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Introduction to Principles of Production Management WS 2013/2014 Chapter 14 – Aggregate sales and Operations Planning Presented by Dr. Eng. Abed Schokry

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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

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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 618 months • Details the aggregate production rate and size of work force required

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Objectives

• Sales and Operations Planning • The Aggregate Operations Plan • Examples: Chase and Level strategies

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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

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The Role of the Aggregate Plan

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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

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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

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Types of Aggregate Plans (cont.) • 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

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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

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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

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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.

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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.

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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: Ø Demand management Ø Production-rate changes Ø Workforce changes Ø Inventory smoothing Ø Facilities, equipment, and transportation

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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.

Islamic University of Gaza - Palestine Dealing with the Problem Complexity through Decomposition Corporate Strategy Aggregate Unit Demand

Aggregate Planning (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)

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Islamic University of Gaza - Palestine Aggregate Planning Problem Aggr. Unit, Production Reqs

Corporate Strategy

Aggregate Unit Demand

Aggregate Unit Availability (Current Inventory Position)

Aggregate Production Plan

Aggregate Planning

Aggregate Production Plan: •Aggregate Production levels •Aggregate Inventory levels •Aggregate Backorder levels

Required Production Capacity

Production Capacity Plan: •Workforce level(s) •Overtime level(s) •Subcontracted Quantities

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Figure 14.1

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Example Aggregate Planning Variables and Revenue/Cost Implications

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Aggregate Planning Goals

• Meet demand (Sales Forecast) • Use capacity efficiently • Meet inventory policy • Minimize cost – – – –

Labor Inventory Plant & equipment Subcontract

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Aggregate Scheduling Options - Advantages and disadvantages

Option

Advantage

Disadvantage

Changing inventory levels

Changes in human resources are gradual, not abrupt production changes

Varying workforce size by hiring or layoffs

Avoids use of Hiring, layoff, other alternatives and training costs

Inventory holding costs; Shortages may result in lost sales

Some Comments Applies mainly to production, not service operations

Used where size of labor pool is large

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Advantages and disadvantages (cont.)

Option

Advantage

Disadvantage Some Comments

Varying production rates through overtime or idle time

Matches seasonal fluctuations without hiring/training costs Permits flexibility and smoothing of the firm's output

Overtime premiums, tired workers, may not meet demand

Allows flexibility within the aggregate plan

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

Applies mainly in production settings

Subcontracting

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Advantages and disadvantages (cont.)

Option

Advantage

Disadvantage

Some Comments

Using part-time workers

Less costly and more flexible than full-time workers

Good for unskilled jobs in areas with large temporary labor pools

Influencing demand

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.

Creates marketing ideas. Overbooking used in some businesses.

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Advantages and disadvantages (cont.)

Option

Advantage

Disadvantage

Back ordering during highdemand periods

May avoid Customer must overtime. Keeps be willing to capacity constant wait, but goodwill is lost.

Counterseasonal Fully utilizes May require products and resources; allows skills or service mixing stable workforce. equipment outside a firm's areas of expertise.

Some Comments Many companies backlog.

Risky finding products or services with opposite demand patterns.

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The Extremes

Level Strategy

Chase Strategy

Production rate is constant

Production equals sales forecast

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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

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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.

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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

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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.

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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.

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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.

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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

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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

Islamic University of Gaza - Palestine Balancing Aggregate Demand and Aggregate Production Capacity 10000

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

10000 8000 8000

7000 6000

5500

6000

4500

4000 2000 0 Jan

Feb

Mar

Apr

May

Jun

9000

10000

8000

8000

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

6000 6000

4500

4000

Jan

Feb

4000

4000 2000 0 Mar

Apr

May

Jun

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Islamic University of Gaza - Palestine Required Inputs to the Production Planning System

Competitors’ behavior

Raw material availability

External capacity

Current physical capacity

Planning for production

Current workforce

Inventory levels

Market demand

External to firm

Economic conditions

Internal to firm

Activities required for production

Islamic University of Gaza - Palestine 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

4500

5500

7000

10000

8000

6000

Materials Holding costs Marginal cost of stockout Hiring and training cost Layoff costs Labor hours required Straight time labor cost Beginning inventory Productive hours/worker/day Paid straight hrs/day

$5/unit $1/unit per mo. $1.25/unit per mo. $200/worker $250/worker .15 hrs/unit $8/hour 250 units 7.25 8

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Islamic University of Gaza - Palestine 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 Jun

Jan

Feb

Mar

Apr

May 7.25x22

4500

5500

7000

10000

8000

6000

Productive hours/worker/day Paid straight hrs/day

22x8hrsx$8=$140 8 Days/mo Hrs/worker/mo Units/worker $/worker

Jan 22 159.5 1063.33 $1,408

7.25 8

Feb 19 137.75 918.33 1,216

Mar 21 152.25 1015 1,344

7.25 / 0.15=48.33 & 48.33x22=1063.33

Apr 21 152.25 1015 1,344

May 22 159.5 1063.33 1,408

Jun 20 145 966.67 1,280

Islamic University of Gaza - Palestine Chase Strategy /(Hiring & Firing to meet demand)

Days/mo Hrs/worker/mo Units/wo rker $ /wo rker

Demand Beg. inv. Net req. Req. wo rkers Hired Fired W o rkfo rce Ending invento ry

Jan 22 1 5 9 .5 1 ,0 6 3 .3 3 $ 1 ,4 0 8

Jan 4 ,5 0 0 250 4 ,2 5 0 3 .9 9 7 3 4 0

Lets assume our current workforce is 7 workers.

First, calculate net requirements for production, or 4500-250=4250 units Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=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.

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Islamic University of Gaza - Palestine Below are the complete calculations for the remaining months in the six month planning horizon Days/mo Hrs/wo rke r/mo Units/worker $/worker

Demand Beg. inv. Net re q. Req. workers Hired Fired Workforce Ending inve nto ry

Jan 22 15 9.5 1,063 $1 ,40 8

Feb 19 1 37.75 9 18 1,2 16

Mar 21 152 .25 1,015 1,344

Apr 21 152.25 1,015 1,344

May 22 1 59.5 1 ,06 3 1 ,40 8

Jun 20 145 967 1,280

Jan 4,500 250 4,250 3.997

Feb 5,5 00

Mar 7,000

Apr 10,000

May 8 ,00 0

Jun 6,000

5,5 00 5.9 89 2

7,000 6.897 1

10,000 9.852 3

8 ,00 0 7 .52 4

6,000 6.207

6 0

7 0

10 0

2 8 0

1 7 0

3 4 0

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Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included Demand Beg. inv. Net req. Req. workers Hired Fired Workforce Ending inventory

Material Labor Hiring cost Firing cost

Jan 4,500 250 4,250 3.997 3 4 0

Feb 5,500

Mar 7,000

Apr 10,000

May 8,000

Jun 6,000

5,500 5.989 2

7,000 6.897 1

10,000 9.852 3

8,000 7.524

6,000 6.207

6 0

7 0

10 0

2 8 0

1 7 0

Jan Feb Mar Apr May Jun $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 400.00 200.00 600.00 750.00 500.00 250.00

Costs 203,750.00 53,958.62 1,200.00 1,500.00 $260,408.62

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Islamic University of Gaza - Palestine 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 4,50 0 25 0 4,25 0 6 6,38 0 2,13 0 2,13 0

Demand Beg. inv. Net req. W orkers P roduction Ending inventory Surplus Shortage

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Below are the complete calculations for the remaining months in the six month planning horizon

Demand Beg. inv. Net req. Workers Production Ending inventory Surplus Shortage

Jan 4,500 250 4,250 6 6,380 2,130 2,130

Feb 5,500 2,130 3,370 6 5,510 2,140 2,140

Mar 7,000 2,140 4,860 6 6,090 1,230 1,230

Apr 10,000 1,230 8,770 6 6,090 -2,680

May 8,000 -2,680 10,680 6 6,380 -1,300

Jun 6,000 -1,300 7,300 6 5,800 -1,500

2,680

1,300

1,500

Note, if we recalculate this sheet with 7 workers we would have a surplus

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Islamic University of Gaza - Palestine Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included Jan 4,500 250 4,250 6 6,380 2,130 2,130

Jan $8,448 31,900 2,130

Feb 5,500 2,130 3,370 6 5,510 2,140 2,140

Feb $7,296 27,550 2,140

Mar 7,000 10 4,860 6 6,090 1,230 1,230

Mar $8,064 30,450 1,230

Apr 10,000 -910 8,770 6 6,090 -2,680

May 8,000 -3,910 10,680 6 6,380 -1,300

Jun 6,000 -1,620 7,300 6 5,800 -1,500

2,680

1,300

1,500

Apr $8,064 30,450

May $8,448 31,900

Jun $7,680 29,000

3,350

1,625

1,875

Note, total costs under this strategy are less than Chase at $260.408.62

$48,000.00 181,250.00 5,500.00 6,850.00

Labor Material Storage Stockout

$241,600.00

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Aggregate Planning Examples: Unit Demand and Cost Data Suppose we have the following unit demand and cost information: Demand/mo

Jan

Feb

Mar

4500

7500

10500 11000 8000

Materials $5/unit Holding costs Marginal cost of backorder Hiring and training cost Layoff costs Labor hours required Straight time labor cost Beginning inventory Productive hours/worker/day Paid straight hrs/day

Apr

May

Jun 5000

$1/unit per mo. based on ending inv. $1.25/unit per mo. $200/worker $250/worker .15 hrs/unit $8/hour 250 units 7.25 8

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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

4500

7500

10500 11000 8000

Jun 5000

Productive hours/worker/day 7.25 Paid straight hrs/day 8 Days/mo Productive Hrs/worker/mo Units/worker/month $/worker

Jan 20 145 966.7 $1,280

Feb 20 145 966.7 $1,280

Mar 20 145 966.7 $1,280

Apr 20 145 966.7 $1,280

May 20 145 966.7 $1,280

Jun 20 145 966.7 $1,280

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Chase Strategy (Hiring & Firing to meet demand/ No Shortage) Days/mo Productive Hrs/worker/mo Units/worker/month $/worker

Demand Beg. inv. Net req. Req. workers Beg. Workers Hired Fired Workforce Production Ending inventory

Jan 20 145 966.7 $1,280

Lets assume our current workforce is 7 workers.

Jan 4500 250 4250 5 7 0 2 5 4834 584

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Demand Beg. inv. Net req. Req. workers Beg. Workers Hired Fired Workforce Production Ending inventory Costs: Material Labor Hiring cost Firing cost Holding Cost

Jan 4,500 250 4,250 5 7 0 2 5 4834 584

Below are the complete calculations for January with the other costs included.

$24,170 $6,400 $0 $500 $584

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Feb Demand Beg. inv. Net req. Req. workers Beg. Workers Hired Fired Workforce Production Ending inventory Costs: Material Labor Hiring cost Firing cost Holding Cost

Now complete calculations for Feb. and March

$0 $0 $0 $0 $0

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March Demand Beg. inv. Net req. Req. workers Beg. Workers Hired Fired Workforce Production Ending inventory Costs: Material Labor Hiring cost Firing cost Holding Cost

Now complete calculations for Feb. and March

$0 $0 $0 $0 $0

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The IDES Sales Forecast for 2003 Unit Sales Forecast For 2003 Quarter 1

307,200

Quarter 2

379,200

Quarter 3

360,000

Quarter 4

489,600

Total

1,536,000

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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).

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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

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Islamic University of Gaza - Palestine Option 1 – Constant Workforce without overtime or subcontracting • First, determine the number of workers required to produce the units forecast for 2003. • Ave. Prod/day = 1,536,000 = 6,400/day 240 days • Then determine how many workers are needed. • Workers needed = 6,400/day = 160 5 units/hr X 8 hrs

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Option 1 Continued: Calculate Inventory Carrying Costs Qtr

Production @ 6400/day

1

384,000

307,200

+76,800

76,800

2

384,000

379,200

+ 4,800

81,600

3

384,000

360,000

+24,000

105,600

4

384,000

489,600

-105,600

1,536,000

1,536,000

Total

Sales Forecast

Inventory Change

Ending Inventory

0 264,000

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Option 1 Continued: Calculation of Annual Costs •

Inventory carrying cost: 264,000 units X $0.50/unit = $ 132,000 Cost to increase capacity: (384,000-360,000) 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

• • •

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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

307,200

360,000

+52,800

52,800

0

0

0

2

379,200

360,000

-19,200

33,600

0

0

0

3

360,000

360,000

33,600

0

0

0

4

489,600

360,000

0

96,000

72,000

24,000

1,536,000

1,440,000

72,000

24,000

Total

0

-33,600

0

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Islamic University of Gaza - Palestine 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

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Option 3 – Vary Production (Workforce) to match Sales Forecast

Qtr

Sales Forecast

Beginning Capacity

Capacity Change Needed

Cost of Capacity Change

1

307,200

360,000

-52,800

$105,600

2

379,200

307,200

+72,000

216,000

3

360,000

379,200

-19,200

38,400

4

489,600

360,000

+129,600

388,800

Total

1,536,000

$748,800

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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

Islamic University of Gaza - Palestine Annual Cost Comparison of the Aggregate Scheduling Strategies

Option

Annual Cost

1. Level – No use of O/T or Outsourcing

$6,396,000

2. Mixed – Present work force w/ O/T & Outsourcing

$6,420,000

3. Chase – Vary Production (workforce)

$6,892,800

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The IDES Sales Forecast for 2003 revised Unit Sales Forecast For 2003 Quarter 1

388,000

Quarter 2

440,000

Quarter 3

400,000

Quarter 4

500,000

Total

1,728,000

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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

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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 Islamic University of Gaza - Palestine

Capacity Requirements Planning (CRP) (cont.) •

Basic MRP does not consider capacity limitations (assumes infinite capacity so no rescheduling, etc.), so CRP addresses this issue.

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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

Islamic University of Gaza - Palestine (End of Chapter 14)

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