Aggregate Planning

Aggregate Planning

Operations Management Chapter 13 Aggregate Planning PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e 2008 Prentice Hall, Inc. 13 1 Aggregate Planning Determine the quantity and timing of production for the immediate future Objective is to minimize cost over the planning period by adjusting 2008 Prentice Hall, Inc. Production rates Labor levels Inventory levels Overtime work Subcontracting rates 13 2 Aggregate Planning Required for aggregate planning A logical overall unit for measuring sales and output A forecast of demand for an intermediate planning period in these aggregate terms A method for determining costs A model that combines forecasts and

costs so that scheduling decisions can be made for the planning period 2008 Prentice Hall, Inc. 13 3 Aggregate Planning Jan 150,000 Quarter 1 Feb 120,000 Mar 110,000 Apr 100,000 Quarter 2 May 130,000 Jun 150,000 Jul 180,000 Quarter 3 Aug 150,000 Sep 140,000 2008 Prentice Hall, Inc. 13 4

Aggregate Planning Part of a larger production planning system Disaggregation breaks the plan down into greater detail Disaggregation results in a master production schedule 2008 Prentice Hall, Inc. 13 5 Demand Options Influencing demand Use advertising or promotion to increase demand in low periods Attempt to shift demand to slow periods May not be sufficient to balance demand and capacity 2008 Prentice Hall, Inc. 13 6 Demand Options Back ordering during highdemand periods Requires customers to wait for an order without loss of goodwill or the order Most effective when there are few if any substitutes for the product or service Often results in lost sales 2008 Prentice Hall, Inc.

13 7 Demand Options Counterseasonal product and service mixing Develop a product mix of counterseasonal items May lead to products or services outside the companys areas of expertise 2008 Prentice Hall, Inc. 13 8 Capacity Options Changing inventory levels Increase inventory in low demand periods to meet high demand in the future Increases costs associated with storage, insurance, handling, obsolescence, and capital investment 15% to 40% Shortages can mean lost sales due to long lead times and poor customer service 2008 Prentice Hall, Inc. 13 9 Capacity Options Varying workforce size by hiring or layoffs Match production rate to demand Training and separation costs for hiring and laying off workers New workers may have lower productivity Laying off workers may lower

morale and productivity 2008 Prentice Hall, Inc. 13 10 Capacity Options Varying production rate through overtime or idle time Allows constant workforce May be difficult to meet large increases in demand Overtime can be costly and may drive down productivity Absorbing idle time may be difficult 2008 Prentice Hall, Inc. 13 11 Capacity Options Subcontracting Temporary measure during periods of peak demand May be costly Assuring quality and timely delivery may be difficult Exposes your customers to a possible competitor 2008 Prentice Hall, Inc. 13 12 Capacity Options Using part-time workers Useful for filling unskilled or low skilled positions, especially in services 2008 Prentice Hall, Inc.

13 13 Develop a Plan: Strategies Chase strategy Match output rates to demand forecast for each period Vary workforce levels or vary production rate Favored by many service organizations 2008 Prentice Hall, Inc. 13 14 Develop a Plan: Strategies Level strategy Daily production is uniform Use inventory or idle time as buffer Stable production leads to better quality and productivity 2008 Prentice Hall, Inc. 13 15 Develop a Plan: Strategies Mixed strategy Keep daily production uniform Dont build inventory Use overtime and subcontracting to meet demand fluctuations 2008 Prentice Hall, Inc. 13 16 Aggregate Planning Options Option

Advantages Disadvantages Chase strategy Avoids inventory costs Hiring, layoff, and training costs may be significant. Level strategy Changes in Inventory human holding cost resources are may increase. gradual or Shortages may none; no abrupt result in lost production sales. changes. Some Comments Used where size of labor pool is large. Applies mainly to production, not service,

operations. Table 13.1 2008 Prentice Hall, Inc. 13 17 Aggregate Planning Options Mixed strategy options Option Advantages Disadvantages Some Comments Varying production rates through overtime or idle time Matches seasonal fluctuations without hiring/ training costs. Overtime premiums; tired workers; may not meet demand. Allows flexibility within the aggregate plan.

Subcontracting Permits flexibility and smoothing of the firms output. Loss of quality control; reduced profits; loss of future business. Applies mainly in production settings. Table 13.1 2008 Prentice Hall, Inc. 13 18 Cost of a plan Cost summary Labor cost Hiring/firing Regular wages OT wages Only for mixed strategy SC cost Only for mixed strategy Hiring cost

Based on worker hired/fired or change in production rate Firing cost Inventory Carrying cost Total cost 2008 Prentice Hall, Inc. 13 19 Example Given data Cost data Other data Wage/hour $15.00 OT pay rate/hour $18.75 Labor-hours/unit Hours/day Subcontracting rate/unit $35.00 OT Limit Carrying cost $10.00

Demand forecast Month Demand Jan 900 Feb 700 Mar 800 Apr 1200 May 1500 June 1100 Hiring cost/unit $200.00 Firing cost/unit $400.00 Initial condition Workers on roll Current inventory Safety stock 2008 Prentice Hall, Inc. 8 25 20 1.6 8 25% Days 22

18 21 21 22 20 13 20 Example Given data Cost data Other data Wage/hour $15.00 OT pay rate $18.75 Labor-hours/unit Hours/day Subcontracting rate/unit $35.00 OT Limit Demand forecast Compute from input data:Month Demand Hiring cost/unit $200.00 Jan 900 Firing cost/unit $400.00 Feb

700 Production rate/worker/day: Mar 800 Initial condition Apr Hours per day 8 1200 Workers on roll 8 May 5 1500 Labor - hours unit 1.6 1100 Current production rate 40 per June Current inventory 25 Safety stockrate per day per20worker: Wage Carrying cost 1.6 8 25% $10.00 Days 22 18 21 21 22 20

= 8 hours x $15/hour = $120 2008 Prentice Hall, Inc. 13 21 Example : Chase Plan Month Jan Feb Mar Apr May June Demand Production 900 700 800 1200 1500 1100 895 700 800 1200 1500 1100 Production for Jan = Demand (Initial inventory Safety stock) i.e. for Jan: 900 (25 20) = 895 Production for all other months = Demand 2008 Prentice Hall, Inc. 13 22

Example : Chase Plan Month Jan Feb Mar Apr May June Demand Production 900 700 800 1200 1500 1100 895 700 800 1200 1500 1100 Days 22 18 21 21 22 20 Production rate Workers 40 41 9

39 8 38 8 57 12 68 14 55 11 Wages $23,760 $17,280 $20,160 $30,240 $36,960 $26,400 $154,800 Workers = Production rate/Rate per worker e.g. for Jan: 41/5 = 8.2 rounded up to 9 Wages = Worker x Days x Wage per day e.g. for Jan: 9 workers x 22 days x $120/day = $23,760 2008 Prentice Hall, Inc. 13 23 Example : Chase Plan Month Jan Feb Mar Apr May June Demand Production

900 700 800 1200 1500 1100 895 700 800 1200 1500 1100 Days 22 18 21 21 22 20 Production rate 40 41 39 38 57 68 55 Hire Fire 1 0 0

19 11 0 31 0 2 1 0 0 13 16 Production rate = Production/Days e.g. for Jan: 895/22 = 40.7 or 41 Hiring cost = 31 x 200 = $6,200 Firing cost = 16 x 400 = $6,400 2008 Prentice Hall, Inc. 13 24 Cost of Chase plan Cost summary Labor cost Regular wages $154,800 OT wages SC cost Hiring/firing Inventory Hiring cost $6,200 Firing cost $6,400

Carrying cost $1,200 Total cost $168,600 Carrying cost = 20 units safety stock x 6 months x $10 = $1,200 2008 Prentice Hall, Inc. 13 25 Example : Level Plan Month Jan Feb Mar Apr May June Demand Days Production 900 700 800 1200 1500 1100 6200 22

18 21 21 22 20 124 1100 900 1050 1050 1100 1000 E.I. 25 225 425 675 525 125 25 2000 Inventory carrying cost = Total E.I. x Carrying cost i.e. = 2000 x $10 = $20,000 Net demand rate = (Total demand-(Initial inv. Safety stock))/Total days i.e. = (6200 (25 20))/124 = 49.96 or 50 = Production rate per day Production each month = Production rate x No. of days e.g. for Jan: 50 x 22 days = 1100 E.I = Ending inventory = Previous E.I. + Production - Demand e.g. for Jan: 25 + 1100 900 = 225 2008 Prentice Hall, Inc. 13 26 Cost of Level plan Cost summary

Labor cost Regular wages $148,800 OT wages SC cost Hiring/firing Hiring cost $2,000 Firing cost Inventory Carrying cost Total cost $20,000 $170,800 No. of workers = Production rate/Rate per worker = 50/5 = 10 Wages = 10 workers x 124 days x $120/day = $148,800 Hiring cost = (New production rate old rate) x $200 i.e. = (50 40) x 200 = $2,000 Firing cost = 0 2008 Prentice Hall, Inc. 13 27 Cost of the two plans Cost summary Labor cost Chase $154,800 Level $148,800

Hiring cost $6,200 $2,000 Firing cost $6,400 $0 Carrying cost $1,200 $20,000 $168,600 $170,800 Regular wages OT wages SC cost Hiring/firing Inventory Total cost 2008 Prentice Hall, Inc. 13 28 Example : Mixed Plan Plan description

Use 10 workers, i.e., production capacity = 5 x 10 = 50 units/day Produce what is demanded If capacity is insufficient use overtime first and then subcontracting as needed Do not accumulate inventory, i.e. E.I. = Safety stock for all months 2008 Prentice Hall, Inc. 13 29 Example : Mixed Plan Production rate capacity = 50 /day Month Req. Jan Feb Mar Apr May June 895 700 800 1200 1500 1100 Produ Shorta Days Capacity ction ge 22 18 21

21 22 20 1100 900 1050 1050 1100 1000 895 700 800 1050 1100 1000 0 0 0 150 400 100 Capacity = Rate x days, e.g. for Jan: 50 x 22 = 1100 Production = Min{Demand,Capacity}, e.g. for Jan: Min{895,1100} = 895 Shortage = Req. Production, e.g. for Apr. = 1200 1050 = 150 2008 Prentice Hall, Inc. 13 30 Example : Mixed Plan Production rate capacity = 50 /day Month Req.

Jan Feb Mar Apr May June 895 700 800 1200 1500 1100 Produ Shorta OT Days Capacity ction ge Capacity 22 18 21 21 22 20 1100 900 1050 1050 1100 1000 895 700 800 1050 1100 1000 0

0 0 150 400 100 275 225 262 262 275 250 OT 0 0 0 150 275 100 525 O.T. Capacity = Capacity x OT Limit %, e.g. for Apr. = 1050 x 25% = 262.5 round down O.T. production = Min{Shortage, OT Capacity) e.g. for Apr. = Min{150, 262} = 150 2008 Prentice Hall, Inc. 13 31 Example : Mixed Plan Production rate capacity = 50 /day Month Req. Jan Feb Mar Apr

May June 895 700 800 1200 1500 1100 Produ Shorta OT Days Capacity ction ge Capacity 22 18 21 21 22 20 1100 900 1050 1050 1100 1000 895 700 800 1050 1100 1000 0 0 0 150 400

100 275 225 262 262 275 250 OT SC 0 0 0 150 275 100 525 0 0 0 0 125 0 125 Subcontracting = Shortage O.T. production e.g. for May = 400 275 = 125 2008 Prentice Hall, Inc. 13 32 Cost of Mixed plan Cost summary Labor cost Regular wages

OT wages SC cost $148,800 $15,750 $4,375 Wages = 10 workers x 124 days x $120/day = $148,800 OT Wages = OT production 525 x 1.6 hours/unit x $18.75/hour = $15,750 SC cost = SC quantity 125 x $35 per unit = $4,375 2008 Prentice Hall, Inc. 13 33 Cost of Mixed plan Cost summary Labor cost Regular wages OT wages Hiring/firing $148,800 $15,750 SC cost $4,375 Hiring cost $2,000 Firing cost Hiring cost = (New production rate old rate) x $200 i.e. = (50 40) x 200 = $2,000 Firing cost = 0 2008 Prentice Hall, Inc.

13 34 Cost of Mixed plan Cost summary Labor cost Regular wages OT wages Hiring/firing $148,800 $15,750 SC cost $4,375 Hiring cost $2,000 Firing cost Inventory Carrying cost Total cost $1,200 $172,125 Carrying cost = 20 units safety stock x 6 months x $10 = $1,200 2008 Prentice Hall, Inc. 13 35 Cost of the three plans Cost summary Labor cost

Regular wages Chase $154,800 Level $148,800 OT wages $15,750 SC cost Hiring/firing Inventory $4,375 Hiring cost $6,200 $2,000 $2,000 Firing cost $6,400 $0 $0 Carrying cost $1,200 $20,000

$1,200 $168,600 $170,800 $172,125 Total cost 2008 Prentice Hall, Inc. Mixed $148,800 13 36 Transportation Method Skip Use Excel Solver 2008 Prentice Hall, Inc. 13 37 Solver Method Production rate table 74 75 76 77 78 79 80 81 E Month

Jan Feb Mar Apr May June F Begin 40 40 40 40 40 40 Sum = G Hire H Fire 0 0 I Rate 40 40 40 40 40 40 J Days 22 18

21 21 22 20 K L Production Workers 880 8 720 8 840 8 840 8 880 8 800 8 Cell F75 = Given Cell range: G75:H80 = Solver changing cells Column I = New production rate, Cell I75 = F75 + G75 H75 Column K = Production, Cell K75 = I75*J75 Column L = No. of workers, Cell L75 = I75/Rate per worker cell Cell F76 = I75 2008 Prentice Hall, Inc. 13 38 Solver Method Inventory table 84 85 86 87 88 89 90

91 E Month Jan Feb Mar Apr May June F BI 25 5 25 65 -295 -915 G RT 880 720 840 840 880 800 Sum = H OT I SC 0 0

J Demand 900 700 800 1200 1500 1100 K EI 5 25 65 -295 -915 -1215 -2330 L OT Limit 220 180 210 210 220 200 Cell F85 = Given Cell range: G85:G90 = K75:K80 Cell range: H85:I90 = Solver changing cells Column K = Ending inventory, Cell K85 = SUM(F85:I85) J85 Column L = O.T. Limit = RT * OT Limit %, Cell L85 = G85 x $B$16 Cell F86 = K85 2008 Prentice Hall, Inc. 13 39 Solver Method Cost summary

95 96 97 98 99 100 101 H Regular wages OT wages SC cost Hiring cost Firing cost Carrying cost Total cost I $119,040 $0 $0 $0 $0 -$23,300 $95,740 Cell I95 = SUMPRODUCT(L75:L80,J75:J80)*B35 (B35 = wage rate/day) Cell I96 = H91*B7*B14 (B7 = OT pay rate, B14 = Hours/unit) Cell I97 = I91*B8 (B8 = SC cost/unit) Cell I98 = G81*B10 (B10 = Hiring cost/unit) Cell I99 = H81*B11 (B11 = Firing cost/unit) Cell I100 = K91*B9 (B9 = Inventory carrying cost/unit/month) 2008 Prentice Hall, Inc. 13 40 Solver Method Solver Parameters Set Target cell = Total cost

Changing cells = Hire & Fire and OT & SC Constraints OT Production <= OT Limit ($H$85:$H$90 <= $L$85:$L$90) E.I. >= Safety stock ($K$85:$K$90 >= $B$31) OT and SC must be integer ($H$85:$I$90 = Int) 2008 Prentice Hall, Inc. 13 41 Solver Solution Inventory table Month Jan Feb Mar Apr May June Month Jan Feb Mar Apr May June 2008 Prentice Hall, Inc. Begin 40 40 40 40 54 55 BI 25 20 40 80

20 20 Hire 0 0 0 14 1 0 15 RT 880 720 840 1140 1210 1100 Fire 0 0 0 0 0 0 0 Produc Days tion Workers 22 880 8.00 18 720 8.00 21 840 8.00

21 1140 10.86 22 1210 11.00 20 1100 11.00 Rate 40 40 40 54 55 55 OT 15 0 0 0 290 0 305 SC 0 0 0 0 0 0 0 Demand 900 700 800 1200 1500 1100

EI 20 40 80 20 20 20 200 Cost summary Regular wages $141,360 OT wages $9,150 SC cost $0 Hiring cost $3,000 Firing cost $0 Carrying cost $2,000 Total cost $155,510 OT Limit 220 180 210 285 302.5 275 13 42 Cost of the all four plans Cost summary Labor cost Regular wages Chase

Level Mixed Solver $154,800 $148,800 $148,800 $141,360 OT wages SC cost $12,600 $9,150 $4,375 $0 Hiring/firing Hiring cost $6,200 $2,000 $2,000 $3,000 Firing cost $6,400 $0 $0 $0 Carrying cost $1,200

$20,000 $1,200 $2,000 Inventory Total cost 2008 Prentice Hall, Inc. $168,600 $170,800 $168,975 $155,510 13 43

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