Aggregate Planning. Nature of Aggregate Planning

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1 Aggregate Planning Nature of Aggregate Planning Costs Decision Processes Nature of Aggregate Planning Macro Planning Bypass the details of individual products No need for individual scheduling of facilities and personnel Logical overall unit for measuring output Gallons, Cases, Pallets, Machine hours, Beds, etc Forecast for the planning period Measure all relevant costs To permit near optimal decision making 1

2 Nature of Aggregate Planning Increases the range of alternatives for capacity use (Pure Strategies) Use of inventory Varying size of work force Varying work hours Subcontract the fluctuations Decide not to meet demand Companies seek to balance the effect of these strategies by combining the pure strategies into Mixed Strategies Costs Aggregate Planning is influenced by several relevant costs: Payroll Costs Cost of Overtime, Second shifts, and Subcontracting Cost of hiring and laying off workers Cost of excess inventory and backlog Cost of production rate changes 2

3 Cost Behavior Patterns Decision Processing The Aggregate Planning problem is the production planning problem of an organization seeking to meet a varying pattern of demand over an intermediate span of time The problem is to set aggregate production rates and workforce levels for each planning period 3

4 Problem Note Demand peaks at 11, 000 and has a minimum of 4,000 The production days of each month varies Production rates varies from 591/day to 174/day Normal plant capacity is 350 units per day Overtime can yield a maximum of 410 units/day Overtime units cost an additional $10 each Buffer stock, to compensate for fluctuations in demand 4

5 Plan 1: Level Production The simplest production plan is to establish the production output which will meet the annual requirements (76,500/244 = 314/day) The strategy is to accumulate inventory during the slow periods and use them during peak requirement periods Plan 1: Level Production 5

6 Plan 1: Level Production The plan calls for dipping into the buffer stock in August Buffer stock is actually exceeded in September Results in a shortfall of 7738 units at the end of the year If we decide not to use the buffer stock, we must increase the beginning inventory by the most negative inventory Average seasonal inventory will increase Plan 1: Level Production Assuming: Inventory holding cost =$50/unit/year Shortage cost = $25/unit/year Holding Costs Shortage Costs Buffer 2800 Units Stock 3552 Units $157,380 $334,980 $193,450 0 Total Costs $350,830 $334,980 6

7 Plan 1: Level Production Advantages Does not require hiring or firing of personnel Scheduling is simple Disadvantages Fails to consider the economic advantages of trading off large seasonal inventory and shortage cost for overtime and hiring/firing costs Plan 2: Hiring, Layoff, and Overtime Normal Plant capacity = 350 units/day Overtime increase = 60 units/day Cost of overtime = $10/unit Cost of Hiring/Layoff = $200/person Hiring, training, severance, insurance 1 person hired, results in 1 unit capacity increase per day 7

8 Plan 2: Hiring, Layoff, and Overtime Involves: 0 to 65 days Produce at 230 units/day 66 to 171 days Produce at 406 units/day Hire 120 workers ( ) and produce 56 units/day overtime 172 to 182 days Produce 350 units/day 183 to 226 days Produce 230 units/day Layoff 120 workers ( ) 227 to 244 days Produce 253 units/day 23 units/day overtime Plan 2: Hiring, Layoff and Overtime Results: Seasonal Inventory reduced by 75% of Plan 1 with shortages and 35% of Plan 1 without shortages Hiring and layoff Costs = $48, 000 Overtime Costs = $63, 500 Total Cost = $339, 320 which is 65% Plan 1 with shortages and 68% Plan 1 without shortages 8

9 Plan 2: Hiring, Layoff and Overtime Plan 2: Hiring, layoff and Overtime Advantages Highly economical Disadvantage Hiring and firing practices may affect social and employee relations Some other plan with smaller fluctuations in employment may be sought 9

10 Comparing Plans 1 & 2 Plan 3: Subcontracting as a source Reduces fluctuations in workforce Uses overtime, seasonal inventories and subcontracting to absorb demand fluctuations 10

11 Plan 3: Subcontracting as a source Involves: 0 to 84 days Produce 250 units/day 85 to 128 days Produce 350 units/day Hire 100 workers ( ) 129 to 148 days Produce 410 units/day 60 units/day overtime 1700 units subcontracted 149 to 171 days Produce 370 units/day 20 units/day overtime Plan 3: Subcontracting as a source 172 to 182 days Produce 410 units/day 60 units/day overtime 1380 units subcontracted 183 to 204 days Produce 173 units/day 23 units/day overtime Layoff 100 workers ( ) 205 to 244 days Produce 250 units/day 11

12 Plan 3: Subcontracting as a source Seasonal Inventories reduced to 1301 $65, 070 Employment fluctuations are modest $40, 000 Only 2826 units are produced on overtime $28, units are subcontracted at $15/unit $46,200 Total Cost = $179, 530 Plan 3: Subcontracting as a source Even though Plan 3 has less employee fluctuations, it may still be considered severe, and other plans can be sough to reduce this even further 12

13 Summary Sequence of Plots Cumulative Graphs 1 Cumulative Production requirements 2 Cumulative Maximum requirements Production requirements + Buffer Stock Any feasible production program (meeting demand and inventory requirements), must fall completely above the maximum requirements line The vertical distance between the program proposed curves and the cumulative max. requirements curve represents the seasonal inventory at each period 13

14 Cumulative Graphs Advantage Alternative programs can be visualized over a broad planning horizon Disadvantage Is static, and does not seek to optimize cost or profit Should be used only to compare different types of programs Cumulative Graphs 14