Aggregate Production Planning - Lecture Notes

Aggregate Production Planning

7 - 1

Section Objectives

After completing this section, you should be able to:

1. Explain what aggregate production planning is and how it can be useful.

2. Identify the variables that decision makers have to work with in aggregate planning and some of the possible strategies they can use.

3. Describe some of the trial and error and quantitative techniques planners use.

4. Prepare aggregate plans and compute their costs.


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PRODUCTIONPLANNING

PRODUCTIONPLANNING

CAPACITY

WORK FORCE

PRODUCTION

INVENTORY

INTERNAL

EXTERNAL

EXTERNALCAPACITY

COMPETITIONRAW MATERIAL

SUPPLYDEMAND

ECONOMICCONDITIONS

Production Planning Environment


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PLANNING HORIZON 1. LONG RANGE

- Business Forecasting- Product & Market Planning- Capacity Planning- Location & Layout- Financial Planning

5 YEARS

2. MEDIUM RANGE

- Aggregate Production Planning- Product Forecasting- Master Production Scheduling- Employment / Output / Inventory

1 YEAR

3. SHORT RANGE

- Materials & Purchasing Control- Scheduling- Machine Loading- Job Assignments

2 - 3 MONTHS

Production Planning Horizon


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Aggregate Production PlanningObjective: To develop a plan that will satisfy or meet demand within the

limits of available resources, at least cost to the organization.

Includes: Optimal combination of production rate, work force level and inventory.

Time Frame: six to eighteen months.

Strategies for Adjusting the Output (Production) Rate1. Vary the work force level.

2. Vary the inventory level.

3. Vary the production level.

4. Vary the level of customer service (back orders).

5. Sub-contract some of the production requirements.

6. Alter the peak output capacity.


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STRATEGY INCREASE DECREASE

1. Work Force(WF)

2. Production Rate(PR)

3. Inventory Level(INV)

4. Back Order(BO)

5. Subcontracting(SUB)

InterviewHiring

Training

Overtime & Shift DifferentialsLower ProductivityDecreased Quality

Warehousing CostsObsolescence / Shrinkage

Opportunity Cost

Lost SalesReduced Level of Service

Decreased QualityLoss of Control

Higher Unit Costs

Severance PaymentsLoss of Morale

Labour Market & Public Image

Idle ManpowerLower Output

Worker Attrition

StockoutsLost Sales

Idle Warehouse Space

Higher Carrying Costs

Increased InvestmentReduced Flexibility

6. Design for Peak Demand Rate:- Large Capital Investment- Underutilization of Resources- Opportunity Costs

Relevant Costs for Aggregate Production Planning


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Forecast / KnownDemand in T+1

Decision Process1. Output Rate

2. Resource Mix

State ofSystem (T)

WFt

PRt

INVt

BOt

SUBt

State ofSystem (T+1)

WFt+1

PRt+1

INVt+1

BOt+1

SUBt+1

Incremental CostsPayroll

Hire / FireShift Premium

Overtime / UndertimeInventory Holding

StockoutBackorder

Subcontract

Minimize

Single-Stage Aggregate Production Planning


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Given: WFt = 20 assemblers (1 assembler produces 10 units per period)

INVt = 100 units of finished goods

Ft = 200 units demand forecast for t + 1

Cw = $800 wage cost per assembler per period

Cf = $400 fire (layoff) cost per assembler

Ch = $300 hire cost per assembler

Forecast: Ft = 200 units demand forecast for period t + 1, then DECt+1 = fire 10 assemblers and build 100 units

Ft+1 = 300 units demand forecast for period t + 2, then DECt+2 = hire 20 assemblers and build 300 units.

Units ofOutput

WageCost

FireCost

HireCost

TotalCost

BeginningInventory

Number ofAssemblers

1030

1000

100300

$ 8000 24000

40006000

$12000 30000$42000

T + 1T + 2

Single-Stage Aggregate Production Planning


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2. Resource Mix

State ofSystem (T)

WFt

PRt

INVt

BOt

SUBt


WFt+1

PRt+1

INVt+1

BOt+1

SUBt+1




StockoutBackorder

Subcontract

Minimize


2. Resource Mix


WFt+2

PRt+2

INVt+2

BOt+2

SUBt+2




StockoutBackorder

Subcontract


+

Multi-Stage Aggregate Production Planning


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Given: WFt = 20 assemblers (1 assembler produces 10 units per period)

INVt = 100 units of finished goods

Ft = 200 units demand forecast for t + 1 / 300 units for t +2

Cw = $800 wage cost per assembler per period

Cf = $400 fire (layoff) cost per assembler

Ch = $300 hire cost per assembler

Forecast: Ft = 200 units demand forecast for period t + 1, then DECt+1 = build 200 units

Ft+1 = 300 units demand forecast for period t + 2, then DECt+2 = build 200 units.

Units ofOutput

WageCost

FireCost

HireCost

TotalCost

BeginningInventory

Number ofAssemblers

2020

100100

200200

$16000 16000

------

$16000 16000$32000

T + 1T + 2

Multi-Stage Aggregate Production Planning


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Techniques for Aggregate Production Planning1. Informal, trial and error methods. In practice, these techniques are more

commonly used.2. Mathematical techniques - such as linear programming, linear decision

rules or simulation. Although not widely used, they serve as a basis for comparing the effectiveness of alternative techniques for aggregate planning.

General Procedure for Aggregate Planning1. Determine demand and production requirements for each period.

2. Determine production capacity (regular time, overtime, subcontracting) for each period.

3. Determine company or departmental policies that are pertinent.For example, maintain a safety stock of 5 percent of demand, or maintain a reasonably stable work force.

4. Determine unit costs for regular time, overtime, subcontracting, holding inventories, back orders and other relevant costs.

5. Develop alternative plans and compute the cost of each.

6. If satisfactory plans emerge, select the one that best satisfies objectives (such as cost minimization). Otherwise, return to step 5.


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Aggregate Production Planning Illustration - Montreal Manufacturing

Given the following information:

6 month production planning period

10 labour-hours per unit required

Labour cost = $10/hour regular = $15/hour overtime

Total unit cost = $200 / unit = $228/unit subcontract

Current workforce = 20 employees

Hiring cost = $500 / employee

Layoff cost = $800 / employee

Safety stock = 20% of monthly forecast

Beginning inventory = 50 units

Inventory carrying cost = $10/unit/month

Stockout cost = $50/unit/month

Additional information available:

Sales Work Work HoursMonth Forecast Days at 8 Hrs. / Day Jan. 300 22 176 Feb. 500 19 152 Mar. 400 21 168 Apr. 100 21 168 May. 200 22 176 June 300 20 160

First Step: Calculate Production Requirement

Sales Safety ProductionMonth Forecast Stock Required Jan. 300 60 300+60-50 = 310 Feb. 500 100 500+100-60 = 540 Mar. 400 80 400+80-100 = 380 Apr. 100 20 100+20-80 = 40 May. 200 40 200+40-20 = 220 June 300 60 300+60-40 = 320


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ProductionRequired

31054038040220320

HoursRequired

31005400380040022003200

Hrs. Avail.per Worker

176152168168176160

WorkersRequired

18362331320

WorkersHired

18

107

Workers Fired

2

1320

Hire/FireCosts$1600 9000

10400 16000 50003500

Total Cost = $45,500

ProductionRequired

31054038040220320

HoursRequired

31005400380040022003200

Total Hrs.Available

352030403360336035203200

OvertimeHours

2360440

UndertimeHours

420

29601320

OT/ UT Costs$420011800 2200 14800 6600

0

Plan # 2 - Exact Production; Vary Production Rate


MonthJan.Feb.Mar.Apr.MayJune


Plan # 1 - Exact Production; Vary Work Force



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Cum. Prod.Required

3108501230127014901810

TotalProduction

352304336336352320

CumulativeProduction

352656992132816802000

InventoryLevel

42

58190190

Stockout Level

194238

Inv. / SOCosts $420 9700

11900 58019001900


HoursAvailable

352030403360336035203200

Total Cost = $7,160 + $ 21,000 = $28,160

Cum. Prod.Required

3108501230127014901810

HoursAvailable3520(20)4560(30)5040(30)1680(10)1760(10)1600(10)

TotalProduction

352456504168176160

Cumulative Production

352808

1312 1480 1656 1816

Inv. / (SO) Level

42(42)822101666

Inv. / SO Costs $420 2100 820 2100 1660 60

Hire/FireCosts

5000

16000

$7,160 $21,000



Plan # 3 - Exact Production; Vary Inventory Level With 20 Employees


Plan # 4 - Exact Production; Vary Workforce Level; Vary Inventory Level


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Plan Costs45,50061,00026,40028,160

Plan1234

ProductionCosts

362,000362,000400,000363,200

TotalCosts

407,500446,500426,400391,360

UnitsProduced

1810181020001816

Costper Unit$225.14$233.70$213.20$215.51

Final Cost Analysis:

Decision: Go with Plan # 3 on the basis of lowest cost per unit.



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Aggregate Production Planning - Additional Illustration # 1

The item demand forecasts for a product for October, November, and December are 2000, 3000, and 2500 units, respectively. Safety stock policy, as determined by management, is 25 percent of the forecast for that month. There is no beginning inventory. Additional information for this product is as follows:

Manufacturing cost $250/unitStorage costs $100/unit/monthStandard pay rate $8.00/hr., 8 hr./dayOvertime rate $12.00/hr.Cost of stockout $10.00/unit/monthCost of subcontracting $10.00/unitHiring and training cost $200/workerLay-off costs $200/workerProduction man-hours required per unit 12 hoursNumber of working days in each month 20

a) Develop a production schedule to produce the exact production requirements by varying the work force size.

b) Calculate total hiring and lay-off costs.


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Aggregate Production Planning - Additional Illustration # 2

The production manager of the Marabell Manufacturing Corporation wants to determine an production strategy for the first quarter of the year. Beginning inventory for the first month of the quarter period is 200 units, and, for each subsequent month, the beginning inventory for that month is equal to the safety stock of the preceding month. The company's safety stock policy is 25 percent of the month's demand forecast.

The demand forecast for each month of the quarter period is 700, 900, and 875 units, respectively. The number of working days in each month is 21, 22, and 20.

The following additional information was also made available:

Manufacturing cost $100/unitStorage costs $1.00/unit/monthStandard pay rate $5.00/hr., 8 hr./dayOvertime pay 150% of standardMarginal cost of stockout $4.00/unit/monthHiring and training cost $150/manLay-off costs $200/manMan-hours required per unit 4Number of workers currently employed 15

Determine the production costs if the company wants to carry out the strategy of:

a) Producing to exact production requirements by varying the work force size on regular hours.

b) Maintaining a constant work force level based on a quarterly (3-month) average. Inventory is allowed to accumulate, while shortages may be filled from next month's production.

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Aggregate Production Planning - Lecture Notes