Aggregate Planning Teaching Notes

CHAPTER 14:

AGGREGATE PLANNING

Teaching Notes

In the earlier chapters, we have looked at certain problems thatinvolve long range planning such as product and process design,layout and major equipment purchase decisions. Aggregate planninginvolves medium range planning. The planning horizon for mediumrange plans varies from six months to 18 months. A majorcomponent of aggregate planning is to plan aggregate productionand inventory levels to meet forecast of demand. In preparing theaggregate plan, a major consideration is to check the desiredproduction plan against the capacity. On the other hand, indetermining the capacity, we must take into account the expecteddemand and the resulting medium range production plan.

We use the term aggregate plan in lieu of medium range productionplan because it generally involves the production plan for agroup or a family of products (aggregation of products)

Even though the aggregate plan is a function of many differentfactors, the key factor is the forecasted demand over the lengthof the medium-range planning horizon. After developing anaggregate plan consistent with the forecasted demand, it isdisaggregated into shorter time periods. The process ofdisaggregation is the beginning of short range planning usingmaster scheduling.

In determining the aggregate plan, integration and communicationbetween various functions of the firm is vital. The forecast ofdemand is obtained from marketing, and sales and operationsplanning are determined cooperatively. Expected changes in theworkforce levels need to be communicated to the human resourcesdepartment, while any major equipment purchases must involve the

Instructor’s Manual, Chapter 14239

approval of the finance department. On the other hand, changes inanticipated inventory levels and especially expected stockoutsmust be discussed with the marketing department.

Answers to Discussion and Review Questions

1. Three levels of planning that involve operations managersare:

a. Strategic plan: It establishes production and capacitystrategies.

b. Aggregate production plan: It establishes productioncapacity and intermediate term general productionschedule.

c. Master schedule: It establishes schedules for specificproducts (disaggregation of aggregate production plan).

2. Aggregate planning involves developing a general plan foremployment, output, and inventory levels. The goal is todevelop a plan which makes efficient use of the resources ofan organization. Planners attempt to determine the best wayto meet forecasted demand within the constraints imposed bylong-term strategic decisions.

3. The need for aggregate planning is to begin to translatelong-term decisions into short-term operating plans.Aggregate planning constitutes the intermediate step in thisprocess. It is especially useful when the demand displayedsignificant seasonality.

4. In both manufacturing and service, managers can vary thesize of the workforce, use subcontract (temporary) workers,use overtime, idle time, and backorder demand. Manufacturershave the additional option of varying the size ofinventories.

Operations Management, 2/ce240

5. An equivalent unit is a typical unit of output, e.g., litresof beer or number of cars produced. There is not distinctionin the type or model of output. A service version ofequivalent units relates to worker input requirements and ismeasured by FTE (full time equivalent).

6. a. Maintaining a constant workforce is good for morale andminimizes hiring and layoff costs. However, inventorycarrying costs may be high.

b. Since labor force has to be continually adjusted,hiring and layoff costs tend to be high. Due to theinstability of the labor force, employee morale is low.However, the inventory carrying costs are very lowbecause production is matched with demand resulting inlittle or no inventory.

c. Idle time is non-productive. Working overtime is alsoless productive, increases quality problems, andincreases the risk of accidents.

7. Worksheet technique is easy to comprehend and enablesplanners to compare alternative plans. Its chief limitationis that it does not necessarily produce the optimumsolution.

8. Transportation Model (TP) is a method of obtaining optimalsolution to problems involving allocation of limitedresources. The objective of TP is minimization of costs. TPis a valid approach if the cost and variable relationshipsand assumptions are linear. Even for fairly small problems,TP approach requires computerization due to massive datamanipulation and calculations.

9. The master schedule has three inputs: the beginninginventory, forecasts for each period of the schedule, and


customer orders. Its outputs are projected inventory, MPs,and uncommitted (available-to-promise) inventory.

10. Aggregate planning is part of sales and operations planning.It is the main process for management to make decisionsaffecting companies' success. Aggregate planning needs to bedone jointly with other functions, especially marketing.

Memo Writing Exercises

1. Aggregate Planning is the planning of the overall, generaluse of resources based on forecasted demand. It involvesdetermining the levels of production or service for sixmonths to 1.5 years into the future. The forecasted demandis aggregated for one “product” or “service.”

Aggregate Planning determines the level of output usingdifferent production strategies. After it is developed,Aggregate Planning is disaggregated into plans for separateproducts and shorter time periods. An important feature ofAggregate Planning is that the Master Schedule is formed bydisaggregating it. In other words, it serves as the basis ofthe Master Schedule and the resulting detailed shop floorschedule. The absence of a clear aggregate plan can causeserious problems in capacity planning, workforce planning,customer service and production efficiency.

2. Chase strategy matches production with varying demand rates.This strategy involves varying the workforce levels. Theprimary advantage of using Chase strategy is that inventorycarrying cost is minimized. The main disadvantage is theadditional cost of changing the workforce level (hiring,layoffs and employee morale).


Level strategy maintains a constant workforce and constantproduction. It has the advantage of minimizing hiring andlayoff costs and keeping employee morale high. However,inventory carrying costs may be high.


Solutions

1.

From example 1.

Period 1 2 3 4 5 6 TotalForecast 200 200 300 400 500 200 1,800OutputRegular 300 300 300 0 450 450 1,800OvertimeSubcontract

Output-Forecast 100 100 0 (400 (50) 250

InventoryBeginning 0 100 200 200 0 0Ending 100 200 200 0 0 0Average 50 150 200 100 0 0 500

Backlog 0 0 0 200 250 0 450

Costs:OutputRegular @ $60 600 600 0 900 900 3,600OvertimeSubcontract

Inventory @ 50 150 200 100 0 0 500Backorder @ 0 0 0 1,00 1,25 0 2,250

Total $65 750 800 1,10 2,15900 6,350

2.

Embedded Excel Worksheet

a.


Note that in order to end with no inventory or backlog inmonth 6, we need 60 units produced during overtime. Becausemaximum O/T is 20 units in any month, and backlogs occurnear months 5 and 6, we should use O/T during the lattermonths. However, month 3 is better than month 6 because itsaves backlogs in month 5 (at savings of $5/unit) eventhrough there are inventory carrying costs for 2 months($2/unit).


b.


Again, we need 60 extra units. Month 5 is the first monthwith backlog, so use maximum subcontracting (50 units) inmonth 5. The remaining 10 units should be used in month 4rather than 6 for the same reason as in part a.

Plan a is cheaper.


Solutions (continued)

3.


The reason for this plan being optimal is a combination ofthe reasons given for the solution to problem 2a and b.

4.


Period 1 2 3 4 5 6 TotalForecast 200 200 300 400 500 200 1,800OutputRegular 280 280 280 280 280 280 1,680Subcontract 0 0 20 50 50 0 120

Output-Forecast 80 80 0 (70) (17 80

InventoryBeginning 0 80 160 160 90 0Ending 80 160 160 90 0 0Average 40 120 160 125 45 0 490

Backlog 0 0 0 0 80 0 80

Costs:Regular @ 2 $56 560 560 560 560 560 $3,36Subcontract 0 0 120 300 300 0 720

Inventory @ 40 120 160 125 45 0 490Backorder @ 0 0 0 0 400 0 400

Total $60 680 840 985 1,3560 $4,97Again, the reason why subcontracting is better before the busymonth 5 is that carrying cost is cheaper than backorder cost. Theabove plan costs: ($4,970 4,640) = $330 more than the plan inexample 2.



5. a.

Period 1 2 3 4 5 6 7 8 TotalForecast 120 135 140 120 125 125 140 135 1,040OutputRegular 120 130 130 120 125 125 130 130 1,010Overtime 5 10 10 5 30Subcontrac

Output -InventoryBeginningEndingAverage

BacklogCosts:OutputRegular @ $7,2 7,80 7,80 7,20 7,50 7,50 7,80 7,80$60,6Overtime @ 450 900 900 450 2,700Subcontrac

Inventory @BackorderTotal 7,20 8,25 8,70 7,20 7,50 7,50 8,70 8,25$63,3

b.


Period 1 2 3 4 5 6 7 8 TotalForecast 120 135 140 120 125 125 140 135 1,040OutputRegular 130 130 130 130 130 130 130 130 1,040OvertimeSubcontrac

Output - 10 (5) (10) 10 5 5 (10) (5)InventoryBeginning 0 10 5 0 5 10 15 5Ending 10 5 0 5 10 15 5 0Average 5 7.5 2.5 2.5 7.5 12.5 10 2.5

Backlog 5Costs:OutputRegular @ $7,8 7,80 7,80 7,80 7,80 7,80 7,80 7,80 $62,4Overtime Subcontrac

Inventory @ 10 15 5 5 15 25 20 5 100Backorder @ 450 450Total $7,8 7,81 8,25 7,80 7,81 7,82 7,82 7,80 $62,9

Plan b is cheaper ($62,950 < $63,300)



6. a.

Period 1 2 3 4 5 6 7 TotalForecast 250 300 250 300 280 275 270 1,925OutputRegular 250 275 250 275 275 275 250 1,850Overtime 25 25 5 20 75Subcontract

Output -InventoryBeginningEndingAverage

BacklogCosts:OutputRegular @ $10,0 11,00 10,00 11,00 11,00 11,00 10,00 $74,0Overtime @ 1,500 1,500300 1,200 4,500Subcontract

Inventory BackorderTotal $10,0 12,50 10,00 12,50 11,30 11,00 11,20 $78,5

b.

Period 1 2 3 4 5 6 7 TotalForecast 250 300 250 300 280 275 270 1,925OutputRegular 275 275 275 275 275 275 250 1,900OvertimeSubcontract 5 20 25

Output - 25 -25 25 -25 0 0 0InventoryBeginning 0 25 0 25 0 0 0Ending 25 0 25 0 0 0 0Average 12.5 12.5 12.5 12.5 0 0 0 50

Backlog 0 0 0 0 0 0 0 0Costs:Regular 11,00 11,00 11,00 11,00 11,00 11,00 10,00 76,00Overtime 0Subcontract 250 1,000 1,250

Inventory 25 25 25 25 100Backorder 0Total 11,02 11,02 11,02 11,02 11,25 11,00 11,00 77,35


Yes, total cost is less for b.



7.


Overtime is cheaper than subcontracting. Use O/T first. Itturns out that we initially need the max OT in each month.Fill in subcontracting as needed. Five extra units will beproduced, hence reduce OT production in August by 5 units.

8. a. Level production supplemented with overtime asneeded.




Max O/T production should be used in busy months of Augustand September. This would satisfy 2000 units out of 3000units short. Another 1000 units could be produced duringovertime in July (not October) ahead of shortage in August.

b. Combination of overtime and subcontracting to handlevariations in demand. Max. overtime = 500, max.subcontracting = 500 units.



Max O/T should be used in every month. However, it ischeaper to subcontract an additional 500 units in Septemberrather than use O/T in October because this avoids shortagecost in September of $10/unit even though subcontracting is20 - 16 = $4/unit more expensive than using overtime.



c. Overtime up to 750 units per period maximum to handlevariations in demand.


We should choose the plan generated in part a because$350,800 < 353,700 < 356,200.

9.



10. Plan B: Hire one worker and subcontract. Workforce = 20 + 1= 21 workers. Note that relative to plan A, plan B will beshort 50 units. These 50 units can be subcontracted.Subcontracting during early months will result in lessbackorder cost than in month 8.




Note: shifting 10 units of subcontracting from month 1 tomonth 4 results in no change in cost.

Plan C: No additional workers are to be hired. It is assumed that the present workforce is retained. Only subcontractingis to be used with a maximum of 20 per period. A total of 50+ 90 = 140 units of subcontracting are needed. It is best tosubcontract earlier than later in order to save backlogcosts.



Plan TotalA $14,790B 14,340C 14,470 The lowest cost is Plan B =



11. Assume that the $5 cost per unit for the temporaryworkers is in addition to $6 per unit for regular time cost.Part-time workers are to be hired to produce a total of 140units.


The same number of part-time workers must be used in anyperiod where they are used. Either 70 units can be producedin 2 consecutive months, or 47 units in 3 consecutivemonths, or 35 units in 4 consecutive months, etc. The bestplan is 47 units over months 2 to 4, which strikes a balancebetween inventory carrying costs and backlog costs.

12.




13.



Hiring and then firing regular workers, even after 5 months,will cost $6 per unit extra (($200 + $100)/50 = $6).Therefore, it is not cost effective relative tosubcontracting or overtime, which would cost only $2/unitand $3/unit more, respectively. Therefore, keep the numberof regular workers to 20. Subcontracting is cheaper thanO/T, so use the maximum number of subcontracting in eachmonth, 20 units, and as early as possible (because ofsavings on backlogs). If only subcontracting is used, 20units will be needed each month for the first 7 months.However, it will cost less to use O/T in the busy 3rd and4th months instead of subcontracting in months 6 and 7.


14.


Note: Alternate optimal solutions exist.


15.


Additional cost = 126,650 – 124,730 = $1,920



16.


17. a. If the resources used to make the two sizes of wheelsare shared, e.g., the same workers and equipment are used tomake both, then one aggregate plan is appropriate, becauseit would allow for the total resources to be planned first.



b.


18. June July

64 1 2 3 4 5 6 7 8

Forecast 30 30 30 30 40 40 40 40

CustomerOrders

33 20 10 4 2

Projected on-handinventory

31 71 41 11 41 71 31 61

MPS 70 70 70 70

ATP 31 36 68 70 70

Week

InventoryFromPre-viousWk.

RequirementsMax(forecast,order)

NetInventoriesBeforeMPS

(70)MPS

ProjectedOn-HandInventory

1 64 33 31 - 31

2 31 30 1 70 71

3 71 30 41 - 41

4 41 30 11 - 11


5 11 40 -21 70 41

6 41 40 1 70 71

7 71 40 31 - 31

8 31 40 -4 70 61


19. June July

31 2 3 4 5 6 7 8

Forecast 30 30 30 40 40 40 40

CustomerOrders 25 16 11 8 3

Projectedon-handinventory

1 41 11 41 1 31 61

MPS 70 70 70 70

ATP 6 43 59 70 70

Week




(70)MPS


2 31 30 1 - 1

3 1 30 -29 70 41

4 41 30 11 - 11

5 11 40 -29 70 41

6 41 40 1 1

7 1 40 -39 70 31

8 31 40 -9 70 61


20. June July

0 1 2 3 4 5 6 7 8

Forecast 50 50 50 50 50 50 50 50

CustomerOrders

52 35 20 12


23 48 73 23 48 73 23 48

MPS 75 75 75 75 75 75

ATP 23 40 43 75 75 75

Week




(70)MPS


1 0 52 -52 75 23

2 23 50 -27 75 48

3 48 50 -2 75 73

4 73 50 23 - 23


5 23 50 -27 75 48

6 48 50 -2 75 73

7 73 50 23 - 23

8 23 50 -27 75 48

21. ATP: WK1: 100 - 80 = 20

WK2: 100 - 50 = 50

WK3: 100 - (30 + 10) = 60


22. June July

30 1 2 3 4 5 6 7 8

Forecast 80 80 60 60 60

CommittedOrders

82 80 60 40 20


18 8 18 28 38

MPS 70 70 70 70 70

ATP 18 0 10 30 50


Case: Eight Glasses a Day

Strategy 1: Level production supplemented by up to 10 tank loadsa month from overtime.


Strategy 2: A combination of overtime (max 10 tank loads permonth) and subcontracting (max 10 tank loads per month).


Strategy 3: Using inventory up to 15 tank loads a month fromovertime.


The second and third strategy both have the minimum cost($466,000 < $474,000).


Aggregate Planning Teaching Notes

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