months 1 Year

Planning Sequence

Aggregate Planning Inputs

¾ Resources 1. Workforce 2. Facilities

¾ Demand forecast

¾ Policies

1. Subcontracting 2. Overtime 3. Inventory levels 4. Back orders

¾ Costs

1. Inventory carrying 2. Back orders 3. Hiring/firing 4. Overtime

5. Inventory changes 6. subcontracting Aggregate Planning Outputs

1. Total cost of a plan

2. Projected levels of inventory 3. Inventory

4. Output 5. Employment 6. Subcontracting 7. Backordering

© Copyright Virtual University of Pakistan Aggregate Planning Strategies

¾ Proactive Strategy: Strategies that alter demand to match capacity are known as Proactive Strategy.

¾ Reactive Strategy: Strategies that alter capacity to match demand are known as Reactive Strategy.

¾ Mixed. Strategies that make use of qualities from both Proactive and Reactive Strategy are known as Mixed Strategies.

Demand and Capacity Options

Demand Options: The four common demand options primarily focus on market aspects apart from backorders which is strictly operational management in nature. The operations manager should know all four demand options but should be more interested in back order option.

1. Pricing 2. Promotion 3. Back orders 4. New demand

Capacity Options: The common capacity options primarily focus on.

1. Hire and layoff workers 2. Overtime/slack time 3. Part-time workers 4. Inventories 5. Subcontracting

6. Maintain a level workforce 7. Maintain a steady output rate 8. Match demand period by period

9. Use a combination of decision variables

An important point to be noted is that Demand options are short range in nature while Capacity options are long duration (term or range).

Which Strategy to Use

The organization needs to consider two factors before choosing a strategy 1. Costs

2. Company/Corporate Policy

¾ Policy can set constraints on available options. E.g. Layoffs, subcontracting/Outsourcing ( PIA subcontracting its databases) to protect secrecy.

¾ As a rule of thumb, aggregate planners seek to match supply and demand within in constraints by policies and minimum costs.

Lesson 30

AGGREGATE PLANNING

Learning Objectives

In this lecture we will cover the basic aggregate planning strategies, Assumptions for Aggregate Planning, different Aggregate Planning Relationships, Master Schedule and Master Scheduler. We will study desegregating the aggregate plans for production control. This discussion would prepare us to take a deeper look into Inventory Management and MRP/ERP. All this would allow us to become effective operations manager to work for improving the operations as well as the systems of the organizations we will work for.

Basic Strategies

¾ Level capacity strategy: Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options.

¾ Chase demand strategy: Matching capacity to demand; the planned output for a period is set at the expected demand for that period.

Chase Approach

¾ Advantages

1. Investment in inventory is low 2. Labor utilization in high

¾ Disadvantages

1. The cost of adjusting output rates and/or workforce levels Level Approach

¾ Advantages

1. Stable output rates and workforce

¾ Disadvantages

1. Greater inventory costs

2. Increased overtime and idle time 3. Resource utilizations vary over time Techniques for Aggregate Planning

1. Determine demand for each period 2. Determine capacities for each period 3. Identify policies that are pertinent 4. Determine units costs

5. Develop alternative plans and costs

6. Select the best plan that satisfies objectives. Otherwise return to step 5.

Assumptions for Aggregate Planning

1. The regular output capacity is the same for all periods.

2. Cost (Back Order, Inventory, Subcontracting etc) is a linear function composed of unit cost and number of units. ( In reality cost is more of a step function)

3. Plans are feasible ( There is sufficient inventory exists to accommodate a plan, subcontractors would provide quality products and outsourcers would be secure)

4. Assumptions for Aggregate Planning

5. All costs associated with a decision option can be represented by a lump sum or by unit costs that are independent of the quantity involved.

© Copyright Virtual University of Pakistan

7. Inventories are built up and draw down at a uniform rate and output occurs at a uniform rate throughout each period. Backlogs are treated as if they exist for the entire period, even though in reality they tend to build up towards the end of the period

Aggregate Planning Relationships

1. Number of workers in a period equals Number of Workers at the end of the previous period PLUS Number of new Workers at the start of the current period - Number of laid off Workers at the start of the current period

2. NOTE: SINCE the organization would not hire and layoff simultaneously, so at least one of the last two terms will be “0”.

3. Inventory at the end of a ( current) period equals Inventory at the end of the previous period PLUS Production in the current period – Amount used to satisfy the demand in the current period

4. NOTE :The average Inventory for a period is equal to (Beginning Inventory Plus Ending Inventory)/2

Average Inventory

Aggregate Planning Relationships

•Cost for a ( current) period equals Output Cost ( Regular +OT+ Subcontract) + Hire/Layoff Cost+

Inventory Cost + Backorder Cost NOTE

The cost of a particular plan for a given period can be determined by summing the appropriate costs

Aggregate Planning Relationships

Type of Costs How to Calculate Output

Regular Regular Cost per Unit X Quantity of Regular Output

Overtime Overtime Cost per Unit X Overtime Quantity Subcontract Subcontract Cost per Unit X Subcontract

Quantity Hire/Layoff

Hire Cost Per Hire X Number Hired Layoff Cost per Layoff X Number laid off

Inventory Carrying Cost per Unit X Average Inventory Back Order Back Order Cost Per Unit X Number of

Backorder Units Mathematical Techniques

Linear programming: Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization.

Linear decision rule: Optimizing technique that seeks to minimize combined costs, using a set of cost-approximating functions to obtain a single quadratic equation.

© Copyright Virtual University of Pakistan Summary of Planning Techniques

Aggregate Planning in Services

1. Services occur when they are rendered .Unlike most manufacturing output, most services cannot be inventoried. Services such as financial planning, tax counseling and oil changes cant be inventoried/stockpiled. This removes the option of building up the inventories during a slow period in anticipation of future demand.

2. Demand for service can be difficult to predict .The volume of demand for services is often variable. In some situations, customers may need prompt service . e.g. police, fire, medical emergency while in others they may not need prompt service and may be willing to find some other service provider.

3. Capacity Availability can be difficult to predict. Processing requirements for services can sometimes be quite variable, similar to the variability of work in a job shop setting.

4. Demand for service can be difficult to predict It is difficult to measure the capacity of a person rendering a service, a dentist, a Montessorian, a bank teller in anticipation of future demand).

5. Labor Flexibility can be advantage in Services Labor often comprises a significant portion of service compared to manufacturing. That coupled with the fact that service providers are often able to handle a fairly wide variety of service requirements means that to some extent, planning is easier than manufacturing