Aggregate Sales and Operations Planning

Chapter 16

Planning Horizon
Aggregate planning: Intermediate-range
capacity planning, usually covering 2 to 12 months.
Long range
Intermediate range

Short range Now

2 months

1 Year

Overview of Planning Levels

Long-range plans Long term capacity Location / layout
Intermediate plans (General levels) Employment Output Inventory Overtime Subcontracting Short-range plans (Detailed plans) Machine loading Job assignments/sequencing/work schedules

Hierarchical Approach to Planning

Aggregate Planning
Also called Sales and Operation Planning
The term has been coined by companies to refer to

the process that helps companies keep demand and supply in balance

What does Aggregate Mean?

Overall terms
Product families or product lines rather than

individual products Big picture approach to planning Aggregate, for example # bicycles to be produced, but would not identify bicycles by colour, size, type etc.

Aggregate Plan and MPS for Electric Motors

Disaggregation
In the manufacturing environment the process

of breaking down the aggregate plan into greater detail is called disaggregation Schedule (MPS)

Disaggregation results in Master Production

MPS Purchasing Production of parts or components

Aggregate Planning
It determines the resource capacity a firm will need

to meet its demand over an intermediate time horizon

In this time frame it is too early to determine

production level by SKU but too late to arrange additional capacity

Why Aggregate Planning?

Provides for fully loaded facilities, thus minimizing
Overloading and under loading Minimizing cost over the planning period

Adequate production capacity to meet expected

aggregate demand
Optimize balance between demand and supply

Why Aggregate Planning?

A plan for orderly and systematic change of

production capacity to meet peaks and valleys of expected customer demand

Getting the most output for the amount of resources

available, which is important in times of scarce production resources

Steps in Aggregate Planning

1.

Begin with sales forecast for each product that indicates the quantities to be sold in each time period (usually weeks, months, or quarters) over the planning horizon (3-18 months)

2.

Total all the individual product or service forecast into one aggregate demand.

Steps in Aggregate Planning

3.

Determine capacities (regular time, OT, Subcontracting) for each period Identify company policy (chase, level) Determine unit costs for regular time, OT, subcontracting, holding inventories, back orders layoffs etc

4. 5.

Steps in Aggregate Planning

6. 7.

Develop alternative plans and compute cost for each Select the best alternative that satisfies companys objectives

Strategies for Meeting Demand

Proactive
Alter demand to match capacity

Reactive
Alter capacity to match demand

Mixed
Some of each

Strategies for Meeting Demand

Proactive strategies
Influencing Demand Offer discounts and promotions Increase advertising in slack periods Counter seasonal products Lawnmowers (summer) and snow-blowers (winter)

Strategies for Meeting Demand

Reactive Strategies

Changing inventory levels Vary workforce size (hiring and lay-off) Varying shifts Varying working hours Varying production through overtime or idle time Subcontracting

Inputs to Aggregate Planning

Production rates Demand forecast Policies on work force changes Costs (inventory, hiring, firing, OT, sub-contracting) Inventory levels

Outputs of Aggregate Planning

Total cost of a plan Projected levels of
Inventory Output Employment

Subcontracting

Graphical Method
Popular techniques Easy to understand and use

Trial-and-error approaches that do not guarantee an optimal solution

Require only limited computations

Graphical Method
Month Expected Demand
Production Days

Demand / day

Avg. daily demand

Jan

900

22

41

50

Feb
March

700
800

18
21

39
38

50
50

April
May

1200
1500

21
22

57
68

50
50

June

1100
6,200

20
124

55

50

Graphical Method

Note: Forecast differs from average demand

Aggregate Planning Techniques

Two pure forms of aggregate planning

strategies

Level Production Maintain constant workforce and adjust inventory Chase Demand Hiring and Firing people Part Time employees Mixed Strategy

Note: When one alternative: Pure Strategy

When multiple: Mixed strategies

Level Strategy
It is an aggregate planning in which daily or

monthly production is uniform

Toyota and Nissan follow this strategy Finished goods inventory go up or down to buffer the

difference between demand and production

Works when demand is stable

Level Production Strategy

LEVEL PRODUCTION STRATEGY

Assume begin inventory: 2000

Chase Strategy
It attempts to achieve output rates that match

demand forecast for that period. This strategy can be accomplished by:
Vary workforce levels (hiring and firing) Part time employees

Overtime or subcontracting

Chase Demand Strategy

CHASE DEMAND STRATEGY

OVERTIME & SUBCONTRACTING

Chase vs. Level

Chase Approach
Advantages
Investment in inventory is

Level Approach

Advantages

low
Labor utilization in high

Stable output rates and workforce

Disadvantages
The cost of adjusting

Disadvantages
Greater

inventory costs overtime and

output rates and/or workforce levels

Increased

idle time

Resource utilizations vary over time

Mixed Strategy
For most firms, neither a chase strategy nor a level

strategy is likely to prove ideal, so a combination of options must be achieved to meet demand and minimize cost
More complex than pure ones but typically yield a

better strategy

Mixed Strategy
Examples Do not hire or lay off workers, adjust the production rate by varying the number of shifts, use inventory and subcontracting to match supply and demand
Do not hire or lay off workers, use subcontracting

during periods of high demand and build inventory during periods of low demand

MIXED STRATEGY

Linear Programming Approaches to AP

Finds minimum cost solution related to regular

labour time, overtime, subcontracting, caring inventory, and costs associated with changing the size of workforce

Mathematical Techniques to Aggregate Planning

Linear Programming
Optimal solutions Cost minimization Profit maximization

Appropriate when cost and variable relationships

are linear
Application in industry limited

Transportation Method in AP

Transportation Method (An Example)

Total Costs

Period

Demand

Regular Production

Overtime

Subcontract

End Inventory

1 2 3 4 Total

900 1500 1600 3000 7000

1000 1200 1300 1300 4800

100 150 200 200 650

0 250 500 500 1250

500 600 1000 0 2100

Total Cost: 4800$20+650$25+1250$28+2100$3 = $153,550

Transportation Method in AP

Problem 8

Total Costs
Period Demand Regular Production Overtime Subcontract End Inventory

1 800 700 2 1000 700 3 750 700 4 Total 2550 2100

50 50 50 150

150 50

200 0 0 200

200

TC = 210040 + 15050 + 20070 + 2003 = $105900

Simulation Models in AP
Development of computerized model under

variety of conditions to find reasonably acceptable solutions Advantages

Lends itself to problems that are difficult to solve

mathematically Experimenting system behaviour without any risk Compresses time to understand system Understand system behaviour under wide range of conditions

Simulation Models in AP
Limitations
Simulation does not produce optimal solutions, it

merely indicates approximate behaviour for a set of inputs

Simulations are based on models, and models are only

approximation of reality

Summary of Aggregate Planning Techniques

Technique
Spreadsheet

Solution Approach
Heuristic (trial and error) Optimizing

Characteristics
Intuitively appealing, easy to understand, solution not optimal Computerized

Linear Programming

Simulation

Heuristic (trial and error)

Computerized models can be examined under various scenarios