can be produced and mad available at a later dateATPCopyright 2011 John Wiley & Sons, Inc.14-37

ATP

Copyright 2011 John Wiley & Sons, Inc.14-38ATP

Copyright 2011 John Wiley & Sons, Inc.14-39ATP in April = (10+100) 70 = 40 ATP in May = 100 110 = -10ATP in June = 100 50 = 50= 30= 0Take excess units from AprilCopyright 2011 John Wiley & Sons, Inc.14-40Rule Based ATPProduct RequestIs the product available at this location?Is an alternative product available at an alternate location?Is an alternative product available at this location?Is this product available at a different location?Available-to-promiseAllocate inventoryCapable-to-promise dateIs the customer willing to wait for the product?Available-to-promiseAllocate inventoryRevise master scheduleTrigger productionLose saleYesNoYesNoYesNoYesNoYesNoAggregate Planning for ServicesMost services cannot be inventoriedDemand for services is difficult to predictCapacity is also difficult to predictService capacity must be provided at the appropriate place and timeLabor is usually the most constraining resource for servicesCopyright 2011 John Wiley & Sons, Inc.14-41Copyright 2011 John Wiley & Sons, Inc.14-42Yield Management

Copyright 2011 John Wiley & Sons, Inc.14-43Yield Management

Yield ManagementCopyright 2011 John Wiley & Sons, Inc.14-44NO-SHOWSPROBABILITYP(N < X)

0.15.001.25.152.30.403.30.70Optimal probability of no-shows

P(n < x) = = .517CuCu + Co7575 + 70.517Hotel should be overbooked by two roomsCopyright 2011 John Wiley & Sons, Inc.14-45Copyright 2011 John Wiley & Sons, Inc.All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permission 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 herein.