Introduction to Principles of Production Management WS 2012/2013 Chapter 14 Aggregate sales and Operations Planning Presented by Dr. Eng.

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1 Introduction to Principles of Production Management WS 2012/2013 Chapter 14 Aggregate sales and Operations Planning Presented by Dr. Eng.Abed Schokry Learning Outcomes Explain business planning Explain sales and operations planning Identify different aggregate planning strategies & options for changing demand and/or capacity in aggregate plans Develop aggregate plans, calculate associated costs, and evaluate the plan in terms of operations, marketing, finance, and human resources Describe differences between aggregate plans for service and manufacturing companies ١

2 The Role of Aggregate Planning Integral to part of the business planning process Supports the strategic plan Also known as the production plan Identifies resources required for operations for the next 6-18 months Details the aggregate production rate and size of work force required Objectives Sales and Operations Planning The Aggregate Operations Plan Examples: Chase and Level strategies ٢

Sales and Operations Planning Activities Long-range planning Greater than one year planning horizon Usually performed in annual increments Medium-range planning Six to eighteen

3 Sales and Operations Planning Activities Long-range planning Greater than one year planning horizon Usually performed in annual increments Medium-range planning Six to eighteen months Usually with weekly, monthly or quarterly increments Short-range planning One day to less than six months Usually with weekly or daily increments The Role of the Aggregate Plan ٣

4 Types of Aggregate Plans Level Aggregate Plans Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products like appliances Disadvantage-builds inventory and/or uses back orders Types of Aggregate Plans Chase Aggregate Plans Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage-constantly changing short term capacity ٤

5 Types of Aggregate Plans con t Hybrid Aggregate Plans Uses a combination of options Options should be limited to facilitate execution May use a level workforce with overtime & temps May allow inventory buildup and some backordering May use short term sourcing Aggregate Planning Options Demand-based options Reactive: uses finished goods inventories and backorders for fluctuations Proactive: shifts the demand patterns to minimize fluctuations e.g. early bird dinner prices at a restaurant ٥

6 Aggregate Planning Options Capacity-based options Changes output capacity to meet demand Uses overtime, under time, subcontracting, hiring, firing, and part-timers cost and operational implications Aggregate planning Aggregate planning is the development of a long-term output and resource plan in aggregate units of measure. These typically define output levels over a planning horizon of 1 to 2 years, focusing on product families or total capacity requirements. Aggregate planning later translates into monthly or quarterly production plans, taking into account capacity limitations such as supply availability, equipment, and labor. ٦

7 Aggregate planning (cont.) Level 2 planning, or disaggregation, is the process of translating aggregate plans into short-term operational plans that provide the basis for weekly and daily schedules and detailed resource requirements. Level 3 focuses on execution, moving work from one workstation to another, assigning people to tasks, setting priorities for jobs, scheduling equipment, and controlling processes. Aggregate planning (cont.) Aggregate planning is most challenging when demand fluctuates over time. Managers have a variety of options in developing aggregate plans in the face of fluctuating demand: Demand management Production-rate changes Workforce changes Inventory smoothing Facilities, equipment, and transportation ٧

8 Disaggregating Service Plans Most service organizations do not require as many levels of intermediate planning (Level 2) as goods-producing firms. Level 1 and 2 planning are often combined in service businesses. One way to think of disaggregation in services is to go from aggregate planning (Levels 1 and 2) to front line resource (staff) capacity and scheduling decisions (Level 3). Manufacturers use and need an intermediate level of planning (Level 2), where work-in-process and subassemblies reside. Dealing with the Problem Complexity through Decomposition Aggregate Unit Demand Aggregate Planning Corporate Strategy (Plan. Hor.: 1 year, Time Unit: 1 month) Capacity and Aggregate Production Plans End Item (SKU) Demand Master Production Scheduling (Plan. Hor.: a few months, Time Unit: 1 week) Stock Keeping Units (SKU)-level Production Plans Manufacturing and Procurement lead times Part process plans Materials Requirement Planning (Plan. Hor.: a few months, Time Unit: 1 week) Component Production lots and due dates Shop floor-level Production Control (Plan. Hor.: a day or a shift, Time Unit: real-time) ٨

Position) Aggregate Planning Aggregate Production Plan Required Production Capacity Aggregate Production

9 Aggregate Planning Problem Aggr. Unit, Production Reqs Corporate Strategy Aggregate Unit Demand Aggregate Unit Availability (Current Inventory Position) Aggregate Planning Aggregate Production Plan Required Production Capacity Aggregate Production Plan: Aggregate Production levels Aggregate Inventory levels Aggregate Backorder levels Production Capacity Plan: Workforce level(s) Overtime level(s) Subcontracted Quantities Figure 14.1 ٩

10 Example Aggregate Planning Variables and Revenue/Cost Implications Aggregate Planning Goals Meet demand (Sales Forecast) Use capacity efficiently Meet inventory policy Minimize cost Labor Inventory Plant & equipment Subcontract ١٠

11 Aggregate Scheduling Options - Advantages and disadvantages Option Advantage Disadvantage Some Comments Changing inventory levels Changes in human resources are gradual, not abrupt production changes Inventory holding costs; Shortages may result in lost sales Applies mainly to production, not service operations Varying workforce size by hiring or layoffs Avoids use of other alternatives Hiring, layoff, and training costs Used where size of labor pool is large Advantages and disadvantages (cont.) Option Advantage Disadvantage Some Comments Varying production rates through overtime or idle time Matches seasonal fluctuations without hiring/training Overtime premiums, tired workers, may not meet demand Allows flexibility within the aggregate plan Subcontracting costs Permits flexibility and smoothing of the firm's output Loss of quality control; reduced profits; loss of future business Applies mainly in production settings ١١

12 Advantages and disadvantages (cont.) Option Advantage Disadvantage Some Comments Using part-time workers Influencing demand Less costly and more flexible than full-time workers Tries to use excess capacity. Discounts draw new customers. High turnover/training costs; quality suffers; scheduling difficult Uncertainty in demand. Hard to match demand to supply exactly. Good for unskilled jobs in areas with large temporary labor pools Creates marketing ideas. Overbooking used in some businesses. Advantages and disadvantages (cont.) Option Advantage Disadvantage Some Comments Back ordering during highdemand periods Counterseasonal products and service mixing May avoid overtime. Keeps capacity constant Fully utilizes resources; allows stable workforce. Customer must be willing to wait, but goodwill is lost. May require skills or equipment outside a firm's areas of expertise. Many companies backlog. Risky finding products or services with opposite demand patterns. ١٢

13 The Extremes Level Strategy Production rate is constant Chase Strategy Production equals sales forecast Aggregate Planning Strategies Level scheduling strategy Produce same amount every day Keep work force level constant Vary non-work force capacity or demand options Often results in lowest production costs Chase scheduling strategy Vary the amount of production to match (chase) the sales forecast This requires changing the workforce (hiring & firing) Mixed strategy Combines 2 or more aggregate scheduling options ١٣

14 Chase Demand Strategies plan for matching output to customer demand a production control plan that attempts to match capacity to the varying levels of forecast demand. Chase demand plans require flexible working practices and place varying demands on equipment requirements. Pure chase demand plans are difficult to achieve and are most commonly found in operations where output cannot be stored or where the organization is seeking to eliminate stores of finished goods. The Trial & Error Approach to Aggregate Planning Forecast the demand for each period Determine the capacity for regular time, overtime, and subcontracting, for each period Determine the labor costs, hiring and firing costs, and inventory holding costs Consider company policies which may apply to the workers, overtime, outsourcing, or to inventory levels Develop alternative plans, and examine their total costs ١٤

15 Disaggregation in Manufacturing Materials Requirements Planning (MRP) Materials Requirements Planning (MRP) is a forward-looking, demand-based approach for planning the production of manufactured goods and ordering materials and components to minimize unnecessary inventories and reduce costs. The output of an MRP system is a schedule for obtaining raw materials and purchased parts, a detailed schedule for manufacturing and controlling inventories, and financial information that drives cash flow, budget, and financial needs. Three Major Concepts of MRP Systems 1. Dependent demand is demand that is directly related to the demand of other Stock Keeping Units (SKUs) and can be calculated without needing to be forecasted. Demand for materials needed to produce finished goods is dependent on the number of finished goods planned. 2. Time phasing: all dependent demand requirements do not need to be ordered at the same time, but rather are timephased as necessary. 3. Lot sizing is the process of determining the appropriate amount and timing of ordering to reduce costs. ١٥

16 MRP explosion MRP explosion is the process of using the logic of dependent demand to calculate the quantity and timing of orders for all subassemblies and components that go into and support the production of finished goods. Lot sizing is the process of determining the appropriate amount and timing of ordering to reduce costs. There are three common lot sizing methods for MRP: 1. Lot-for-lot (LFL) 2. Fixed order quantity (FOQ) 3. Periodic order quantity (POQ) 4. Economic Order Quantity (EOQ) Each of these is illustrated in the following examples. Sales and Operations Planning Activities Long-range planning Greater than one year planning horizon Usually performed in annual increments Medium-range planning Six to eighteen months Usually with weekly, monthly or quarterly increments Short-range planning One day to less than six months Usually with weekly or daily increments ١٦

17 The Aggregate Operations Plan Main purpose: Specify the optimal combination of production rate (units completed per unit of time) workforce level (number of workers) inventory on hand (inventory carried from previous period) Product group or broad category (Aggregation) This planning is done over an intermediate-range planning period of 3 to18 months Balancing Aggregate Demand and Aggregate Production Capacity Suppose the figure to the right represents forecast demand in units Now suppose this lower figure represents the aggregate capacity of the company to meet demand What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up Jan Feb Mar Apr May Jun Jan Feb Mar Apr May Jun ١٧

18 Required Inputs to the Production Planning System Competitors behavior External capacity Raw material availability Planning for production Market demand Economic conditions External to firm Current physical capacity Current workforce Inventory levels Activities required for production Internal to firm Aggregate Planning Examples: Unit Demand and Cost Data Suppose we have the following unit demand and cost information: Demand/mo Jan Feb Mar Apr May Jun Materials $5/unit Holding costs $1/unit per mo. Marginal cost of stockout $1.25/unit per mo. Hiring and training cost $200/worker Layoff costs $250/worker Labor hours required.15 hrs/unit Straight time labor cost $8/hour Beginning inventory 250 units Productive hours/worker/day 7.25 Paid straight hrs/day 8 ١٨

19 Cut-and-Try Example: Determining Straight Labor Costs and Output Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker? Demand/mo Jan Feb Mar Apr May Jun Productive hours/worker/day 7.25 Paid straight hrs/day 8 22x8hrsx$8=$ x x0.15=48.33 & 84.33x22= Jan Feb Mar Apr May Jun Days/mo Hrs/worker/mo Units/worker $/worker $1,408 1,216 1,344 1,344 1,408 1,280 Chase Strategy /(Hiring & Firing to meet demand) Jan Days/mo 22 Hrs/worker/mo Units/worker 1, $/worker $1,408 Jan Demand 4,500 Beg. inv. 250 Net req. 4,250 Req. workers Hired Fired 3 Workforce 4 Ending inventory 0 Lets assume our current workforce is 7 workers. First, calculate net requirements for production, or =4250 units Then, calculate number of workers needed to produce the net requirements, or 4250/ =3.997 or 4 workers Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired. ١٩

20 16-39 Below are the complete calculations for the remaining months in the six month planning horizon Jan Feb Mar Apr May Jun Days/mo Hrs/worker/mo Units/worker 1, ,015 1,015 1, $/worker $1,408 1,216 1,344 1,344 1,408 1,280 Jan Feb Mar Apr May Jun Demand 4,500 5,500 7,000 10,000 8,000 6,000 Beg. inv. 250 Net req. 4,250 5,500 7,000 10,000 8,000 6,000 Req. workers Hired Fired Workforce Ending inventory Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included Jan Feb Mar Apr May Jun Demand 4,500 5,500 7,000 10,000 8,000 6,000 Beg. inv. 250 Net req. 4,250 5,500 7,000 10,000 8,000 6,000 Req. workers Hired Fired Workforce Ending inventory Jan Feb Mar Apr May Jun Costs Material $21, $27, $35, $50, $40, $30, , Labor 5, , , , , , , Hiring cost , Firing cost , $260, ٢٠

21 16-41 Level Workforce Strategy (Surplus and Shortage Allowed) Lets take the same problem as before but this time use the Level Workforce strategy This time we will seek to use a workforce level of 6 workers Jan Demand 4,500 Beg. inv. 250 Net req. 4,250 Workers 6 Production 6,380 Ending inventory 2,130 Surplus 2,130 Shortage Below are the complete calculations for the remaining months in the six month planning horizon Jan Feb Mar Apr May Jun Demand 4,500 5,500 7,000 10,000 8,000 6,000 Beg. inv ,130 2,140 1,230-2,680-1,300 Net req. 4,250 3,370 4,860 8,770 10,680 7,300 Workers Production 6,380 5,510 6,090 6,090 6,380 5,800 Ending inventory 2,130 2,140 1,230-2,680-1,300-1,500 Surplus 2,130 2,140 1,230 Shortage 2,680 1,300 1,500 Note, if we recalculate this sheet with 7 workers we would have a surplus ٢١

22 Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included Jan Feb Mar Apr May Jun 4,500 5,500 7,000 10,000 8,000 6, , ,910-1,620 4,250 3,370 4,860 8,770 10,680 7, ,380 5,510 6,090 6,090 6,380 5,800 2,130 2,140 1,230-2,680-1,300-1,500 2,130 2,140 1,230 2,680 1,300 1,500 Note, total costs under this strategy are less than Chase at $ Jan Feb Mar Apr May Jun $8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48, ,900 27,550 30,450 30,450 31,900 29, , ,130 2,140 1,230 5, ,350 1,625 1,875 6, $241, Labor Material Storage Stockout The IDES Sales Forecast for 2003 Quarter 1 307,200 Quarter 2 379,200 Quarter 3 360,000 Quarter 4 489,600 Total 1,536,000 Unit Sales Forecast For 2003 ٢٢

23 IDES Manufacturing Example IDES Manufacturing wants to compare the annual (year 2003) costs associated with scheduling using the following three (3) options: Option 1 Maintain a constant work force during the entire year (Level). Option 2 Maintain the present work force of 150 and use overtime and sub-contracting as needed (Mixed) Option 3 Hire/layoff (stop) workers as needed to produce the required output (Chase). IDES Cost Information Inventory Carrying Cost (per quarter) $ 0.50/unit Subcontracting cost $ 7/unit Pay rate regular time $20/hr Pay rate overtime $30/hr Labor standard per unit 0.2 hrs Cost to increase production $ 3/unit Cost to decrease production $ 2/unit IDES has 0 units in inventory Each Quarter has 60 working days At end of 2002, IDES has 150 prod. workers IDES Policy Maximum of 72,000 units/qtr produced using overtime ٢٣

24 Option 1 Constant Workforce without overtime or subcontracting First, determine the number of workers required to produce the units forecast for Ave. Prod/day = 1,536,000 = 6,400/day 240 days Then determine how many workers are needed. Workers needed = 6,400/day = units/hr X 8 hrs Option 1 Continued: Calculate Inventory Carrying Costs Qtr 6400/day Sales Forecast Inventory Change Ending Inventory 1 384, , ,800 76, , , ,800 81, , , , , , , ,600 0 Total 1,536,000 1,536, ,000 ٢٤

25 Option 1 Continued: Calculation of Annual Costs Inventory carrying cost: 264,000 units X $0.50/unit = $ 132,000 Cost to increase capacity: (384, ,000) units X $5/unit = $ 120,000 Regular time labor cost: 1,536,000 units X $4/unit = $6,144,000 Total Annual Cost for Option 1 = $6,396,000 Option 2 Present Workforce (150) using O/T & subcontracting Qtr Sales Forecast In-house Production Inv Change End Inv Units Req d O/T Out Source 1 307, , ,800 52, , ,000-19,200 33, , , , , ,000-33, ,000 72,000 24,000 Total 1,536,000 1,440, ,000 24,000 ٢٥

26 Option 2 Continued: Calculation of Annual Costs Inventory Carrying Costs 120,000 units X $.50/unit = $ 60,000 Regular time labor (150 workers) $4/unit X 1,440,000 units = $5,760,000 Overtime labor $6/unit X 72,000 units = $ 432,000 Out-sourcing $7/unit X 24,000 units = $ 168,000 Total Annual Costs for Option 2 = $6,420,000 Option 3 Vary Production (Workforce) to match Sales Forecast Qtr Sales Forecast Beginning Capacity Capacity Change Needed Cost of Capacity Change 1 307, ,000-52,800 $105, , , , , , ,200-19,200 38, , , , ,800 Total 1,536,000 $748,800 ٢٦

27 Option 3 calculation of Annual Costs (Cont.) Regular time labor costs 1,536,000 units X $4/unit = $6,144,000 Capacity Change Costs = $ 748,800 Total Annual Cost -Option 3 = $6,892,800 Annual Cost Comparison of the Aggregate Scheduling Strategies Option Annual Cost 1. Level No use of O/T or Outsourcing 2. Mixed Present work force w/ O/T & Outsourcing $6,396,000 $6,420, Chase Vary Production (workforce) $6,892,800 ٢٧

28 The IDES Sales Forecast for 2003 revised Quarter 1 388,000 Unit Sales Forecast For 2003 Quarter 2 440,000 Quarter 3 400,000 Quarter 4 500,000 Total 1,728,000 IDES Cost Information - Revised Inventory Carrying Cost (per quarter) $ 0.75/unit Subcontracting cost $ 7.50/unit Pay rate regular time $20/hr Pay rate overtime $30/hr Labor standard per unit 0.2 hrs Cost to increase production $ 1.50/unit Cost to decrease production $ 1/unit IDES has 0 units in inventory Each Quarter has 60 working days At end of 2000, IDES has 140 prod. workers IDES Policy Maximum of 78,000 units/qtr produced using overtime ٢٨

29 Capacity Requirements Planning (CRP) Capacity Requirements Planning (CRP) is the process of determining the amount of labor and machine resources required to accomplish the tasks of production on a more detailed level, taking into account all component parts and end items in the materials plan. This information is provided in a work center load report. Chapter 13 Resource Management Capacity Requirements Planning (CRP) (cont.) Basic MRP does not consider capacity limitations (assumes infinite capacity so no rescheduling, etc.), so CRP addresses this issue. ٢٩

30 Aggregate Planning for Services Most services cannot be inventoried Demand for services is difficult to predict Capacity is also difficult to predict Service capacity must be provided at the appropriate place and time Labor is usually the most constraining resource for services Copyright 2011 John Wiley & Sons, Inc (End of Chapter 14) ٣٠

Aggregate Planning (session 1,2)

Aggregate Planning (session 1,2) 1 Outline The Planning Process The Nature of Aggregate Planning Aggregate Planning Strategies Capacity Options Demand Options Mixing Options to Develop a Plan Methods for