aggregate plan ning in accounting

8/12/2019 Aggregate Plan ning in Accounting

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Aggregate Planning Chapter 12


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Learning Objectives

Review of forecasting

Forecast errors

Aggregate planning


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Phases of Decisions

Strategy or design: ForecastPlanning: ForecastOperation Actual demand

Since actual demands differs from forecasts so doesthe execution from the plans. E.g. Supply Chain concentration plans 40 students per year

whereas the actual is ??.


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Characteristics of forecasts

Forecasts are always wrong. Should include expected value andmeasure of error.Long-term forecasts are less accurate than short-term forecasts. Toolong term forecasts are useless: Forecast horizon

Forecasting to determine Raw material purchases for the next week Annual electricity generation capacity in TX for the next 30 years

Aggregate forecasts are more accurate than disaggregate forecasts Variance of aggregate is smaller because extremes cancel out

Two samples: {3,5} and {2,6}. Averages of samples: 4 and 4. Variance of sample averages=0 Variance of {3,5,2,6}=5/2

Several ways to aggregate Products into product groups Demand by location Demand by time


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Time Fences in MPS

Period

frozen (firm orfixed)

slushy somewhat

firm

liquid (open)

1 2 3 4 5 6 7 8 9

Time Fences divide a scheduling time horizon into threesections or phases, referred as frozen, slushy, and liquid.

Strict adherence to time fence policies and rules.


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Planning Horizon

Aggregate planning : Intermediate-range capacity planning,usually covering 2 to 12 months. In other words, it is matching thecapacity and the demand.

Shortrange

Intermediaterange

Long range

Now 2 months 1 Year



Short-range plans (Detailed plans) Machine loading Job assignmentsIntermediate plans (General levels)

Employment OutputLong-range plans Long term capacity Location / layout

Product/Process design

Overview of Planning Levels



Listen to Tom Thumbs manager

- Need more space in 2005 to expand the store- Allocate 25% of the floor space to fresh produce

- During the winter months employ 6 cashiers during rush hours- On Wed before Thanksgiving, employ 12 cashiers throughout the

day- In the next two weeks, no Italian parsley will be delivered.

Shelve Dill instead of parsley



Why aggregate planningDetails are hard to gather for longer horizons Demand for Christmas turkeys at Tom Thumbs vs Thanksgiving turkeys

Details carry a lot of uncertainty: aggregation reduces variability Demand for meat during Christmas has less variability than the total

variability in the demand for chicken, turkey, beef, etc.If there is variability why bother making detailed plans, inputs willchange anyway Instead make plans that carry a lot of flexibility Flexibility and aggregation go hand in hand



Aggregate Planning

Aggregate planning: General plan Combined products = aggregate product

Short and long sleeve shirts = shirt

Single product Pooled capacities = aggregated capacity

Dedicated machine and general machine = machineSingle capacity

Time periods = time buckets Consider all the demand and production of a given month togetherQuite a few time bucketsWhen does the demand or production take place in a time bucket?



Planning Sequence

Corporatestrategies

and policies

Economic,competitive,and political

conditions

Aggregatedemand

forecasts

Business Plan

Production plan

Master schedule

Establishes productionand capacity strategies

Establishesproduction capacity

Establishes schedulesfor specific products



Resources Workforce Facilities

Demand forecastPolicy statements Subcontracting Overtime Inventory levels

Back orders

Costs Inventory carrying Back orders Hiring/firing Overtime Inventory changes subcontracting

Aggregate Planning Inputs



Total cost of a planProjected levels of inventory Inventory

Output Employment Subcontracting Backordering

Aggregate Planning Outputs



Strategies

Proactive Alter demand to match capacity

Reactive Alter capacity to match demand

Mixed Some of each



Pricing Price reduction leads to higher demandPromotion Not necessarily via pricing Free delivery, free after sale service

Some Puerto Rico hotels pay for your flight

Back orders Short selling: Sell now, deliver later

New demand Finding alternative uses for the product

Demand Optionsto Match Demand and Capacity



Hire and layoff workers, unions are pivotal Layoff: Emotional stress

Fired Moulinex (appliances producer in France) workers start fire at the plant Hire: Availability of qualified work force

Operators at semiconductor plantsOvertime/slack time How too use slack time constructively? Training. Overtime is expensive, low quality, prone to accidentsPart-time workers

35 hour work week of EuropeInventories, To smooth demandsSubcontracting. Low quality. Reveals technological secrets

Capacity Optionsto Match demand and Capacity


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Fundamental tradeoffs in Aggregate PlanningCapacity (regular time, over time, subcontract)

Inventory

Backlog / lost sales: Customer patience?

Basic Strategies

Chase (the demand) strategy; Matching capacity to demand; the planned outputfor a period is the expected demand for that period fast food restaurants

Time flexibility from high levels of workforce or capacity;

machining shops, army

Level strategy; Maintaining a steady rate of regular-time output while meetingvariations in demand by a combination of options. swim wear



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Matching the Demand withLevel or Time flexibility strategies

U s e

i n v e n

t o r y

Use delivery time

Demand

Demand

Demand



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Chase vs. Level

Chase Approach

Advantages Investment in inventory is low

Labor utilization in high

Disadvantages The cost of adjusting output rates

and/or workforce levels

Level Approach

Advantages Stable output rates and

workforce

Disadvantages Greater inventory costs

Increased overtime and idletime

Resource utilizations vary overtime



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Inputs: Determine demand for each period Determine capacities for each period

Identify policies that are pertinent Determine units costs

Analysis Develop alternative plans and costs

Select the best plan that satisfies objectives

Techniques for Aggregate Planning



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Technique 1: Cumulative Graph

1 2 3 4 5 6 7 8 9 10

Cumulativeproduction

Cumulativedemand C

u m u l a

t i v e o u

t p u

t / d e m a n

d



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Technique 2: Mathematical Techniques

Linear programming : Methods for obtaining optimalsolutions to problems involving allocation of scarceresources in terms of cost minimization.

Minimize Costs

Subject to: Demand, capacity, initial inventoryrequirements


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Summary of Planning Techniques

Technique Solution CharacteristicsGraphical/charting

Trial anderror

Intuitively appealing, easy tounderstand; solution notnecessarily optimal.

Linearprogramming Optimizing Computerized; linear assumptionsnot always valid.Simulation Trial and

errorComputerized models can beexamined under a variety ofconditions.

Linear decision rule???


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Example - RelationshipsBasic Relationships

Workforce

Number ofworkers in a

period =

Number ofworkers at end of

previous period +

Number ofnew workersat start of the

period -

Number oflaid offworkers atstart of the period

Inventory

Inventory atthe end ofa period =

Inventory at endof the

previous period +

Production incurrent

period -

Amount used tosatisfydemand incurrent

period

Cost

Cost for a period =

Output Cost(Reg+OT+Sub) +

Hire/Lay OffCost + Inventory Cost +

Back-orderCost


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Technique 3: Simulation ExampleLevel Output

Period 1 2 3 4 5 6 Total

Forecast 200 200 300 400 500 200 1800

Policy: Level Output Rate of 300 per period

Output Cost

Regular 300 300 300 300 300 300 1800 $2

Overtime $3

Subcontract $6

Output-Forecast 100 100 0 -100 -200 100 0

Inventory

Beginning 0 100 200 200 100 0

Ending 100 200 200 100 0 0

Average 50 150 200 150 50 0 600 $1

Backlog 0 0 0 0 100 0 100 $5Costs

Regular $600 $600 $600 $600 $600 $600 $3,600

Inventory $50 $150 $200 $150 $50 $0 $600

Back Orders $0 $0 $0 $0 $500 $0 $500

Total Cost of Plan $650 $750 $800 $750 $1,150 $600 $4,700

Average Inventory= (Beginning Inventory + Ending Inventory)/2


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Technique 3: Simulation ExampleLevel Output + Overtime

Period 1 2 3 4 5 6 Total Forecast 200 200 300 400 500 200 1800

Policy: Level Output Rate+Overtime

Output Cost

Regular 280 280 280 280 280 280 1680 $2

Overtime 40 40 40 0 120 $3

Subcontract $6Output-Forecast 80 80 20 -80 -200 -180 0

Inventory

Beginning 0 80 160 180 100 0

Ending 80 160 180 100 0 0

Average 40 120 170 140 50 0 520 $1

Backlog 0 0 0 0 80 0 80 $5

Costs Regular $560 $560 $560 $560 $560 $560 $3,360

Overtime $0 $0 $120 $120 $120 $0 $360

Inventory $40 $120 $170 $50 $0 $0 $520

Back Orders $0 $0 $0 $0 $400 $0 $400

Total Cost of Plan $600 $680 $850 $730 $1,080 $560 $4,640


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Services occur when they are rendered Limited time-wise aggregation

Services occur where they are rendered Limited location-wise aggregation

Demand for service can be difficult to predict Personalization of service

Capacity availability can be difficult to predictLabor flexibility can be an advantage in services Human is more flexible than a machine, well at the expense of low

efficiency.

Aggregate Planning in Services


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Aggregate Plan to Master Schedule

AggregatePlanning

Disaggregation

MasterSchedule

For a short planning range 2-4 months: Master schedule : The result ofdisaggregating an aggregate plan;shows quantity and timing of specificend items for a scheduled horizon.

Rough-cut capacity planning :

Approximate balancing of capacityand demand to test the feasibility of amaster schedule.


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Master Scheduling

Master schedule Determines quantitiesneeded to meet demand

Interfaces with Marketing Capacity planning Production planning Distribution planning

Master Scheduler Evaluates impact ofnew orders

Provides delivery dates fororders

Deals with problems Production delays

Revising master schedule Insufficient capacity


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Master Scheduling Process

MasterScheduling

Beginning inventory

Forecast

CommittedCustomer orders

Inputs Outputs

Projected inventory

Master production schedule

ATP: Uncommitted inventory


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Preview of Materials Requirement Planning Terminology Net Inventory After Production

Requirements=Forecast

Assuming that the forecasts include committed orders

Net inventory before production=

Projected on hand inventory in the previous period- Requirements

Produce in lots if Net inventory is less than zero

Net inventory after production= Net inventory before production+ Production


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Projected On-hand Inventory

64 1 2 3 4 5 6 7 8

Customer Orders(committed) 33 30 30 30 40Projected on-handinventory 31 1 -29

JUNE JULY

BeginningInventory


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Example: Find ATP with lot size of 70

June July

64 1 2 3 4 5 6 7 8

Forecast 30 30 30 30 40 40 40 40

Customer Orders(Committed) 33 20 10 4 2

Projected on Hand Inventory + + - + - + - -MPS: Production 70 70 70 70

Projected on Hand Inventory 31 1 41 11 41 1 31 61

Available to promiseInventory until next

production(uncommitted) 11 57 79 71 ???


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Summary

Aggregate planning:conception, demand and capacity optionBasic strategy:

level capacity strategy, chase demand strategyTechniques:

Trial and Error, mathematical techniquesMaster scheduling


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Practice Questions

1. The goal of aggregate planning is to achieve a production plan thatattempts to balance the organization's resources and meet expecteddemand.

Answer: True Page: 5412. A chase strategy in aggregate planning would attempt to matchcapacity and demand.

Answer: True Page: 5483. Ultimately the overriding factor in choosing a strategy in aggregate

planning is overall cost.Answer: True Page: 550


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Practice Questions1. Which of the following best describes aggregate planning?

A) the link between intermediate term planning and short termoperating decisions

B) a collection of objective planning tools

C) make or buy decisionsD) an attempt to respond to predicted demand within theconstraints set by product, process and location decisions

E) manpower planning

Answer: D Page: 541


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Practice Questions

2.Which of the following is an input to aggregate planning?A) beginning inventoryB) forecasts for each period of the schedule

C) customer ordersD) all of the aboveE) none of the above

Answer: D Page: 561


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Practice Questions

3.Which of the following is not an input to the aggregate planning process:A) resources

B) demand forecastC) policies on work force changesD) master production schedules

E) cost informationAnswer: D Page: 545


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Practice Questions

4. Which one of the following is not a basic option foraltering demand?

A) promotion

B) backorderingC) pricingD) subcontracting

E) All are demand options.Answer: D Page: 545


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Practice Questions5. Which of the following would not be a strategy associated with

adjusting aggregate capacity to meet expected demand?A) subcontractB) vary the size of the workforceC) vary the intensity of workforce utilizationD) allow inventory levels to varyE) use backorders

Answer: E Page: 546-547


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Practice Questions

6. Moving from the aggregate plan to a master production schedule requires:A) rough cut capacity planning

B) disaggregationC) sub-optimizationD) strategy formulation

E) chase strategiesAnswer: B Page: 559

aggregate plan ning in accounting

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