aggregate production planning - lecture notes
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Aggregate Production Planning
7 - 1
Section Objectives
After completing this section, you should be able to:
1. Explain what aggregate production planning is and how it can be useful.
2. Identify the variables that decision makers have to work with in aggregate planning and some of the possible strategies they can use.
3. Describe some of the trial and error and quantitative techniques planners use.
4. Prepare aggregate plans and compute their costs.
Aggregate Production Planning
7 - 2
PRODUCTIONPLANNING
PRODUCTIONPLANNING
CAPACITY
WORK FORCE
PRODUCTION
INVENTORY
INTERNAL
EXTERNAL
EXTERNALCAPACITY
COMPETITIONRAW MATERIAL
SUPPLYDEMAND
ECONOMICCONDITIONS
Production Planning Environment
Aggregate Production Planning
7 - 3
PLANNING HORIZON 1. LONG RANGE
- Business Forecasting- Product & Market Planning- Capacity Planning- Location & Layout- Financial Planning
5 YEARS
2. MEDIUM RANGE
- Aggregate Production Planning- Product Forecasting- Master Production Scheduling- Employment / Output / Inventory
1 YEAR
3. SHORT RANGE
- Materials & Purchasing Control- Scheduling- Machine Loading- Job Assignments
2 - 3 MONTHS
Production Planning Horizon
Aggregate Production Planning
7 - 4
Aggregate Production PlanningObjective: To develop a plan that will satisfy or meet demand within the
limits of available resources, at least cost to the organization.
Includes: Optimal combination of production rate, work force level and inventory.
Time Frame: six to eighteen months.
Strategies for Adjusting the Output (Production) Rate1. Vary the work force level.
2. Vary the inventory level.
3. Vary the production level.
4. Vary the level of customer service (back orders).
5. Sub-contract some of the production requirements.
6. Alter the peak output capacity.
Aggregate Production Planning
7 - 5
STRATEGY INCREASE DECREASE
1. Work Force(WF)
2. Production Rate(PR)
3. Inventory Level(INV)
4. Back Order(BO)
5. Subcontracting(SUB)
InterviewHiring
Training
Overtime & Shift DifferentialsLower ProductivityDecreased Quality
Warehousing CostsObsolescence / Shrinkage
Opportunity Cost
Lost SalesReduced Level of Service
Decreased QualityLoss of Control
Higher Unit Costs
Severance PaymentsLoss of Morale
Labour Market & Public Image
Idle ManpowerLower Output
Worker Attrition
StockoutsLost Sales
Idle Warehouse Space
Higher Carrying Costs
Increased InvestmentReduced Flexibility
6. Design for Peak Demand Rate:- Large Capital Investment- Underutilization of Resources- Opportunity Costs
Relevant Costs for Aggregate Production Planning
Aggregate Production Planning
7 - 6
Forecast / KnownDemand in T+1
Decision Process1. Output Rate
2. Resource Mix
State ofSystem (T)
WFt
PRt
INVt
BOt
SUBt
State ofSystem (T+1)
WFt+1
PRt+1
INVt+1
BOt+1
SUBt+1
Incremental CostsPayroll
Hire / FireShift Premium
Overtime / UndertimeInventory Holding
StockoutBackorder
Subcontract
Minimize
Single-Stage Aggregate Production Planning
Aggregate Production Planning
7 - 7
Given: WFt = 20 assemblers (1 assembler produces 10 units per period)
INVt = 100 units of finished goods
Ft = 200 units demand forecast for t + 1
Cw = $800 wage cost per assembler per period
Cf = $400 fire (layoff) cost per assembler
Ch = $300 hire cost per assembler
Forecast: Ft = 200 units demand forecast for period t + 1, then DECt+1 = fire 10 assemblers and build 100 units
Ft+1 = 300 units demand forecast for period t + 2, then DECt+2 = hire 20 assemblers and build 300 units.
Units ofOutput
WageCost
FireCost
HireCost
TotalCost
BeginningInventory
Number ofAssemblers
1030
1000
100300
$ 8000 24000
40006000
$12000 30000$42000
T + 1T + 2
Single-Stage Aggregate Production Planning
Aggregate Production Planning
7 - 8
Forecast / KnownDemand in T+1
Decision Process1. Output Rate
2. Resource Mix
State ofSystem (T)
WFt
PRt
INVt
BOt
SUBt
State ofSystem (T+1)
WFt+1
PRt+1
INVt+1
BOt+1
SUBt+1
Incremental CostsPayroll
Hire / FireShift Premium
Overtime / UndertimeInventory Holding
StockoutBackorder
Subcontract
Minimize
Decision Process1. Output Rate
2. Resource Mix
State ofSystem (T+2)
WFt+2
PRt+2
INVt+2
BOt+2
SUBt+2
Incremental CostsPayroll
Hire / FireShift Premium
Overtime / UndertimeInventory Holding
StockoutBackorder
Subcontract
Forecast / KnownDemand in T+2
+
Multi-Stage Aggregate Production Planning
Aggregate Production Planning
7 - 9
Given: WFt = 20 assemblers (1 assembler produces 10 units per period)
INVt = 100 units of finished goods
Ft = 200 units demand forecast for t + 1 / 300 units for t +2
Cw = $800 wage cost per assembler per period
Cf = $400 fire (layoff) cost per assembler
Ch = $300 hire cost per assembler
Forecast: Ft = 200 units demand forecast for period t + 1, then DECt+1 = build 200 units
Ft+1 = 300 units demand forecast for period t + 2, then DECt+2 = build 200 units.
Units ofOutput
WageCost
FireCost
HireCost
TotalCost
BeginningInventory
Number ofAssemblers
2020
100100
200200
$16000 16000
------
$16000 16000$32000
T + 1T + 2
Multi-Stage Aggregate Production Planning
Aggregate Production Planning
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Techniques for Aggregate Production Planning1. Informal, trial and error methods. In practice, these techniques are more
commonly used.2. Mathematical techniques - such as linear programming, linear decision
rules or simulation. Although not widely used, they serve as a basis for comparing the effectiveness of alternative techniques for aggregate planning.
General Procedure for Aggregate Planning1. Determine demand and production requirements for each period.
2. Determine production capacity (regular time, overtime, subcontracting) for each period.
3. Determine company or departmental policies that are pertinent.For example, maintain a safety stock of 5 percent of demand, or maintain a reasonably stable work force.
4. Determine unit costs for regular time, overtime, subcontracting, holding inventories, back orders and other relevant costs.
5. Develop alternative plans and compute the cost of each.
6. If satisfactory plans emerge, select the one that best satisfies objectives (such as cost minimization). Otherwise, return to step 5.
Aggregate Production Planning
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Aggregate Production Planning Illustration - Montreal Manufacturing
Given the following information:
6 month production planning period
10 labour-hours per unit required
Labour cost = $10/hour regular = $15/hour overtime
Total unit cost = $200 / unit = $228/unit subcontract
Current workforce = 20 employees
Hiring cost = $500 / employee
Layoff cost = $800 / employee
Safety stock = 20% of monthly forecast
Beginning inventory = 50 units
Inventory carrying cost = $10/unit/month
Stockout cost = $50/unit/month
Additional information available:
Sales Work Work HoursMonth Forecast Days at 8 Hrs. / Day Jan. 300 22 176 Feb. 500 19 152 Mar. 400 21 168 Apr. 100 21 168 May. 200 22 176 June 300 20 160
First Step: Calculate Production Requirement
Sales Safety ProductionMonth Forecast Stock Required Jan. 300 60 300+60-50 = 310 Feb. 500 100 500+100-60 = 540 Mar. 400 80 400+80-100 = 380 Apr. 100 20 100+20-80 = 40 May. 200 40 200+40-20 = 220 June 300 60 300+60-40 = 320
Aggregate Production Planning
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ProductionRequired
31054038040220320
HoursRequired
31005400380040022003200
Hrs. Avail.per Worker
176152168168176160
WorkersRequired
18362331320
WorkersHired
18
107
Workers Fired
2
1320
Hire/FireCosts$1600 9000
10400 16000 50003500
Total Cost = $45,500
ProductionRequired
31054038040220320
HoursRequired
31005400380040022003200
Total Hrs.Available
352030403360336035203200
OvertimeHours
2360440
UndertimeHours
420
29601320
OT/ UT Costs$420011800 2200 14800 6600
0
Plan # 2 - Exact Production; Vary Production Rate
Total Cost = $61,000
MonthJan.Feb.Mar.Apr.MayJune
MonthJan.Feb.Mar.Apr.MayJune
Plan # 1 - Exact Production; Vary Work Force
Aggregate Production Planning Illustration - Montreal Manufacturing
Aggregate Production Planning
7 - 13
Cum. Prod.Required
3108501230127014901810
TotalProduction
352304336336352320
CumulativeProduction
352656992132816802000
InventoryLevel
42
58190190
Stockout Level
194238
Inv. / SOCosts $420 9700
11900 58019001900
Total Cost = $26,400
HoursAvailable
352030403360336035203200
Total Cost = $7,160 + $ 21,000 = $28,160
Cum. Prod.Required
3108501230127014901810
HoursAvailable3520(20)4560(30)5040(30)1680(10)1760(10)1600(10)
TotalProduction
352456504168176160
Cumulative Production
352808
1312 1480 1656 1816
Inv. / (SO) Level
42(42)822101666
Inv. / SO Costs $420 2100 820 2100 1660 60
Hire/FireCosts
5000
16000
$7,160 $21,000
MonthJan.Feb.Mar.Apr.MayJune
MonthJan.Feb.Mar.Apr.MayJune
Plan # 3 - Exact Production; Vary Inventory Level With 20 Employees
Aggregate Production Planning Illustration - Montreal Manufacturing
Plan # 4 - Exact Production; Vary Workforce Level; Vary Inventory Level
Aggregate Production Planning
7 - 14
Plan Costs45,50061,00026,40028,160
Plan1234
ProductionCosts
362,000362,000400,000363,200
TotalCosts
407,500446,500426,400391,360
UnitsProduced
1810181020001816
Costper Unit$225.14$233.70$213.20$215.51
Final Cost Analysis:
Decision: Go with Plan # 3 on the basis of lowest cost per unit.
Aggregate Production Planning Illustration - Montreal Manufacturing
Aggregate Production Planning
7 - 15
Aggregate Production Planning - Additional Illustration # 1
The item demand forecasts for a product for October, November, and December are 2000, 3000, and 2500 units, respectively. Safety stock policy, as determined by management, is 25 percent of the forecast for that month. There is no beginning inventory. Additional information for this product is as follows:
Manufacturing cost $250/unitStorage costs $100/unit/monthStandard pay rate $8.00/hr., 8 hr./dayOvertime rate $12.00/hr.Cost of stockout $10.00/unit/monthCost of subcontracting $10.00/unitHiring and training cost $200/workerLay-off costs $200/workerProduction man-hours required per unit 12 hoursNumber of working days in each month 20
a) Develop a production schedule to produce the exact production requirements by varying the work force size.
b) Calculate total hiring and lay-off costs.
Aggregate Production Planning
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Aggregate Production Planning - Additional Illustration # 2
The production manager of the Marabell Manufacturing Corporation wants to determine an production strategy for the first quarter of the year. Beginning inventory for the first month of the quarter period is 200 units, and, for each subsequent month, the beginning inventory for that month is equal to the safety stock of the preceding month. The company's safety stock policy is 25 percent of the month's demand forecast.
The demand forecast for each month of the quarter period is 700, 900, and 875 units, respectively. The number of working days in each month is 21, 22, and 20.
The following additional information was also made available:
Manufacturing cost $100/unitStorage costs $1.00/unit/monthStandard pay rate $5.00/hr., 8 hr./dayOvertime pay 150% of standardMarginal cost of stockout $4.00/unit/monthHiring and training cost $150/manLay-off costs $200/manMan-hours required per unit 4Number of workers currently employed 15
Determine the production costs if the company wants to carry out the strategy of:
a) Producing to exact production requirements by varying the work force size on regular hours.
b) Maintaining a constant work force level based on a quarterly (3-month) average. Inventory is allowed to accumulate, while shortages may be filled from next month's production.