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11/20/2010 PGP1-OM 1-S Venkat 1

Dr. S.Venkataramanaiah (S Venkat)OM & QT Area

IIM IndorePrabhandh Shikhar

Rau-Pithampur RoadIndore- 453 331

Email: svenkat@iimidr.ac.in

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Aggregate Planning

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To understand

• Importance of Business Plan

• Planning Activities and their relation

• Planning for Sales and Operations

• The Aggregate Operations Plan

• Approaches for AP- Chase and Level Strategies

OBJECTIVES

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Business Plan- Importance § BP strategic in nature and addresses the following:§ Should we meet the projected demand entirely or a

portion of the projected demand?§ What are the implications of this decision on the overall

competitive scenario and the firm’s standing in the market?

§ How is this likely to affect the operating system and planning in other functional areas of the business such as marketing and finance?

§ What resources should we commit to meet the chosen demand during the planning horizon?

§ APP seeks to translate business plans to operational decisions

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Why APP?• Demand fluctuations• Capacity fluctuations • Difficulty level in altering production or output rates

– Production systems are complex and varying the rate of production requires prior planning and co-ordination with supplier and distributor

• Benefits of multi-period planning

Aggregate Planning is done in an organisation to match the demand with the supply on a period-by-period basis in a cost effective manner

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The Aggregate Plan• Main purpose is to specify optimal

combination of– Production rate (units completed per unit of

time)– Workforce level (number of workers)– Inventory on hand (inventory carried from

period to period)• Product group or broad category

(Aggregation)• This planning is done over an intermediate-

range planning period of 6 to 18 months

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Aggregate Demand- Components

Time

AGGREGATE DEMANDFor PSEUDO PRODUCT

ITEM 3 DEMANDITEM 2 DEMAND

ITEM 1 DEMAND

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Production Planning System- Inputs

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

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ForecastingAggregateProduction

Planning

MasterProductionScheduling

Materials PlanCapacity Plan

Actual Production

Market

Labour & Resources Vendors

Material Inflow

Order Inflow

Resource availability

MPS Linkages with APP & Forecasting

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Business Plan

Marketing Plan Financial Plan

Production Plan(rough cut capacity)

Master Production Schedule

Materials Requirement

Plan

Capacity Requirement

Plan

Detailed Scheduling

Shop Floor Control

Level 1

Level 2

Level 3

Hierarchical Approach to Planning

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APP Decision Variables: An illustration

• The decisions involve – Amount of resources (productive capacity and

labour hours) to be committed – Rate at which goods and services needs to be

produced during a period – Inventory to be carried forward from one

period to the next

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APP Decision Variables: An illustration

• An example from Garment Manufacturing– Produce at the rate of 9000 metres of cloth everyday

during the months of January to March – Increase it to 11,000 metres during April to August – Change the production rate to 10,000 metres during

September to December – Carry 10% of monthly production as inventory during

the first 9 months of production. – Work on a one-shift basis throughout the year with 20%

over time during July to October

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Aggregate Units for Capacity-Examples

Sl. No Product Aggregate Unit of capacity1 Acetic Acid Metric tonnes2 Data Entry Systems Numbers3 Mini computer Value (ex-factory) in Rs.4 Printed Circuit Board Square Metres5 Alloy Iron Castings Metric tonnes6 Cement Metric tonnes

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Aggregate Planning Framework

Targeted Demandto be fulfilled

Arriving at effectivePeriod-by-period

Demand to be met

Arriving at Period-by-PeriodSupply Schedules

-Actual period-by-period

Supply Schedules

ForecastingAlternatives for

Modifying demand

Alternatives forModifying supply

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Alternatives for managing demand

• Reservation of Capacity• Influencing Demand

– Special Tariffs– Differential Discount Structures– Limited period special offers

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Alternatives for Managing Supply

• Inventory Based Alternatives– Stock out, Backordering/Backlogging– Carrying Inventory

• Capacity Adjustment Alternatives– Hiring/Lay-off of workers– Varying shifts– Varying Working Hours (OT,UT)

• Capacity Augmentation Alternatives– Sub-contracting/Outsourcing– De-bottlenecking– Addition of new capacity

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APP-Example

Any Observations?

0

200

400

600

800

1000

1200

1400

1 2 3 4 5 6 7 8 9 10 11 12

Total-lbr hrs Total-m/c hrs

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APP-Example

Any Observations?

0

2000

4000

6000

8000

10000

12000

1 2 3 4 5 6 7 8 9 10 11 12

Cumulative labr hrs Cumulative m/c hrs

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APP-Example

Any Observations?

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1 2 3 4 5 6 7 8 9 10 11 12

Total-lbr hrs Total-m/c hrs Total-Fin Rs

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APP-Example

Any Observations?

0

5000

10000

15000

20000

25000

30000

35000

1 2 3 4 5 6 7 8 9 10 11 12

Cumulative labr hrsCumulative m/c hrsCumulative fin res Rs

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Balancing Aggregate Demandand Aggregate Production Capacity

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

45005500

7000

10000

8000

6000

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

4500 4000

90008000

4000

6000

Suppose the figure to the right represents forecast demand in units

Now suppose this lower figure represents the aggregate capacity of the company to meet demand

up

What we want to do is balance the production rate, workforce levels, and inventory to make these figures match up

Avg demand= 41000/6

Avg Capacity= 35500/6; what is the gap?

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APP-Demand and Capacity

Any Observations?

0

2000

4000

6000

8000

10000

12000

1 2 3 4 5 6

Demand Cap

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

1 2 3 4 5 6

Cum Dmd

Cum Cap

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APP Examples: Unit Demand and Cost Data

Materials Rs5/unitHolding costs Rs1/unit per mo.Marginal cost of stockout Rs1.25/unit per mo.Hiring and training cost Rs200/workerLayoff costs Rs250/workerLabor hours required 0.15 hrs/unitStraight time labor cost Rs8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8

Suppose we have the following unit demand and cost information:

Month Jan Feb Mar Apr May Jun Total

Demand 4500 5500 7000 10000 8000 6000 41000

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Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67Rs/worker 1,408 1,216 1,344 1,344 1,408 1,280

Productive hours/worker/day 7.25Paid straight hrs/day 8

Given the demand and cost information below, whatare the aggregate hours/worker/month, units/worker, and Rs/worker?

7.25x22

7.25/0.15=48.33 & 48.33x22=1063.3322x8hrsxRs8=Rs1408

Cut-and-Try Example: Determining Straight Labor Costs and Output

Month Jan Feb Mar Apr May Jun Total

Demand 4500 5500 7000 10000 8000 6000 41000

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Chase Strategy(Hiring & Firing to meet demand)

JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33Rs/worker 1,408

JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0

Lets assume our current workforce is 7 workers.

First, calculate net requirements for production, or 4500-250=4250 units

Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers

Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired.

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Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1,063 918 1,015 1,015 1,063 967Rs/worker 1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

Below are the complete calculations for the remaining months in the six month planning horizon

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Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

Jan Feb Mar Apr May Jun CostsMaterial 21,250.00 27,500.00 35,000.00 50,000.00 40,000.00 30,000.00 203,750.00Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62Hiring cost 400.00 200.00 600.00 1,200.00Firing cost 750.00 500.00 250.00 1,500.00

260,408.62

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included

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Level Workforce Strategy (Surplus and Shortage Allowed)

JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6Production 6,380Ending inventory 2,130Surplus 2,130Shortage

Lets take the same problem as before but this time use the Level Workforce strategy

This time we will seek to use a workforce level of 6 workers

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Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300Net req. 4,250 3,370 4,860 8,770 10,680 7,300Workers 6 6 6 6 6 6Production 6,380 5,510 6,090 6,090 6,380 5,800Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500Surplus 2,130 2,140 1,230Shortage 2,680 1,300 1,500

Note, if we recalculate this sheet with 7 workers we would have a surplus

Below are the complete calculations for the remaining months in the six month planning horizon

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Jan Feb Mar Apr May Jun4,500 5,500 7,000 10,000 8,000 6,000

250 2,130 10 -910 -3,910 -1,6204,250 3,370 4,860 8,770 10,680 7,300

6 6 6 6 6 66,380 5,510 6,090 6,090 6,380 5,8002,130 2,140 1,230 -2,680 -1,300 -1,5002,130 2,140 1,230

2,680 1,300 1,500

Jan Feb Mar Apr May Jun8,448.00 7,296.00 8,064.00 8,064.00 8,448.00 7,680.00 48,000.00

31,900.00 27,550.00 30,450.00 30,450.00 31,900.00 29,000.00 181,250.002,130.00 2,140.00 1,230.00 5,500.00

3,350.00 1,625.00 1,875.00 6,850.00

241,600.00

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included

Note:Total costs under this strategy are less than Chase at Rs260.408.62

LaborMaterialStorageStockout

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Some Observations

• Which strategy is better and why?

• What is the impact of cost structure and level of workforce on total cost?

LaborMaterialStorageStockout

48,000.00181,250.005,500.006,850.00

241,600.00

LaborMaterialHiringFiring

53,958.62203,750.00 1,200.001,500.00

260,408.62Chase Strg

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APP- Alternatives

Description of the alternative Costs

Reservation of capacity Planning and Scheduling costs

Influencing Demand Marketing oriented costs

Inventory based alternatives(a) Build Inventory Inventory holding costs(b) Backlog/Backorder/Shortage Shortage/Loss of goodwill costsCapacity adjustment alternatives(a) Over Time/Under Time OT premium, Lost productivity(b) Vary no. of shifts Shift change costs(c) Hire/Lay-off workers Training/Hiring costs, Morale issuesCapacity augmentation alternatives(a) Sub-contract/Outsource Transaction costs for sub-contract(b) De-bottleneck Annualised de-bottlenecking cost(c) Add new capacity Annualised cost of new capacity

Alternatives for managing demand

Alternatives for managing supply

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APP-Generic strategies

APP Strategy APP alternatives applicable Key featuresInventory based alternatives

(a) Build Inventory

(b) Backlog/Backorder/ShortageCapacity adjustment alternatives(a) Over Time/Under Time(b) Vary no. of shifts(c) Hire/Lay-off workersCapacity augmentation alternatives(a) Sub-contract/Outsource(b) De-bottleneck

No inventory carried from one period to another; Made-to-order and project environments; Several service systems

Inventory as the critical link between the periods; Made-to-stock environments; Products with low risks of obsolescence

Chase Strategy

Level Strategy

§ In level strategy, the emphasis is not to disturb the existing production rate at all § In chase strategy, no effort is made to carry inventory from one period

to another; the supply – demand mismatch is addressed during each period by employing a variety of capacity related alternatives

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Key Strategies for Meeting Demand

• Chase- hiring and layoff – need easily trained pool of workers-match bet production and order

• Stable workforce-variable work hours-vary output by flexible work schedules or OT

• Level – maintain constant workforce with constant output, variations are addressed using inventories

• Pure and mixed strategies

• Subcontracting

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Relevant cost components• From Agg production plan- production cost,

inventory cost, backorder cost, cost due to variations in production

• Basic production cost-Fixed and variable cost includes direct and indirect material and labour cost, OT cost etc

• Costs associated with changes in production rate- training, hiring and firing, subcontracting etc

• Inventory holding cost- cost of capital tied up, storing, insurance, taxes, spoilage and obsolescence

• Backordering cost-hard to measure- cost of follow up, loss of goodwill, loss of sales revenue etc

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APP-DensePack Inc Problem Densepack is to plan workforce and production levels for the six-month period January to June. The firm produces a line of disk drivesfor mainframe computers that are plug compatible with severalcomputers produced by major manufacturers. Forecast demands overthe next six months for a particular line of drives produced in theXYZ plant are 1280, 640, 900, 1200, 2000 and 1400. Numbers ofworking days are respectively 20, 24, 18, 26, 22, and 15. There arecurrently (end of December) 300 workers employed in theDensepack plant. Ending inventory in December is expected to be500 units, and the firm would like to have 600 units on hand at theend of June.

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APP-DensePack Inc Problem

Cost of hiring one worker = Rs. 500/-, cost of firing one worker =Rs. 1000/- and cost of holding one unit of inventory for one month= Rs. 80/-. The other costs of production in regular time, over timeand subcontract may be ignored.

In the past, the plant manager observed that over 22 workingdays, with the workforce level constant at 76 workers, the firmproduced 245 disk drives.

Solve the APP problem by Linear Programming.

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LINGO model Solution

Global optimal solution found at step: 13

Objective value: 379286.4

Workforce level

WT(0) 300.00

WT(T1) 273.0189

WT(T2) 273.0189

WT(T3) 273.0189

WT(T4) 273.0189

WT(T5) 737.8889

WT(T6) 737.8889

Production levelPT(T1) 800.00PT(T2) 960.00 PT(T3) 720.00PT(T4) 1040.00 PT(T5) 2378.378 PT(T6) 1621.622 Inventory levelIT(T1) 20.00 IT(T2) 340.00IT(T3) 160.00 IT(T4) 0.00 18.39849IT(T5) 378.37 IT(T6) 600.00

HT( T5) 464.8700 FT( T1) 26.98109

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Excel Model Solution

Any Observations?

Hiring cost layoff cost Inv cost total cost % Change Int Invent Final InvtBase case 232435.015 26981.0934 119870.2703 379286.38 ---- 500 600Case 1 227089.5131 34737.3129 119658.9685 381485.79 0.58 600 500Case 2 223211.4033 26981.0934 107113.5135 357306.01 -5.80 500 500Case 3 236313.1245 34737.3124 132415.7249 403466.16 6.38 600 600Case 4 68415.12458 37702.6095 275093.3331 381211.07 0.51 0 0Case 5 229762.2639 30859.2029 119764.6192 380386.09 0.29 550 550

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A SIMPLE EXAMPLE OF AGGREGATIONCAPACITY

MACHINE HRS. AVAILABLE/WK.

INDEX STD. M/C. HRS. AVAILABLE/WK.

1 36 0.5 18

2 54 1 (STANDARD) 54

3 80 0.8 64

4 33.5 0.6 20

156

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NEXT WEEK’S FORECASTED DEMAND

JOB A B C D E TOTAL

1. UNITS DEMANDED 300 210 240 1800 400

2. PRODN. RATE/SMH 6 7 6 30 25

3. DEMAND IN SMH = (1) / (2)

50 30 40 60 16 196

CAPACITY SHORTFALL 196 – 156 = 40 S.M.H.

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APP-Conclusions• Aggregate Planning (AP) serves to translate the business

plans into operational decisions• The decisions include

– amount of resources (productive capacity and labour hours) to commit, – rate at which to produce – inventory to be carried forward from one period to the next

• AP is done to match the demand and the available capacity on a period-by-period using a set of alternatives available to modify demand and/or the supply

• Alternatives for modifying demand include reservation of capacity and methods of influencing (changing) the demand during a period

• Alternatives for modifying the supply include inventory variations, capacity adjustment and capacity augmentation

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• AP exercise employs the two generic strategies; chase and level production.

• Chase strategy is often found to be expensive and hard to implement in organisations

• In reality a mixed strategy using a combination of alternatives is employed in an AP exercise. It uses a variety of alternatives for modifying supply.

• The structure of a transportation model lends itself to studying the AP problem

• Linear programming can also be used to model the AP problem

• MPS involves dis-aggregation of product information and ensuring the required capacity and material are available as per the plan

APP-Conclusions