BU395 Chapter 13 â Aggregate Operations Planning ...
BU395
Chapter 13 – Aggregate Operations Planning
Week 6
Introduction -Organizations make capacity and production decisions on three levels: long term, intermediate term, and short term -Long term decisions relate to products selection, facility size and location, major equipment decisions, and layout of facilities -Short-term decisions include scheduling jobs, workers, and equipment Sales and Operations Planning -Sales and operations planning – process of integrating sales forecasts with operations plans -Performed once a month -The process must reconcile all supply, demand, and new-product plans at both the detail and aggregate level and tie them to the strategic plan -The process of sales and operations planning (S&OP) begins with recording the sales, production, and inventory levels of the previous month, updating forecasts for the next 12 months or so, seeing if necessary production changes are feasible and providing a summary of information to top management for making decisions -Aggregate operations planning – monthly planning for all the products in the same family (produced in the same facility) for the next 12 months or so -Useful for organizations that experience seasonal fluctuations in demand -Planners must make decisions on output rates, employment levels and changes, inventory levels and changes, and backorders The Concept of Aggregation -In aggregate operations planning, planners focus on a group of similar products, or sometimes an entire line -Ex. All sizes of TVs for a company producing televisions are grouped as the same and they are grouped together and dealt with as if they were a single product -For labour-intensive services, a common aggregate measure or equivalent unit is full time equivalent (FTE) of a workforce – Ex. One half time worker (working 20 hours a week) is counted as 0.5 FTE -An aggregate approach allow managers to make general decisions about intermediate-term capacity and production levels without having to deal with highly specific details Demand and Capacity Options Demand Options 1. Pricing – pricing differentials are commonly used to shift demand from peak periods to off peak periods 2. Promotion – price discounts, advertising, and other forms of promotion, such as displays and direct marketing can sometimes be very effective in shifting demand 3. Backorders – A company can shift demand to future periods by using backorders 4. Complementary products – Manufacturers that experience seasonal demands for certain products are sometimes able to develop a demand for a complementary product that makes use of their resources during off season – Ex. Snow blowers and lawnmowers Capacity Options 1. Hiring and laying off permanent workers 2. Using overtime/idle time 3. Hiring and laying off part-time/temporary workers 4. Stockpiling inventories – the use of finished-goods inventories allows companies to produce goods in one period and sell or distribute them in a future period Inputs to and Outputs from Aggregate Operations Planning
BU395
Chapter 13 – Aggregate Operations Planning
Week 6
-Effective aggregate operations planning requires good information -The available resources over the planning horizon must be known, and forecasts of demand must be available -Planners must then take into account company policies -The outputs of aggregate planning is the level of production (output), which is determined from the level of employment, and in turn determines the amount of inventory or backordering in each period Basic Strategies 1. Maintain level output/workforce 2. Change output to match demand period by period 3. Use a combination -Level output/workforce strategy – maintaining a steady rate of output and workforce while meeting variations in demand by a combination of inventories and backorders -Chase demand strategy – matching output to demand; the planned output for any period is set at the forecast of demand for that period Choosing a Strategy -Whatever strategy a company chooses, two important factors are: -Company policy -Costs -Company policy may set a constraint on the available options Techniques for Aggregate Production Planning -Two different approaches are used: -Trial-and-error -Optimization -A general procedure for aggregate production planning consists of the following steps: 1. Determine demand forecast for each period in the planning horizon 2. Determine capacities and production rates 3. Identify company policies that are pertinent 4. Determine unit costs for regular time permanent, overtime, and part-time/temporary production; holding inventory; backorder; hiring and layoff 5. If using the trail-and-error approach, develop alternative feasible plans, compute the total for each, and select the one with the lowest total cost Trial-and-Error -Consists of developing simple tables/worksheets or graphs that enable managers to meet projected demand requirements with production -Graphs can be used to guide the development of alternative aggregate plans -Assumptions: 1. No allowance is made for holidays and different number of workdays in different months 2. We present all production in terms of number of units of the aggregate measure 3. The total cost for each of regular time permanent production, overtime production, backorder, inventory, and hire/layoff is a linear function of number of units of the aggregate product; that is, it equals a constant unit cost times the number of units of the aggregate product Procedure for Trial and Error -Determine the production output by permanent workers -Determine total units short and period short -Determine the cheapest way to meet the units short: -Hire temporary workers
BU395
Chapter 13 – Aggregate Operations Planning
Week 6
-Use permanent workers during overtime -Carry inventory from previous periods -Meet demand from following periods Trade-off Analysis -It is possible to use the unit costs of labour, inventory, and backorder in trade-off analyses in order to make good production planning decisions, without having to recalculate the total plan cost Optimization Linear Programming Model -Mathematical representation of the aggregate planning problem -A variable is assigned to each of the number of hires and number of layoffs, amount of overtime, ending inventory, and backorder in each period -Each relationship is represented as a linear equation or inequality constraint -Ex. BDM last year Transportation Model -When there are no hiring or layoffs the problem can be formulated as a transportation model -In order to use this approach, planners must identify capacity of regular time, overtime, and part time, and demand for each period, as well as related costs of production and inventory -The production quantities, to be determined by the software, will be in each cell Aggregate Services Planning -Note: a few differences with services: 1. Services occur when they are rendered 2. For labour-intensive services, it may be easier to measure the aggregate plan in terms of time or number of workers instead of an aggregate measure of output -Because service capacity is perishable, aggregate planners need to take this fact into account when deciding how to match supply and demand -Yield management – the application of variable pricing strategy to allocate capacity based on capacity availability Disaggregating the Aggregate Production Plan -It is necessary to break down the aggregate production plan into specific product’s production schedule -Master production schedule (MPS) – the anticipated build schedule expressed in the quantity and timing of specific end items for the next 12 weeks or so -Rough-cut capacity planning – concerting the MPS into requirements for key resources in order to test the feasibility of a proposed master production schedule -Master production scheduling is challenging because each product’s anticipated demand should be satisfied while the sum of resource requirements of the MPS should not exceed the capacity determined in the aggregate plan -Master scheduling can be done using linear programming Master Production Scheduling Inputs -Three inputs: -Beginning inventory -Forecasts for each week of the schedule -Customer orders
BU395
Chapter 13 – Aggregate Operations Planning
Week 6
-The master production scheduler should work closely with the demand planner to obtain the customer order and forecast information and to cooperatively determine the MPS Outputs -The master production scheduling process uses the inputs on a week-by-week basis for each product to determine the projected inventory, planned production, and the resulting uncommitted planned inventory -Available-to-promise (ATP) inventory – uncommitted planned inventory -The first step is to calculate the projected on-hand inventory, one week at a time, until it falls below a specified limit -“Look-ahead procedure” –Sum customer orders week by week until a week in which there is a planned production Stabilizing the Master Production Schedule -Changes to a master production schedule can be disruptive, particularly changes to the nearfuture portion of the schedule -Master production schedules are often divided into three zones: Emergency zone, trading zone, planning zone -Time fences – points in time that separate zones of a master production schedule -The emergency zone is closest to present time and is affected only when sometime unforeseen and unplanned has happened -Changes in the emergency zone may affect commitment of key resources and therefore require top management level of approval -The trading zone is when changes can be approved at a middle management level and generally involve trading one planned production for another -In the planning zone changes are managed without management approval, usually by the demand planner and master scheduler
Chapter 13 – Aggregate Operations Planning
Week 6
Introduction -Organizations make capacity and production decisions on three levels: long term, intermediate term, and short term -Long term decisions relate to products selection, facility size and location, major equipment decisions, and layout of facilities -Short-term decisions include scheduling jobs, workers, and equipment Sales and Operations Planning -Sales and operations planning – process of integrating sales forecasts with operations plans -Performed once a month -The process must reconcile all supply, demand, and new-product plans at both the detail and aggregate level and tie them to the strategic plan -The process of sales and operations planning (S&OP) begins with recording the sales, production, and inventory levels of the previous month, updating forecasts for the next 12 months or so, seeing if necessary production changes are feasible and providing a summary of information to top management for making decisions -Aggregate operations planning – monthly planning for all the products in the same family (produced in the same facility) for the next 12 months or so -Useful for organizations that experience seasonal fluctuations in demand -Planners must make decisions on output rates, employment levels and changes, inventory levels and changes, and backorders The Concept of Aggregation -In aggregate operations planning, planners focus on a group of similar products, or sometimes an entire line -Ex. All sizes of TVs for a company producing televisions are grouped as the same and they are grouped together and dealt with as if they were a single product -For labour-intensive services, a common aggregate measure or equivalent unit is full time equivalent (FTE) of a workforce – Ex. One half time worker (working 20 hours a week) is counted as 0.5 FTE -An aggregate approach allow managers to make general decisions about intermediate-term capacity and production levels without having to deal with highly specific details Demand and Capacity Options Demand Options 1. Pricing – pricing differentials are commonly used to shift demand from peak periods to off peak periods 2. Promotion – price discounts, advertising, and other forms of promotion, such as displays and direct marketing can sometimes be very effective in shifting demand 3. Backorders – A company can shift demand to future periods by using backorders 4. Complementary products – Manufacturers that experience seasonal demands for certain products are sometimes able to develop a demand for a complementary product that makes use of their resources during off season – Ex. Snow blowers and lawnmowers Capacity Options 1. Hiring and laying off permanent workers 2. Using overtime/idle time 3. Hiring and laying off part-time/temporary workers 4. Stockpiling inventories – the use of finished-goods inventories allows companies to produce goods in one period and sell or distribute them in a future period Inputs to and Outputs from Aggregate Operations Planning
BU395
Chapter 13 – Aggregate Operations Planning
Week 6
-Effective aggregate operations planning requires good information -The available resources over the planning horizon must be known, and forecasts of demand must be available -Planners must then take into account company policies -The outputs of aggregate planning is the level of production (output), which is determined from the level of employment, and in turn determines the amount of inventory or backordering in each period Basic Strategies 1. Maintain level output/workforce 2. Change output to match demand period by period 3. Use a combination -Level output/workforce strategy – maintaining a steady rate of output and workforce while meeting variations in demand by a combination of inventories and backorders -Chase demand strategy – matching output to demand; the planned output for any period is set at the forecast of demand for that period Choosing a Strategy -Whatever strategy a company chooses, two important factors are: -Company policy -Costs -Company policy may set a constraint on the available options Techniques for Aggregate Production Planning -Two different approaches are used: -Trial-and-error -Optimization -A general procedure for aggregate production planning consists of the following steps: 1. Determine demand forecast for each period in the planning horizon 2. Determine capacities and production rates 3. Identify company policies that are pertinent 4. Determine unit costs for regular time permanent, overtime, and part-time/temporary production; holding inventory; backorder; hiring and layoff 5. If using the trail-and-error approach, develop alternative feasible plans, compute the total for each, and select the one with the lowest total cost Trial-and-Error -Consists of developing simple tables/worksheets or graphs that enable managers to meet projected demand requirements with production -Graphs can be used to guide the development of alternative aggregate plans -Assumptions: 1. No allowance is made for holidays and different number of workdays in different months 2. We present all production in terms of number of units of the aggregate measure 3. The total cost for each of regular time permanent production, overtime production, backorder, inventory, and hire/layoff is a linear function of number of units of the aggregate product; that is, it equals a constant unit cost times the number of units of the aggregate product Procedure for Trial and Error -Determine the production output by permanent workers -Determine total units short and period short -Determine the cheapest way to meet the units short: -Hire temporary workers
BU395
Chapter 13 – Aggregate Operations Planning
Week 6
-Use permanent workers during overtime -Carry inventory from previous periods -Meet demand from following periods Trade-off Analysis -It is possible to use the unit costs of labour, inventory, and backorder in trade-off analyses in order to make good production planning decisions, without having to recalculate the total plan cost Optimization Linear Programming Model -Mathematical representation of the aggregate planning problem -A variable is assigned to each of the number of hires and number of layoffs, amount of overtime, ending inventory, and backorder in each period -Each relationship is represented as a linear equation or inequality constraint -Ex. BDM last year Transportation Model -When there are no hiring or layoffs the problem can be formulated as a transportation model -In order to use this approach, planners must identify capacity of regular time, overtime, and part time, and demand for each period, as well as related costs of production and inventory -The production quantities, to be determined by the software, will be in each cell Aggregate Services Planning -Note: a few differences with services: 1. Services occur when they are rendered 2. For labour-intensive services, it may be easier to measure the aggregate plan in terms of time or number of workers instead of an aggregate measure of output -Because service capacity is perishable, aggregate planners need to take this fact into account when deciding how to match supply and demand -Yield management – the application of variable pricing strategy to allocate capacity based on capacity availability Disaggregating the Aggregate Production Plan -It is necessary to break down the aggregate production plan into specific product’s production schedule -Master production schedule (MPS) – the anticipated build schedule expressed in the quantity and timing of specific end items for the next 12 weeks or so -Rough-cut capacity planning – concerting the MPS into requirements for key resources in order to test the feasibility of a proposed master production schedule -Master production scheduling is challenging because each product’s anticipated demand should be satisfied while the sum of resource requirements of the MPS should not exceed the capacity determined in the aggregate plan -Master scheduling can be done using linear programming Master Production Scheduling Inputs -Three inputs: -Beginning inventory -Forecasts for each week of the schedule -Customer orders
BU395
Chapter 13 – Aggregate Operations Planning
Week 6
-The master production scheduler should work closely with the demand planner to obtain the customer order and forecast information and to cooperatively determine the MPS Outputs -The master production scheduling process uses the inputs on a week-by-week basis for each product to determine the projected inventory, planned production, and the resulting uncommitted planned inventory -Available-to-promise (ATP) inventory – uncommitted planned inventory -The first step is to calculate the projected on-hand inventory, one week at a time, until it falls below a specified limit -“Look-ahead procedure” –Sum customer orders week by week until a week in which there is a planned production Stabilizing the Master Production Schedule -Changes to a master production schedule can be disruptive, particularly changes to the nearfuture portion of the schedule -Master production schedules are often divided into three zones: Emergency zone, trading zone, planning zone -Time fences – points in time that separate zones of a master production schedule -The emergency zone is closest to present time and is affected only when sometime unforeseen and unplanned has happened -Changes in the emergency zone may affect commitment of key resources and therefore require top management level of approval -The trading zone is when changes can be approved at a middle management level and generally involve trading one planned production for another -In the planning zone changes are managed without management approval, usually by the demand planner and master scheduler
