Aggregate Production Planning

Section Objectives
After completing this section, you should be able to: 1. Explain what aggregate production planning is and how it can be useful. 2. Identify the variables that decision makers have to work with in aggregate planning and some of the possible strategies they can use. 3. Describe some of the trial and error and quantitative techniques planners use. 4. Prepare aggregate plans and compute their costs.

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Aggregate Production Planning

Production Planning Environment
EXTERNAL
COMPETITION RAW MATERIAL SUPPLY DEMAND

EXTERNAL CAPACITY

ECONOMIC CONDITIONS

PRODUCTION PLANNING
CAPACITY PRODUCTION

WORK FORCE

INVENTORY

INTERNAL

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Aggregate Production Planning

Production Planning Horizon
PLANNING HORIZON
5 YEARS
1. LONG RANGE
- Business Forecasting - Product & Market Planning - Capacity Planning - Location & Layout - Financial Planning

2. MEDIUM RANGE 1 YEAR

- Aggregate Production Planning - Product Forecasting - Master Production Scheduling - Employment / Output / Inventory

3. SHORT RANGE 2 - 3 MONTHS

- Materials & Purchasing Control - Scheduling - Machine Loading - Job Assignments

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Aggregate Production Planning

Aggregate Production Planning

Objective: To develop a plan that will satisfy or meet demand within the limits of available resources, at least cost to the organization. Includes: Optimal combination of production rate, work force level and inventory. Time Frame: six to eighteen months.

Strategies for Adjusting the Output (Production) Rate

1. Vary the work force level.
2. Vary the inventory level. 3. Vary the production level. 4. Vary the level of customer service (back orders). 5. Sub-contract some of the production requirements. 6. Alter the peak output capacity.

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Aggregate Production Planning

Relevant Costs for Aggregate Production Planning
STRATEGY
1. Work Force (WF) 2. Production Rate (PR) 3. Inventory Level (INV) 4. Back Order (BO) 5. Subcontracting (SUB)

INCREASE
Interview Hiring Training

DECREASE
Severance Payments Loss of Morale Labour Market & Public Image
Idle Manpower Lower Output Worker Attrition Stockouts Lost Sales Idle Warehouse Space Higher Carrying Costs

Overtime & Shift Differentials Lower Productivity Decreased Quality

Warehousing Costs Obsolescence / Shrinkage Opportunity Cost Lost Sales Reduced Level of Service

Decreased Quality Loss of Control Higher Unit Costs

Increased Investment Reduced Flexibility

6. Design for Peak Demand Rate: - Large Capital Investment - Underutilization of Resources - Opportunity Costs
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Aggregate Production Planning

Single-Stage Aggregate Production Planning
Forecast / Known Demand in T+1 State of System (T) WFt PRt INVt BOt SUBt State of System (T+1) WFt+1 PRt+1 INVt+1 BOt+1 SUBt+1

Decision Process 1. Output Rate 2. Resource Mix

Minimize

Incremental Costs Payroll Hire / Fire Shift Premium Overtime / Undertime Inventory Holding Stockout Backorder Subcontract

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Aggregate Production Planning

Single-Stage Aggregate Production Planning
Given: WFt = 20 assemblers (1 assembler produces 10 units per period) INVt = 100 units of finished goods Ft = 200 units demand forecast for t + 1 Cw = $800 wage cost per assembler per period Cf = $400 fire (layoff) cost per assembler Ch = $300 hire cost per assembler Ft = 200 units demand forecast for period t + 1, then DECt+1 = fire 10 assemblers and build 100 units Ft+1 = 300 units demand forecast for period t + 2, then DECt+2 = hire 20 assemblers and build 300 units. Beginning Inventory Units of Output Wage Cost Fire Cost Hire Cost 6000 Total Cost

Forecast:

Number of Assemblers

T+1 T+2

10 30

100 0

100 300

$ 8000 24000

4000

$12000 30000 $42000

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Aggregate Production Planning

Multi-Stage Aggregate Production Planning
Forecast / Known Demand in T+1 State of System (T) WFt PRt INVt BOt SUBt State of System (T+1) WFt+1 PRt+1 INVt+1 BOt+1 SUBt+1 Forecast / Known Demand in T+2 State of System (T+2) WFt+2 PRt+2 INVt+2 BOt+2 SUBt+2

Decision Process 1. Output Rate 2. Resource Mix

Decision Process 1. Output Rate 2. Resource Mix

Minimize

Incremental Costs Payroll Hire / Fire Shift Premium Overtime / Undertime Inventory Holding Stockout Backorder Subcontract

Incremental Costs Payroll Hire / Fire Shift Premium Overtime / Undertime Inventory Holding Stockout Backorder Subcontract
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Aggregate Production Planning

Multi-Stage Aggregate Production Planning
Given: WFt = 20 assemblers (1 assembler produces 10 units per period) INVt = 100 units of finished goods Ft = 200 units demand forecast for t + 1 / 300 units for t +2 Cw = $800 wage cost per assembler per period Cf = $400 fire (layoff) cost per assembler Ch = $300 hire cost per assembler Ft = 200 units demand forecast for period t + 1, then DECt+1 = build 200 units Ft+1 = 300 units demand forecast for period t + 2, then DECt+2 = build 200 units.

Forecast:

Number of Assemblers
T+1 T+2 20 20

Beginning Inventory
100 100

Units of Output
200 200

Wage Cost
$16000 16000

Fire Cost
---

Hire Cost
---

Total Cost
$16000 16000 $32000
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Aggregate Production Planning

Techniques for Aggregate Production Planning

1. Informal, trial and error methods. In practice, these techniques are more commonly used. 2. Mathematical techniques - such as linear programming, linear decision rules or simulation. Although not widely used, they serve as a basis for comparing the effectiveness of alternative techniques for aggregate planning.

General Procedure for Aggregate Planning

1. Determine demand and production requirements for each period. 2. Determine production capacity (regular time, overtime, subcontracting) for each period. 3. Determine company or departmental policies that are pertinent. For example, maintain a safety stock of 5 percent of demand, or maintain a reasonably stable work force. 4. Determine unit costs for regular time, overtime, subcontracting, holding inventories, back orders and other relevant costs. 5. Develop alternative plans and compute the cost of each. 6. If satisfactory plans emerge, select the one that best satisfies objectives (such as cost minimization). Otherwise, return to step 5.
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Aggregate Production Planning

Aggregate Production Planning Illustration - Montreal Manufacturing
Given the following information: Additional information available: Sales Forecast 300 500 400 100 200 300 Work Days 22 19 21 21 22 20 Work Hours at 8 Hrs. / Day 176 152 168 168 176 160

6 month production planning period

10 labour-hours per unit required Labour cost = $10/hour regular = $15/hour overtime Total unit cost = $200 / unit = $228/unit subcontract Current workforce = 20 employees Hiring cost = $500 / employee Layoff cost = $800 / employee Safety stock = 20% of monthly forecast Beginning inventory = 50 units Inventory carrying cost = $10/unit/month Stockout cost = $50/unit/month Month Jan. Feb. Mar. Apr. May. June

First Step: Calculate Production Requirement

Month Jan. Feb. Mar. Apr. May. June Sales Forecast 300 500 400 100 200 300 Safety Stock 60 100 80 20 40 60 Production Required 300+60-50 = 310 500+100-60 = 540 400+80-100 = 380 100+20-80 = 40 200+40-20 = 220 300+60-40 = 320
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Aggregate Production Planning

Aggregate Production Planning Illustration - Montreal Manufacturing
Plan # 1 - Exact Production; Vary Work Force
Month Jan. Feb. Mar. Apr. May June Production Required 310 540 380 40 220 320 Hours Required 3100 5400 3800 400 2200 3200 Hrs. Avail. per Worker 176 152 168 168 176 160 Workers Required 18 36 23 3 13 20 Workers Hired 18 Hire/Fire Costs $1600 9000 10400 13 16000 20 5000 3500 Total Cost = $45,500 Workers Fired 2

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Plan # 2 - Exact Production; Vary Production Rate

Month Jan. Feb. Mar. Apr. May June

Production Required 310 540 380 40 220 320

Hours Required 3100 5400 3800 400 2200 3200

Total Hrs. Available 3520 3040 3360 3360 3520 3200

Overtime Hours
2360 440

Undertime Hours 420

OT/ UT Costs $4200 11800 2200 2960 14800 1320 6600 0 Total Cost = $61,000
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Aggregate Production Planning

Aggregate Production Planning Illustration - Montreal Manufacturing
Plan # 3 - Exact Production; Vary Inventory Level With 20 Employees
Cum. Prod. Required 310 850 1230 1270 1490 1810 Hours Available 3520 3040 3360 3360 3520 3200 Total Production 352 304 336 336 352 320 Cumulative Production 352 656 992 1328 1680 2000 Inventory Level 42 Stockout Level Inv. / SO Costs $420 194 9700 238 11900 580 1900 1900 Total Cost = $26,400

Month Jan. Feb. Mar. Apr. May June

58 190 190

Plan # 4 - Exact Production; Vary Workforce Level; Vary Inventory Level

Month Jan. Feb. Mar. Apr. May June Cum. Prod. Required 310 850 1230 1270 1490 1810 Hours Available 3520(20) 4560(30) 5040(30) 1680(10) 1760(10) 1600(10) Total Production 352 456 504 168 176 160 Cumulative Production 352 808 1312 1480 1656 1816 Inv. / (SO) Level 42 (42) 82 210 166 6 Inv. / SO Costs $420 2100 820 2100 1660 60 $7,160 Hire/Fire Costs 5000 16000

$21,000
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Total Cost = $7,160 + $ 21,000 = $28,160

Aggregate Production Planning

Aggregate Production Planning Illustration - Montreal Manufacturing Final Cost Analysis:
Units Produced 1810 1810 2000 1816 Plan Costs 45,500 61,000 26,400 28,160 Production Costs 362,000 362,000 400,000 363,200 Total Costs 407,500 446,500 426,400 391,360 Cost per Unit $225.14 $233.70 $213.20 $215.51

Plan 1 2 3 4

Decision: Go with Plan # 3 on the basis of lowest cost per unit.

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Aggregate Production Planning

Aggregate Production Planning - Additional Illustration # 1
The item demand forecasts for a product for October, November, and December are 2000, 3000, and 2500 units, respectively. Safety stock policy, as determined by management, is 25 percent of the forecast for that month. There is no beginning inventory. Additional information for this product is as follows: Manufacturing cost Storage costs Standard pay rate Overtime rate Cost of stockout Cost of subcontracting Hiring and training cost Lay-off costs Production man-hours required per unit Number of working days in each month a) b) $250/unit $100/unit/month $8.00/hr., 8 hr./day $12.00/hr. $10.00/unit/month $10.00/unit $200/worker $200/worker 12 hours 20

Develop a production schedule to produce the exact production requirements by varying the work force size. Calculate total hiring and lay-off costs.

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Aggregate Production Planning

Aggregate Production Planning - Additional Illustration # 2
The production manager of the Marabell Manufacturing Corporation wants to determine an production strategy for the first quarter of the year. Beginning inventory for the first month of the quarter period is 200 units, and, for each subsequent month, the beginning inventory for that month is equal to the safety stock of the preceding month. The company's safety stock policy is 25 percent of the month's demand forecast. The demand forecast for each month of the quarter period is 700, 900, and 875 units, respectively. The number of working days in each month is 21, 22, and 20. The following additional information was also made available: Manufacturing cost Storage costs Standard pay rate Overtime pay Marginal cost of stockout Hiring and training cost Lay-off costs Man-hours required per unit Number of workers currently employed $100/unit $1.00/unit/month $5.00/hr., 8 hr./day 150% of standard $4.00/unit/month $150/man $200/man 4 15

Determine the production costs if the company wants to carry out the strategy of: a) b) Producing to exact production requirements by varying the work force size on regular hours. Maintaining a constant work force level based on a quarterly (3-month) average. Inventory is allowed to accumulate, while shortages may be filled from next month's production.
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