Aggregate Aggregate

ProductionProduction

PlanningPlanning

ContentsContents1- What is aggregation?1- What is aggregation?2- What is aggregate production planning?2- What is aggregate production planning?3- Importance of aggregate planning3- Importance of aggregate planning4- Aggregate planning inputs+ outputs4- Aggregate planning inputs+ outputs5- Aggregate planning in services5- Aggregate planning in services6- Matching capacity and demand6- Matching capacity and demand7- Aggregate planning strategies7- Aggregate planning strategies8- Example of aggregate planning8- Example of aggregate planning

1- What is aggregation?1- What is aggregation?

What is What is aggregation?aggregation? Aggregation refers to the idea ofAggregation refers to the idea of focusing on overall capacity, focusing on overall capacity,

rather than on individual products or services, or bringing rather than on individual products or services, or bringing together under one plan, groupings of related products or together under one plan, groupings of related products or services.services.

For servicesFor services : : For services, aggregate planning refers to determining a For services, aggregate planning refers to determining a staffing staffing

planplan based on the following: based on the following: The scheduling of staff to meet or exceed customer service needsThe scheduling of staff to meet or exceed customer service needs Capacity requirements (machines, facility)Capacity requirements (machines, facility)

For manufacturingFor manufacturing:: aggregate planning refers to determining a production plan based on aggregate planning refers to determining a production plan based on

the following:the following: Work force levelsWork force levels - the number of workers required for - the number of workers required for

productionproduction Production ratesProduction rates - the number of units produced per time period - the number of units produced per time period Inventory levelsInventory levels - the balance of unused units carried forward - the balance of unused units carried forward

from the previous period. from the previous period.

What is What is aggregation?aggregation? Aggregation is done according to: products, labour, & Aggregation is done according to: products, labour, &

time:time: ProductsProducts A product family (or product archetype) is a group of products group of products

that are manufactured similarlythat are manufactured similarly Have common labor and material requirementsrequirements Do not focus on details, but on broad product familiesDo not focus on details, but on broad product families LaborLabor Usually a specific plant is devoted to a given product family TimeTime How often should an aggregate plan be updated? Disruption versus sudden demand changes and/or seasonality

2-What is aggregate production planning?

What is the aggregate production What is the aggregate production planning?planning?

1- A “big picture” approach that does not focus on individual products or services. Instead, the focus is on groups of similar products of an entire product line. (Examples:- total number of bikes produced, and total number of customers served).

2- Medium-term capacity planning over a two to eighteen month planning horizon. It involves determining the lowest-cost method of providing the adjustable capacity for meeting production requirements.

3- An intermediate planning method used to determine the necessary resource capacity a firm will need in order to meet its expected demand

4- Process by which a company determines levels of capacity, production, subcontracting, inventory, stockouts, and pricing over a specified time horizon.

5- Process that translates annual business & marketing plans & demand forecasts into a production plan for all products in a plant or facility. Focus on quantity and timing of expected demand (forecast) Start with multiple plans and choose the most appropriate one

depending on revenue, market share, and Inventory targets

Overview of Overview of ManufacturManufacturing ing Planning Planning ActivitiesActivities

3-Importance of aggregate planning3-Importance of aggregate planning

Why aggregate planning is Why aggregate planning is necessary?necessary?

Operations and supply chain managementOperations and supply chain management To ensure that Operations is prepared to meet customer needsTo ensure that Operations is prepared to meet customer needs

Should make-buy decisions be changed?Should make-buy decisions be changed? Contracts for raw materials and partsContracts for raw materials and parts Labor requirementsLabor requirements Inventory levels Inventory levels

MarketingMarketing To ensure that the company's capacity will be used in the most profitable way, To ensure that the company's capacity will be used in the most profitable way,

considering market constraintsconsidering market constraints– If there is not enough capacity, which products or customers will have If there is not enough capacity, which products or customers will have

priority?priority? If there is more capacity than needed, how can the firm sell more?If there is more capacity than needed, how can the firm sell more? The aggregate operations plan and the sales Plan must be consistentThe aggregate operations plan and the sales Plan must be consistent

Accounting and FinanceAccounting and Finance To have an accurate budget for operationsTo have an accurate budget for operations To ensure adequate cash flow for operationsTo ensure adequate cash flow for operations Year-end inventory levels affect earnings forecastsYear-end inventory levels affect earnings forecasts

Human resources managementHuman resources management If more workers will be needed, plan for hiring and trainingIf more workers will be needed, plan for hiring and training If fewer workers are needed, plan for layoffsIf fewer workers are needed, plan for layoffs

4- inputs, outputs of aggregate planning4- inputs, outputs of aggregate planning

Aggregate planning Aggregate planning inputsinputs A forecast of aggregate demandA forecast of aggregate demand

covering the selected planning horizon (6-18 months) Constraints:Constraints: limits on overtime, layoffs, capital available, stockouts or

backlogs, company policy, financial constraints, capacity constraints

The alternative means availableThe alternative means available to adjust short- to medium-term capacity, to what extent each

alternative could impact capacity and the related costs Production costs:-Production costs:-

labor costs, regular time ($/hr) and overtime ($/hr)labor costs, regular time ($/hr) and overtime ($/hr) subcontracting costs ($/hr or $/unit)subcontracting costs ($/hr or $/unit) cost of changing capacity: hiring or layoff ($/worker) and cost of adding cost of changing capacity: hiring or layoff ($/worker) and cost of adding

or reducing machine capacity ($/machine)or reducing machine capacity ($/machine) Stockout or backlog cost ($/unit/periodStockout or backlog cost ($/unit/period))

Aggregate planning outputs Total cost of a plan

Production quantity from regular time, overtime, and subcontracted time: used to determine number of workers and supplier purchase levels

Inventory held: used to determine how much warehouse space and working capital is needed

Backlog/stockout quantity: used to determine what customer service levels will be

Machine capacity increase/decrease: used to determine if new production equipment needs to be purchased

In brief outputs are the projected levels of : Monthly production inventory Employment (size of work force) Subcontracting Backordering, and the costs of all these components

5-Aggregate planning in services5-Aggregate planning in services

--Intangible products can’t be inventoried Possible approaches:-

Try to proactively shift demand away from peaks Use overtime or subcontracting to handle peaks Allow lost sales Cross train people to increase effective capacity

DifficultiesDifficulties Services can not be inventoried Demand is difficult to predict Capacity is difficult to predict Service capacity must be provided at appropriate time and place Labor is most constraining resource Demand is perishable Input is highly variable

Aggregate planning in Aggregate planning in servicesservices

6- Matching capacity and demand6- Matching capacity and demand

Matching capacity and Matching capacity and demand demand

A- Adjusting capacityB- Adjusting demand

(A)- Modifying capacity(A)- Modifying capacity

Strategies for modifying capacity

After existing and future capacity requirements are assessed, alternative ways of modifying capacity must be identified.

Short-term Responses: For short-term periods of up to one yearFor short-term periods of up to one year,

fundamental capacity is fixed. Major facilities are seldom opened or closed on a regular monthly or

yearly basis. Many short-term adjustments for increasing or decreasing capacity

are possible,

Temporary capacity changesType Action

Inventories Inventories Stock pile finished goods during slack periods to meet later demand. Stock pile finished goods during slack periods to meet later demand.

BacklogsBacklogs During peak demand periods, ask willing customers to wait some time before During peak demand periods, ask willing customers to wait some time before receiving their product. File their order and fulfill it after the peak demand period receiving their product. File their order and fulfill it after the peak demand period

Employment levelsEmployment levels Hire additional employees or layoff employees as demand for output increases and Hire additional employees or layoff employees as demand for output increases and decreases. decreases.

Work force utilization Work force utilization Have employees work overtime during peaks and be idle or work fewer hours Have employees work overtime during peaks and be idle or work fewer hours during slack demand periodsduring slack demand periods

Employees trainingEmployees training Instead of having each employee specialize in one task, train each in several tasks. Instead of having each employee specialize in one task, train each in several tasks. Then, as skill requirements change, rotate employees among different tasks. This is Then, as skill requirements change, rotate employees among different tasks. This is an alternative to hiring and layoffs for getting needed skills. an alternative to hiring and layoffs for getting needed skills.

Process design Process design Change the job content at each workstation to increase productivity~ Use work Change the job content at each workstation to increase productivity~ Use work methods analysis to redesign-jobs. methods analysis to redesign-jobs.

SubcontractingSubcontracting During peak periods, hire other firms temporarily to make the product or some of During peak periods, hire other firms temporarily to make the product or some of its subcomponents its subcomponents

Capacity (aggregate) options - advantages & Capacity (aggregate) options - advantages & disadvantagesdisadvantages

OptionOption AdvantageAdvantage DisadvantageDisadvantage Some Some CommentsComments

Changing Changing inventory inventory levelslevels

Changes in human Changes in human resources are gradual, resources are gradual, not abrupt production not abrupt production

changeschanges

InventoryInventoryholding costs; holding costs; Shortages may result Shortages may result in lost salesin lost sales

Applies mainly to production Applies mainly to production , not service, not service

operationsoperations

VaryingVarying

workforce size workforce size by hiring or by hiring or layoffslayoffs

Avoids use of other Avoids use of other alternativesalternatives

Hiring, layoff and Hiring, layoff and training coststraining costs

Used where size of labor Used where size of labor pool is largepool is large

VaryingVarying

production production rates through rates through overtime or overtime or idle timeidle time

Matches seasonal Matches seasonal fluctuations without fluctuations without hiring/training costshiring/training costs

Overtime premiums, Overtime premiums, tired, workers, may tired, workers, may not meet demandnot meet demand

Allows flexibility withinAllows flexibility within

the aggregate planthe aggregate plan

SubcontractingSubcontracting Permits flexibility and Permits flexibility and smoothing of the firm's smoothing of the firm's outputoutput

Loss of quality control; Loss of quality control; reduced profits; loss reduced profits; loss of future businessof future business

Applies mainly in production Applies mainly in production settingssettings

Capacity (aggregate) options - advantages & Capacity (aggregate) options - advantages & disadvantagesdisadvantages

OptionOption AdvantageAdvantage DisadvantageDisadvantage Some Some CommentsComments

Using part-timeUsing part-time workersworkers

Less costly and more Less costly and more flexible than full-time flexible than full-time workersworkers

High turnover/training High turnover/training costs; quality suffers; costs; quality suffers; scheduling difficultscheduling difficult

Good forGood for

unskilled jobs in areas with unskilled jobs in areas with large temporary labor large temporary labor poolspools

InfluencingInfluencing

DemandDemandTries to use excess Tries to use excess capacity. Discounts capacity. Discounts draw new customersdraw new customers

Uncertainty inUncertainty in

demand. Hard to demand. Hard to match demand to match demand to supply exactlysupply exactly

Creates marketing ideas.Creates marketing ideas.

Overbooking used in some Overbooking used in some businesses.businesses.

Back ordering Back ordering during high- during high- demand periodsdemand periods

May avoid overtime. May avoid overtime. Keeps capacity Keeps capacity constantconstant

Customer must be Customer must be willing to wait, but willing to wait, but goodwill is lostgoodwill is lost

Many companies backlog.Many companies backlog.

Counterseasonal Counterseasonal products and products and service mixingservice mixing

Fully utilizesFully utilizes

resources; allows resources; allows stable workforcestable workforce

May require skills or May require skills or equipmentequipment

outside a firm's areas outside a firm's areas of expertiseof expertise

Risky finding products or Risky finding products or services with opposite services with opposite demand patterns.demand patterns.

STRATGIES FOR MODIFYING STRATGIES FOR MODIFYING CAPACITYCAPACITY

Long-term Responses: The costs, benefits, and risks of expansionexpansion pose an interesting decision

problem. By building the entire addition nowBy building the entire addition now, the company avoids higher

building costs, the risk of accelerated inflation (and even higher future construction costs), and the risk of losing additional future business because of inadequate capacity.

But there may also be disadvantages to this alternative:-But there may also be disadvantages to this alternative:- FirstFirst: the organization may not be able to muster the financial investment. Second:Second: if the organization expands nownow, it may find later that its

demand forecasts were incorrectdemand forecasts were incorrect; if ultimate demand is lower than expected, the organization has overbuilt.

Finally,Finally, even if forecasted demand is accurate, it may not fully materialize until the end of the planning horizonend of the planning horizon. If so, the organization will have invested in an excess-capacity facility on which no return is invested in an excess-capacity facility on which no return is realized for several yearsrealized for several years. Since funds could have been invested in other ways, the organization has forgone the opportunity of earning returns elsewhere on its investment

(B)- Modifying demand(B)- Modifying demand

DEMAND STRATEGIESDEMAND STRATEGIES

Regardless of the capacity expansion strategy used, a company will almost always benefit if it can satisfy the same total demand using less investment in capacity.

A primary cause of underutilized capacity is short-term fluctuations in demand. Some products are highly seasonal, so that demand is very large during certain months of the yea days of the week, or even times of the day.

If the capacity of the production system is designed to meet the maximum demand rates, a substantial amount of the capacity is unused during low-demand periods. Here we present strategic actions that can reduce a company's investment in production capacity without harming its ability to satisfy customer demand .

Here we will discuss some the following strategies:

1- Development of countercyclic but similar products2- Differential pricing and product promotion3- Capacity sharing

7- Aggregate planning strategies7- Aggregate planning strategies

Aggregate Planning Strategies – Aggregate Planning Strategies – main questionsmain questions

Should inventories be usedinventories be used to absorb changes in demand during planning period?

Should demand changes be accommodated by varying the size of the workforce?varying the size of the workforce?

Should part-timerspart-timers be used, or should overtimeovertime and/or machine idle timeidle time be used to absorb fluctuations?

Should subcontractorsubcontractors be used on fluctuating orders so a stable workforcestable workforce can be maintained?

Should pricesprices or other factors be changed to influence demand?influence demand?

Aggregate Planning Strategies

Three basic production strategies :Three basic production strategies :

- - chase strategy,chase strategy,

- level strategy, and - level strategy, and

- mixed production strategy- mixed production strategy

Extremes strategiesExtremes strategies

Level Strategy

Chase Strategy

Production equals

demand

Production rate is constant

Aggregate planning pure Aggregate planning pure strategystrategy

Level Production

Production

Demand

Uni

ts

Time

Chase Demand

Production

Demand

Uni

ts

Time

Chase StrategyChase Strategy

- Adjusts capacity to match the demand pattern. Firm Adjusts capacity to match the demand pattern. Firm hires & lays off workers to match production to hires & lays off workers to match production to demand. Workforce fluctuates but finished goods demand. Workforce fluctuates but finished goods inventory remains constant. inventory remains constant.

- Works well for - Works well for make-to-ordermake-to-order firms firms Produces exactly what is needed each periodProduces exactly what is needed each period

Sets labor/equipmentSets labor/equipment capacity to satisfy period capacity to satisfy period demandsdemands

Level strategyLevel strategy

Relies on a Relies on a constant output rate & constant output rate & capacity (capacity (Workforce levels )Workforce levels )while varying while varying inventory & backlog levelsinventory & backlog levels according to according to fluctuating demand pattern. fluctuating demand pattern.

. Works well for . Works well for make-to-stomake-to-stockck manufacturing manufacturing firms.firms.

Sets capacity to accommodate average demandSets capacity to accommodate average demand Produce same amount alwaysProduce same amount always Keep work force level constant Keep work force level constant Vary non-work force capacity or demandVary non-work force capacity or demand Often results in lowest production costsOften results in lowest production costs

Maintaining a steady rate of regular-time Maintaining a steady rate of regular-time output while meeting variations in demand output while meeting variations in demand by a combination of options.by a combination of options.

Production planning Production planning techniquestechniques

Production planning Production planning techniquestechniques

Linear Programming Linear Decision Rule Computer Simulation Search Decision (Computer heuristic model) Tableau Method (transportation method) Trial and Error

Costing out the production alternatives and choosing the one with the lowest cost.

Developing the Aggregate Developing the Aggregate PlanPlan

Step 1-Step 1- Choose strategy: level, chase, or hybrid Step 2-Step 2- Determine the aggregate production rate Step 3-Step 3- Calculate the size of the workforce Step 4-Step 4- Test the plan as follows:

Calculate Inventory, expected hiring/firing, overtime needs Calculate total cost of plan

Step 5-Step 5- Evaluate performance: cost, service, human resources, and operations

7- aggregate planning example7- aggregate planning example