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Operations managers
Forecast of demand
Goal: Maximize profits/Minimize costs, meet demand. The Aggregate Planning Problem:
Given the demand forecast for each period in the planning
horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firms profit over the planning horizon
Build inventories in slack periods in anticipation of higher demand later in the planning horizon Carry backorders or tolerate lost sales during peak periods Use overtime in peak periods and under time (idle time)in slack periods, while holding workforce and facilities constant.
Vary capacity by changing the size of the workforce through hiring and firing. Vary capacity through changes in plant and equipment ( long term option)
Each option involve cost ( tangible and intangible). Aim of Aggregate production planning is to choose the best option.
Capacity Options
Changing inventory levels
Increase inventory in low demand periods to meet high demand in the future Increases costs associated with storage, insurance, handling, obsolescence, and capital investment 15% to 40% Shortages can mean lost sales and poor customer service
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Capacity Options
Varying workforce size by hiring or layoffs
Match production rate to demand
Training and severance costs for hiring and laying off workers
Capacity Options
Varying production rate through overtime or idle time
Allows constant workforce
May be difficult to meet large increases in demand
Capacity Options
Subcontracting
Temporary measure during periods of peak demand May be costly Assuring quality and timely delivery may be difficult
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Capacity Options
Using part-time workers
Useful for filling unskilled or low skilled positions, especially in services
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Demand Options
Influencing demand
Use advertising or promotion to increase demand in low periods Attempt to shift demand to slow periods May not be sufficient to balance demand and capacity
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Demand Options
Back ordering during highdemand periods
Requires customers to wait for an order without loss of goodwill or the order Most effective when there are few if any substitutes for the product or service
Often results in lost sales
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Varying Avoids the costs of workforce size other alternatives. by hiring or layoffs
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Influencing demand
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Costs involved
1.
2.
3. 4. 5. 6.
7.
Procurement Cost Production Cost Inventory holding cost Back orders/ Lost sales Cost of Increasing/Decreasing work force Cost of overtime/ under time Costs to vary production rates.
Specify the planning horizon (typically 3-18 months) Aggregate planner requires the following information
Demand forecast in each period Production costs labor costs, regular time ($/hr) and overtime ($/hr) subcontracting costs ($/hr or $/unit) cost of changing capacity: hiring or layoff ($/worker) and cost of adding or reducing machine capacity ($/machine) Labor/machine hours required per unit Inventory holding cost ($/unit/period) Stockout or backlog cost ($/unit/period) Constraints: limits on overtime, layoffs, capital available, stockouts and backlogs
Production quantity from regular time, overtime, and subcontracted time: used to determine number of workers and
supplier purchase levels
Chase strategy using capacity as the lever Level strategy using inventory as the lever Mixed strategy a combination of the two strategies
Level Strategy
(using inventory as lever)
Maintain stable machine capacity and workforce levels with a constant output rate Shortages and surpluses result in fluctuations in inventory levels over time Drawback: Large inventories and backlogs may accumulate. When to use: Should be used when inventory holding and backlog costs are relatively low
Total expected demand Average requirement = Number of production days 6,200 = = 50 units per day 124
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70 60 50 40 30
Jan
Feb
Mar
Apr
May
June
= Month
= Number of working days
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22
Figure 13.3
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21
21
22
20
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Monthly Demand Inventory Ending Forecast $ 5 per unit per month Change Inventory
$10 per unit +200
900 Average pay rate Feb 900 700 Mar 1,050 800 Overtime pay rate Apr 1,050 1,200 Labor-hours to produce a unit May 1,100 1,500 Cost of increasing daily production rate (hiring June 1,000 1,100 and training)
Cost of decreasing daily production rate (layoffs)
200 $ 5 per hour ($40 per day) +200 400 $ 7 per hour +250 650 (above 8 hours per day) -150 500 1.6 hours per unit -400 100 $300 per unit -100 0 $600 per unit 1,850
Total units of inventory carried over from one month to the next = 1,850 units Table 13.3 Workforce required to produce 50 units per day = 10 workers
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Regular-time Average pay rate labor 900 Feb Mar Overtime pay rate
Monthly Calculations Demand Inventory Ending $9,250 (= $ 5 perunits carried x $5 per Forecast 1,850 unit per month Change Inventory $10 +200 900 unit) per unit 200
1,050 Other costs (overtime, Apr hiring, layoffs, 1,050 Labor-hours to produce a unit May subcontracting) 1,100
49,600 (= $ 5 workers ($40 per day) x 10 per hour x $40 per400 day 700 +200 124 7 per hour $ days)
800 1,200 1,500 0
(above 8 hours per day) 1.6 hours per unit
+250
Cost of increasing daily production rate (hiring June 1,000 1,100 Total training) $58,850 and cost
Cost of decreasing daily production rate (layoffs)
1,850
Total units of inventory carried over from one month to the next = 1,850 units Table 13.3 Workforce required to produce 50 units per day = 10 workers
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2,000
1,000 Jan Feb Mar
Excess inventory
Apr May June
Figure 13.4
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70 60 50 40 30
Level production using lowest monthly forecast demand
Jan
Feb
Mar
Apr
May
June
= Month
= Number of working days
33
22
18
21
21
22
20
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= 38 units per day $10 per unit x $ 5 per hour ($40 per day) 124 days = 4,712 hour $ 7 per units
(above 8 hours per day)
units = 6,200 - per unit 1.6 hours 4,712 Cost of increasing daily production rate (hiring 1,488 units = $300 per unit
Cost of decreasing daily production rate (layoffs)
Table 13.3
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= 38 units per day $10 per unit x $ 5 per hour ($40 per day) 124 days = 4,712 hour $ 7 per units
(above 8 hours per day)
units = Calculationsper unit 6,200 - 4,712 1.6 hours Regular-time labor $37,696= 1,488 units 7.6 per unit Cost of increasing daily production rate (hiring (= $300workers x $40 per day x
124 days)
Subcontracting 14,880 1,488 units Cost of decreasing daily production rate (layoffs) (= $600 per unitx $10 per unit)
Table 13.3
Total cost
$52,576
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70 60 50 40 30
Jan
Feb
Mar
Apr
May
June
= Month
= Number of working days
38
22
18
21
21
22
20
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Cost Information
Extra Cost of Extra Cost of Increasing 5 per unit per month Decreasing $ Production (hiring Production cost) $10 per unit cost) (layoff Total Cost
41 39
$ 7,200 5,600
$ 5 per hour per day)$ 7,200 ($40 $ 7 per hour x $600) (= 2 (above 8 hours per day) $600
(= 1 x $600) 1.6 hours per unit $1,200 6,800
Feb
700
38
6,400
$5,700
7,000
15,300 15,300 16,600
Apr 1,200 57 9,600 Cost of increasing daily production rate (hiring 19 x $300) per unit $300 (= and training) $3,300 May 1,500 1,100 68 55 12,000
per unit
Table 13.3
$68,200
Table 13.4
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Plan 2 $ 0
0 0 0 14,880 $52,576
Plan 3 $ 0
0 9,000 9,600 0 $68,200
37,696
49,600
Table 13.5
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The demand is highly seasonal for gardening tools. Red Tomatos options for handling seasonality are
Adding workers during peak season Subcontracting Building up inventory during slow months Building up backorders ( orders delivered late to customers)
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Aggregate Planning using Linear Programming Case Study: Red Tomato Tools.
Cost Parameters
Item Materials Inventory holding cost Marginal cost of a stockout Hiring and training costs Layoff cost Labor hours required Regular time cost Over time cost Cost of subcontracting Cost $10/unit $2/unit/month $5/unit/month $300/worker $500/worker 4/unit $4/hour $6/hour $30/unit
Regular time Labor cost Overtime Labor cost Cost of Hiring Cost of Layoff Cost of Inventory Cost of Stock out Cost of Materials Cost of Subcontracting
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Decision Variables
Wt = Workforce size for month t, t = 1, ..., 6 Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6 Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6 Pt = Number of units produced in month t, t = 1, ..., 6 It = Inventory at the end of month t, t = 1, ..., 6 St = Number of units stocked out/ backlogged at the end of month t, t = 1, ..., 6 Ct = Number of units subcontracted for month t, t = 1, ..., 6 Ot = Number of overtime hours worked in month t, t = 1, ..., 6
Objective Function
Min 640 W t 300 H t
t 1 t 1 6 6
500 Lt 6 Ot 2 I t
t 1 6 t 1 t 1
5 S t 10 P t 30 C t
t 1 t 1 t 1
Constraints:
1. Workforce, hiring and layoff constraint
Constraints ( Contd..)
2. Capacity Constraint: Production for each month cannot exceed capacity
P t 40 W t O t 4 , 40 W t O t 4 P t 0, for t 1,..., 6.
Constraints ( Contd..)
3.
Constraints ( Contd..)
4. Over time limit constraint
O t 10 W t, 10 W t O t 0, for t 1,..., 6.
Plus, add constraints such that Each variable must be non-negative
Summary
Aggregate planning is an intermediate time frame planning process by which a company determines optimum levels of capacity, production and inventory over a specified time horizon. Aggregate planning problem aims to maximize firms profit/ minimize costs over the planning horizon. There are 3 main kinds of aggregate planning strategies: Chase, Level and Mixed. Aggregate planning problem can be solved as an LPP, depending on the nature of parameters involved.
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