Aggregate Operations Planning

Aggregate Operations Planning

Aggregate (Production or Operations) Planning is Concerned With Determining The Quantity And Timing Of Production For The Intermediate Future, Often From Three To 18 Months Ahead. The Goal is To Minimize Costs Over The Planning Period.

Aggregate Operations Planning

Other Objectives May Be To Minimize Fluctuations In The Work Force Or Inventory Levels in accordance with company policies. Based on the planning horizon, We can divide plans into 3 general categories:

Process planning
Long range

Supply network planning Forecasting and demand management

Strategic capacity planning Sales and operations (aggregate) planning Sales plan Aggregate operations plan

Medium range

Manufacturing Master scheduling

Material requirements planning

Logistics

Services

Vehicle capacity planning Vehicle loading Vehicle dispatching Warehouse receipt planning Weekly workforce scheduling Daily workforce scheduling

Order scheduling
Short range

Aggregate Operations Planning

Capacity Decisions Hierarchy

Linkages
Facilities Planning
Aggregate Planning

Scheduling

Time Frame
Scheduling Time

Facilities Planning Aggregate Planning

Aggregate Operations Planning

The Heart Of The Medium Range Planning Is The Aggregate Production (or Operations) Plan. In Aggregate Planning, Given The Demand Forecast, Production Capacity, Inventory Levels, Size Of Work Force, And Other Inputs, The Planner Has To Select The Rate Of Output For The Next 3 To 18 Months.

Aggregation
Aggregation refers to the idea of focusing on overall capacity, rather than individual products or services.
Aggregation is done according to: Products Labour Time

An Example of Aggregation
Model No. A5532 K4242 L9898 L3800 M2624 M3880 Labour-hours Selling Required Price 4.2 $ 285 4.9 345 5.1 395 5.2 425 5.4 525 5.8 725

If Product Mix is stable with percentages as 32%, 21%, 17%, 14%, 10% and 6% respectively, Then define a standard model with labour-hours = (0.32x4.2) + (0.21x4.9) + (0.17x5.1) + (0.14x5.2) + (0.10x5.4) + (0.06x5.8) = 4.856 labour-hours per unit

An Example of Aggregation
Here, Operations Manager Makes Decisions About Intermediate Range Capacity Without Getting Into Details Of Specific Products, Parts, Or People. Later, He/She Deals With Financial Data, Personnel, Capacity, And Availability Of Raw Material As Well.

An Example of Aggregation
As an intermediate type planning, The aggregate plan interacts with both long range strategies, AND short-term planning activities.

Required Inputs to the Production Planning System

Competitors behavior External capacity Raw material availability Market demand Economic conditions

External to firm

Planning for production

Current physical capacity

Current workforce

Inventory levels

Activities required for production

Internal to firm

Relationships Of Aggregate Plan

Aggregate production planning involves managing...

Work force levels - the number of workers required for production. Production rates - the number of units produced per time period. Inventory levels - the balance of unused units carried forward from the previous period.

Common Objectives of Aggregate Planning

MINIMIZE: cost, inventory levels, changes in work force levels, use of overtime, use of subcontracting, changes in production rates, changes in production rates, plant/personnel idle time MAXIMIZE: profits, customer service

Methods of Influencing Demand

Price Incentives Reservations Backlogs Complementary Products or Services Advertising/promotion

Methods of Influencing Supply

Hiring/firing workers Overtime/slack time Part time/temporary labour Subcontracting Cooperative arrangements Inventories

Aggregate Production Planning Strategies

Chase strategy
production rates or work force levels are adjusted to match demand requirements over planning horizon

Level strategy
constant production rate or work force level is maintained over planning horizon

Mixed strategy
both inventory level changes and work force level changes occur

Strategies In Aggregate Planning

There are several ways for improving the effectiveness in the aggregate planning process:

Strategies In Aggregate Planning

1. Changing Inventory Levels This is to Increase Inventory During Periods Of Low Demand To Meet High Demand in Future Periods. However, By doing this, Costs Of Storage and Handling Increases.

Strategies In Aggregate Planning

2. Varying Work Force Size By Hiring Or Layoffs This is to Hire Or Lay Off Workers To Meet Production Rates. In this option, Often New Employees Need To Be Trained.

Strategies In Aggregate Planning

3. Varying Production Rates Through Overtime Or Idle Time. There is always a Limit For Overtime. Costs also Increase.

Strategies In Aggregate Planning

4. Subcontracting Costly, Opens Doors To Competitors, Hard To Find Perfect Subcontractor.

Strategies In Aggregate Planning

5. Using Part Time Workers e.g., Fast Food Restaurants

Strategies In Aggregate Planning

6. Influencing Demand Through Advertising, Promotion, And Price Cuts. For example, Weekend Discounts At Hotels and Airlines.

Strategies In Aggregate Planning

7. Back Ordering at High Demand Periods. Back ordering means That A Firm Promises To Deliver a Product In A Later Date. Many Auto Dealers Purposely Back Order.

Strategies In Aggregate Planning

8. Counterseasonal Product Mixing This is To Develop A Product Mix Of Counterseasonal Items. For example, Companies That Make Both Furnaces And Air Conditioners.

Aggregate Production Planning Variable Costs

Hiring/firing costs Overtime/slack time costs Part time/temporary labor costs Subcontracting costs Cooperative arrangements costs Inventory carrying costs Backorder or stock out costs

Strategies In Aggregate Planning

Although Each Of These Strategies Might Produce A Cost Effective Aggregate Plan, A Combination Of Them Often Works Best. But The Optimal Plan Is Not Always Possible.

Methods For Aggregate Planning

1. Graphical And Charting Methods 2. Mathematical Approaches A) Linear Programming B) Linear Decision Rules C) Management Coefficient Model D) Simulation E) Search Decision Rules

Graphical And Charting Methods

- This is a Trial And Error Approach. - It Does Not Guarantee Optimal Production Plan. - It is Easy To Apply And Understand. It includes following steps:

Graphical And Charting Methods

1- Determine Demand In Each Period 2- Determine Capacities Of Regular Time, Overtime, And Subcontractor Each Period 3- Find Labour Costs, Hiring/Layoff Costs, And Inventory Costs 4- Consider Company Policies That May Apply To The Workers Or To Stock Levels. 5- Develop Alternative Plans And Find Their Total Costs.

Level demand: plotted cumulatively

Cumulative amount
7000 6000 5000 4000 3000 Deplete Inv. Production Demand

2000
1000 Build Inv. 0 Jan Feb Mar April May June

Basic Relationships
Workforce
Number of workers at end of previous period Number of new workers at start of the period -

Number of workers in a period

Number of laid off workers at start of the period

Inventory
Inventory at the end of a period Inventory at end of the previous period Production in current period Amount used to satisfy demand in current period

Cost
Cost for a period = Output Cost (Reg+OT+Sub) + Hire/Lay Off Cost + Inventory Cost + Back-order Cost

Graphical And Charting Methods

Determining the Optimal Mixed Strategy

Try multiple attempts with different scenarios OR Use Linear Programming (LP) or in some cases the Transportation Method We can use LP to address many production planning & distribution problems.

Transportation Method
QUARTER EXPECTED DEMAND REGULAR CAPACITY OVERTIME CAPACITY SUBCONTRACT CAPACITY

1 2 3 4

900 1500 1600 3000

1000 1200 1300 1300

100 150 200 200

$20 $25 $28 $3 300 units

500 500 500 500

Regular production cost per unit Overtime production cost per unit Subcontracting cost per unit Inventory holding cost per unit per period Beginning inventory

Transportation Tableau
PERIOD OF USE Unused Capacity 9 300 PERIOD OF PRODUCTION Beginning Inventory 1 Regular Overtime Subcontract 2 Regular Overtime Subcontract 3 Regular Overtime Subcontract 4 Regular Overtime Subcontract Demand 900 1500 1600 300 600 1 0 2 3 3 6 4 Capacity

20
25 28

300

23
28 31

100

26
31 34

100

29
34 37

1000 100 500 1200 150 250 500 1300 200 500 1300 200 500 250

1200

20 25 28

23 28 31

150 250 500 1300 200 500 3000

26 31 34 23 28 31 20 25 28

1300 200

20 25 28

Aggregate Planning for Services

Most services cant be inventoried Demand for services is difficult to predict Capacity is also difficult to predict Service capacity must be provided at the appropriate place and time 5. Labour is usually the most constraining resource for services 6. For service companies, aggregate planning results in staffing plans that call for changing the number of employees or subcontracting. 1. 2. 3. 4.

DisAggregation
The Output of Aggregate Planning is a Production Schedule for family groupings of products. For example, It tells us how many cars to make, But it does not indicate how many of them Should be two-doors, and how many will be four doors.

DisAggregation
A manufacturer firm needs more information to operate. We must know what quantities will be produced for each type of product AND what time. The process of Breaking the Aggregate Plan down into Greater Detail is called DisAggregation.

DisAggregation
Later, Disaggregation results in Master Production Schedule (MPS). This schedule specifies: 1) The sizing and timing of specific item production quantities, 2) The sizing and timing of manufactured or purchased components, 3) The sequence of individual orders or jobs, and 4) The short-term allocation of resources to individual operations.

Master Production Schedule

MPS specifies what is to be made AND when. Many organizations First establish a Master Production Schedule, AND Then Fix the Near-term Portion of the plan. (This portion is called Frozen)

Master Production Schedule

After freezing the plan, Only changes beyond the Fixed Schedule are permitted. MPS is a STATEMENT OF PRODUCTION, It is Not a Forecast.

Master Production Schedule

Depending on the type of operation, Master Schedule can be expressed in terms of: Either
1) An end item in a make-to-stock company, or 2) A customer order in a make-to-order (jobshop) company, or 3) Modules in an assemble-to-order company.

Master Production Schedule

For example, A Master Production Schedule for two Products (A and S) might be as follows: