Aggregate Planning - PageOut

OPERATIONS MANAGEMENT
Aggregate Planning
Learning Objectives
• Explain business, sales & operations planning
• Identify different aggregate planning strategies
• Identify options for changing demand & capacity
• Develop aggregate plans & calculate costs
• Evaluate the impact of aggregate plans on functional
areas
• Describe the differences between plans for services &
manufacturing companies
Long
Range
Operations Planning Hierarchy
Process Planning
Strategic Capacity Planning
Medium
Aggregate Planning
Range
Manufacturing
Master Production Scheduling
Services
Material Requirements Planning
Short
Range
Order Scheduling
Weekly Workforce &
Customer Scheduling
Daily Workforce &
Customer Scheduling
4

Business Planning Hierarchy
Sales and Operations Planning
• Medium-term functional plans designed to
operationalize the long-term strategic plan:
• Marketing plan: defines the target customers
• Aggregate production plan: identifies the desired
inventory levels & staffing
• Financial plan: identifies the source of funds, cash flows,
& sets budgets
• Engineering plan: explores needed product & process
changes in support of the marketing plan
Aggregate Planning
• Based on composite (representative)
products:
• Simplifies calculations
• Forecasts for grouped items are more accurate
• Considers trade-offs between holding
inventory & short-term capacity based on
workforce

Master Production Schedule
• Breaks apart the composite product used in
Aggregate Planning:
• Identifies specific product configurations,
quantities & dates
• Used by marketing to determine units available
to promise to customers
Planning Approaches
• Reactive approach:
• Allow volume forecasts based on Marketing plan
to drive production planning
• Proactive approach:
• Coordinate Marketing & Production plans to
level demand using advertising & price
incentives
Inputs to / Outputs of
Aggregate Planning
Inputs
• A forecast of aggregate demand over planning horizon
• Available Resources (current workforce, inventory levels,
production rates, available capital etc.)
• Alternative means available to adjust capacity and
associated costs
Outputs
• A production plan: aggregate decisions concerning
workforce,production, inventory levels + Cost of the plan

Demand-based Options
• Finished goods inventories:
• Anticipate demand, i.e….
• Back orders & lost sales:
• Delay delivery or allow demand to go unfilled
• Shift demand to off-peak times:
• Less inventory,
• Proactive marketing, i.e. …
Capacity-based Options
• Overtime: Short-term option –Downside?
• Pay workers a premium to work longer hours
• Undertime: Short-term option – Why?
• Slow the production rate or send workers home early
(lowers labor productivity, but doesn’t tie up capital in
finished good inventories)
• Subcontracting: Medium-term option (cost, control)
• Hire & fire workers: Long-term option
• Change the size of the workforce (expensive?)
Costs in Aggregate Planning
• Smoothing costs (i.e. hiring/firing costs)
• Holding costs
• Backordering costs
• Regular time costs
• Overtime costs
• Subcontracting costs
• Idle time costs

Techniques for AP
• Informal or Trial-and-Error techniques
• Most commonly used in practice.
• Consist of developing simple tables and graphs that enable planners
to visually compare projected demand requirements with existing
capacity.
• May not result in optimal aggregate plan.
• Mathematical Techniques
• Linear Programming
• Simulation
Strategies for Meeting Demand
• Pure Strategies: Focused strategies
• Level Strategy: constant level of production, variations in demand
absorbed by some combination of capacity and demand based options
• Chase Strategy: match production to the demand for every period
• Mixed Strategies: Some combination of pure strategies.
• Choice of strategy depends on:
• company policy: e.g. no layoffs, subcontracting etc.
• costs: match demand and supply within constraints imposed on them
by policies or agreements and at minimum costs.

Pure Strategies
• Level Strategy:
• Use a constant workforce & produce similar quantities each time
period.
• Use inventories & backorders to absorb demand peaks & valleys.
• Employee benefit from stable work hours.
• Risk of rendering inventoried products obsolete.
• Chase Strategy:
• Match the production rate to the order rate by hiring and laying off
employees as the order rate varies.
• Minimize finished good inventories by trying to keep pace with
demand fluctuations.
• Low backlogs --> employees feel compelled to slow down out of
fear of being laid off as soon as existing orders are completed.
Mixed Strategies
• Use a combination of options:
• Build-up inventory ahead of rising demand &
use backorders to level extreme peaks
• Layoff or furlough workers during lulls
• Subcontract production or hire temporary
workers to cover short-term peaks
• Reassign workers to preventive maintenance
during lulls
Developing Aggregate Planning
• Choose the basic strategy:
• Level, chase, or hybrid
• Determine the production rate:
• Level plan with back orders: rate = average
demand over the planning horizon
• Level plan without back orders: rate is set to meet
all demand on time
• Chase plan: assign regular production, amount of
overtime & subcontracted work to meet demand

Developing Aggregate Planning-Contd.
• Calculate the size of the workforce needed
• Calculate period-to-period inventory levels,
shortages, expected hiring & firings, and overtime
• Calculate period-by-period costs, then sum for
total costs of the plan
• Evaluate the plan’s impact on customer service
and human resource issues
Example
Example
Plan A: LEVEL Aggregate Plan, Inventories and Back Orders
Plan A: LEVEL Aggregate Plan, Inventories and Back Orders
Period 1 2 3 4 5 6 7 8 Total
Demand (units) 1,920 2,160 1,440 1,200 2,040 2,400 1,740 1,500 14,400
Cumulative Demand 1,920 4,080 5,520 6,720 8,760 11,160 12,900 14,400
Period Production 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 14,400
Cumulative Production 1,800 3,600 5,400 7,200 9,000 10,800 12,600 14,400
Ending Inventory 480 240 720
Back Orders 120 480 120 360 300 1,380
Total Cost Calculation for Plan A
Regular-time Labor Cost
$12.50 per hour x 160 hours per period x 8 periods x 90 employees $ 1,440,000
Inventory Holding Cost
720 units x $10 per unit $ 7,200
Back-order Costs
1,380 units x $25 per unit $ 34,500
Total Costs $ 1,481,700

Example
Plan B: LEVEL Aggregate Plan, Inventories and NO Back Orders, All
Demand Met
Plan B: LEVEL Aggregate Plan, Inventories and NO Back Orders, All Demand Met
Period 1 2 3 4 5 6 7 8 Total
Demand (units) 1,920 2,160 1,440 1,200 2,040 2,400 1,740 1,500 14,400
Cumulative Demand 1,920 4,080 5,520 6,720 8,760 11,160 12,900 14,400
Cum. Demand / # of Periods 1,920 2,040 1,840 1,680 1,752 1,860 1,843 1,800
Period Production 2,040 2,040 2,040 2,040 2,040 2,040 2,040 2,040 16,320
Cumulative Production 2,040 4,080 6,120 8,160 10,200 12,240 14,280 16,320
Ending Inventory 120 - 600 1,440 1,440 1,080 1,380 1,920 7,980
Total Cost Calculation for Plan B
Regular-time Labor Cost
$12.50 per hour x 160 hours per period x 8 periods x 90 employees $ 1,632,000
Inventory Holding Cost
7980 units x $10 per unit $ 79,800
Hiring Costs
12 employees x $800 $ 9,600
Total Costs $ 1,721,400
Example
Plan C: CHASE Aggregate Plan, Using Hiring and Firing
Plan C: CHASE Aggregate Planning ,Using Hiring and Firing
Period 1 2 3 4 5 6 7 8 Total
Demand (units) 1,920 2,160 1,440 1,200 2,040 2,400 1,740 1,500 14,400
Employees Needed 96 108 72 60 102 120 87 75 720
Number of Hires 6 12 42 18 78
Number of Fires 36 12 33 12 93
Total Cost Calculation for Plan C
Regular-time Labor Cost
$12.50 per hour x 160 hours per period x 720 employees $ 1,440,000
Firing Costs
93 employees x $500 each $ 46,500
Hiring Costs
78 employees x $800 each $ 62,400
Total Costs $ 1,548,900
Example
Plan D: Hybrid Aggregate Plan, Initial Workforce and
Overtime as Needed
Plan D: Hybrid Aggregate Plan, Initial Workforce and Overtime as Needed
Period 1 2 3 4 5 6 7 8 Total
Demand (units) 1,920 2,160 1,440 840 1,080 1,680 1,620 1,500 14,400
Regular time units produced 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 14,400
Overtime units produced 120 360 480
Ending Inventory - - 360 960 720 120 180 480 2,820
Total Cost Calculation for Plan D
Regular-time Labor Cost
$12.50 per hour x 160 hours per period x 8 periods x 90 employees $ 1,440,000
Overtime Labor Hours
$18.75 per hour x 8 hours per unit x 480 units $ 72,000
Holding Costs
2,820 units x $10 per unit $ 28,200
Total Costs $ 1,540,200

Master Scheduling Process
• Master Schedule: Result of disaggregating the AP. It
shows the quantity and timing of individual products over
a shorter horizon
Inputs
Beginning inventory
Master
Forecast
scheduling
Customer orders (committed)
Outputs
Master production schedule
Projected inventory
Uncommitted inventory
This schedule is used to determine material and inventory
requirements for all the parts in the product (MRP)
Master Scheduling Process
• Done on an ongoing basis using time fences:
6+ wks
1-2 wks
No Change
Frozen
2-4 wks
+/- 5%
Firm
4-6 wks
+/- 10% +/- 20%
Full
Open
Non-Financial Criteria
• Operations perspective:
• Can operations ramp up & back down this quickly?
• Much more difficult to accomplish
• Human resources perspective:
• Will employees tolerate being hired & fired so rapidly?
• What about training & learning curve issues?
• Marketing perspective:
• All demand is met (assuming no strikes)

Service Planning Issues
• Intangible products can’t be inventoried
• Possible approaches:
• Try to proactively shift demand away from peaks
• Use overtime or subcontracting to handle peaks
• Allow lost sales
OPERATIONS MANAGEMENT
Materials Requirement
Planning
Learning Objectives
• Distinguish independent & dependent demand
• Describe the objectives & inputs of MRP
• Explain MRP operating logic
• Describe bill of materials & product structure trees
• Understand the impact of lot size rules
• Understand capacity requirements planning
• Introduce advanced planning systems

Review: Types of Inventory
Types of Demand
• Independent:
• Effects inventories that are managed separately from
other items (e.g.: finished goods made-to-stock)
• Demand is managed based on forecasts
• Dependent:
• Effects inventories that are managed to support
production of other items (e.g.: component parts)
• Demand is managed based on plans (e.g.: MPS)
• Dependent items are needed just prior to when
they are needed for production
Demand is lumpy
Little or no safety stock
Independent Demand
Dependent Demand
Demand
Stable demand
Demand
“Lumpy” demand
Amount on hand
Safety stock
Time
Time
Amount on hand
Time
Time

Material Requirements
Planning
• An information system that uses the concept of
backward scheduling to push the right material,
in the right amount, at the right time, into the
production process
• Used in dependent demand environments
MRP Overview
• Inputs:
• Master production schedule
• Bill of Materials
• Inventory Records
• Primary objectives:
• Schedule of replenishment orders (timing & quantities of
material requirements)
• Maintain priorities & track performance to plan (changes
in requirements and customer orders)

Overview
Definitions
• End item:
• The product sold as a completed item or repair part (an
independently demanded item)
• Parent items:
• Items produced from one or more “children”
• Components:
• Raw materials & other items (“children”) that are part of
a larger assembly
• MRP converts the production plan for final products into
requirements for component items and raw materials:
• What is needed?
• When is needed?
• How much is needed?
When should procurement, fabrication assembly start for
completing end items on time
Procurement of
raw material D
Procurement of
raw material F
Procurement of
raw material G
Fabrication
of part E
Procurement of
part C
Procurement of
part H
Subassembly A
Subassembly B
Final assembly
and inspection
1 2 3 4 5 6 7 8 9 10 11

Lot Sizing Rules
• Rules are used to change the frequency of
replenishment orders & set the quantity of
each order (balance holding & ordering costs
to reduce total costs)
• Common rules:
• Fixed Order Quantity (FOQ)
• Lot-for-Lot (L4L)
• Periodic Order Quantity (POQ)
End Item Example: Pie Safe
Bill of Material (BOM)
• A list of all the assemblies, components, &
raw materials required to produce the end
item
Part Number
Description Quantity Required
PS1001-U Unfinished pie safe 1
PSF1001-U Frame assembly 1
PST 1001-U Cabinet top 1
PSD 1001-U Door assembly 2
PSD 1001-D Pre-cut door 1
PSD 1001-I Punched tin insert 3
PSD 1001-K Knob 1
PSC 1001-U Closure assembly 1
PSH 1001-U Hinge 4

Product Structure Tree
• A graphical view of the BOM:
Inventory Record
• Gross requirements:
• The total period demand for the item
• Scheduled receipts:
• An open order with an assigned due date
• Projected available:
• The projected inventory balance for the period
• Planned orders:
• Quantities & released dates suggested by the MRP
system
Example
Inventory Record for Pie Safe
Item: Pie Safe
Lot size rule: L4L
Lead time: 1 week
0 1 2 3 4 5 6 7 8 9 10 11 12
Gross requirements 0 0 0 100 0 0 100 0 0 100 0 0
Scheduled receipts 100 100
A Time Bucket
100
Projected available 0 0 0 0 0 0 0 0 0 0 0 0 0
Planned orders 100 100 100

Operating Logic
• Explosion:
• Calculate the children’s time-phased gross
requirements by multiplying the parent item’s
planned order amount by the number of children
required to produce one parent item
Example
Item: Pie Safe
Lot size rule: L4L
Lead time: 1 week
0 1 2 3 4 5 6 7 8 9 10 11 12
Gross requirements 0 0 0 100 0 0 100 0 0 100 0 0
Scheduled receipts 100 100 100
Projected available 0 0 0 0 0 0 0 0 0 0 0 0 0
Planned orders 100 100 100
Item: Hinge assembly
Parent item: Pie Safe
Lot size rule: FOQ = 800
Children: None
Lead time: 3 weeks
0 1 2 3 4 5 6 7 8 9 10 11 12
Gross requirements 0 0 400 0 0 400 0 0 400 0 0 0
Scheduled receipts 800
Projected available 700 700 700 300 300 300 700 700 700 300 300 300 300
Planned orders 800
Pie Safe Example
Inventory Record for Pie Safe
Item: Pie Safe
Lot size rule: L4L
Lead time: 1 week
0 1 2 3 4 5 6 7 8 9 10 11 12
Gross requirements 0 0 0 100 0 0 100 0 0 100 0 0
Scheduled receipts 100 100 100
Projected available 0 0 0 0 0 0 0 0 0 0 0 0 0
Planned orders 100 100 100

Pie Safe Example- contd.
First Inventory Record For Frame Assembly
Item: Frame Assembly Parent: Pie Safe
Lot Size Rule: FOQ=144 Children: None
Lead Time: 3 weeks
1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements 0 0 100 0 0 100 0 0 100 0 0 0
Scheduled Receipts
Projected Available (120) 120 120 20 20 20 -80
Planned Orders
Pie Safe Example- contd.
Updated Inventory Record For Frame Assembly
Item: Frame Assembly Parent: Pie Safe
Lot Size Rule: FOQ=144 Children: None
Lead Time: 3 weeks
1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements 0 0 100 0 0 100 0 0 100 0 0 0
Scheduled Receipts
Projected Available (120) 120 120 20 20 20 64 64 64 108 108 108 108
Planned Orders 144 144
Pie Safe Example- contd.
Updated Inventory Record For Door Assembly
Item: Door Assembly Parent: Pie Safe
Lot Size Rule: L4L Children: Pre-cut Door, punched tin insert, knob
Lead Time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements 0 0 200 0 0 200 0 0 200 0 0 0
Scheduled Receipts
Projected Available (0) 0 0 0 0 0 0 0 0 0 0 0 0
Planned Orders 200 200 200

Pie Safe Example- contd.
Inventory Record For Knob
Item: Knob Parent: Door Assembly
Lot Size Rule: FOQ=300 Children: none
Lead Time: 2 weeks
1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements 0 200 0 0 200 0 0 200 0 0 0 0
Scheduled Receipts
Projected Available (250) 250 50 50 50 150 150 150 250 250 250 250 250
Planned Orders 300 300
Comparison of Lot Size Rules
• Different rules yield to different replenishment order frequencies and
order quantities.
Inventory Record Pie Safe
Item: Pie Safe Parent: None
Lot Size Rule: FOQ=144 Children:Frame A., Top, Door A., Hinge kit, Closure Assembly
Lead Time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12 13
Gross Requirements 0 25 25 40 40 0 60 60 60 0 60 60 60
Scheduled Receipts
Projected Available (0) 0 119 94 54 14 14 98 38 122 122 62 2 86
Planned Orders 144 144 144 144
Comparison of Lot Size Rules
Inventory Record Pie Safe
Item: Pie Safe Parent: None
Lot Size Rule: L4L Children:Frame A., Top, Door A., Hinge kit, Closure Assembly
Lead Time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12 13
Gross Requirements 0 25 25 40 40 0 60 60 60 0 60 60 60
Scheduled Receipts
Projected Available (0) 0 0 0 0 0 0 0 0 0 0 0 0 0
Planned Orders 25 25 40 40 60 60 60 60 60 60
Inventory Record Pie Safe
Item: Pie Safe Parent: None
Lot Size Rule: POQ=4 periods Children:Frame A., Top, Door A., Hinge kit, Closure Assembly
Lead Time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12 13
Gross Requirements 0 25 25 40 40 0 60 60 60 0 60 60 60
Scheduled Receipts
Projected Available (0) 0 105 80 40 0 0 120 60 0 0 120 60 0
Planned Orders 130 180 180

Comparison of Lot Size Rules
Total Cost= Holding Cost + Ordering Cost
H=$0.10 per period per unit, S= $25 per order
• Fixed Order Quantity (FOQ)
825x($0.10)+4x($25)=$182.5
• Lot-for-Lot (L4L)
0x($0.10)+10x($25)=$250.0
• Periodic Order Quantity (POQ)
585x($0.10)+3x($25)=$133.50
MRP Outputs
Primary Reports
• Planned orders - schedule indicating the amount and timing of future
orders.
• Order releases - Authorization for the execution of planned orders.
• Changes - revisions of due dates or order quantities, or cancellations of
orders.
Secondary Reports
Performance-control reports - Assess performance
Planning reports - Assess future material
requirements.
Exception reports - Calls attention to major
discrepancies.

Shortcomings of MRP
• Uncertainty: not taken into account.
• Capacity: till now mostly uncapacitated.
• Nervousness: major changes in production plan due to
revised schedule.
Capacity Requirements
Planning (CRP)
• Similar to rough cut capacity planning
• CRP is a feasibility check on labor &
machine utilization:
• Compare the open orders & planned orders
(from the MRP) to the actual shop floor capacity
Example

Advanced Planning Systems
• Manufacturing Resource Planning (MRP II):
• Second generation MRP systems that connect to
financial systems & help synchronize internal
operations
• Enterprise Resource Planning (ERP):
• An information system designed to integrate
internal & external processes of a supply chain
via a centralized database
ERP Overview