Agregate planing lecture

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  • Students should be asked about the characteristics of the decisions which must be made in each of these planning horizons.
  • 11 11
  • Agregate planing lecture

    1. 1. Chapter 2 – Aggregate Planning 1
    2. 2. 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
    3. 3. 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 3
    4. 4. 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. 4
    5. 5. 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: 5
    6. 6. VARIABLES USED INAGGREGATE PLANNING 6
    7. 7. Planning Horizons Responsible: Short-range plans Operations Job assignments managers Ordering Job scheduling Responsible: Intermediate-range plans Dispatching Top executives Sales planning Production planning and budgeting Responsible: Setting employment, inventory, Long-range plans Operations subcontracting levels R&D managers, Aggregate planning New product plans supervisors, Capital expenses foremen Facility location, expansionToday 3 Months 1 year 5 years Planning Horizon
    8. 8. Relationships of Aggregate Schedule AggregateForecast & Resource ProductionFirm Orders Availability Planning Work force Inventory Material Master SubcontractorsRequirements Production Planning Scheduling No, modify CRP, MRP, or MPS Capacity ShopRequirements Realistic? Floor Planning Yes Schedules
    9. 9. Required Inputs to the Production Planning System Competitors’be Raw material Market havior availability demand External to firm External Economic capacity conditions Planning for productionCurrent Current Inventory Activities Internalphysical workforce levels required for to firmcapacity production
    10. 10. Manufacturing options to meetfluctuating 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) 10
    11. 11. Relevant costs1. Basic production cost  Direct & indirect labor costs & regular as well as overtime compensation2. Costs associated with changes in the production rate  Cost of hiring, firing & training3. Inventory holding cost  Cost of capital tied up, storing, insurance…etc 11
    12. 12. Relevant costs4. Backordering costs  Very hard to measure, loss of customer goodwill, loss of sales revenues resulting from backordering. 12
    13. 13. 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 13
    14. 14. The Extremes Level Chase Strategy Strategy ProductionProduction rate is equals constant demand
    15. 15. Level Plan Example Level production rate= 28,000 units/7 periods= 4000 units Level workforce= (4000 units x .64 std.)/160 = 16 people 15
    16. 16. 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 16
    17. 17. 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 17
    18. 18. 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 18
    19. 19. 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? 19
    20. 20. 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 20
    21. 21. Plan for Companies with TangibleProducts – 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 21
    22. 22. Problem Data for Plans A & B (Table 13-4) 22
    23. 23. Plan A - Level Using Inventory & Backorders (Table 13-5) First calculate the level production rate (14400/8=1800) 23
    24. 24. 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 24
    25. 25. Plan B – Chase Aggregate PlanUsing Hiring and Firing (Table 13-6) 25
    26. 26. 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 26
    27. 27. 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 27
    28. 28. Problem Data for Plans C, D, and E (Table 13-7) A B 4 Cost Data 5 Regular time labor cost per hour $8.00 6 Ov ertime labor cost per hour $12.00 7 Subcontracting cost per unit (labor only) $60.00 8 Hiring cost per employee $250.00 9 Firing cost per employee $150.001011 Capacity Data12 Beginning workforce (employees) 6013 Serv ice standard per call (hours) 414 Regular time av ailable per period (hours) 16015 Ov ertime av ailable per period (hours) 241617 Demand Data (calls)18 Period 1 240019 Period 2 156020 Period 3 120021 Period 4 204022 Period 5 276023 Period 6 168024 Period 7 132025 Period 8 24002627 Total Number of Periods 8 2828
    29. 29. Plan C – Level Aggregate Plan with No Back Orders, No Tangible Product (Table 13-8) D E F G H I J K L M 3 Plan E: Level Aggregate Plan with No Backorders, No Tangible Product 4 5 Compute Workforce Needed 6 Maximum Demand 2760 <-- Need to staff to meet the maximum number of calls 7 Calls per Worker per Period (Reg Time) 40 8 Workers Needed 69 9 Number to Hire 910 Number to Fire 01112 Detailed Plan Computations Period13 1 2 3 4 5 6 7 8 Total14 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 1536015 Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 6144016 Regular time hours available 11040 11040 11040 11040 11040 11040 11040 1104017 Undertime hours 1440 4800 6240 2880 0 4320 5760 1440 268801819 Cost Calculations for Plan E20 Regular time labor cost $706,56021 Hiring cost $2,25022 Firing cost $023 Total Cost $708,81024  Staff of 69 people creates excessive UT (averages 30% UT)  Cost per service call is $46.15 ($708,000 Divided by 15360 calls) 29
    30. 30. Plan D – Hybrid Aggregate Plan Using Initial Workforce and OT as Needed (Table 13-9) D E F G H I J K L M26 Plan F: Hybrid Aggregate Plan Using Initial Workforce and Overtime as Needed2728 Detailed Plan Computations Period29 1 2 3 4 5 6 7 8 Total30 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 1536031 Service hours needed 9600 6240 4800 8160 11040 6720 5280 9600 6144032 Regular time hours of capacity 9600 9600 9600 9600 9600 9600 9600 9600 7680033 Overtime hours needed 0 0 0 0 1440 0 0 0 144034 Undertime hours 0 3360 4800 1440 0 2880 4320 0 168003536 Cost Calculations for Plan F37 Regular time labor cost $614,40038 Overtime labor cost $17,28039 Total Cost $631,680  Costs reduced by $77K and under time to an average of 20%  Cost per service call reduced to $41.13 (-$5.02) 30
    31. 31. Plan E – Chase Aggregate Plan for Nontangible Products Using Hiring and Firing (Table 13-10) D E F G H I J K L42 Plan G: Chase Aggregate Plan Using Hiring and Firing4344 Beginning Number of Employees 604546 Detailed Plan Computations Period47 1 2 3 4 5 6 7 848 Demand (calls) 2400 1560 1200 2040 2760 1680 1320 240049 Service hours needed 9600 6240 4800 8160 11040 6720 5280 960050 Number of employees needed 60 39 30 51 69 42 33 6051 Number of hires 0 0 0 21 18 0 0 2752 Number of fires 0 21 9 0 0 27 9 05354 Cost Calculations for Plan G55 Regular time labor cost $491,52056 Hiring cost $16,50057 Firing cost $9,90058 Total Cost $517,920  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?? 31
    32. 32. 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 32
    33. 33. 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 33
    34. 34. Planning Links to MPS 34
    35. 35. 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 35
    36. 36. 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 36
    37. 37. MPS as a Basis ofCommunication 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) 37
    38. 38. 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? 38
    39. 39. The MPS RecordW eek BI 1 2 3 4 5 6 7 8 9 10 11 12F orec as t 50 50 50 50 75 75 75 75 50 50 50 50P rojec t ed ava ila ble 110 60 10 -4 0MPSW eek BI 1 2 3 4 5 6 7 8 9 10 11 12F orec as t 50 50 50 50 75 75 75 75 50 50 50 50P rojec t ed ava ila ble 110 60 10 85 35 -40MPS 12 5 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) 39
    40. 40. Revised and Completed MPS RecordW eek BI 1 2 3 4 5 6 7 8 9 10 11 12Forec as t 50 50 50 50 75 75 75 75 50 50 50 50P rojec ted available 110 60 10 85 35 85 10 -65MPS 125 125 W eek BI 1 2 3 4 5 6 7 8 9 10 11 12 Forec as t 50 50 50 50 75 75 75 75 50 50 50 50 P rojec ted available 110 60 10 85 35 85 10 60 110 60 10 85 35 MPS 125 125 125 125 125 40
    41. 41. 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? 41
    42. 42. Stabilizing the MPS 42
    43. 43. Aggregate Planning Across theOrganization 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 43
    44. 44. 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. 44
    45. 45. 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. 45
    46. 46. The End Copyright © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. 46

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