Chapter 2 – Aggregate Planning

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Sales and Operations Planning

Is a process: Lower inventory Shorten customer lead times Stabilize production rates To help give better customer service Give top management a handle on the

business The process is designed to balance

demand and supply over time.2

Sales and Operations Planning

The balance must occur at an aggregate level & also at the detailed individual product level.

Aggregate we mean at the level of larger group of similar products.

Often expressed in common units Example: Tones of steel

Liters of paint

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Aggregate Production Planning

(Aggregate) Planning is Concerned With Determining the Quantity and Timing of Production for the Intermediate Future, Often From 3 To 18 Months Ahead.

The main purpose is to specify the optimal combination of production rate, work force level, and inventory on hand.

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Aggregate Production Planning

The Goal is: To Minimize Costs Over The Planning

Period by determining the optimal combination of workforce and inventory.

To Minimize Fluctuations In The Work Force or Inventory Levels.

Based on the planning horizon, We can divide plans into 3 general categories:

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VARIABLES USED IN AGGREGATE PLANNING

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Planning Horizons

Today 3 Months 1 year 5 years

Planning Horizon

Short-range plansJob assignmentsOrderingJob schedulingDispatching Intermediate-range plans

Sales planningProduction planning and budgetingSetting employment, inventory, subcontracting levelsAggregate planning

Long-range plansR&DNew product plansCapital expensesFacility location, expansion

Responsible: Operations managers, supervisors, foremen

Responsible: Operations managers

Responsible: Top executives

Relationships of Aggregate ScheduleRelationships of Aggregate Schedule

Forecast &Firm Orders

MaterialRequirements

Planning

AggregateProductionPlanning

ResourceAvailability

MasterProductionScheduling

ShopFloor

Schedules

CapacityRequirements

PlanningRealistic?

Yes

No, modify CRP, MRP, or MPS

Work forceInventorySubcontractors

Required Inputs to the Production Planning System

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

Manufacturing options to meet fluctuating demand

Build inventory Carry backorders or tolerate lost

sales Over time or under time Hire & fire Vary capacity through changes in

plant & equipment (long term)

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Relevant costs

1. Basic production cost Direct & indirect labor costs & regular as

well as overtime compensation

2. Costs associated with changes in the production rate

Cost of hiring, firing & training

3. Inventory holding cost Cost of capital tied up, storing,

insurance…etc

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Relevant costs

4. Backordering costs Very hard to measure, loss of customer

goodwill, loss of sales revenues resulting from backordering.

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Types of Aggregate Plans Level Aggregate Plans

Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products Disadvantage- builds inventory and/or uses back orders

Chase Aggregate Plans Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage- constantly changing short term capacity

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The Extremes

Level Strategy

Chase Strategy

Production equals

demand

Production rate is constant

Level Plan Example Level production rate= 28,000 units/7 periods= 4000 units Level workforce= (4000 units x .64 std.)/160 = 16 people

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Chase Plan Example Chase hires and fires staff to exactly meet each

periods demand Period 1 = (500 units x .64 std.)/160 = 2 people, need

to fire 16 people

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Types of Aggregate Plans (Cont.)

Hybrid Aggregate Plans Uses a combination of options Options should be limited to facilitate execution May use a level workforce with overtime & temps May allow inventory buildup and some

backordering May use short term sourcing

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Aggregate Planning Options

Demand based options Reactive: uses finished goods inventories and backorders for fluctuations Proactive: shifts the demand patterns to minimize

fluctuations Capacity based options

Changes output capacity to meet demand Uses overtime, under time, subcontracting, hiring,

firing, and part-timers – cost and operational implications

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Evaluating the Current Situation

Important to evaluate current situation in terms of; Point of Departure

Current % of normal capacity Options are different depending on present situation

Magnitude of change Larger changes need more dramatic measures

Duration of change Is the length of time a brief seasonal change? Is a permanent change in capacity needed?

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Developing the Aggregate Plan

Step 1- Choose strategy: level, chase, or hybrid Step 2- Determine the aggregate production

rate Step 3- Calculate the size of the workforce Step 4- Test the plan as follows:

Calculate Inventory, expected hiring/firing, overtime needs Calculate total cost of plan

Step 5- Evaluate performance: cost, service, human resources, and operations

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Plan for Companies with Tangible Products – Plans A, B, C, D Plan A: Level aggregate plan using

inventories and back orders Plan B: Level plan using

inventories but no back orders Plan C: Chase aggregate plan

using hiring and firing Plan D: Hybrid plan using initial

workforce and overtime as needed

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Problem Data for Plans A & B (Table 13-4)

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Plan A - Level Using Inventory & Backorders (Table 13-5)

First calculate the level production rate (14400/8=1800)

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Plan A Evaluation

Fill rate is 83.9% Fill rate is likely too low Inventory levels seem to be okay Human resources fires two

employees

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Plan B – Chase Aggregate Plan Using Hiring and Firing (Table 13-6)

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Plan B Evaluation Plan B costs slightly less than the level

plan. Hiring demands ranges from two in

November to thirty-four in February Utilization is highest, 70.6%, in December

and even lower in the other months Space and equipment are underutilized in

every other month of the plan

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Aggregate Plans for Service Companies with Non-Tangible Products- Plans E, F, G

Options remain the same – level, chase, and hybrid plans Overtime and under time can be used Staff can be hired and fired

Inventory cannot be used to level the service plan

All demand must be satisfied or lose business to a competing service provider

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Problem Data for Plans C, D, and E (Table 13-7)

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262728

A BCost Data

Regular time labor cost per hour $8.00Overtime labor cost per hour $12.00

Subcontracting cost per unit (labor only) $60.00Hiring cost per employee $250.00Firing cost per employee $150.00

Capacity DataBeginning workforce (employees) 60Service standard per call (hours) 4

Regular time available per period (hours) 160Overtime available per period (hours) 24

Demand Data (calls)Period 1 2400Period 2 1560Period 3 1200Period 4 2040Period 5 2760Period 6 1680Period 7 1320Period 8 2400

Total Number of Periods 8 28

Plan C – Level Aggregate Plan with No Back Orders, No Tangible Product (Table 13-8)

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101112131415161718192021222324

D E F G H I J K L M

Plan E: Level Aggregate Plan with No Backorders, No Tangible Product

Compute Workforce NeededMaximum Demand 2760 <-- Need to staff to meet the maximum number of calls

Calls per Worker per Period (Reg Time) 40Workers Needed 69

Number to Hire 9Number to Fire 0

Detailed Plan Computations1 2 3 4 5 6 7 8 Total

Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 15360Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 61440

Regular time hours available 11040 11040 11040 11040 11040 11040 11040 11040Undertime hours 1440 4800 6240 2880 0 4320 5760 1440 26880

Cost Calculations for Plan ERegular time labor cost $706,560

Hiring cost $2,250Firing cost $0Total Cost $708,810

Period

Staff of 69 people creates excessive UT (averages 30% UT) Cost per service call is $46.15 ($708,000 Divided by 15360 calls)

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Plan D – Hybrid Aggregate Plan Using Initial Workforce and OT as Needed (Table 13-9)

2627282930313233343536373839

D E F G H I J K L M

Plan F: Hybrid Aggregate Plan Using Initial Workforce and Overtime as Needed

Detailed Plan Computations1 2 3 4 5 6 7 8 Total

Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 15360Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 61440

Regular time hours of capacity 9600 9600 9600 9600 9600 9600 9600 9600 76800Overtime hours needed 0 0 0 0 1440 0 0 0 1440

Undertime hours 0 3360 4800 1440 0 2880 4320 0 16800

Cost Calculations for Plan FRegular time labor cost $614,400

Overtime labor cost $17,280Total Cost $631,680

Period

Costs reduced by $77K and under time to an average of 20% Cost per service call reduced to $41.13 (-$5.02)

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Plan E – Chase Aggregate Plan for Nontangible Products Using Hiring and Firing (Table 13-10)

Total cost reduced by $114K over Plan F, utilization improved to 100%, and cost per service call now $33.72 (-$7.41)

Workforce fluctuates from 30-69 people- morale problems Solution?? Compare smaller permanent workforce, more OT??

4243444546474849505152535455565758

D E F G H I J K L

Plan G: Chase Aggregate Plan Using Hiring and Firing

Beginning Number of Employees 60

Detailed Plan Computations1 2 3 4 5 6 7 8

Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600

Number of employees needed 60 39 30 51 69 42 33 60Number of hires 0 0 0 21 18 0 0 27Number of fires 0 21 9 0 0 27 9 0

Cost Calculations for Plan GRegular time labor cost $491,520

Hiring cost $16,500Firing cost $9,900Total Cost $517,920

Period

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Aggregate Planning Bottom Line

The Aggregate plan must balance several perspectives

Costs are important but so are: Customer service Operational effectiveness Workforce morale

A successful AP considers each of these factors

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Master Production Scheduling

Master production schedule (MPS) is the anticipated build schedule

MPS is often stated in produce or service specifications rather than dollars

MPS is often built, managed, reviewed and maintained by the master scheduler

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Planning Links to MPS

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Role of the MPS

Aggregate plan: Specifies the resources available (e.g.:

regular workforce, overtime, subcontracting, allowable inventory levels & shortages)

Master production schedule: Specifies the number & when to produce

each end item (the anticipated build schedule)

Disaggregates the aggregate plan

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Objectives of Master Schedule The Master Scheduler must:

Maintain the desired customer service level Utilize resources efficiently Maintain desired inventory levels

The Master Schedule must: Satisfy customer demand Not exceed Operation’s capacity Work within the constraints of the

Aggregate Plan

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MPS as a Basis of Communication MPS is a basis for communication between

operations and other functional areas Demand management and master

scheduler communication is ongoing to incorporate Forecasts, order-entry, order-promising, and

physical distribution activities Authorized MPS is critical input to the

material requirements planning (MRP)

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Developing an MPS The Master Scheduler:

Develops a proposed MPS Checks the schedule for feasibility with available

capacity Modifies as needed Authorizes the MPS

Consider the following example: Make-to-stock environment with fixed orders of 125

units There are 110 in inventory to start When are new order quantities needed to

satisfy the forecasted demand?

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The MPS Record

Projected Available = beginning inventory + MPS shipments - forecasted demand

The MPS row shows when replenishment shipments need to arrive to avoid a stock out (negative projected available)

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

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 -40

MPS

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

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 85 35 -40

MPS 125

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Revised and Completed MPS Record

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

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 85 35 85 10 -65

MPS 125 125

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

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Projected available 110 60 10 85 35 85 10 60 110 60 10 85 35

MPS 125 125 125 125 125

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Evaluating the MPS Rough-cut capacity planning:

An estimate of the plan’s feasibility Given the demonstrated capacity of critical

resources (e.g.: direct labor & machine time), have we overloaded the system?

Customer service issues: Does “available-to-promise” inventory

satisfy customer orders? If not, can future MPS quantities be pulled in to satisfy new orders?

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Stabilizing the MPS

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Aggregate Planning Across the Organization Aggregate planning, MPS, and rough-cut

capacity affection functional areas throughout the organization Accounting is affected because aggregate

plan details the resources needed by operations

Marketing uses the aggregate plan to support the marketing plan

Information systems maintains the databases that support demand forecasts and other such information

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Chapter 13 Highlights Planning begins with the development of the strategic

business plan that provides your company’s direction and objectives for the next two to ten years.

Sales and operations planning integrates plans from the other functional areas and regularly evaluates company performance.

The level aggregate plan maintains the same size workforce and produces the same output each period. Inventories and backorders absorb fluctuations in demand. The chase aggregate plan changes the capacity each period to match the demand

Demand patterns can be smoothed through pricing incentives, reduced prices for out-of-season purchases, or nonprime service times.

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Chapter 13 Highlights (continued)

The difference in aggregate planning for companies that do not provide a tangible product is that the option to use inventories is not available

The MPS shows how the resources authorized by the AP will be used to satisfy the organizational objectives. The MPS specifies the products to be built in each time period. MPS is checked for feasibility using a rough-cut capacity planning technique.

The objectives of master scheduling are to satisfy customer service objectives, use resources effectively, and minimize costs.

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