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Aggregate planning
Chapter 21
Aggregate planning Chapter takeaways After completion of this chapter the reader would be able to 1. Appreciate the need and importance of aggregate planning in production planning. 2. Know what should be the inputs for aggregate planning to be ready with all required information. 3. Decide whether the static production program or the static inventory program suits the proposed production planning. 4. Be able to explore other aggregate planning strategies that would best suit the program. 5. Appreciate the specific planning required for the service industries as distinct from the manufacturing industries.
21.1 What is aggregate planning? Aggregate planning is an intermediate-term planning function. It is the process of planning the quantity and timing of output over an intermediate time of, say, from 3 months to 1 year. Within this range, the physical facilities are assumed to be fixed for the planning period. Therefore, fluctuations in demand must be met by varying labor and inventory schedules. Aggregate planning seeks the best combination to minimize costs by matching the supply and demand of output over the medium time range, generally for the next 12-month period. It tells management exactly when and in what quantum the materials and other resources are to be procured to ensure that the total cost of operations of the organization is kept to the minimum. According to Wikipedia, the term aggregate indicates that planning is done for a single overall measure of output or, at the most, a few aggregated product categories. In other words, aggregate planning is the matching of the plant capacity with demand in such a way that production costs are minimized.
Production Planning and Control. DOI: https://doi.org/10.1016/B978-0-12-818364-9.00021-4 Copyright © 2019 BSP Books Pvt. Ltd. Published by Elsevier Inc. All rights reserved.
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21.2 Importance of aggregate planning http://www.managementstudyguide.com, the website of Management Study Guide, indicates that aggregate planning plays an important part in achieving long-term objectives of the organization and helps in the following: G
G G
G G
Achieve financial goals by reducing overall variable cost and improving the bottom line. Maximum utilization of the available production facility. Provide customer satisfaction by matching demand and reducing wait time for customers. Reduce investment in inventory stocking, Enable meeting scheduling goals, thereby creating a happy and satisfied workforce.
21.3 Definitions of aggregate planning The following are some of the definitions given on aggregate planning: Aggregate planning is an operational activity that does an aggregate plan for the production process, in advance of 2 to 18 months, to give an idea to management as to what quantity of materials and other resources are to be procured and when, so that the total cost of operations of the organization is kept to the minimum over that period https://en.wikipedia.org/wiki
Aggregate planning is an operational activity critical to the organization as it looks to balance long-term strategic planning with short term production success. . . www.managementstudyguide.com
Aggregate planning is the process of developing, analyzing, and maintaining a preliminary, approximate schedule of the overall operations of an organization. www.referenceforbusiness.com
Aggregate Planning is an attempt to match the supply of and demand for a product or service by determining the appropriate quantities and timing of inputs, transformation, and outputs. Decisions made on production, staffing, inventory and backorder levels. www.uoguelph.ca
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Aggregate planning is a forecasting technique that businesses use in an attempt to predict the supply and demand of their products and services. Mainly, this is done in an effort to save money, streamline operations and increase productivity. To accomplish this, businesses use an aggregate planning model to develop a game plan that will assist them with determining their staffing requirements, materials needed, estimated timelines and budget costs so they can better plan ahead. http://smallbusiness.chron.com
Aggregate Planning is a medium range capacity planning type that typically covers a 3 to 18 month period of time. Used in a manufacturing environment and determines overall output levels planned as well as appropriate resource input mix to be used for related groups of products. www.businessdictionary.com
Aggregate planning is the intermediate planning method used to determine the necessary resource capacity a firm will need in order to meet its expected demand. www.academia.edu
21.4 Stages of aggregate planning See Fig. 21.1.
FIGURE 21.1 Stages of aggregate planning.
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21.5 Aggregate planning inputs The following inputs are required for optimal aggregate planning: G
G G
G
Full knowledge on the resources and the facilities available. This is basically the same as the voice of the organization considered in the quality function deployment exercises as discussed in quality management books. Demand forecast for the period for which the planning has to be done. Different costs associated with the production, inventory carrying, and ordering, as well as alternative production strategies like make or buy decisions subcontracting, backordering, overtime, etc. Organizational policies regarding the usage of these alternatives. In other words, we can summarize the following required inputs:
1. Demand forecast 2. Resources a. Workforce b. Machinery—their capacities and specifications 3. Other facilities a. Policy statements b. Subcontracting c. Overtime d. Inventory levels e. Back orders 4. Costs a. Inventory carrying b. Back orders c. Hiring/firing d. Overtime e. Inventory changes f. subcontracting
21.6 Strategies for aggregate planning 1. Changing inventory levels: Also called level strategy or proactive aggregate planning, inventories are built up during the slack marketing periods in anticipation of higher demand later on the planning horizon. This is very common for seasonal products like umbrellas, mango juices, and the like. This has a major disadvantage in that the working capital and costs associated with obsolescence, storage, insurance, and handling will increase. Conversely, during periods of increased demand, this strategy might lead to better customer service, shorter lead times, and potential entry of new competitors in the market. This is equivalent to the push system and more explained in section 21.7 and is illustrated in Fig. 21.3, a static production program as suggested by Samuel Eilon. Garment manufacture provides the best illustration.
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FIGURE 21.2 Production and inventory flow line levels.
FIGURE 21.3 Static production program.
Advantages a. Stable output rates and workforce Disadvantages a. Greater inventory costs b. Increased overtime and idle time c. Resource utilizations vary overtime 2. Varying the production levels: Also called the chase strategy or reactive aggregate planning, this involves varying the production output according to the demand or matching demand and capacity period by period.
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This is normally achieved by any of the following suggested variations. Although this strategy has such advantages as low inventory levels, it has disadvantages of complicated production control systems and considerable amount of hiring, resulting in unhappy employees, and erratic utilization of plant and equipment. This is equivalent to the pull system and is illustrated in Fig. 21.4 as a static inventory program, as suggested by Samuel Eilon. Most firms embracing the just-in-time production with push type concept as explained in Chapter 26, Just in time and Kanban, utilize a chase strategy approach to aggregate planning. Fast-food restaurants provide the best illustration. Advantages a. Investment in inventory is low b. Labor utilization is high Disadvantages a. The cost of adjusting output rates and/or workforce levels 3. Combination strategy: Also called hybrid or mixed strategy. It follows a mix of variation in inventory levels and production capacity, as illustrated by Fig. 21.5. Most firms find it advantageous to plan and control for this combination of the level and chase strategy, as it can meet organizational
FIGURE 21.4 Static inventory program.
FIGURE 21.5 Combination program.
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4.
5.
6.
7.
8.
309
goals better and achieve lower costs than either of the pure strategies used independently. Changing workforce size: The manager may change the size of the workforce by hiring new employees when there is excessive demand and then firing them when the demand decreases. However, this is an indication of poor management, because frequent hiring and firing is not only unethical and generally is against the law but also results in considerable loss in productivity as new employees take longer to train. This may also have a chain effect, since the remaining employees may slow output to protect themselves against a similar fate. Varying working hours: Use overtime in peak periods, and downtime in slack periods to vary output, while holding workforce and facilities constant. This is a fairly better strategy, but there is a limit on how much overtime is practical. The most common practice is to add an additional shift of production. The incremental costs associated with shift premium, supervision, and overhead may be significant. In periods of slack demand, the additional hands may have to be absorbed by other departments or otherwise to satisfy the labor laws. Subcontracting: As an alternative to changing workforce or inventory, perhaps the company could subcontract or assign some of the production jobs to an outside party during the peak demand periods and increase the capacity to satisfy the demand. This has become a very common strategy in today’s industrial environment, where not only the peak demands but also the regular demand are offloaded to outside manufacturing parties. Again, a potential danger exists of opening doors to competition. A classic example is that 20 years ago, every public sector undertaking in Bangalore used to operate a large fleet of buses of their own to such an extent that those of four to five undertakings like HMT, BEL, and ITI alone outnumbered the city transport buses. But today, roads of Bangalore present a different picture. Most of these undertakings have now reduced their fleet sizes and are engaging contract services. Similar practice of engaging external small-scale units to manufacture some products as and when required can be done. Here, the buyer company has to be more meticulous in quality control. Influencing demand: Sometimes promotional offers like “buy one get one free” in case of general traders, or giving extra free talk time during the lean periods in case of mobile operators or the airline industry offering weekend discounts and winter fares, can somewhat compensate for the falling demand and the aggregate planning problems, to some extent. Varying capacity through changes in plant and equipment: Additional equipment or machines can be hired to increase the capacity. However, it is not always possible to hire larger machinery needed for the particular production process.
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9. Heuristic method: Heuristic method is an approach to problem solving, learning, or discovery that employs a practical method not guaranteed to be optimal or perfect, but is sufficient for the immediate goals. Examples of this method include using a rule of thumb, an educated guess, an intuitive judgment, stereotyping, profiling, or common sense.
21.7 Static and dynamic production programming Samuel Eilon in his book Elements of Production Planning & Control has given beautiful illustrations for the preceding strategies as shown following. As explained earlier, aggregate planning emphasizes balancing the sales forecasts, the desired inventory levels, and the production batch quantities. Fig. 21.2 illustrates the production and inventory flow line levels, which fluctuate as per the market demand and production batch adjustments. Based on the Fig. 21.2, the changes in demand can be met in any of the following three production strategies.
21.7.1 Static production programme Illustrated next is a static production program coupled with an inventory large enough to satisfy the fluctuating demand. This method is greatly favored by the production department, since it simplifies planning, ensures higher machine utilization, and allows better supervision. But average stock level is high, increasing inventory costs, thereby tying up capital and other scarce resources. This is also called level strategy as explained earlier.
21.7.2 Static inventory program Have a fluctuating production program to cater to the enhanced demand and keep a constant level. The purpose of the inventory in this case is to provide a safety cushion between production and marketing. The stock level does not, strictly speaking, remain constant, but the fluctuations and the average stock level are fairly low, compared with the previous method. Although this program reduces inventory costs, it leads to complete production control systems. This is also called chase strategy as explained earlier.
21.7.3 Combination of the two systems Have a combination of the two systems to bring the total costs to a minimum by achieving a proper balance between the amount of fluctuations in the sales forecasts, production program, and the stock level. Fig. 21.5 illustrates this situation.
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21.8 Impact of forecasting on aggregate planning As we have seen in Chapter 10, Forecasting, forecasting figures provide only the broad outline on which to base the actual production planning. The forecasting can be divided into three time frames as in Figure 10.1.
Week no.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Planning range
Short range planning
Medium range planning
Long range planning
Forecast figures
Firm or frozen
Slushy or modifiable based on the trend variation
Liquid or variable based on the actual demand in the previous weeks
18 and beyond
FIGURE 21.6 Impact of forecasting on aggregate planning
1. Firm or frozen time frame for short-range plans (Detailed plans) a. Machine loading b. Job assignments 2. Slushy or modifiable based on the trend variation for intermediate plans (General levels) a. Employment b. Output 3. Liquid or variable based on the actual demand in the previous weeks for long-range plans a. Long-term capacity b. Location/layout c. Product/process design
21.9 Guidelines for aggregate planning 1. Good forecast is the basis for good aggregate planning. 2. Plan in proper units of capacity. 3. Plan meticulously for those components that would require high and complex resources. 4. Maintain stable workforce. 5. Maintain optimal inventory control. 6. Ensure flexibility as and when needed. 7. Respond to demand in controlled manner by static production or static inventory program, etc., as explained in the next paragraphs. 8. Assess and evaluate the plans periodically and regularly. 9. Use line balancing effectively, which is explained in more detail in Chapter 24, Routing, scheduling, and loading.
21.10 Disaggregating Despite the prefix dis. . ., the word disaggregating is neither the opposite of aggregating nor a reversal of the aggregating process. It is a supplement
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to the aggregating process, implying its subsequent stage. Disaggregating is to break down the aggregate plan into specific product requirements in order to determine requirements of labor (skills, size, or workforce), materials, inventory, and other inputs.
21.11 Aggregate planning for service industries We have in the previous paragraphs discussed the concept of aggregate planning for manufacturing industries. In case of certain service industries, such planning is essential to some extent but with a different concept. The following are some of the differences: 1. Most services cannot be inventoried. Such as in fast-food restaurants or flower shops. 2. Demand for services is difficult to predict, unlike industrial goods. Demand variations occur frequently or erratically at random and are often severe. We can only express the percentage of demand that must be met and, sometimes, how quickly demand must be met. 3. Capacity is also difficult to predict. Since most services are more human labor oriented than equipment oriented, the demand variations need frequent and unpredictable manpower requirements. 4. Service capacity must be provided at the appropriate place and time. Unlike manufacturing industries being located at a definite fixed location, service has to be provided at the customer’s location. Determining the range of services and staff levels at each location is part of aggregate planning. 5. Labor is usually the most constraining resource for services. Hiring temporary workers or using overtime is possible and is more economical for service industries than for manufacturing industries. This is an advantage in aggregate planning because labor is very flexible.
21.12 Summary of the aggregate planning methods Apart from using rough cut capacity planning for aggregating planning, there can be other methods for the aggregate planning, as illustrated in Table 21.1.
21.13 Case study on aggregate planning In a medium-scale automobile component manufacturing industry, the forecasted demand for a certain component for a 6-month cycle is shown:
Forecasted demand Work days
Jan
Feb
Mar
Apr
May
June
300 22
500 19
400 21
100 21
200 22
300 20
Each unit requires 10 man-hours, and labor cost is Rs. 6 per hour regular time and Rs. 9 per hour overtime. The total cost per unit is estimated to be Rs. 200 and can be subcontracted at the cost of Rs. 208 per unit. Currently,
TABLE 21.1 Summary of aggregate planning methods. Trial and error
Rough
Graphical
method
cut capacity
method
Linear programming
Linear decision
Management
Computer search
rule
coefficients
models
Use quadratic cost functions to derive rules for workforce size and number of units
Develops regression model that incorporates managers’ past decisions to predict capacity needs
Computer routing searches numerous combinations of capacity and selects the one of least cost
1. Permits non linear cost functions 2. Yields optimal plan 3. Theoretic value
1. No limitations on form of costs or constraints 2. Incorporates past experience
1. Accepts wide range of cost functions 2. Flexible 3. Easily changed
1. Complex and not easily understood 2. Require quadratic cost functions 3. Outputs not always realistic (variables unconstrained)
1. Nonoptimal, but reasonably code 2. Relies on expertise of individual manager 3. Model not directly transferable to others
1. Nonoptimal but does well compared with other rules 2. Doesn’t always locate global minimum
planning Application
Minimizes costs of employment, overtime and inventories subject to meeting the demand Simple to understand and apply
1. Approximates with an aggregate product 2. Does not guarantee optimum solution
Can deal with variety of products
Simple to understand and easy to use
Millions of solutions. Chosen solution need not be optimal
Strengths
1. Understandable 2. Yields optimal plan 3. Powerful and inclusive 4. Flexible Limitations
1. Requires linear cost functions 2. Outputs require interpretation
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there are 20 workers employed, and hiring and training costs for additional workers are Rs. 300 per person, whereas layoff costs are Rs. 400 per a person. Company policy is to retain a safety stock equal to 20% of the monthly forecast, and each months’ safety stock becomes the beginning inventory for the next month. There are currently 50 units in stock carried at a cost of Rs. 6 per month. Stock out cost is Rs. 20 per unit per month. The company works on 8-hour per shift basis. Three aggregate plans are proposed: 1. Plan 1: Vary the workforce size to accommodate demand. 2. Plan 2: Maintain a constant workforce of 20 and use overtime and idle time to meet demand. 3. Plan 3: Maintain constantly a workforce of 20, and build inventory or incur stock out cost. The firm must begin production in January with the 50-unit inventory on hand. Compare the cost of three plans. Solution: Determine what will be the production requirements as adjusted to include a safety stock of 20% of the next months’ forecast. Starting with January of 50 units, each subsequent months’ inventory reflects the difference between the forecasted demand and the production requirement of the previous month (Table 21.2). On the analysis as explained by the calculations illustrated in the following tables, the total cost for each of the three plans workout to be Rs. 24,500, 9600, and 36,000, respectively. The obvious choice is therefore for plan 2 to use constant workforce with OT when required (Table 21.3). Plan 1. Vary the workforce size: Plan 2: Use constant workforce strategy (Table 21.4) TABLE 21.2 Production requirements. Month
Forecasted demand (A)
Cumulative demand (B)
Safety stock (20% of A) (C)
Opening inventory (D)
Production required (A 1 C 2 D)
January
300
300
60
50
310
February
500
800
100
60
540
March
400
1200
100
60
440
April
100
130
20
80
40
May
200
1500
40
20
220
June
300
1800
60
40
320
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TABLE 21.3 Total costs per plan 1. SI. no.
Particulars
Jan
Feb
March
April
May
June
A
Production required
310
540
440
40
220
320
B
Production hours required (A 3 10)
3100
5400
4400
400
2200
3200
C
Hours available at 8 hours/day
176
152
152
168
176
160
D
No. of workers required (B:C)
18
36
3
3
13
20
E
No. of workers hired
18
10
7
F
Hiring cost (E 3 300 Rs.)
5400
3000
2100
G
No. of workers laid off
2
20
20
H
Layoff costs (G 3 400 Rs.)
800
8000
8000
I
Total Cost
Total
10,500
16,800 27,300
TABLE 21.4 Total costs per plan 2. SI. no.
Particulars
Jan
Feb
March
April
May
June
A
Production required
B
Production hours required (A 3 10)
310
540
440
40
220
320
3100
5400
4400
400
2200
3200
C
Hours available (20 men at 8 hours/day)
3520
3040
3360
3360
3520
3200
D
Nits produced (C:10)
352
304
336
336
352
320
E
Cumulative production
352
656
992
1328
1680
2000
F
Unit falling short
194
238
G
Shortage cost (F 3 20 Rs.)
3880
4760
H
Excess units produced
42
58
190
190
I
Inventory cost (H 3 2 Rs)
84
116
380
380
J
Total Cost
Total
8640
960 9,600
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Since the second plan incurs the lowest cost, it is better to adapt this policy of having constant workforce.
21.14 Conclusion All the points discussed in this chapter enable us to explore the various aggregate planning strategies that would best suit the program. In most cases, the constant production strategy is ideal, leading to simplified production planning and control issues. Nevertheless, where the inventory cost of the components is very high, limiting the inventories would become critical, and the constant inventory strategy is ideal. We can thus conclude that in general, the combination strategy is best suited.
Further reading 1. Eilon, S., 1962. Elements of Production Planning & Control. 2. Kiran, D.R., 2014. Total Quality Management, An Integrated Approach. BS Publications. 3. Nahmias, S., 2009. Production and Operation Analysis. McGraw-Hill Irwin. 4. Schroeder, R.G., 2007. Operations Management. New York: McGrawHill Irwin. 5. Stevenson, W.J., 2007, Operations Management. New York: McGrawHill Irwin. 6. www.csus.edu. 7. http://www.wisegeek.com/what-is-rough-cut-capacity-planning.htm. 8. http://www.prenhall.com/. Criteria questions (The figures in the bracket provide a clue to the answer.) 1. Distinguish aggregate planning from capacity planning. (21.1) 2. How does aggregate planning differ from long-range planning and shortrange planning? Explain with examples. (21.5) 3. Cite some inputs required for optimal aggregate planning. (21.5) 4. Explain the four strategies of aggregate planning. (Fig. 21.6) 5. List the guidelines for aggregate scheduling. (21.9) 6. Illustrate diagrammatically the sales forecasts, the desired inventory levels, and the production batch quantities. (Fig. 21.2) 7. What is meant by frozen time frame? Illustrate how it can change into slushy or variable time frame. (21.8) 8. What is disaggregating? (21.10) 9. In what ways does the aggregate planning for the service industries differ from that of manufacturing industries? (21.11) 10. In assignment linear programming, how can one tell when an optimal solution has been reached? (21.14)
Aggregate planning Chapter takeaways After completion of this chapter the reader would be able to 1. Appreciate the need and importance of aggregate planning in production planning. 2. Know what should be the inputs for aggregate planning to be ready with all required information. 3. Decide whether the static production program or the static inventory program suits the proposed production planning. 4. Be able to explore other aggregate planning strategies that would best suit the program. 5. Appreciate the specific planning required for the service industries as distinct from the manufacturing industries.
21.1 What is aggregate planning? Aggregate planning is an intermediate-term planning function. It is the process of planning the quantity and timing of output over an intermediate time of, say, from 3 months to 1 year. Within this range, the physical facilities are assumed to be fixed for the planning period. Therefore, fluctuations in demand must be met by varying labor and inventory schedules. Aggregate planning seeks the best combination to minimize costs by matching the supply and demand of output over the medium time range, generally for the next 12-month period. It tells management exactly when and in what quantum the materials and other resources are to be procured to ensure that the total cost of operations of the organization is kept to the minimum. According to Wikipedia, the term aggregate indicates that planning is done for a single overall measure of output or, at the most, a few aggregated product categories. In other words, aggregate planning is the matching of the plant capacity with demand in such a way that production costs are minimized.
Production Planning and Control. DOI: https://doi.org/10.1016/B978-0-12-818364-9.00021-4 Copyright © 2019 BSP Books Pvt. Ltd. Published by Elsevier Inc. All rights reserved.
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21.2 Importance of aggregate planning http://www.managementstudyguide.com, the website of Management Study Guide, indicates that aggregate planning plays an important part in achieving long-term objectives of the organization and helps in the following: G
G G
G G
Achieve financial goals by reducing overall variable cost and improving the bottom line. Maximum utilization of the available production facility. Provide customer satisfaction by matching demand and reducing wait time for customers. Reduce investment in inventory stocking, Enable meeting scheduling goals, thereby creating a happy and satisfied workforce.
21.3 Definitions of aggregate planning The following are some of the definitions given on aggregate planning: Aggregate planning is an operational activity that does an aggregate plan for the production process, in advance of 2 to 18 months, to give an idea to management as to what quantity of materials and other resources are to be procured and when, so that the total cost of operations of the organization is kept to the minimum over that period https://en.wikipedia.org/wiki
Aggregate planning is an operational activity critical to the organization as it looks to balance long-term strategic planning with short term production success. . . www.managementstudyguide.com
Aggregate planning is the process of developing, analyzing, and maintaining a preliminary, approximate schedule of the overall operations of an organization. www.referenceforbusiness.com
Aggregate Planning is an attempt to match the supply of and demand for a product or service by determining the appropriate quantities and timing of inputs, transformation, and outputs. Decisions made on production, staffing, inventory and backorder levels. www.uoguelph.ca
Aggregate planning Chapter | 21
305
Aggregate planning is a forecasting technique that businesses use in an attempt to predict the supply and demand of their products and services. Mainly, this is done in an effort to save money, streamline operations and increase productivity. To accomplish this, businesses use an aggregate planning model to develop a game plan that will assist them with determining their staffing requirements, materials needed, estimated timelines and budget costs so they can better plan ahead. http://smallbusiness.chron.com
Aggregate Planning is a medium range capacity planning type that typically covers a 3 to 18 month period of time. Used in a manufacturing environment and determines overall output levels planned as well as appropriate resource input mix to be used for related groups of products. www.businessdictionary.com
Aggregate planning is the intermediate planning method used to determine the necessary resource capacity a firm will need in order to meet its expected demand. www.academia.edu
21.4 Stages of aggregate planning See Fig. 21.1.
FIGURE 21.1 Stages of aggregate planning.
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21.5 Aggregate planning inputs The following inputs are required for optimal aggregate planning: G
G G
G
Full knowledge on the resources and the facilities available. This is basically the same as the voice of the organization considered in the quality function deployment exercises as discussed in quality management books. Demand forecast for the period for which the planning has to be done. Different costs associated with the production, inventory carrying, and ordering, as well as alternative production strategies like make or buy decisions subcontracting, backordering, overtime, etc. Organizational policies regarding the usage of these alternatives. In other words, we can summarize the following required inputs:
1. Demand forecast 2. Resources a. Workforce b. Machinery—their capacities and specifications 3. Other facilities a. Policy statements b. Subcontracting c. Overtime d. Inventory levels e. Back orders 4. Costs a. Inventory carrying b. Back orders c. Hiring/firing d. Overtime e. Inventory changes f. subcontracting
21.6 Strategies for aggregate planning 1. Changing inventory levels: Also called level strategy or proactive aggregate planning, inventories are built up during the slack marketing periods in anticipation of higher demand later on the planning horizon. This is very common for seasonal products like umbrellas, mango juices, and the like. This has a major disadvantage in that the working capital and costs associated with obsolescence, storage, insurance, and handling will increase. Conversely, during periods of increased demand, this strategy might lead to better customer service, shorter lead times, and potential entry of new competitors in the market. This is equivalent to the push system and more explained in section 21.7 and is illustrated in Fig. 21.3, a static production program as suggested by Samuel Eilon. Garment manufacture provides the best illustration.
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FIGURE 21.2 Production and inventory flow line levels.
FIGURE 21.3 Static production program.
Advantages a. Stable output rates and workforce Disadvantages a. Greater inventory costs b. Increased overtime and idle time c. Resource utilizations vary overtime 2. Varying the production levels: Also called the chase strategy or reactive aggregate planning, this involves varying the production output according to the demand or matching demand and capacity period by period.
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This is normally achieved by any of the following suggested variations. Although this strategy has such advantages as low inventory levels, it has disadvantages of complicated production control systems and considerable amount of hiring, resulting in unhappy employees, and erratic utilization of plant and equipment. This is equivalent to the pull system and is illustrated in Fig. 21.4 as a static inventory program, as suggested by Samuel Eilon. Most firms embracing the just-in-time production with push type concept as explained in Chapter 26, Just in time and Kanban, utilize a chase strategy approach to aggregate planning. Fast-food restaurants provide the best illustration. Advantages a. Investment in inventory is low b. Labor utilization is high Disadvantages a. The cost of adjusting output rates and/or workforce levels 3. Combination strategy: Also called hybrid or mixed strategy. It follows a mix of variation in inventory levels and production capacity, as illustrated by Fig. 21.5. Most firms find it advantageous to plan and control for this combination of the level and chase strategy, as it can meet organizational
FIGURE 21.4 Static inventory program.
FIGURE 21.5 Combination program.
Aggregate planning Chapter | 21
4.
5.
6.
7.
8.
309
goals better and achieve lower costs than either of the pure strategies used independently. Changing workforce size: The manager may change the size of the workforce by hiring new employees when there is excessive demand and then firing them when the demand decreases. However, this is an indication of poor management, because frequent hiring and firing is not only unethical and generally is against the law but also results in considerable loss in productivity as new employees take longer to train. This may also have a chain effect, since the remaining employees may slow output to protect themselves against a similar fate. Varying working hours: Use overtime in peak periods, and downtime in slack periods to vary output, while holding workforce and facilities constant. This is a fairly better strategy, but there is a limit on how much overtime is practical. The most common practice is to add an additional shift of production. The incremental costs associated with shift premium, supervision, and overhead may be significant. In periods of slack demand, the additional hands may have to be absorbed by other departments or otherwise to satisfy the labor laws. Subcontracting: As an alternative to changing workforce or inventory, perhaps the company could subcontract or assign some of the production jobs to an outside party during the peak demand periods and increase the capacity to satisfy the demand. This has become a very common strategy in today’s industrial environment, where not only the peak demands but also the regular demand are offloaded to outside manufacturing parties. Again, a potential danger exists of opening doors to competition. A classic example is that 20 years ago, every public sector undertaking in Bangalore used to operate a large fleet of buses of their own to such an extent that those of four to five undertakings like HMT, BEL, and ITI alone outnumbered the city transport buses. But today, roads of Bangalore present a different picture. Most of these undertakings have now reduced their fleet sizes and are engaging contract services. Similar practice of engaging external small-scale units to manufacture some products as and when required can be done. Here, the buyer company has to be more meticulous in quality control. Influencing demand: Sometimes promotional offers like “buy one get one free” in case of general traders, or giving extra free talk time during the lean periods in case of mobile operators or the airline industry offering weekend discounts and winter fares, can somewhat compensate for the falling demand and the aggregate planning problems, to some extent. Varying capacity through changes in plant and equipment: Additional equipment or machines can be hired to increase the capacity. However, it is not always possible to hire larger machinery needed for the particular production process.
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9. Heuristic method: Heuristic method is an approach to problem solving, learning, or discovery that employs a practical method not guaranteed to be optimal or perfect, but is sufficient for the immediate goals. Examples of this method include using a rule of thumb, an educated guess, an intuitive judgment, stereotyping, profiling, or common sense.
21.7 Static and dynamic production programming Samuel Eilon in his book Elements of Production Planning & Control has given beautiful illustrations for the preceding strategies as shown following. As explained earlier, aggregate planning emphasizes balancing the sales forecasts, the desired inventory levels, and the production batch quantities. Fig. 21.2 illustrates the production and inventory flow line levels, which fluctuate as per the market demand and production batch adjustments. Based on the Fig. 21.2, the changes in demand can be met in any of the following three production strategies.
21.7.1 Static production programme Illustrated next is a static production program coupled with an inventory large enough to satisfy the fluctuating demand. This method is greatly favored by the production department, since it simplifies planning, ensures higher machine utilization, and allows better supervision. But average stock level is high, increasing inventory costs, thereby tying up capital and other scarce resources. This is also called level strategy as explained earlier.
21.7.2 Static inventory program Have a fluctuating production program to cater to the enhanced demand and keep a constant level. The purpose of the inventory in this case is to provide a safety cushion between production and marketing. The stock level does not, strictly speaking, remain constant, but the fluctuations and the average stock level are fairly low, compared with the previous method. Although this program reduces inventory costs, it leads to complete production control systems. This is also called chase strategy as explained earlier.
21.7.3 Combination of the two systems Have a combination of the two systems to bring the total costs to a minimum by achieving a proper balance between the amount of fluctuations in the sales forecasts, production program, and the stock level. Fig. 21.5 illustrates this situation.
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21.8 Impact of forecasting on aggregate planning As we have seen in Chapter 10, Forecasting, forecasting figures provide only the broad outline on which to base the actual production planning. The forecasting can be divided into three time frames as in Figure 10.1.
Week no.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Planning range
Short range planning
Medium range planning
Long range planning
Forecast figures
Firm or frozen
Slushy or modifiable based on the trend variation
Liquid or variable based on the actual demand in the previous weeks
18 and beyond
FIGURE 21.6 Impact of forecasting on aggregate planning
1. Firm or frozen time frame for short-range plans (Detailed plans) a. Machine loading b. Job assignments 2. Slushy or modifiable based on the trend variation for intermediate plans (General levels) a. Employment b. Output 3. Liquid or variable based on the actual demand in the previous weeks for long-range plans a. Long-term capacity b. Location/layout c. Product/process design
21.9 Guidelines for aggregate planning 1. Good forecast is the basis for good aggregate planning. 2. Plan in proper units of capacity. 3. Plan meticulously for those components that would require high and complex resources. 4. Maintain stable workforce. 5. Maintain optimal inventory control. 6. Ensure flexibility as and when needed. 7. Respond to demand in controlled manner by static production or static inventory program, etc., as explained in the next paragraphs. 8. Assess and evaluate the plans periodically and regularly. 9. Use line balancing effectively, which is explained in more detail in Chapter 24, Routing, scheduling, and loading.
21.10 Disaggregating Despite the prefix dis. . ., the word disaggregating is neither the opposite of aggregating nor a reversal of the aggregating process. It is a supplement
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to the aggregating process, implying its subsequent stage. Disaggregating is to break down the aggregate plan into specific product requirements in order to determine requirements of labor (skills, size, or workforce), materials, inventory, and other inputs.
21.11 Aggregate planning for service industries We have in the previous paragraphs discussed the concept of aggregate planning for manufacturing industries. In case of certain service industries, such planning is essential to some extent but with a different concept. The following are some of the differences: 1. Most services cannot be inventoried. Such as in fast-food restaurants or flower shops. 2. Demand for services is difficult to predict, unlike industrial goods. Demand variations occur frequently or erratically at random and are often severe. We can only express the percentage of demand that must be met and, sometimes, how quickly demand must be met. 3. Capacity is also difficult to predict. Since most services are more human labor oriented than equipment oriented, the demand variations need frequent and unpredictable manpower requirements. 4. Service capacity must be provided at the appropriate place and time. Unlike manufacturing industries being located at a definite fixed location, service has to be provided at the customer’s location. Determining the range of services and staff levels at each location is part of aggregate planning. 5. Labor is usually the most constraining resource for services. Hiring temporary workers or using overtime is possible and is more economical for service industries than for manufacturing industries. This is an advantage in aggregate planning because labor is very flexible.
21.12 Summary of the aggregate planning methods Apart from using rough cut capacity planning for aggregating planning, there can be other methods for the aggregate planning, as illustrated in Table 21.1.
21.13 Case study on aggregate planning In a medium-scale automobile component manufacturing industry, the forecasted demand for a certain component for a 6-month cycle is shown:
Forecasted demand Work days
Jan
Feb
Mar
Apr
May
June
300 22
500 19
400 21
100 21
200 22
300 20
Each unit requires 10 man-hours, and labor cost is Rs. 6 per hour regular time and Rs. 9 per hour overtime. The total cost per unit is estimated to be Rs. 200 and can be subcontracted at the cost of Rs. 208 per unit. Currently,
TABLE 21.1 Summary of aggregate planning methods. Trial and error
Rough
Graphical
method
cut capacity
method
Linear programming
Linear decision
Management
Computer search
rule
coefficients
models
Use quadratic cost functions to derive rules for workforce size and number of units
Develops regression model that incorporates managers’ past decisions to predict capacity needs
Computer routing searches numerous combinations of capacity and selects the one of least cost
1. Permits non linear cost functions 2. Yields optimal plan 3. Theoretic value
1. No limitations on form of costs or constraints 2. Incorporates past experience
1. Accepts wide range of cost functions 2. Flexible 3. Easily changed
1. Complex and not easily understood 2. Require quadratic cost functions 3. Outputs not always realistic (variables unconstrained)
1. Nonoptimal, but reasonably code 2. Relies on expertise of individual manager 3. Model not directly transferable to others
1. Nonoptimal but does well compared with other rules 2. Doesn’t always locate global minimum
planning Application
Minimizes costs of employment, overtime and inventories subject to meeting the demand Simple to understand and apply
1. Approximates with an aggregate product 2. Does not guarantee optimum solution
Can deal with variety of products
Simple to understand and easy to use
Millions of solutions. Chosen solution need not be optimal
Strengths
1. Understandable 2. Yields optimal plan 3. Powerful and inclusive 4. Flexible Limitations
1. Requires linear cost functions 2. Outputs require interpretation
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there are 20 workers employed, and hiring and training costs for additional workers are Rs. 300 per person, whereas layoff costs are Rs. 400 per a person. Company policy is to retain a safety stock equal to 20% of the monthly forecast, and each months’ safety stock becomes the beginning inventory for the next month. There are currently 50 units in stock carried at a cost of Rs. 6 per month. Stock out cost is Rs. 20 per unit per month. The company works on 8-hour per shift basis. Three aggregate plans are proposed: 1. Plan 1: Vary the workforce size to accommodate demand. 2. Plan 2: Maintain a constant workforce of 20 and use overtime and idle time to meet demand. 3. Plan 3: Maintain constantly a workforce of 20, and build inventory or incur stock out cost. The firm must begin production in January with the 50-unit inventory on hand. Compare the cost of three plans. Solution: Determine what will be the production requirements as adjusted to include a safety stock of 20% of the next months’ forecast. Starting with January of 50 units, each subsequent months’ inventory reflects the difference between the forecasted demand and the production requirement of the previous month (Table 21.2). On the analysis as explained by the calculations illustrated in the following tables, the total cost for each of the three plans workout to be Rs. 24,500, 9600, and 36,000, respectively. The obvious choice is therefore for plan 2 to use constant workforce with OT when required (Table 21.3). Plan 1. Vary the workforce size: Plan 2: Use constant workforce strategy (Table 21.4) TABLE 21.2 Production requirements. Month
Forecasted demand (A)
Cumulative demand (B)
Safety stock (20% of A) (C)
Opening inventory (D)
Production required (A 1 C 2 D)
January
300
300
60
50
310
February
500
800
100
60
540
March
400
1200
100
60
440
April
100
130
20
80
40
May
200
1500
40
20
220
June
300
1800
60
40
320
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TABLE 21.3 Total costs per plan 1. SI. no.
Particulars
Jan
Feb
March
April
May
June
A
Production required
310
540
440
40
220
320
B
Production hours required (A 3 10)
3100
5400
4400
400
2200
3200
C
Hours available at 8 hours/day
176
152
152
168
176
160
D
No. of workers required (B:C)
18
36
3
3
13
20
E
No. of workers hired
18
10
7
F
Hiring cost (E 3 300 Rs.)
5400
3000
2100
G
No. of workers laid off
2
20
20
H
Layoff costs (G 3 400 Rs.)
800
8000
8000
I
Total Cost
Total
10,500
16,800 27,300
TABLE 21.4 Total costs per plan 2. SI. no.
Particulars
Jan
Feb
March
April
May
June
A
Production required
B
Production hours required (A 3 10)
310
540
440
40
220
320
3100
5400
4400
400
2200
3200
C
Hours available (20 men at 8 hours/day)
3520
3040
3360
3360
3520
3200
D
Nits produced (C:10)
352
304
336
336
352
320
E
Cumulative production
352
656
992
1328
1680
2000
F
Unit falling short
194
238
G
Shortage cost (F 3 20 Rs.)
3880
4760
H
Excess units produced
42
58
190
190
I
Inventory cost (H 3 2 Rs)
84
116
380
380
J
Total Cost
Total
8640
960 9,600
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Since the second plan incurs the lowest cost, it is better to adapt this policy of having constant workforce.
21.14 Conclusion All the points discussed in this chapter enable us to explore the various aggregate planning strategies that would best suit the program. In most cases, the constant production strategy is ideal, leading to simplified production planning and control issues. Nevertheless, where the inventory cost of the components is very high, limiting the inventories would become critical, and the constant inventory strategy is ideal. We can thus conclude that in general, the combination strategy is best suited.
Further reading 1. Eilon, S., 1962. Elements of Production Planning & Control. 2. Kiran, D.R., 2014. Total Quality Management, An Integrated Approach. BS Publications. 3. Nahmias, S., 2009. Production and Operation Analysis. McGraw-Hill Irwin. 4. Schroeder, R.G., 2007. Operations Management. New York: McGrawHill Irwin. 5. Stevenson, W.J., 2007, Operations Management. New York: McGrawHill Irwin. 6. www.csus.edu. 7. http://www.wisegeek.com/what-is-rough-cut-capacity-planning.htm. 8. http://www.prenhall.com/. Criteria questions (The figures in the bracket provide a clue to the answer.) 1. Distinguish aggregate planning from capacity planning. (21.1) 2. How does aggregate planning differ from long-range planning and shortrange planning? Explain with examples. (21.5) 3. Cite some inputs required for optimal aggregate planning. (21.5) 4. Explain the four strategies of aggregate planning. (Fig. 21.6) 5. List the guidelines for aggregate scheduling. (21.9) 6. Illustrate diagrammatically the sales forecasts, the desired inventory levels, and the production batch quantities. (Fig. 21.2) 7. What is meant by frozen time frame? Illustrate how it can change into slushy or variable time frame. (21.8) 8. What is disaggregating? (21.10) 9. In what ways does the aggregate planning for the service industries differ from that of manufacturing industries? (21.11) 10. In assignment linear programming, how can one tell when an optimal solution has been reached? (21.14)