Topic 2

1. Topic 2 Aggregate Planning Prof. Upendra Kachru

2. Planning Hierarchy

3. Types of Decision Short term Current Plans Medium term Aggregate Plans Long term Planning Strategies & Facilities Time horizon in years Planning Hierarchy

4. WHAT IS AGRREGATE PLANNING? The aggregate plan links strategic goals and objectives of the organization with the plans for individual products , services and their various components.

5. Nature of Aggregate Planning It determines the course the organization takes in the medium term, with the following in mind: • Market Inputs (demand forecasts and/or actual orders); • Capability Specifications and Performance Metrics; and • Resource Availability Aggregate Planning has to firstly link strategic goals and objectives with the plans for individual products by transforming its understanding of the market into a set of capability specifications. i.e. what business processes must do to meet the needs and expectations of customers.

6. The business processes that are involved are as follows:

7. Objectives of Aggregate Planning Maximize • profits • customer service • utilization of plant and equipment Minimize • inventory investment • changes in production rates • changes in workforce levels

8. Distribution and marketing Customers needs Demand forecasts Competition behavior Operations Current machine capacities Plans for future capacities Workforce capacities Current staffing level Accounting and Finance Cost data Financial condition of firm Materials Supplier capabilities Storage capability Materials availability Human Resources Labor-market conditions Training capacity Engineering New Products Product design changes Machine standards The Aggregate Planning Process Aggregate plan

9. Aggregate Planning System - Inputs Competitors’ behavior Raw material availability Market demand External capacity Economic conditions Current physical capacity Current workforce Inventory levels Activities required for production External to firm Planning for production Internal to firm

10. Business Environment • Market Orientation • Time Focused Environment • Product Flexibility Focused Environment

11. Market Orientation Make-To-Stock (MTS): Produce to buildup inventory and then use that inventory later to meet demand. This makes the aggregate plan critical to the business. Make-To-Order (MTO): Service organizations and job shops provide such Products. Assemble-to-Order (ATO), Engineer-to-Order (ETO): Aggregate planning has to use actual or projected orders to plan production activities.

12. Time Focused Environment • Right inventory stocking decisions • Efficient, timely feedback • Excellence in collecting and analyzing data • Sufficient resources • Sufficient resources at the right location

13. Product Flexibility Focused Environment • Sufficient Goods at convenient place • Good Forecast • Short change over times • Reduction in manufacturing lead time

14. Aggregate Demand and Aggregate Capacity 10000 Suppose the figure to the right represents forecast demand in units 10000 8000 8000 7000 6000 5500 6000 4500 4000 Now suppose this lower figure represents the aggregate capacity of the company to meet demand 2000 0 Jan Feb Mar Apr May Jun 9000 10000 8000 8000 What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up 6000 6000 4000 4500 4000 4000 2000 0 Jan Feb Mar Apr May Jun 14

15. Chase Strategy A Chase Strategy is a strategy aimed at adjusting capacity in anticipation of demand. You are "chasing demand" by regulating capacity to the demand doing it as dynamically and quickly as you can.

16. Using part-time employees • Varying production rates through overtime or idle time • Maximizing efficiency through training, work scheduling, cross-training, use of technology, etc. • Increasing involvement of consumer in delivery of service • Keeping Bottleneck Resources Busy • Sharing capacity with other divisions/firms • Outsourcing Chase Strategy

17. Level Strategy Level Strategy is a strategy where you maintain a constant capacity over a period of time, irrespective of fluctuations in demand. This strategy is used when skill level, the training required, or the cost of hiring people and terminating them is high.

18. Level Strategy • Changing Product Mix • Increasing Machine Product Rate • Improving Quality • Increasing Product Yield • Increasing Motivation • Increasing Employee Involvement • Changing Inventory Levels • Planning for future expansion

19. Mixed Strategy In a “mixed” strategy, the organization combines strategies, in view of its specific and unique requirements. Mixed Strategy

20. Impact of Different Options

22. Methods for Aggregate Planning • Graphical and charting procedure. • Linear programming. • Mathematical modeling using Linear Decision Rules • Management Coefficient Models • Production Switching Heuristics • Simulation

23. Graphical & Charting Method This is a trial-and-error method, assisted by spreadsheets. In general, the graphical and charting method follows five steps: • Determine the demand in each period. • Determine what the capacity is for regular time, overtime, and subcontracting each period. • Find the labor costs, hiring and layoff costs, and inventory holding costs. • Consider company policy that may apply to the workers or to stock levels. • Develop alternative plans and examine their total costs.

24. The method requires the planner to specify a planning horizon and secure aggregate demand forecasts Second, the decision variable such as size of workforce, output rate, overtime or idle time, inventory level, sub-contracting, etc., have to be explicitly identified. Third, all models require the relevant costs, including costs of wages, hiring/layoff, overtime, inventory, etc., to be specified Graphical & Charting Method

25. Chase and Level Strategy Costs Suppose we have the following unit demand and cost information: Demand/mo Jan Feb Mar Apr May Jun 1000 1200 1500 1900 1800 1600 Production Cost Rs. 350/unit Lost Sales Rs. 1000/unit per mo. Inventory Carrying Cost Rs. 10/unit per mo. Subcontracting Costs Rs. 600/unit Layoff costs Rs. 7000/worker Hiring Cost Rs. 3500/worker Beginning Workforce Level 20 workers Capacity per Worker 50 units/mo. Beginning inventory 700 units Closing Inventory 100 units 25

26. 50x(20+4+6)=1500 700x10 7000x2= 14000 1000x350=Rs. 350000 Chase Strategy Given is the demand information below: Demand Jan Feb Mar Apr May Jun Production/mo 1000 1200 1500 1900 1800 1600 Inventory 700 700 700 700 700 700 Hire/Fire 0 +4 +6 +8 -2 -4 Cumulative cost information is given in ‘000 below: Jan Feb Mar Apr May Jun Production 350 420 525 665 630 560 Inventory 7 7 7 7 7 7 Hire/Fire 0 14 21 28 14 28 Total 357 798 1351 2051 2702 3297

27. 1300+1400-1500=1200 1100x10 Chase Strategy costs Rs.3,297,000 Level Strategy Given is the demand information below: Demand Jan Feb Mar Apr May Jun Production/mo 1400 1400 1400 1400 1400 1400 Inventory 1100 1300 1200 700 300 100 Hire/Fire 0 0 0 0 0 -0 Cumulative cost information is given in ‘000 below: Jan Feb Mar Apr May Jun Production 490 980 1470 1960 2450 2940 Inventory 11 13 12 7 3 47 Hire/Fire 0 0 0 0 0 0 Total 529 1032 1534 2031 2524 3015

28. Problem: Ramson & Co. Ramson & Company, a Delhi company, manufactures designer furniture for offices. Mr. Ram has developed monthly forecasts for executive chairs and presented the period January – June in the table below.

29. Cost Information for Manufacture of Executive Chairs

30. 6800/124 = 54.838 Forecast vs. Demand

31. Plan 1: Level Strategy - Production is equal to Average Demand

32. Plan 2: Mixed Strategy- Constant Workforce at lowest demand level and meet additional demand through Outsourcing To produce 44 units/day in-house, 33 workers are needed. All other demand is met by subcontracting, which is thus required in every month. No inventory costs are incurred. In-house production = 44 units/day x 124 production days = 5,456 units Subcontract units = 6,800 - 5,456 = 1,344 units

33. 44 x 6 x Rs.20 x 18 = Rs. 95,040 Rs. 150 x 13 x 20 = Rs. 3,900 Rs. 100 x 13 x 21= Rs. 27,300 Plan 3: Chase Strategy – Hire and layoff workers to meet the exact demand each month.

34. Plan 2 is the lowest cost option Comparison of Different Plans

35. Hierarchical Production Planning (HPP) In large companies with several divisions or plants, HPP is used so decide which product groups to produce where. Planning is then carried out at the appropriate organizational level. HPP is the starting point for decisions about production quantities, inventory levels, and workforce levels for each plant. This planning process can continue plans for individual products being developed by departmental managers.

36. Aggregate Planning For Services The typical service operation is Make-To-Order rather than Make-To-Stock. The aggregate planning process, therefore, is different for services in the following ways: • Most services can not be inventoried. • Demand for services is difficult to predict. • Capacity is also difficult to predict. • Service capacity must be provided at the appropriate place and time. • Labor is usually the most constraining resource for service.

37. Fixed Service Schedules/Variable Hours Strategy • Appointment for Service Times • Customer Involvement • Planning with order Backlogs • Differential Pricing • Develop Complementary Products or Services to address imbalance • Coordination with other Organizations Proactive Strategies

38. Scheduling Customer Demand Backlogs: • For example, your tailor shop will not tell you exactly when service will commence. You give your measurements (service request) to a tailor (order taker), who adds it to the waiting line of orders already in the system and he gives you a date for trying out the outfit. Prof. Upendra Kachru

39. Reservations: In many industries like in the hospitality and travel trades, reservations have become a norm. Reservations systems, although quite similar to appointment systems, are used when the customer actually occupies or use facilities associated with the service.

40. Cont. Appointments: An appointment system assign specific times for service to customers. The advantages of this method are: • Timely customer service • High utilization of servers Hospitals are examples of service providers that use appointment systems Prof. Upendra Kachru

41. Aggregate Planning For Services Where this is not the case, service organizations also use aggregate planning, some in exactly the same way with a manufacturing firm. Aggregate planning in the case of a high-volume-product output business is very similar to manufacturing. In such high-volume tangible services, traditional aggregate planning methods may be applied.

42. In a restaurant, for example, inventory is perishable. In addition, in fast-food restaurants, peak and slack periods may be measured in hours. The ’product’ may be inventoried for only as long as 10 minutes. This brings in complexity in aggregate planning.

43. Yield Management Aggregate Planning for Services Most service organizations have limited capacity. Their product is perishable e.g. airlines, and hotels, etc. In yield management, pricing relates to addressing specific capacity problems. The objective is to sell as much of the service at full price as possible, but to offer discounts if necessary to avoid the service to elapse.

44. Yield Management From an operational perspective, yield management is most effective when • Demand can be segmented by customer. • Fixed costs are high and variable costs are low. • Inventory is perishable. • Product can be sold in advance. • Demand is highly variable.

45. Yield Management Formula Where: n = number of no-shows x = number of rooms or seats overbooked Cu = cost of under-booking; i.e., lost sale Co = cost of overbooking; i.e., replacement cost P = probability In yield management, service providers seek to minimize the cost of overbooking. • The probability of ‘no-shows’ is given by the formula: • P(n < x)  Cu/ ( Cu + Co)

46. Problem – Great Eastern Hotel The Great Eastern Hotel at Jaipur had on the basis of historical data calculated the probability of ‘no-shows’ in a particular season. The cost of under booking was estimated at Rs. 1750; and the cost of overbooking at Rs. 1200. • The statistical data is shown below: • No-ShowsProbabilityP(N < X) • 0 .15 0.00 • 1 .25 0.15 • 2 .30 0.40 • 3 .30 0.70

47. 0*(.15) + 1*(.25) + 2*(.30) + 3*(.30) = 1.75 [(Rs. 1750* 1.75) - Rs. 1185.00] = Rs. 1877.50 1750 / (1750 + 1200) = 0.593 (.30)* Rs. 1750 = Rs. 525 [2(.15) + 1(.25)]*Rs. 1200 = Rs. 660.00 Solution Expected number of no shows = 1.75 Optimal probability of no-shows = 0.593 As you expect 1.75 ‘no shows’ and rooms have to be integer numbers, you overbook 2 rooms. The cost of overbooking the rooms is as follows: Cost of Refusing Rooms = Rs. 660.00 Lost revenue from no-shows = Rs. 525.00 Total cost of overbooking by 2 rooms = Rs. 1185.00 Expected savings = Rs. 1877.50 a night Therefore, it is worth overbooking 2 rooms to maximize profits and capacity utilization.

48. Graphical Problem & Solution The hotel sells its first 30 rooms at Rs. 2000.00 and the next 30 rooms at Rs. 4200.00. The variable cost per room is Rs. 1500.00. By selling rooms at differential prices, the hotel expects to improve its operations. Does it do so?

49. The result is that it sells an additional 30 per cent of its rooms and improves profitability to Rs. 96,000 per day. Solution

50. Desegregating the Aggregate Plan In the real world, a manufacturing system with only a fair degree of complexity might process components through seven or eight manufacturing stages. The process would probably be integrated with parts purchased from outside vendors. The final-assembly plan would combine numerous internally manufactured components, purchased components, and subassemblies into end products for the customers.