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POM Lecture
POM Lecture
Scheduling Operations
Chapter 12: Aggregate Planning
Lesson 37 - THE AGGREGATE PLANNING PROCESS
Learning Objectives
For e.g. steel producer can plan in terms of tons of steel, gallons of paint in case
of paint industry. Service organizations such as transport system may use
passenger miles as a common measure, health care facilities may use patient
visits, and educational institutes may use student to faculty contact ratio in terms
of hours as a reasonable measure.
You may recall that a group of products or services that have similar demand
requirements and common processing, labour and materials requirements is called
a Product Family. Therefore a firm can aggregate its products or services into a
set of relatively broad families, avoiding too much detail at the planning stage.
For example consider the Bicycle manufacture that has aggregated all products
into two families: mountain bikes and road bikes. This approach aids production
planning for the assembly lines in the plants.
4. Interrelationships among decisions Here the managers must consider the future
consequences of current decisions. This is important mainly due to the fact that
output plans are developed for a long period of time.
Table 2
Month Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Units / day 182 527 619 1000 1143 952 682 1454 857 637 499 286
Productive 22 19 21 22 21 21 22 11 21 22 18 21
Days
Forecast (in 4 10 13 22 24 20 15 16 18 14 9 6
000 units
The first step in the analysis is to determine the production requirements the forecasted
demand places on the facility. At first glance May , appears to be the peak month with
24,000 units demanded. The number of Productive days actually available must also be
considered for e.g. August has 11 productive days only Because of annual vacation.
Shutdown. The output rates, output per available productive day, are shown in figure.
Let’s examine three “ pure strategies” that the planner could use to cope with these wide
swings in monthly demands.
This strategy has disadvantages. The hiring and layoff costs are going to be high, indirect
costs of training new employees are going to be there, employee morale low, required
work skills may not be readily available when they are needed, lead times necessary to
hire and train the new employees must be accounted for in the planning process, society
reaction negative. Finally this strategy is not feasible for the companies constrained by
guaranteed wage and also hiring and layoff agreements.
Strategy 2: Maintain a Constant Work Force Size but Vary the Utilization of the Work
Force ( also known as Level # 1)
Suppose, for example, we chose the strategy of employing 70 workers per month
throughout the year. On an average, this work force would be capable of producing 700
wagons each day. During the lean months (January, February, March, July, October,
November, December), the work force would be scheduled to produce only the amount
forecasted, resulting in some idle working hours. During high-demand months (April,
May, June, August, September), overtime operations would be needed to meet demand.
The work force would therefore be intensely utilized during some months and
underutilized in other months.
A big advantage of this strategy is that it avoids the hiring and layoff costs
associated with strategy 1. But other costs are incurred instead. Overtime, for example,
can be very expensive, commonly at least 50 percent higher than regular-time wages.
Furthermore, there are both legal and behavioral limits on overtime. When employees
work a lot of overtime, they tend to become inefficient, and job-related accidents happen
more often.
Idle time also has some subtle drawbacks. During slack periods, employee morale
can diminish, especially if the idle time is perceived to be a precursor of layoffs.
Opportunity costs also result from idle time. When employees are forced to be idle, the
company foregoes the opportunity of additional output. While wages are still paid, some
potential output has been lost forever.
Usually, no pure strategy is best by itself; a mixture of two or three is better. The various
alternative plans or "mixtures" involve tradeoffs. One way to develop and evaluate these
alternatives is by using a graphical planning procedure. The graphical method is
convenient, relatively simple to understand, and requires only minimal computational
effort. To use the graphical method, follow these steps:
1. Draw a graph showing cumulative productive days for the entire planning horizon
on the horizontal axis, and cumulative units of output on the vertical axis. Plot the
cumulative demand data (forecasts) for the entire planning horizon.
2. Select a planning strategy, taking into account aggregate planning goals. Calculate
and plot the proposed output for each period in the planning horizon on the same
set of axes used to plot the demand.
3. Compare expected demand and proposed output. Identify periods of excess
inventory and inventory shortages.
4. Calculate the costs for this plan.
5. Modify the plan, attempting to meet aggregate planning goals by repeating steps 2
through 4 until a satisfactory plan is established.
We will demonstrate steps 1 through 4 for three different aggregate plans. The fifth
step, additional modification, is left for you to do as an exercise.
The first plan we demonstrate is a plan that calls for a constant rate of output throughout
the planning horizon. Often such a plan is chosen when the costs of changing the rate of
output, on a monthly basis, say, are deemed too high.
Step 1 of the graphical planning procedure draw a graph of the demand data shown in
Figure. This graph is the black curve in Figure.
For step 2, we consider the fact that business plan, and hence the goals of the aggregate
plan, calls for output that meets forecasted demand throughout the planning horizon:
Relying on backordering has been deemed too costly. We consider, too, that costs will be
incurred if we change the output rate during the planning horizon: When the output rate is
increased, additional employees must be hired and trained. When the output rate is
decreased, some employees must be laid off and/or idle time occurs. The larger the
increase or decrease in output rate, the greater the cost incurred. Table 3 shows the costs
of changing output rates by different amounts. Output rates are expressed in terms of
units (wagons) per day. The facility's maximum capacity is 100 employees (1,000
wagons/day) on a single shift. Using overtime with additional costs of $4/unit can
temporarily increase capacity.
Thus, we select a planning strategy consisting of a constant output rate for each day
throughout the planning horizon, one that
allows cumulative output at least to meet
forecasted demand throughout the planning
horizon. To plot the curve of output, then on the
same set of axes we plotted forecasted demand, we
must recognize that the curve should be a straight
line-that is, a curve whose slope is constant, since
we want the output rate to be constant. What slope
should it have? What constant rate of output should
we specify? The cumulative output line should
be steep enough always to meet or exceed
cumulative demand. But if the output line is too
steep, excessive inventories are accumulated.
Moreover, output rate cannot exceed the facility's
maximum capacity: 1000 wagons/day, or 10
wagons/day for each of 100 employees. The desired
line passes through Inventory
the origin where output and
days are both 0 (point Accumulation A), and the outlining point B,
on the cumulative demand curve.
0 20 40 60 80 100 120 140 160 180 200 220
---------------
Units/output in
000.
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
The cumulative output described by this line meets our planning requirements: Beginning
on the first day production commences at a constant daily rate and total output exceeds
total demand until the end of September (point B). At the end of September, units
produced to date equal the total demanded to date. Thereafter, output exceeds expected
demand for the remainder of the planning horizon. What is the constant output rate? Point
B represents 180 productive days and 142,000 cumulative units of output (from Table.2)
1,42,000 units
= 790 units /day approx
180 days
.
Comparing the data in table form, as part of Step 3, the resulting monthly plans are
shown in Table 4. Since 790 units are produced each day, and since each employee can
average 10 units/day, 79 employees are needed. Step 4 requires that we calculate the
costs for this plan. Since the daily output rate is unchanged from month to month, there
are no change of output rate costs. The cumulative average monthly inventory is 120,405
units for the year. Inventory carrying cost is $l/unit/month, based on the average monthly
inventory. Therefore inventory costs are about $120,405.
This rate is boosted to 1000 units/day from April through July. Output is then decreased
to 689 units/day for the remainder of the year. The inventory cost of this plan is $1/unit
stored, or $67,276. Output rate changes cost $18,000 for the March-April change and
$10,000 for the July-August change, for a total of $28,000.
Comparing the Plans
The three plans are evaluated on the basis of total cost for the planning horizon. We have
done this in Table 7. The level output plan has high inventory costs and no overtime or
rate-change costs. The variable output plan has negligible inventory costs, high rate-
change costs, and some overtime costs. These plans exemplify two of the pure strategies
discussed earlier. The third (intermediate) plan incurs substantial costs of inventories and
rate changes but has the lowest total cost. This plan reflects a mixed strategy, using
moderate (not extreme) amounts of inventory and output rate changes to absorb demand
fluctuations.
Our example shows why the aggregate planning process is sometimes called
production smoothing. As demand decreases to lower levels, it is cheaper to decrease
output rates (occasionally) than to continue to build up excessive inventories. If there is
anyone generalization that can be made about aggregate planning, it is this: When
planning production, smooth out the peaks and valleys to meet uneven demand because
extreme
.fluctuations in production are generally very costly.
Table 7 Operating Costs ( in $ ) for three plans
Plan
*May: 143 units/day x 21 days x $4/unit = $12,012. August: 454
units/day x 11 days x $4/unit = $19,976. $12,012 + $19,976 =
$31,988
#From data in Table .3.
Type of cost Level Variable Intermediate
output rate output rate
(Chase
Plan )
Overtime 0 31,988* 0
Inventory 120,000 139 67,276
Output rate
change# 0 112,000 28,000
Total Cost in 120,405 144,127 95,276.
dollars
CAPACITY PLANNING
In terms of capacity utilization, the level plan consistently uses 79 percent of maximum
capacity. The chase plan's utilization, in contrast, varies from only 18 percent up to 145
percent during the year. The intermediate plan uses 55 to 100 percent of maximum
capacity. If these levels of utilization are unsuitable, either the demand for its products
must be stimulated (to gain higher capacity utilization) or the capacity must be adjusted,
by hiring more employees, for example.
We give a comparative chart of all the plans at a glance:
With that, we have come to the end of today’s discussions. I hope it has
been an enriching and satisfying experience. See you around in the next
lecture. Take care. Bye.