Aggregate planning 1

Aggregate planning / scheduling

• Medium range plan - what we will make over the next 3-18 months.– general demand– controllable variables / forms of capacity

• production rates

• labor levels

• inventory levels

• outsourcing

• overtime

– does not include investments in facilities

Aggregate planning 2

Linkages• Marketing:

– when will products be available ? Lead times ? Excess inventory (good time for a sale?)

• Accounting and Finance:– cash flows- will we be making more than we are selling?

– do we have to finance inventory?

– when will suppliers need to be paid?

• Human resources– timing of hiring, firing and training

• Information Systems– what to track

– linkages to other supply chain members

Aggregate planning 3

Aggregate planning strategies

Companies can do any or all of the following:– Use inventory to absorb changes in demand– Vary the size of the workforce– Vary work hours

• part timers

• overtime

– Outsource• parts they could make

• the entire product

– Demand management

Aggregate planning 4

Examples of different strategies: tool and die shops

1) Atlas Tool and Die (competes on cost)– as demand increases working hours increase -

until both shifts are working 65 hours a week– once the shop is effectively running 24 a day

they start to outsource. If there is enough demand they will outsource the entire project.

– as demand decrease they bring work back in house and then cut work hours

Aggregate planning 5

Examples: DieCast

2) DieCast (competes on innovation / knowledge)

– work hours set at 50 a week• size of workforce driven by decision to keep people

working 50 hours a week all the time.

– usually outsource simple work– never outsource entire project– when demand decreases they bring work back

in house - have never laid off– when demand outstrips their capacity they turn

work down

Aggregate planning 6

Examples: Grand Rapids Mold and Die

3) GRMD (competes on speed)– machine capacity set at maximum level of

demand– hire workers as they get busier and fire when

work slows down– only outsource if every machine is running 24

hours a day- and then only until they can get another machine

Aggregate planning 7

Aggregate planning options: capacity

• Changing inventory levels• Varying workforce size by hiring or firing

– Grand Rapids

– Construction unions

• Over and idle time– why do companies prefer overtime to hiring new

people?

• Part time or temps– Adjunct faculty members

• Outsourcing

Aggregate planning 8

Outsourcing pluses and minuses

• Pluses– increased flexibility– increased quality (?)– decreased costs (?)

• Minuses– decreased control– can be very expensive in certain situations– suppliers can become competitors

Aggregate planning 9

Aggregate planning options: demand management

• Directly influence demand– promotions– early bird specials and happy hour

• Back-orders– MTO verses MTS

• Product mixing– Sea-doo / Ski-doo– The golf / ski shop

Aggregate planning 10

Level verses chase strategies

• Level production strategies: if possible the best plan is to keep production level and use inventory or backlogs (note DieCast is level with no inventory) to act as a buffer between production and demand.

– requires fairly stable demand (or very low inventory / backorder costs)

– why is this preferred

• Chase demand production strategies: vary the level of production to match demand using a combination of the previously discussed options.

– What must our capacity be to chase?

Aggregate planning 11

Methods of aggregate planning

• Mathematical approaches: a number of mathematical approaches to scheduling exist- but they are very complex, often do not work for large problems, and or take a very long time to run. So...

• Graphical / logical models tend to be used in practice

Aggregate planning 12

An example

Month Demand Production days

Demand per day

Jan. 900 22 41

Feb. 700 18 39

Mar. 800 21 38

Apr. 1200 21 57

May 1500 22 68

June 1100 20 55

Total 6200 124 50

Aggregate planning 13

Cost info. for example

Inventory carrying costs $5 unit per month

Subcontracting costs $10 unit

Average pay rate $ 5 hour ($40 a day)

Overtime pay rate $ 7 an hour (after 8 hours)

Labor hours per unit 1.6

units per day 5 per employee (8 hours)

costs to hire an employee 500

cost to fire an employee 700

Aggregate planning 14

A level demand strategy

• Produce 50 units a day - increasing inventory in Jan., Feb., and Mar., and decreasing it the last 3 months

• Workers required = 10 per day no O.T.• Beginning inventory and ending inventory = 0

Aggregate planning 15

The level plan

Month Production Demand Inventory change

Ending inventory

Jan. 1100 900 +200 200

Feb. 900 700 +200 400

Mar. 1050 800 +250 650

Apr. 1050 1200 -150 500

May 1100 1500 -400 100

June 1000 1100 -100 0

Aggregate planning 16

Costs of level plan

Costs Calculations

Inventorycarrying

9250 = 1850 units carried * $5unit / month

Regular-timelabor

49,600 = 10 workers * 40 per day* 124 days

other costs 0

Total costs 58,850

Aggregate planning 17

Another option: outsourcing

• In this option we choose to set production at the level of the lowest demand month (like DieCast) and outsource the remaining work.

• The lowest demand month is March where we make 38 units per day - so 38 units per day is our production plan.

• In order to achieve this we need 7.6 workers (38 /5)

Aggregate planning 18

Outsourcing costs

• In house production = 38 * 124 = 4712– 7.6 workers * $ 40 per day * 124 days = 37,696

• Outsourced production = 6200 - 4712 = 1488 – 1488 * 10 unit = 14,880

• Total costs =– 37.696 + 14,880 = 52,576

Aggregate planning 19

Your turn

• Do a chase demand plan

• Use only whole employees

• Remember to include hire and fire costs

• Use overtime not idle time

Aggregate planning 20

Chase strategyDemand

Days Produce

Employee

RT OT Hire costs

Fire costs

Total

900 22 41 8 7040 246.4 0 0 7286.4

700 18 39 7 5040 806.4 0 700 6546.4

800 21 38 7 5880 705.6 0 0 6585.6

1200 21 57 11 9240 470.4 2000 0 11710.4

1500 22 68 13 11440 739.2 1000 0 13179.2

1100 20 55 11 8800 0 0 1400 10200

55508

Aggregate planning 21

Try this

• Use the same cost data but – Add backorder costs of $10 a unit

• Plan – split level: 1 level of production for Jan- March, a second for April – June

• Use overtime not idle time

• If you did not want to have backorders what could you do?

Aggregate planning 22

The basics of the split planMonth day month Demand Inventory

change Ending

inventory Jan. 39.34 865.57 900 -34.43 -34.43

Feb. 39.34 708.2 700 8.2 -26.23

Mar. 39.34 826.23 800 26.23 0

Apr. 60.32 1266.67 1200 66.67 66.67

May 60.32 1326.98 1500 -173.02 -106.35

June 60.32 1206.35 1100 106.35 0

Aggregate planning 23

Costs for the split plan

Employment

RT OT Ending Inventory

Inventory

backorder

hire Fire total

7 6160 1070..43

-34.43 0 344 0 0 7574.69

7 5040 875.80 -26.23 0 262 0 0 6178.1

7 5880 1021.77 0 0 0 0 0 6901.77

12 10080 74.67 66.67 333 0 2500 0 12988

12 10560 78.22 -106.35 0 1063 0 0 11701.71

12 9600 71.11 0 0 0 0 0 9671.11

55015.38

Aggregate planning 24

Aggregate planning conclusions

• These were only a few of a number of options.

• We generally focused on the price

• Other goals besides lowest price ?– customer service– employee morale– etc.– Should be linked to strategy