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Phases of Decisions
Strategy or design: Forecast
Planning: Forecast
Operation Actual demand
Since actual demands differs from forecasts so does
the 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 and
measure of error.
Long-term forecasts are less accurate than short-term forecasts. Too
long 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 or
fixed)
“slushy”
somewhat
firm
“liquid”
(open)
1 2 3 4 5 6 7 8 9
Time Fences divide a scheduling time horizon into three
sections 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 the
capacity and the demand.
Short
range
Intermediate
range
Long range
Now 2 months 1 Year
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Listen to Tom Thumb’s 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
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Why aggregate planning
Details are hard to gather for longer horizons
– Demand for Christmas turkeys at Tom Thumb’s 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 will
change anyway
– Instead make plans that carry a lot of flexibility
– Flexibility and aggregation go hand in hand
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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 = machine
Single capacity
– Time periods = time buckets
» Consider all the demand and production of a given month together
Quite a few time buckets
When does the demand or production take place in a time bucket?
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Pricing
– Price reduction leads to higher demand
Promotion
– 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 Options
to Match Demand and Capacity
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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 plants
Overtime/slack time
– How too use slack time constructively? Training.
– Overtime is expensive, low quality, prone to accidents
Part-time workers
– 35 hour work week of Europe
Inventories, To smooth demands
Subcontracting. Low quality. Reveals technological secrets
Capacity Options
to Match demand and Capacity
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Fundamental tradeoffs in Aggregate Planning
Capacity (regular time, over time, subcontract)
Inventory
Backlog / lost sales: Customer patience?
Basic Strategies
Chase (the demand) strategy; Matching capacity to demand; the planned output
for 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 meeting
variations in demand by a combination of options.
– swim wear
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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 idle
time
– Resource utilizations vary over
time
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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 2: Mathematical Techniques
Linear programming: Methods for obtaining optimal
solutions to problems involving allocation of scarce
resources in terms of cost minimization.
Minimize Costs
Subject to: Demand, capacity, initial inventory
requirements
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Summary of Planning Techniques
Technique Solution Characteristics
Graphical/
charting
Trial and
error
Intuitively appealing, easy to
understand; solution not
necessarily optimal.
Linear
programming
Optimizing Computerized; linear assumptions
not always valid.
Simulation Trial and
error
Computerized models can be
examined under a variety of
conditions.
Linear decision rule???
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Example - Relationships
Basic Relationships
Workforce
Number of
workers in a
period =
Number of
workers at end of
previous period +
Number of
new workers
at start of the
period -
Number of
laid off
workers at
start of the period
Inventory
Inventory at
the end of
a period =
Inventory at end
of the
previous
period +
Production in
current
period -
Amount used to
satisfy
demand in
current
period
Cost
Cost for a
period =
Output Cost
(Reg+OT+Sub) +
Hire/Lay Off
Cost + Inventory Cost +
Back-order
Cost
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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 predict
Labor 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
Aggregate
Planning
Disaggregation
Master
Schedule
For a short planning range 2-4 months:
Master schedule: The result of
disaggregating an aggregate plan;
shows quantity and timing of specific
end items for a scheduled horizon.
Rough-cut capacity planning:
Approximate balancing of capacity
and demand to test the feasibility of a
master schedule.
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Master Scheduling
Master schedule
– Determines quantities
needed to meet demand
– Interfaces with
» Marketing
» Capacity planning
» Production planning
» Distribution planning
Master Scheduler
– Evaluates impact of
new orders
– Provides delivery dates for
orders
– Deals with problems
» Production delays
» Revising master schedule
» Insufficient capacity
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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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Practice Questions
1. The goal of aggregate planning is to achieve a production plan that
attempts to balance the organization's resources and meet expected
demand.
Answer: True Page: 541
2. A “chase” strategy in aggregate planning would attempt to match
capacity and demand.
Answer: True Page: 548
3. Ultimately the overriding factor in choosing a strategy in aggregate
planning is overall cost.
Answer: True Page: 550
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Practice Questions
1. Which of the following best describes aggregate planning?
A) the link between intermediate term planning and short term
operating decisions
B) a collection of objective planning tools
C) make or buy decisions
D) an attempt to respond to predicted demand within the
constraints 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 inventory
B) forecasts for each period of the schedule
C) customer orders
D) all of the above
E) 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 forecast
C) policies on work force changes
D) master production schedules
E) cost information
Answer: D Page: 545
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Practice Questions
4. Which one of the following is not a basic option for
altering demand?
A) promotion
B) backordering
C) pricing
D) subcontracting
E) All are demand options.
Answer: D Page: 545
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Practice Questions
5. Which of the following would not be a strategy associated with
adjusting aggregate capacity to meet expected demand?
A) subcontract
B) vary the size of the workforce
C) vary the intensity of workforce utilization
D) allow inventory levels to vary
E) 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) disaggregation
C) sub-optimization
D) strategy formulation
E) chase strategies
Answer: B Page: 559
