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Aggregate Planning
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Learning Objectives
Review of forecasting
Forecast errors
Aggregate planning
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Phases of Decisions
Strategyor design: Forecast
Planning: Forecast
Operation Actual demand
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Characteristics of forecasts
Forecasts are always wrong. Should include expected value and
measure of error.
Long-term forecasts are less accurate than short-term forecasts. Too
long term forecasts are useless: Forecast horizon
Forecasting to determine
Raw material purchases for the next week
Annual electricity generation capacity in TX for the next 30 years
Aggregate forecasts are more accurate than disaggregate forecasts
Variance of aggregate is smaller because extremes cancel out
Two samples: {3,5} and {2,6}. Averages of samples: 4 and 4.
Variance of sample averages=0
Variance of {3,5,2,6}=5/2
Several ways to aggregate
Products into product groups
Demand by location
Demand by time 4
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Forecast Variability implies time zones
Frozen and Flexible zones
Volume
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Time Fences in MPS
Period
1 2 3 4 5 6 7 8 9
Long range
Intermediate
range
Short
range
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Overview of Planning Levels
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Listen to Tom Thumbs manager
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Why aggregate planning
Details are hard to gather for longer horizons
Demand for Christmas turkeys at Tom Thumbs vs Thanksgiving turkeys
Details carry a lot of uncertainty: aggregation reduces variability
Demand for meat during Christmas has less variability than the total
variability in the demand for chicken, turkey, beef, etc.
If there is variability why bother making detailed plans, inputs will
change anyway
Instead make plans that carry a lot of flexibility
Flexibility and aggregation go hand in hand
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Aggregate Planning
Aggregate planning: General plan
Combined products = aggregate product
Short and long sleeve shirts = shirt
Single product
Pooled capacities = aggregated capacity
Dedicated machine and general machine = machine
Single capacity
Time periods = time buckets
Consider all the demand and production of a given month together
Quite a few time buckets
When does the demand or production take place in a time bucket?
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Planning Sequence
Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts
Establishes production
Business Plan
and capacity strategies
Establishes
Production plan
production capacity
Resources Costs
Workforce Inventory carrying
Facilities Back orders
Demand forecast Hiring/firing
Policy statements Overtime
Subcontracting Inventory changes
Overtime
subcontracting
Inventory levels
Back orders
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Aggregate Planning Outputs
Totalcost of a plan
Projected levels of inventory
Inventory
Output
Employment
Subcontracting
Backordering
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Strategies
Proactive
Alter demand to match capacity
Reactive
Alter capacity to match demand
Mixed
Some of each
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Demand Options
to Match Demand and Capacity
Pricing
Price reduction leads to higher demand
Promotion
Not necessarily via pricing
Free delivery, free after sale service
Some Puerto Rico hotels pay for your flight
Back orders
Short selling: Sell now, deliver later
New demand
Finding alternative uses for the product
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Capacity Options
to Match demand and Capacity
Hire and layoff workers, unions are pivotal
Layoff: Emotional stress
Fired Moulinex (appliances producer in France) workers start fire at the plant
Hire: Availability of qualified work force
Operators at semiconductor plants
Overtime/slack time
How too use slack time constructively? Training.
Overtime is expensive, low quality, prone to accidents
Part-time workers
35 hour work week of Europe
Inventories, To smooth demands
Subcontracting. Low quality. Reveals technological secrets
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Fundamental tradeoffs in Aggregate Planning
Capacity (regular time, over time, subcontract)
Inventory
Backlog / lost sales: Customer patience?
Basic Strategies
Chase (the demand) strategy; Matching capacity to demand; the planned output
for a period is the expected demand for that period
fast food restaurants
Time flexibility from high levels of workforce or capacity;
machining shops, army
Demand
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Chase vs. Level
Advantages
Advantages
Stable output rates and
Investment in inventory is low
workforce
Labor utilization in high
Disadvantages
Disadvantages
Greater inventory costs
The cost of adjusting output rates
Increased overtime and idle
and/or workforce levels
time
Resource utilizations vary over
time
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Techniques for Aggregate Planning
Inputs:
Determine demand for each period
Determine capacities for each period
Identify policies that are pertinent
Determine units costs
Analysis
Develop alternative plans and costs
Select the best plan that satisfies objectives
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Technique 1: Cumulative Graph
Cumulative output/demand
Cumulative
production
Cumulative
demand
1 2 3 4 5 6 7 8 9 10
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Technique 2: Mathematical Techniques
Minimize Costs
Subject to: Demand, capacity, initial inventory
requirements
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Summary of Planning Techniques
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Basic Relationships
Example - Relationships
Workforce
Number of Number of
Number of Number of new workers laid off
workers in a workers at end of at start of the workers at
period = previous period + period - start of the period
Inventory
Amount used to
Inventory at end satisfy
Inventory at of the Production in demand in
the end of previous current current
a period = period + period - period
Cost
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Technique 3: Simulation Example
Level Output
Period 1 2 3 4 5 6 Total
Output Cost
Overtime $3
Subcontract $6
Inventory
Costs
Total Cost of Plan $650 $750 $800 $750 $1,150 $600 $4,700
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Average Inventory= (Beginning Inventory + Ending Inventory)/2
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Technique 3: Simulation Example
Level Output + Overtime
Period 1 2 3 4 5 6 Total
Output Cost
Overtime 40 40 40 0 120 $3
Subcontract $6
Backlog 0 0 0 0 80 0 80 $5
Costs
Total Cost of Plan $600 $680 $850 $730 $1,080 $560 $4,640
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Aggregate Planning in Services
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Aggregate Plan to Master Schedule
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Master Scheduling Process
Inputs Outputs
Beginning inventory Projected inventory
Master
Forecast Master production schedule
Scheduling
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Preview of Materials Requirement Planning Terminology
Net Inventory After Production
Requirements=Forecast
Assuming that the forecasts include committed orders
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Projected On-hand Inventory
Beginning
Inventory
JUNE JULY
64 1 2 3 4 5 6 7 8
Customer Orders
(committed) 33 30 30 30 40
Projected on-hand
inventory 31 1 -29
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Example: Find ATP with lot size of 70
June July
64 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders
(Committed) 33 20 10 4 2
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Practice Questions
1. The goal of aggregate planning is to achieve a production plan that
attempts to balance the organization's resources and meet expected
demand.
Answer: True Page: 541
2. A chase strategy in aggregate planning would attempt to match
capacity and demand.
Answer: True Page: 548
3. Ultimately the overriding factor in choosing a strategy in aggregate
planning is overall cost.
Answer: True Page: 550
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Practice Questions
1. Which of the following best describes aggregate planning?
A) the link between intermediate term planning and short term
operating decisions
B) a collection of objective planning tools
C) make or buy decisions
D) an attempt to respond to predicted demand within the
constraints set by product, process and location decisions
E) manpower planning
Answer: D Page: 541
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Practice Questions
2.Which of the following is an input to aggregate planning?
A) beginning inventory
B) forecasts for each period of the schedule
C) customer orders
D) all of the above
E) none of the above
Answer: D Page: 561
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Practice Questions
3.Which of the following is not an input to the aggregate
planning process:
A) resources
B) demand forecast
C) policies on work force changes
D) master production schedules
E) cost information
Answer: D Page: 545
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Practice Questions
4. Which one of the following is not a basic option for
altering demand?
A) promotion
B) backordering
C) pricing
D) subcontracting
E) All are demand options.
Answer: D Page: 545
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Practice Questions
5. Which of the following would not be a strategy associated with
adjusting aggregate capacity to meet expected demand?
A) subcontract
B) vary the size of the workforce
C) vary the intensity of workforce utilization
D) allow inventory levels to vary
E) use backorders
Answer: E Page: 546-547
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Practice Questions
6. Moving from the aggregate plan to a master
production schedule requires:
A) rough cut capacity planning
B) disaggregation
C) sub-optimization
D) strategy formulation
E) chase strategies
Answer: B Page: 559
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