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Aggregate Planning

Production and Operations Planning


Production Process Design Long Term Capacity Planning

Aggregate Planning Forecast

Master Production Schedule


Demand Material Requirements Planning Individual Order Scheduling

The main idea behind aggregate planning

Aggregate planning Translates business plans into rough labor schedules and production plans

Issues to Consider for Aggregate Planning


Production rate: aggregate units per worker per unit time Workforce level: available workforce in terms of hours

Actual Production: Production rate x Workforce level


Inventory: Units carried over from previous periods Costs: production, changing workforce, inventory

What does aggregate planning do?


Given an aggregate demand forecast , determine production levels, inventory levels, and workforce levels, in order to minimize total relevant costs over the planning horizon

Given the number of variables, there is not a single optimal solution!

Aggregate Planning Strategies


1. Chase strategy: match production rate to production requirements by varying the workforce (no inventory buildup or shortage allowed) 2. Level strategy: keep a constant workforce who work at maximum capacity (inventory will vary from period to period); workforce level chosen such that the total requirement over the planning horizon can be exactly met 3. Stable workforce: keep a constant workforce who work at maximum capacity; outsource in order to match production and requirements (no inventory buildup or shortage allowed); workforce level chosen such that they can exactly satisfy the requirements in the period with the minimum requirement level

Example: CA&J Company


JAN Demand Forecast Working Days
1,800 22

FEB
1,500 19

MAR APR
1,100 21 900 21

MAY
1,100 22

JUN
1,600 20

Total
8,000 125

Costs
Inventory holding Backorders $1.50/unit/month $5.00/unit/month

Inventory
Beginning Inventory 400 units

Hiring and training


Layoff Labor time required Straight time cost (8 hours)

$200.00/worker
$250.00/worker 0.20 units/hour $4.00/hour

Labor
Beginning Labor 40 workers

Outsourcing

$20.00/unit

First step: Analyze the requirements


JAN Beginning Inventory
400

FEB

MAR

APR

MAY

JUN

Demand Forecast
Production requirement Ending Inventory

1,800

1,500

1,100

900

1,100

1,600

Production requirement = Forecast Beginning Inventory Ending Inventory = Beginning Inventory + Production Requirement Forecast

First step: Analyze the requirements


JAN Beginning Inventory
400

FEB
0

MAR
0

APR
0

MAY
0

JUN
0

Demand Forecast
Production requirement Ending Inventory

1,800
1,400 0

1,500
1,500 0

1,100
1,100 0

900
900 0

1,100
1,100 0

1,600
1,600 0

Plan 1: Chase strategy (variable workforce)


JAN FEB 1,500 MAR 1,100 APR 900 MAY 1,100 JUN 1,600

Production requirement

1,400

Production hours required


Days per month Worker hours per month
22 19 21 21 22 20

Workers required
Workers hired Hiring cost Workers laid off Layoff cost Labor cost

Plan 1: Chase strategy


JAN FEB 1,500 MAR 1,100 APR 900 MAY 1,100 JUN 1,600

Production requirement

1,400

Production hours required


Days per month Worker hours per month

7,000
22 176

7,500
19 152

5,500
21 168

4,500
21 168

5,500
22 176

8,000
20 160

Workers required
Workers hired Hiring cost Workers laid off Layoff cost Labor cost

40
0 0 0 0 28,000

49
9 1800 0 0 30,000

33
0 0 16 4,000 22,000

27
0 0 6 1,500 18,000

31
4 800 0 0 22,000

50
19 3,800 0 0 32,000

Plan 1: Chase strategy

Hiring cost
Layoff cost Labor cost Total Cost

6,400
5,500 152,000 163,900

Plan 2: Level strategy


JAN FEB MAR APR MAY JUN

Beginning inventory Working days per month Production hours available Monthly production level Demand Forecast Ending Inventory Shortage Cost Inventory cost Labor cost

400 22 19 21 21 22 20

1,800

1,500

1,100

900

1,100

1,600

Plan 2: Level strategy


Number of workers required = Total hours required over planning horizon/(8*total days) = 38,000/(8*125) = 38. This is the no. of workers for each month
JAN FEB -62 19 MAR -407 21 APR -230 21 MAY 147 22 JUN 385 20

Beginning inventory Working days per month

400 22

Production hours available


Monthly production level Demand Forecast Ending Inventory

6688
1,338 1,800 -62

5776
1,155 1,500 -407

6384
1,277 1,100 -230

6,384
1,277 900 147

6,688
1,338 1,100 385

6,080
1,216 1,600 1

Shortage Cost
Inventory cost Labor cost

310
0 26752

2035
0 23104

1150
0 25536

0
220.5 25536

0
577.5 26752

0
1.5 24320

Plan 2: Level strategy

Layoff cost
Shortage cost Inventory cost Labor cost Total Cost

500
3,495 798 152,000 156,793

Plan 3: Stable strategy with outsourcing


JAN FEB 1,500 19 MAR 1,100 21 APR 900 21 MAY 1,100 22 JUN 1,600 20

Production requirement Working days per month Monthly production hours Monthly production level Monthly outsourcing level Monthly outsourcing cost Monthly labor cost

1,400 22

Plan 3: Stable strategy with outsourcing


Number of workers = enough workers to cover requirements in April = 900*5/(21*8) = 27 workers (this is the no. of workers for each month)
JAN FEB 1,500 19 4,104 821 679 13,580 16 416 MAR 1,100 21 4,536 907 193 3,860 18,144 APR 900 21 4,536 907 0 18,144 MAY 1,100 22 4,752 950 150 3,000 19,008 JUN 1,600 20 4,320 864 736 14,720 17,280

Production requirement Working days per month Monthly production hours Monthly production level Monthly outsourcing level Monthly outsourcing cost Monthly labor cost

1,400 22 4,752 950 450 9,000 19,008

Plan 3: Stable strategy with outsourcing

Layoff Cost Outsourcing Cost

3,250 44,160

Labor Cost
Total Cost

108,000
155,410

Comparison
Layoff cost Hiring cost Layoff cost 6,400 5,500 Shortage cost 500 3,495 798 152,000 156,793 Layoff Cost Outsourcing Cost Labor cost Total Cost 3,250

Inventory cost
Labor cost Total Cost

44,160
108,000 155,410

Labor cost
Total Cost

152,000
163,900

Chase

Level

Stable

Sensitivity Analysis
WHAT IF

outsourcing costs increase or decrease?

the holding costs are higher?


the hiring costs are lower? the firing costs are higher?

We can always plug the data in and re-calculate the costs

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