CHAPTER 3 : AGGREGATE PLANNING MOHD HAFIZUL BIN TUKIMINMOHD SYAFIQ BIN MANSORMOHD RUBA’I AMIR BIN SALLEHCHE MUHD FIRDAUS BIN CHE MAT

OUTLINE

3.1 Introduction3.2 Aggregate Planning Option

Demand Capacity

3.3 Aggregate Unit of Production3.4 Technique of Aggregate Planning

Linear programming : Transportation Method Spreadsheet ApproachDisaggregation

3.1 Introduction

Aggregate planning

Operational activity that does an aggregate plan for the production process in advance of 2 to 18 months.

Give an idea to management as to what quantity of materials and other resources are to be procured and when.

To keep the total cost of operations of the organization to the minimum over that period.

3.1.1Goal of aggregate planning

• Determine the quantity and timing of production for the immediate future.

• To achieve a production plan which will effectively utilize the organization’s resources to satisfy expected demand

3.1.2 Why Aggregate planning

3.1.2.1 Objectives of Aggregate Planning:

– Minimize total cost over the planning horizon.

– Maximize customer service

– Minimize inventory investment

– Minimize changes in workforce levels

– Minimize changes in production rates

– Maximize utilization of plant and equipment

3.2 Aggregate Planning Option

Capacity - total number of units per time period that can be produced

Demand - total number of units needed

If capacity and demand are not balance, must decide whether: - To increase or decrease capacity to meet demand

or;- Decrease demand to meet capacity

Capacity Options – change capacity

• Varying workforce size by hiring or lay offs

• Varying production capacity through overtime

• Subcontracting• Using part-time workers• Changing inventory levels

Demand Options – change demand

• Pricing and promotion• Back ordering• New demand creation

3.2.1 Capacity Options

Varying workforce size by hiring or lay offs•Hiring additional workers as needed •Laying off workers not currently required to meet demand•Match production rate to demand•New workers may have lower productivity•Laying off workers may lower morale and productivity

Varying production capacity through

overtime

•Allows constant workforce•Can create temporary increase in capacity without to added expense of hiring additional worker•May be difficult to meet large increases in demand•Overtime can be costly and may drive down productivity

Cont……Capacity Options

Subcontracting•The amount of capacity or product contacted to subcontractors•Temporary measure during periods of peak demand•May be costly•Assuring quality and timely delivery may be difficult•Exposes your customers to a possible competitor

Using part-time workers

•Utilizing temporary worker / casual labor •Useful for filling unskilled or low skilled positions, especially in services

Cont…..Capacity Options

Changing inventory levels • Increase inventory in low demand periods to meet high demand in the future

Backlog• The part of the demand that is not satisfied in

the intended period and is carried forward to the next periods as promised delivery

3.2.2 Demand Options

•Varying pricing to increase demand in periods when demand is less than peak•Advertising, direct marketing, and other forms of promotion are used to shift demand.

Pricing and promotion

•Postponing delivery on current orders demands is shifted to period when capacity is not fully utilized•Requires customers to wait for an order without loss of goodwill or the order

Back ordering

•Develop a product mix of counter seasonal items•May lead to products or services outside the company’s areas of expertise

Counter seasonal product and service

mixing

Option Advantages DisadvantagesVarying workforce size by hiring or layoffs

Avoids the costs of other alternatives.

Hiring, layoff, and training costs may be significant.

Varying production rates through overtime

Matches seasonal fluctuations without hiring/ training costs.

Overtime premiums; tired workers; may not meet demand.

Sub-contracting Permits flexibility and smoothing of the firm’s output.

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

Using part-time workers

Is less costly and more flexible than full-time workers.

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

Changing inventory levels

Changes in human resources are gradual or none; no abrupt production changes.

Inventory holding cost may increase. Shortages may result in lost sales.

Option Advantages DisadvantagesPromotion and advertising

Tries to use excess capacity. Discounts draw new customers.

Uncertainty in demand. Hard to match demand to supply exactly.

Back ordering during high-demand periods

May avoid overtime. Keeps capacity constant.

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

Counter seasonal product and service mixing

Fully utilizes resources; allows stable workforce.

May require skills or equipment outside the firm’s areas of expertise.

3.4 Aggregate Units of Production

The method is based on notion of aggregate units. They may be actual units of production

• Weight (tons of steel)• Volume (gallons of gasoline)• Dollars (Value of sales)• Fictitious aggregate units

3.4.1 Example of fictitious aggregate units:

A plant manager working for a large national appliance firm is considering implementing an aggregate planning system to determine the workforce and production levels in his plant. This particular plant produces 6 models of TVs. The characteristics of the TVs are:

Model # Number of Worker - Hours Required to produce 1 4.2 $285 2 4.9 $345 3 5.1 $395 4 5.2 $425 5 5.4 $525 6 5.8 $725

Selling Price

The manager notices that the percentages of the total number of sales for these six models have been fairly constant:

Model # % of the total numbers of sales 1 32% 2 21% 3 17% 4 14% 5 10% 6 6%

To find the particular aggregation scheme

(1) Selling price / Number of worker-hours required = $ per Input-Hour

Model # $/hr 1 $285/4.2 = $67.86 2 $345/4.9 = $70.41 3 $395/5.1 = $77.45 4 $425/5.2 = $81.73 5 $525/5.4 = $97.22 6 $725/5.8 = $125.00

then

what is $78.34? “Average dollars of output / worker-hour input”

in this particular production plant

Model # $/hr * % of Sales 1 $67.86* 0.32 = $21.72 2 $70.41* 0.21 = $14.79 3 $77.45* 0.17 = $13.17 4 $81.73* 0.14 = $11.44 5 $97.22* 0.10 = $9.72 6 $125.00* 0.06 = $7.50

34.78$

(2) The manager decides to define an aggregate unit of production as a fictitious TV

what is 4.86 hours? “ Average worker-hours required to produce a fictitious

TV”

Model # Number of worker-Hours Required 1 4.2*0.32 = 1.34 2 4.9*0.21 = 1.03 3 5.1*0.17 = 0.87 4 5.2*0.14 = 0.73 5 5.4*0.10 = 0.54 6 5.8*0.06 = 0.35

86.4$

What if we like to know

“ how many fictitious TV can one worker – one day (8hrs) produce ? ”

[ 1 / 4.86 ] x 8 = 1.646

• Applications of this Avg. worker-hours/ TV ：～ If the manager can obtain sales forecast of overall models,

then he can use this to plan workforce ～

3.4 Technique of Aggregate Planning:

3.4.1 Spreadsheet Approach3.4.2 Linear Programming3.4.3 Disaggregation

3.4.1 Spreadsheet Approach

Basic RelationshipsWorkforce                

Number of workers in a period =

Number of workers at end of previous period +

Number of new workers at start of the period -

Number of laid off workers at start of the period

Inventory                

Inventory at the end of a period =

Inventory at end of the previous period +

Production in current period -

Amount used to satisfy demand in current period

Cost                

Cost for a period =

Output Cost (Reg+OT+Sub) +

Hire/Lay Off Cost + Inventory Cost +

Back-order Cost

               

Quarter Sales Forecast (lb)

April 90,000

May 80,000

June 150,000

July 100,000

The Power Star Company makes a variety of cookies . Given the following costs and monthly sales forecasts, formulate a plan that minimizes cost. They have an inventory from March of 5000 lb of cookies. Find the total cost of the production.  

 Hiring cost = $300 per worker Firing cost = $850 per worker Inventory carrying cost = $1.50 per pound per quarter Production per employee = 1,000 pounds per quarterBeginning work force = 95 workers

Example spreadsheet

Solution 3

Example of Spreadsheet Method

• There are 15 workers and each can produce 20 skateboards per period.• Assume a level of output rate of 300 units.• Find the total cost for this plan?

Period 1 2 3 4 5 6 Total  

Forecast 200 200 300 400 500 200 1800  

                 

Policy:Level Output Rate of 300 per period              

Output               CostRegular 300 300 300 300 300 300 1800 $2

Overtime               $3 Subcontract               $6

Output-Forecast 100 100 0 -100 -200 100 0  Inventory                

Beginning 0 100 200 200 100 0    Ending 100 200 200 100 0 0    

Average 50 150 200 150 50 0 600 $1 Backlog 0 0 0 0 100 0 100 $5 Costs                

Regular $600 $600 $600 $600 $600 $600 $3,600  

Inventory $50 $150 $200 $150 $50 $0 $600  

Back Orders $0 $0 $0 $0 $500 $0 $500  

Total Cost of Plan $650 $750 $800 $750 $1,150 $600 $4,700  

Technique 3: Simulation ExampleLevel Output

3.4.2 Linear Programming

3.4.2 Linear Programming

3.4.2.1 Transportation Linear Program

Description1. Carrying costs are $2/tire/month. If goods are made in one

period and held over to the next, holding costs are incurred2. Supply must equal demand, so a dummy column called

“unused capacity” is added3. Because back ordering is not viable in this example, cells that

might be used to satisfy earlier demand are not available.4. Quantities in each column designate the levels of inventory

needed to meet demand requirements5. In general, production should be allocated to the lowest cost

cell available without exceeding unused capacity in the row or demand in the column

EXERCISE:solve problem 13.2

page 461 (OPERATION MANAGEMENT)

A Dover, Delaware, plant has developed the accompanying supply, demand cost , and inventory data. The firm has a constant workforce and meets all its demand. Allocate production capacity to satisfy demand at a minimum cost. What is the cost of this plan?

Supply capacity available (units) Demand forecast

Other data :Initial inventory 50 unitsRegular- time cost per unit $50Over time cost per unit $65Subcontract cost per unit $80Carrying cost per unit per period $1Back order cost per unit per period $4

Period

Regular time Overtime Subcontract

1 300 50 200

2 400 50 200

3 450 50 200

Period Demand (units)

1 4502 5503 750

35

3.4.3 Disaggregation• Aggregate plans were built to optimal staffing levels

for “families” or groups of products• Disaggregation is a means to build specific “Master

Production Schedules”• Typically by breaking down the aggregating weights

to individual parts – or working on schedules of these families as optimal

• Later leads to values similar to Economic Order Quantity(EOQ)which will explore in Chapter 4!

Q&A