How much to produce? When to produce?
- Define & explain sales and operations planning
and aggregate planning. - Compute chase and level strategies and their
horizon costs. - Explain techniques for addressing uncertainty
in production plans. - Describe how aggregate planning fits into the
overall production planning process.
Chapter 13
SCM 302 - Aggregate Planning
2
Test Your IQ: Frito Lays
• More than three dozen brands, 15 brands sell more
than $100 million annually, 7 sell over $1 billion
• Planning processes covers 3 to 18 months
• Unique processes and specially designed equipment
• High fixed costs require high volumes and high
utilization
• Demand profile based on historical sales, forecasts,
innovations, promotion, local demand data
• Match total demand to capacity, expansion plans, and
costs
• Quarterly aggregate plan goes to 36 plants in 17
regions
• Each plant develops 4-week plan for product lines and
production runs
• What information would you like to know
before developing the plan?
Chapter 13
SCM 302 - Aggregate Planning
3
The Operations Planning Hierarchy
Chapter 13
SCM 302 - Aggregate Planning
4
Long Range Planning
(1-5 years)
Support the strategic plan
• Top Executives
• Expensive decisions, take significant time to implement
• Research & Development
• New product introduction
• Capital investments
• Facility location/expansion
Medium Range Planning
(3-18 months)
Support the sales plan
• Operations Managers, S&OP Team
• Capacity/production decisions for existing
resources
• Sales and operations planning
• Production planning and budgeting
• Employment, inventory, subcontracting levels
• Analyzing operating plans
Short Range Planning
(0-3 months)
Support existing orders
• Operations Managers, Floor Supervisors
• Daily/weekly scheduling and allocation decisions
• Job assignments
• Ordering
• Job scheduling
• Dispatching
• Overtime
• Part-time help
What are S&OP and Aggregate Planning?
• Sales & Operation Planning (S&OP)
• Integrate functional areas around a production plan which satisfies the
sales plan and meets business objectives.
• What is feasible? Which resources are below expectations?
• Coordinate internal and external resources
• Communication within cross functional teams.
• Aggregate Planning
• Determine quantity and timing of production for intermediate range
• Meet forecasted demand while minimizing cost
• Disaggregation: breaking down plan into greater detail.
• Master Production Schedule: a timetable of what is to be made when.
• 4 things needed for aggregate planning - Unit for measuring sales and output
- Aggregate demand forecast for planning period
- Method for determining relevant costs
- Model that combines forecasts and costs to inform scheduling decisions
Chapter 13
SCM 302 - Aggregate Planning
5
QUARTER 1
Jan. Feb. March
150,000 120,000 110,000
QUARTER 2
April May June
100,000 130,000 150,000
QUARTER 3
July Aug. Sept.
180,000 150,000 140,000
S&OP and the Aggregate Plan
Figure 13.2
Chapter 13
SCM 302 - Aggregate Planning
6
Product Types
Families
Business Level
Product family: group of SKUs with similar design (e.g.
hard drive size)
• Share manufacturing resources.
• Demand patterns are similar, often planned as a unit
• Costs are often expressed at this level.
SKU’s Stock-keeping Units
3C products
Apple
Chapter 13
SCM 302 - Aggregate Planning
7
iPhone
iPod
Macbook
Aggregate Planning Capacity Options - Change inventory levels
• Increase in low periods to meet high demand later
• Costs: storage, insurance, handling, obsolescence, and capital
investment
• Shortages may mean lost sales - Varying workforce size by hiring or layoffs
• Training and separation costs for hiring and laying off workers
• New workers may have lower productivity
• Laying off workers may lower morale and productivity - Varying production rates through overtime or idle time
• May be difficult to meet large increases in demand
• Overtime can be costly and may drive down productivity
• Absorbing idle time may be difficult - Subcontracting
• Meet peak demand, may be costly
• Assuring quality and timely delivery may be difficult
• Exposes your customers to a possible competitor - Using part-time workers
• Useful for filling unskilled or low skilled positions
Chapter 13
SCM 302 - Aggregate Planning
8
See Table 13.1 for advantages & disadvantages
Aggregate Planning 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 - Back ordering during high-demand
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 - Counterseasonal product and service
mixing
• Develop a product mix of counterseasonal
items
• May lead to products or services outside the
company’s areas of expertise
Chapter 13
SCM 302 - Aggregate Planning
9
See Table 13.1 for advantages & disadvantages
ABC Corp. Forecasts Demand for Six Months
Chapter 13
SCM 302 - Aggregate Planning
10
Method for Aggregate Planning
• Select a plan that best meets your chosen objective
• Lowest cost
• Hiring / firing costs
• Inventory carrying costs. Backorder or stock-out costs
• Overtime / slack time costs
• Part time / temporary labor costs. Subcontracting costs
• Highest profit
• Minimum workforce disruption,
• While meeting your requirements (constraints ) e.g.
• no demand is ever backlogged
• must end horizon with certain amount of inventory
• Methods - Determine the demand for each period
- Determine the capacity for regular time, overtime, and subcontracting each period
- Find labor costs, hiring and layoff costs, and inventory holding costs
- Consider company policy on workers and stock levels
- Develop alternative plans and examine their total cost
Chapter 13
SCM 302 - Aggregate Planning
11
Production Planning Strategies
• Chase Strategy
• Workforce levels are adjusted to
match demand requirements over
planning horizon.
• No inventory or backorders
• Level Strategy
• A constant work force level is
maintained over planning horizon.
• Inventory / demand backorders
are built and dissipated.
• Mixed Strategy
• Workforce levels are allowed to
change and inventory/ backorders
can be used.
Demand
Time
Production
Demand
Time
Production
Chapter 13
SCM 302 - Aggregate Planning
12
Back to the ABC Example
Monthly Demand for Apple
Production
Starting Inventory = 0
No specific Ending Inventory Target
Previous Month’s Production = 1050
Costs
Production Cost: $100 per unit
Hiring: $30 per unit hired
Firing: $70 per unit fired
Inventory: $20 per unit in inventory at
the end of the month
Backorders: $50 per unit on backorder
at the end of each month
Other Data
Imagine that you are the assistant to the VP of Mfg and need to
develop different scenarios for the production plan.
What is the best production plan?
Chapter 13
SCM 302 - Aggregate Planning
13
Month Demand
1 600
2 900
3 1200
4 2000
5 1400
6 800
The Chase Strategy
Produce The Required Demand Each Month
Month Demand
1 600
Hire
(Units)
Layoff
(Units)
Production
Costs
($)
Hiring
Costs
($)
Firing
Costs
($)
Total Horizon Cost = 847,500
60,000 31,500
(600)*100=
0
(450)(70)=
2 900 300 0
90,000 9,000 0
(30)(300)=
3 1200 300 0 120,000 9,000 0
4 2000 800 0 200,000 24,000 0
5 1400 0 600 140,000 0 42,000
6 800 0 600 80,000 0 42,000
Horizon Costs = 690,000 42,000 115,500
Production Hiring Firing
0 450
1050-600=450
Chapter 13
SCM 302 - Aggregate Planning
14
Production
600
900
1200
2000
1400
800
(900-600)=
There are many “right”
ways to set up the tables.
It depends on the data
provided and how you like
to organize it.
The Level Strategy With Backorders
Produce the Average Demand Each Period What assumptions does this scenario make?
Month Demand
1 600
2 900
3 1200
4 2000
5 1400
6 800
Production
1150
1150
1150
1150
1150
1150
Cumulative
Demand
(CD)
600
1500
2700
4700
6100
6900
Cumulative
Prod’tion
(CP)
1150
2300
3450
4600
5750
6900
Inventory
Costs
($)
11,000
16,000
15,000
0
0
0
Backorder
Costs
($)
0
0
0
5,000
17,500
0
Prod’ction
Costs
($)
115,500
115,500
115,500
115,500
115,500
115,500
690,000 42,000 22,500
Labor Inventory Backorders
Total L/I/B Costs = 754,500
Don’t forget hiring/firing at start of horizon:
Hire (1150-1050)=100 units @ cost of 30 100(30) =3000
Total Horizon Cost = 757,500
Ending
Inventory
550
800
750
0
0
0
Ending Inventory = max(CP-CD,0)
Ending
Backorders
0
0
0
100
350
0
Ending backorders = max(CD-CP,0)
Average Monthly Demand =1150
Chapter 13
SCM 302 - Aggregate Planning
15
The Level Strategy With No Backorders
What assumptions does this plan make?
Month Demand
1 600
2 900
3 1200
4 2000
5 1400
6 800
Cumulative
Demand
(CD)
600
1500
2700
4700
6100
6900
Cumulative
Prod’tion
(CP)
1220
2440
3660
4880
6100
7320
Inventory
Costs
($)
12,400
18,800
19,200
3,600
0
8,400
Backorder
Costs
($)
0
0
0
0
0
0
Labor
Costs
($)
122,000
122,000
122,000
122,000
122,000
122,000
732,000 62,400 0
Labor Inventory Backorders
Total L/I/B Costs = 794,400
Don’t forget hiring/firing at start of horizon: Hire (1220-1050)=170 workers @ cost of 170(30) =5100
Total Horizon Cost = 799,500
Ending
Inventory
620
940
960
180
0
420
Ending
Backorders
0
0
0
0
0
0
Cumulative
Demand
(CD) /
Cumulative No.
of Periods
Maximum = 1330. Produce at this constant level.
Produ
ction
1220
1220
1220
1220
1220
1220
600
(600)/1=
750
(600+9000/2=
900
(600+900+1200)/3
1175
4700/4=
1220
6100/5=
1150
6900/6=
Chapter 13
SCM 302 - Aggregate Planning
16
Best suited for:
Competitive conditions, e.g. substitute products exist
Seasonal products: candy company
Customer service is important to you
0
2000
4000
6000
8000
1 2 3 4 5 6
Level – No Backorders
Month
0
2000
4000
6000
8000
1 2 3 4 5 6
Level – Allowing Backorders
Month
0
2000
4000
6000
8000
1 2 3 4 5 6
Chase
Month
Cumulative
Production
Cumulative
Demand
Legend
Cumulative Demand and Production
Chapter 13
SCM 302 - Aggregate Planning
17
Chapter 13
SCM 302 - Aggregate Planning
18
Exercise #1.A THE CHASE STRATEGY
Produce The Required Demand Each Month
Month Demand Production Units
Hired
Units
Fired
Production
Costs
Hiring
Costs
Firing
Costs
Starting
Inventory 0
1 2800
Target
Ending
Inventory
2 3000 Last Month’s
Production 3000
3 2400
Unit
Production
Cost $200
4 1200
Hiring Cost $50
5 3600
Firing Cost $75
6 2000 Inventory
Cost $60
Horizon Cost= Backorder
Cost $150
Total Horizon Cost=
Chapter 13
SCM 302 - Aggregate Planning
19
Exercise #1.B. THE LEVEL STRATEGY WITH BACKORDERS
Produce the Average Demand Each Period
Month Demand Product
ion
Cum.
Demand
(CD)
Cum.
Producti
on (CP)
Ending
Inventory
Ending
Backorders
Labor
Costs
Inventory
Costs
Back-order
Costs Production Rate
1 2800 2500 Starting
Inventory 0
2 3000 2500 Target Ending
Inventory
3 2400 2500 Starting
Workers 3000
4 1200 2500
Labor Cost $200
5 3600 2500
Hiring Cost $50
6 2000 2500
Firing Cost $75
Total
Inventory Cost $60
Total L/I/B Costs =
Backorder Cost $150
Total Horizon Cost=
Starting and Ending Inventories
• What happens if you start the
planning horizon with inventory
• This can be used to fulfill demand in the
first few months
• What happens if you want to end the
planning horizon with inventory
• This is like having extra “demand” in
the last month that needs to be met
• The trick is to “net out” these
inventories from the demand to
create a net demand for each month
Chapter 13
SCM 302 - Aggregate Planning
20
Back to the Apple Example
Monthly Demand for Apple
Production
Starting Inventory = 1000
No specific Ending Inventory Target
Previous Month’s Production = 1050
Costs:
Production Cost: $100 per unit
Hiring: $30 per unit hired
Firing: $70 per unit fired
Inventory: $20 per unit in inventory at
the end of the month
Backorders: $50 per unit on backorder
at the end of each month
Other Data
Now you have a starting inventory of 1000 (all else the same)
What is the best production plan?
Chapter 13
SCM 302 - Aggregate Planning
21
Month Demand
1 600
2 900
3 1200
4 2000
5 1400
6 800
The Level Strategy With No Backorders
Positive Starting Inventory
Month Demand
1 600
2 900
3 1200
4 2000
5 1400
6 800
Cumulative
Net
Demand
(CND)
0
500
1700
3700
5100
5900
Cumulative
Production
- Starting
Inventory
(CPI)
2020
3040
4060
5080
6100
7120
Inventory
Costs
($)
29,280
25,760
7,840
1,920
0
4,080
Backorder
Costs
($)
0
0
0
0
0
0
Productio
n Costs
($)
102,000
102,000
102,000
102,000
102,000
102,000
612,000 98,400 0
Labor Inventory Backorders
Total L/I/B Costs = 710,400
Don’t forget hiring/firing at start of horizon: Fire (1020-1050)=30 workers @ cost of 30(70) =2100 Total Horizon Cost = 712,500
Ending
Inventor
y
1420
1540
1360
380
0
220
Ending
Backorders
0
0
0
0
0
0
CND/
Cumulative
No. of
Periods
0
250
566.67
925
1020
983.33
Maximum = 1104. Produce at this constant level.
Produ
ction
1020
1020
1020
1020
1020
1020
Net
Demand
1200
2000
1400
800
0
600-1000=--400
500
1500-1000=
Cumulative
Actual
Demand
(CD)
600
1500
2700
4700
6100
6900
Chapter 13
SCM 302 - Aggregate Planning
22
Aggregate Planning in Services
• Most services use combination strategies
and mixed plans
• Controlling the cost of labor is critical
• Accurate scheduling of labor-hours to
assure quick response to customer demand
• Use an on-call labor resource to cover
unexpected demand
• Increase flexibility of individual worker
skills
• Increase flexibility in rate of output or
hours of work
Chapter 13
SCM 302 - Aggregate Planning
23
Service System:
The Level Strategy With No Backorders
Chapter 13
SCM 302 - Aggregate Planning
24
Month Demand
1 600
2 900
3 1200
4 2000
5 1400
6 800
Labor cost
200,000
200,000
200,000
200,000
200,000
200,000
Don’t forget hiring/firing at start of horizon: Hire (2000-1050)=950 workers @ cost of 950(30) =28500
No. of units
produced
Maximum = 2000
Therefore 2000 units needed
2000
2000
2000
2000
2000
2000
Total Horizon Cost = 1,228,500
Imagine ABC is a life insurance company.
Assuming they never wanted back-orders how
could a level strategy be implemented?
Why can’t we use the approach from before?
=max {cumulative demand/cumulative no. of periods}
Must have enough staff to cover the busiest
period.
Assume demand is given in terms of no. of
insurance agent working hours needed.
$!#%…There’s Way Too Many Plans I
have to Evaluate
• Optimization software exists to
make planning better and faster
• Can set up the production planning
problem as a linear program
• Use software to solve
• Almost always, we want to
modify the mathematically
optimal plan
• No math model captures all the real
world issues
• Managers may need to modify the
plan based on their insights
Chapter 13
SCM 302 - Aggregate Planning
25
Sales and Operations Planning is a Crucial
Business Process
Sales/Marketing Forecasts Operational
capabilities/costs
Planning, Negotiation
and Revisions
Final Agreed
Plan
Chapter 13
SCM 302 - Aggregate Planning
26
SOP Seems to Assume Forecasts are Perfect
But We Know Forecasts are Wrong
Use Safety Stock
Set safety stock targets for the
expected inventory on hand at
the end of each month
• Safety stock should be high
enough to buffer against
forecast uncertainty to a
desired probability
Rolling Horizon Planning
Review production planning
on a monthly basis to
incorporate updated forecasts
• See following slides
Chapter 13
SCM 302 - Aggregate Planning
27
Rolling Horizon Planning
Revise Plan on a Monthly Basis Given Updated Forecasts
Chapter 13
SCM 302 - Aggregate Planning
28
Jan Feb March April May June July August Sept. Oct. Nov Dec
- Beginning of January: Do production plan for the year. Implement the January plan
Jan
(next year) Feb March April May June July August Sept. Oct. Nov Dec - Beginning of February: Update demand forecasts. Do production plan for the
following 12 months. Implement February plan.
Jan
(next year)
Feb
(next year)
March April May June July August Sept. Oct. Nov Dec - Beginning of March 2010: Update demand forecasts and do production plan for the
following 12 months. Implement March plan. - etc. etc.
Changing the Plan after a Forecast Update
Jan Feb March April May June July August Sept. Oct. Nov Dec - Beginning of January: Do production plan for the year. Decisions about January and February are
frozen (i.e. cannot be changed at later date).
Jan
(next year) Feb March April May June July August Sept. Oct. Nov Dec - Beginning of February: Update demand forecasts. Do production plan for following 12 months.
Not allowed change decision already made for February. Decisions about March are now frozen
Jan 2010 Feb
(next year) March April May June July August Sept. Oct. Nov Dec - Beginning of March. Update demand forecasts and do production plan for following 12 months.
Not allowed change decision already made for March. Decisions about April are now frozen - etc. etc.
Chapter 13
SCM 302 - Aggregate Planning
29
• What if you commit on Jan. 1 to production in Feb. and it’s too late to change these on Feb. 1?
• E.g. hire a subcontractor to produce 200 units in Feb., but forecast is updated to 100.
• Plans in the frozen zone (e.g. next 2 months) cannot be changed, even if forecast is updated.
• Vary by company: those with more flexibility can have shorter frozen zones
• Vary by type of planning decision
• e.g. subcontracting plans be frozen 3 months ahead but overtime decisions only 1 month ahead
Short Term Planning May Be in Weeks
not Months
Chapter 13
SCM 302 - Aggregate Planning
30
Jan Feb March April May June July August Sept. Oct. Nov Dec - Beginning of January: Do production plan for the year. Decisions about January and February broken
down into individual weeks. Decision for March, April etc are at the month level
Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Showing example with a 6
week frozen zone - Beginning of February 2010: Update forecasts. Do production plan next 12 months. Decisions about
February and March broken down into individual weeks. Decision for April, May, etc. are at the month
level
Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 Week 11 Week 12
Jan
(next year) Feb March April May June July August Sept. Oct. Nov Dec
Showing example with a 6
week frozen zone
Aggregation & Disaggregation
• Sounds like an awful lot of data to collect!!!
• Sales/Marketing: Forecasts for each product for the next 12-18 months
• Operations: capabilities and current costs
• Current Capacities/ Inventories
• Capacity adjustment options
• Capacity, Inventory, Labor costs
• Existing commitments
• Companies reduce the data needed using aggregation
• Toyota does not need to know whether car will be red or blue when sourcing components
• Grouping similar products reduces complexity of the planning problem
• Grouping similar products companies can increase plan accuracy. Why?
• Demand side aggregation
• Group products (or customer) into families sharing similar sales prices, demand patterns
• E.g. Plan Toyota Corollas rather than Toyota Corolla CE, LE and S types
• Supply side aggregation
• Group products using similar resources (equipment, labor, etc.), processing capabilities or costs.
• E.g. Plan plant’s production rather than production for each individual assembly line.
• At some point, the aggregate plan needs to be disaggregated for production scheduling
• E.g. The plant eventually needs to know whether it is building a CE, LE or S Corolla
• Disaggregation often occurs for the initial 0-3 months of a plan
• Because decisions regarding actual products and resources need to be finalized (frozen)
Chapter 13
SCM 302 - Aggregate Planning
31
Chapter 13
SCM 302 - Aggregate Planning
32
SOP Exercise #2.A. THE CHASE STRATEGY
Produce The Required Demand Each Month
Month Demand
Num.
Workers
(before
Rounding)
Num.
Workers
(after
Rounding)
Workers
Hired
Workers
Fired
Labor
Costs
Hiring
Costs
Firing
Costs
Production
Rate 15
1 600 Starting
Inventory 0
2 500
Target
Ending
Inventory
3 1400 Starting
Workers 70
4 1200
Labor Cost $1,600
5 1100
Hiring Cost $500
6 500
Firing Cost $1,000
Horizon Cost= Inventory
Cost $20
Total Horizon Cost= Backorder
Cost $50
Chapter 13
SCM 302 - Aggregate Planning
33
SOP EXERCISE #2.B. THE LEVEL STRATEGY WITH BACKORDERS
Produce the Average Demand Each Period
Month Demand Workers
Cum.
Demand
(CD)
Cum.
Production
(CP)
Ending
Inventory
Ending
Backorders
Labor
Costs
Inventory
Costs
Backorder
Costs
Production
Rate 15
1 600 Starting
Inventory 0
2 500
3 1400 Starting
Workers 70
4 1200 Labor Cost $1,600
5 1100 Hiring Cost $500
6 500 Firing Cost $1,000
Inventory
Cost $20
Total L/I/B Costs = Backorder
Cost $50
Total Horizon Cost=
Chapter 13
SCM 302 - Aggregate Planning
34
SOP EXERCISE #2.C. THE LEVEL STRATEGY WITH NO BACKORDERS
Produce the Average Demand Each Period
Month Demand Workers
Cum.
Demand
(CD)
Cum.
Production
(CP)
Ending
Inventory
Ending
Backorders
Labor
Costs
Inventory
Costs
Backorder
Costs
Production
Rate 15
1 600 Starting
Inventory 0
2 500
3 1400 Starting
Workers 70
4 1200 Labor Cost $1,600
5 1100 Hiring Cost $500
6 500 Firing Cost $1,000
Inventory
Cost $20
Total L/I/B Costs = Backorder
Cost $50
Total Horizon Cost=
Kindly find the link below:
Please fill in the tables on pages 32-34 in the presentation as attached.
What is the total costs of production for the three different scenarios? What is the most economical one?
Sample Solution