DAO2703 OTM

Week 4
Aggregate Planning

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 Course Structure
Introduction to OTM;
Managing the Overview
Transformation Process

Process Types; Advanced Recognizing

Operations Technologies;
Process Analysis the Plant
Aggregate
Production Planning
Planning for
Inventory Material Require- the Plant;
Management ments Planning
PP&C Cycle
Operations Waiting Line
Scheduling Management

Quality Improving the

Lean Operations
Management Plant
Operations Strategic
Strategies Considerations
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 Operations Planning Overview:
Planning Horizon
Aggregate planning: Intermediate-range capacity planning,
usually covering at least one seasonal cycle (2 to 12 months) of
aggregate demands
Long range
Intermediate
range
Short
range

Now 2 months 12 months

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 Operations Planning Overview
Long-range planning
More than one year planning horizon; with yearly increments
Long-term capacity; location; layout; product design; work system design
Intermediate-range planning
One seasonal cycle as planning horizon; monthly or quarterly increments
Employment; output; finished-goods inventories; subcontracting;
backorders
Short-range planning
One day to less than six months horizon; weekly increments
Production lot size; order quantities; machine loading; job
assignments/sequencing; work schedules

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 Hierarchical Planning Process
Economic,
Corporate Aggregate
competitive,
strategies demand
and political
and policies forecasts
conditions

Establishes operations
Long-range Business plan
and capacity strategies

Establishes
Production plan
operations capacity
Intermediate-
range Establishes schedules
Master schedule
for specific products
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 Process Planning
Long-range
Strategic Capacity Planning

Aggregate Planning
Manufacturing Services
Intermediate-range
Master Production Scheduling

Material Requirements Planning

Weekly Workforce &

Order Scheduling Customer Scheduling
Short-range
Daily Workforce &
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 Decision Level Decision Process Forecasts needed
Allocates
Annual demand by
Corporate production
item and by region
among plants

Determines
Monthly demand
seasonal plan by
Plant manager for 15 months by
product type
product type
(Aggregate Plan)

Determines monthly Monthly demand

Shop
item production for 5 months by
superintendent
schedules item
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 Aggregate Production Planning
Purpose: specify the combination of the following in order to meet
the varying aggregate demand pattern over a seasonal cycle
Production rate (units completed per unit of time)
Employment level (number of workers)
Inventory on hand (inventory carried from previous period)
Objectives: minimize cost, maintain service level; minimize
workforce fluctuations
Forecast Demand Capacity
12000 How to balance out the production rate,
10000 workforce levels, and inventory to make
8000
these figures match up?
6000
march will produce more and fulfill previous period
4000
2000
0
Jan Feb Mar Apr May Jun
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 Aggregate Production Planning: Inputs
Resources Costs:
Workforce Inventory carrying
Facilities Backordering
Demand forecast Hiring/firing
Overtime
Policy statements Subcontracting
Subcontracting
Overtime; Part-time
Inventory levels
Back orders

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 Aggregate Production Planning: Outputs
Total cost of a plan
Projected levels of
Inventory
Output
Employment
Subcontracting
Backordering

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 Aggregate Production Planning: Strategies
Demand Management
Influence demand through promotion; pricing; backorders
Create new demand for complementary products
Supply Management
Level capacity strategy
Maintain a level workforce/steady output rate
Use inventory/backorders to absorb variations in demand
Works best when inventory-carrying and backlog costs are relatively low
Chase demand strategy
Match demand period by period; hire/fire; OT/Slack time; part-timers;
subcontractors
Works best when inventory-carrying costs are high, and costs of changing
capacity are low
Mixed strategy: a combination of both
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 Advantages and Disadvantages

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 Techniques For Aggregate Production
Planning
Aggregate planning techniques:
Informal trial-and-error techniques
Mathematical techniques
Steps for developing an aggregate plan:
Determine demand for each period
Determine capacities for each period
Identify policies that are pertinent
Determine unit costs
Develop alternative plans (trial-and-error) and compute associated costs
Select the best plan that satisfies objectives

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 Techniques For Aggregate Production Planning
Example 1:
A manufacturer of roofing supplies has developed monthly forecasts for a
family of products. The firm would like to develop an aggregate plan.
Monthly Forecast
Month Jan. Feb. Mar. Apr. May Jun.
Demand Forecast 900 1,050 1,150 1,200 1,400 900
Cost Information
Production cost during regular time $10 per unit
Production cost during overtime $15 per unit
Subcontracting cost $20 per unit
Cost of increasing daily production rate (hiring and training) $20 per unit
Cost of decreasing daily production rate (layoffs) $30 per unit
Inventory carrying cost $5 per unit per month
Backorder cost $25 per unit per month
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 Trial-and-Error Technique: Graphs
1600

1400
1400

1200
1200 1150 Output Level = 1100
1050
1000
900 900
Demand

800

600

400

200

0
Jan Feb Mar Apr May Jun
Month
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 Trial-and-Error Technique: Graphs
Cumulative forecast requirements Cumulative production level

7000 6600
Demand exceeds output
6000

5000
Cumulative demand units

4000

3000

Surplus output
2000

1000

0
0 1 2 3 4 5 6
Period

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 Trial-and-Error Technique: Spreadsheet
Period 1 2 3 4 5 ⋯ Total

Forecast

Output ⋯

Regular time ⋯

Overtime ⋯

Subcontract ⋯

Output – Forecast ⋯

Inventory ⋯

Beginning ⋯ Ending inventory from the previous period

Ending ⋯ Beginning inventory + Production – Quantity used to satisfy demand
1
Average ⋯ × (Beginning inventory + Ending inventory)
2
Backlog ⋯

Costs ⋯

Output ⋯

Regular ⋯ Regular cost per unit × Quantity of regular output

Overtime ⋯ Overtime cost per unit × Quantity of overtime output
Subcontract ⋯ Subcontract cost per unit × Quantity of subcontract output
Hire/Lay off ⋯ Cost per hire (layoff) × Number hired (laid off)
Inventory ⋯ Carrying cost per unit × Average inventory
Back orders ⋯ Backorder cost per unit × Quantity of backorder units
Total
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 Trial-and-Error Technique: Spreadsheet
Plan 1: Maintaining a constant workforce to produce 1,100 units per month (level capacity strategy)

Period 1 2 3 4 5 6 Total
Forecast 900 1,050 1,150 1,200 1,400 900 6,600
Output:
Regular 1,100 1,100 1,100 1,100 1,100 1,100 6,600
Overtime - - - - - -
Subcontract - - - - - -
Total output 1,100 1,100 1,100 1,100 1,100 1,100 6,600
Output - Forecast 200 50 (50) (100) (300) 200 -
Inventory
Beginning - 200 250 200 100 -
Ending 200 250 200 100 - -
Average 100 225 225 150 50 - 750
Backlog - - - - 200 - 200
Costs
Output
Regular ($10 per unit) $ 11,000 $ 11,000 $ 11,000 $ 11,000 $ 11,000 $ 11,000 $ 66,000
Overtime ($15 per unit) $ - $ - $ - $ - $ - $ - $ -
Subcontract ($20 per unit) $ - $ - $ - $ - $ - $ - $ -
Hiring and Training ($20 per unit) $ - $ - $ - $ - $ - $ - $ -
Lay off ($30 per unit) $ - $ - $ - $ - $ - $ - $ -
Inventory ($5 per unit per month) $ 500 $ 1,125 $ 1,125 $ 750 $ 250 $ - $ 3,750
Back orders ($25 per unit per month) $ - $ - $ - $ - $ 5,000 $ - $ 5,000
Total $ 11,500 $ 12,125 $ 12,125 $ 11,750 $ 16,250 $ 11,000 $ 74,750
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 Trial-and-Error Technique: Spreadsheet
Plan 2: Varying the workforce size by hiring and firing as necessary (chase demand strategy)

Period 1 2 3 4 5 6 Total
Forecast 900 1,050 1,150 1,200 1,400 900 6,600
Output:
Regular 900 1,050 1,150 1,200 1,400 900 6,600
Overtime - - - - - -
Subcontract - - - - - -
Total output 900 1,050 1,150 1,200 1,400 900 6,600
Output - Forecast - - - - - - -
Inventory
Beginning - - - - - -
Ending - - - - - -
Average - - - - - - -
Backlog - - - - - - -
Costs
Output
Regular ($10 per unit) $ 9,000 $ 10,500 $ 11,500 $ 12,000 $ 14,000 $ 9,000 $ 66,000
Overtime ($15 per unit) $ - $ - $ - $ - $ - $ - $ -
Subcontract ($20 per unit) $ - $ - $ - $ - $ - $ - $ -
Hiring and Training ($20 per unit) $ - $ 3,000 $ 2,000 $ 1,000 $ 4,000 $ - $ 10,000
Lay off ($30 per unit) $ - $ - $ - $ - $ - $ 15,000 $ 15,000
Inventory ($5 per unit per month) $ - $ - $ - $ - $ - $ - $ -
Back orders ($25 per unit per month) $ - $ - $ - $ - $ - $ - $ -
Total $ 9,000 $ 13,500 $ 13,500 $ 13,000 $ 18,000 $ 24,000 $ 91,000
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 Trial-and-Error Technique: Spreadsheet
Plan 3: Use of subcontractors within a constant workforce to produce 900 units per month (mixed strategy)

Period 1 2 3 4 5 6 Total
Forecast 900 1,050 1,150 1,200 1,400 900 6,600
Output:
Regular 900 900 900 900 900 900 5,400
Overtime - - - - - -
Subcontract - - - - - -
Total output 900 900 900 900 900 900 5,400
Output - Forecast - (150) (250) (300) (500) - (1,200)
Inventory
Beginning - - - - - -
Ending - - - - - -
Average - - - - - - -
Backlog - - - - - - -
Costs
Output
Regular ($10 per unit) $ 9,000 $ 9,000 $ 9,000 $ 9,000 $ 9,000 $ 9,000 $ 54,000
Overtime ($15 per unit) $ - $ - $ - $ - $ - $ - $ -
Subcontract ($20 per unit) $ - $ 3,000 $ 5,000 $ 6,000 $ 10,000 $ - $ 24,000
Hiring and Training ($20 per unit) $ - $ - $ - $ - $ - $ - $ -
Lay off ($30 per unit) $ - $ - $ - $ - $ - $ - $ -
Inventory ($5 per unit per month) $ - $ - $ - $ - $ - $ - $ -
Back orders ($25 per unit per month) $ - $ - $ - $ - $ - $ - $ -
Total $ 9,000 $ 12,000 $ 14,000 $ 15,000 $ 19,000 $ 9,000 $ 78,000
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 Trial-and-Error Technique: Spreadsheet
Comparison of the Three Plans
Plan 1: Level Plan 2: Chase Plan 3: Mixed
Cost
Capacity Strategy Demand Strategy Strategy
Inventory carrying $3,750 $0 $0
Backorder 5,000 0 0
Regular labor 66,000 66,000 54,000
Overtime labor 0 0 0
Hiring 0 10,000 0
Layoffs 0 15,000 0
Subcontracting 0 0 24,000
Total $74,750 $91,000 $78,000
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 Techniques For Aggregate Production
Planning
Mathematical
Linear programming
Methods for obtaining optimal solutions to problems involving allocation of
scarce resources in terms of cost minimization
Simulation
Computerized models that can be tested under different scenarios to identify
acceptable solutions to problems

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 Techniques For Aggregate Production
Planning
Example 2:
A tire manufacturer would like to develop an aggregate plan using the Linear
Programming technique.

Sales Period Cost Information

Mar. Apr. May Regular time $40 per tire
Demand 800 1,000 750 Overtime $50 per tire
Capacity: Subcontracting cost $70 per tire
Regular 700 700 700 Carrying cost $2 per tire per month
Overtime 50 50 50
Subcontracting 150 150 130
Beginning inventory 100
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 Demand for Total capacity
Supply from available
Period 1 Period 2 Period 3 Unused capacity (supply)
(dummy)
0 2 4 0
Period Beginning inventory 100 100
40 42 44 0
1 Regular Time 700 700
50 52 54 0
Overtime 50 50
70 72 74 0
Subcontract 50 100 150
40 42 0
2 Regular Time x 700 700
50 52 0
Overtime x 50 50
70 72 0
Subcontract x 150 150
x 40 0
3 Regular Time x 700 700
50 0
Overtime x x 50 50
70 0
Subcontract x x 130 130
Demand 800 1000 750 230 2780
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Total cost =
 Mathematical Technique: LP
Example 2:
Notations:
Pt = number of units produced during regular time in period t, t = 1, 2, 3.
Ot = number of units produced during overtime in period t, t = 1, 2, 3.
St = number of subcontracting units in period t, t = 1, 2, 3.
Dt = number of units demanded in period t, t = 1, 2, 3.
It = inventory at the end of period t, t = 1, 2, 3. I0 = beginning inventory in period t = 1.
p, o, s, and i = per unit cost of regular production, overtime production, subcontracting, and
inventory carrying, respectively..
𝑝
𝑙𝑡 , 𝑙𝑡𝑜 , and 𝑙𝑡𝑠 = production, overtime, and subcontracting capacities, respectively in period t, t =
1, 2, 3.

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 Mathematical Technique: LP
Example 2:
3
min  ( pPt + oOt + sSt + iI t )
t =1

s.t.

I t = I t −1 + Pt + Ot + St − Dt for t = 1, 2,3

Pt  ltp , Ot  lto , St  lts for t = 1, 2,3

I 0 = 100, I 3 = 0, I t  0 for t = 1, 2,3

Pt , Ot , and St  0 for t = 1, 2,3.

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 Mathematical Technique: LP
Example 2

Cost per unit (regular) $ 40.00

Cost per unit (overtime) $ 50.00
Cost per unit (subcontract) $ 70.00
Carrying cost per unit per period $ 2.00

Mar. Apr. May

Number of units produced during regular time 700 700 700
<= <= <=
700 700 700
Number of units produced during overtime 50 50 50
<= <= <=
50 50 50
Number of subcontract units 50 150 0
<= <= <=
150 150 130
Total number of units produced 800 900 750
Beginning inventory 100 100 0
>= >= >=
0 0 0
Total number of units available 900 1000 750
>= >= >=
Demand 800 1000 750
Ending Inventory 100 0 0
>= >= =
0 0 0 Total
Total cost $ 34,200.00 $ 41,000.00 $ 30,500.00 $ 105,700.00
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 Aggregate Production Planning:
Summary of Techniques
Technique Solution Characteristics
Intuitively appealing, easy
Trial-and-error: Graphs
Heuristic (trial and error) to understand; solution
and spreadsheet
not necessarily optimal
Computerized; linear
Mathematical
Linear programming assumptions not always
(optimization)
valid
Realistic; computerized
models can be examined
Simulation Heuristic (trial and error)
under a variety of
conditions
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 Aggregate Planning in Services
Examples of service organizations using aggregate planning:
Airlines:
Aggregate planning in this environment is complex due to the number of factors
involved
Capacity decisions must take into account the percentage of seats to be
allocated to various fare classes in order to maximize profit or yield
Hospitals:
Aggregate planning used to allocate funds, staff, and supplies to meet the demands
of patients for their medical services
Restaurants:
Aggregate planning in high-volume businesses is directed toward smoothing the
service rate, determining workforce size, and managing demand to match a fixed
capacity
Can use inventory; however, it is perishable

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 Aggregate Planning in Services
Miscellaneous services:
Financial, hospitality, transportation, and recreation services provide a high
volume, intangible output
Aggregate planning for these services deals with mainly planning for human
resource requirements and managing demand
Main goals are to level demand peaks and to design methods for fully utilizing
labor resources during low-demand periods
Differences between manufacturing and services:
Services occur when they are rendered; cannot be inventoried
Demand for services can be difficult to predict; highly variable even over
short time horizon
Capacity availability can be difficult to predict; often labor intensive and
service task requirements highly variable
Labor flexibility can be an advantage in services; cross-training and use of
part-timers
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 Aggregate Planning in Services
Example 3:
A medium-sized law firm of 32 legal professionals wants to develop an
aggregate plan for the next quarter.
Labor Allocation, Forecasts for Coming Quarter (1 lawyer = 500 hours of labor)
Forecasted Labor Hours Required Capacity Constraints
Category of Best Likely Worst Maximum Number of
Legal Business (Hours) (Hours) (Hours) Demand for Staff Qualified Staff

Trial work 1,800 1,500 1,200 3.6 4

Legal research 4,500 4,000 3,500 9.0 32
Corporate law 8,000 7,000 6,500 16.0 15
Real estate law 1,700 1,500 1,300 3.4 6
Criminal law 3,500 3,000 2,500 7.0 12
Total hours 19,500 17,000 15,000
Lawyers needed 39 34 30
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 Disaggregation of the Aggregate Plan
Aggregate
Plan

Disaggregation

Master
Schedule
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 Disaggregating: Master Schedule
Master Schedule
The result of disaggregating an aggregate plan; shows quantity and
timing of specific end items for a scheduled horizon

Aggregate Plan Jan. Feb. Mar.

200 300 400

Master Schedule Jan. Feb. Mar.

Model 1 100 100 100
Model 2 75 150 200
Model 3 25 50 100
Total 200 300 400
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 Master Scheduling
Master Production Schedule (MPS)
Indicates the quantity and timing of planned production, taking into
account desired delivery quantity and timing as well as on-hand inventory
The heart of production planning and control (PP&C)
Determines the quantities needed to meet demand
Interfaces with marketing, capacity, production, and distribution plannings
Enables marketing to make valid delivery commitments to warehouse and final
customers
Enables production to evaluate capacity requirements
Provides the necessary information for production and marketing to negotiate
when customer requests cannot be met by normal capacity
Enables the senior management to determine whether the business plan
and its strategic objectives will be achieved
Used as Input for Material Requirements Planning
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 Master Scheduling Process

Inputs Outputs
Beginning inventory Projected inventory of finished goods

Forecast
Master Master production schedule (MPS)
Scheduling
Customer orders Uncommitted inventory

• Beginning inventory: actual inventory on hand from the preceding period of the schedule
• Forecast: demand forecasts for each period
• Customer orders: quantities (already) committed to customers
• Projected on-hand inventory: inventory from previous period (week) – current week’s requirements
• MPS: production requirements
• Uncommitted inventory: available-to-promise (ATP) inventory
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 Master Schedule
Example 4:
The forecast for each week of an eight-week schedule is 70 units. The
starting inventory is 40. The MPS rule is to schedule production if the
projected inventory on hand is negative. The production lot size is 100 units,
and the following table shows the committed orders.

Period Customer Orders

1 80
2 50
3 30
4 10

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 Master Schedule
if forecast more than customer order choose forecast

Example 4:
(A) (B) (C = A – B) (MPS + C)
Customer Projected Inventory Requirements Net Inventory Projected On-
Period Demand Orders from Previous Period max(forecast, orders) Before MPS MPS Hand Inventory
1 70 80 40 80 –40 100 60
2 70 50 60 70 –10 100 90
3 70 30 90 70 20 20
4 70 10 20 70 –50 100 50
5 70 50 70 –20 100 80
6 70 80 70 10 10
7 70 10 70 –60 100 40
8 70 40 70 –30 100 70

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 Master Schedule
Example 4:
Period
Beginning inventory = 40 1 2 3 4 5 6 7 8
Forecast 70 70 70 70 70 70 70 70
Customer orders (committed) 80 50 30 10
Projected on-hand inventory 60 90 20 50 80 10 40 70
MPS 100 100 100 100 100 100
ATP* 40 + 100 - 80= 60 20 90 100 100 100
100— 50- 30 =
*ATP (first period) = Beginning inventory + MPS (first period) – sum of customer orders until (but not including) the

period of the next MPS

ATP (subsequent periods) = MPS (current period) – sum of customer orders until (but not including) the period of
the next MPS

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 Master Scheduling Process
Rough-cut capacity planning (RCCP)
Involves testing the feasibility of a proposed master relative to available
capacities, to assure that no obvious capacity constraints exist
Checking capacities of production warehouse facilities, labor, and vendors to
ensure that no gross deficiencies exist that will render the master schedule
unworkable
Time fences
Points in time that separate phases of a master schedule planning
horizon
Divide a scheduling time horizon into three sections or phases, sometimes
referred as frozen, slushy, and liquid, in reference to the firmness of schedule:
Frozen phase: near-term phase that is so soon that delivery of a new order would
be impossible, or only possible using very costly or extraordinary options such as
delaying another delivery
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 Master Scheduling Process
Slushy phase: next phase, and its time fence is usually a few periods beyond the
frozen phase. Order entry in this phase necessitate trade-offs, but is less costly or
disruptive than in frozen phase
Liquid phase: farthest out on the time horizon. New orders or cancellations can be
entered with ease

Period
1 2 3 4 5 6 7 8 9

Frozen Slushy Liquid

(firm or fixed) (somewhat firm) (open)

Strict adherence to time fence policies and rules is the key to success!
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