Meeting-4

Aggregate Production Planning

  Aggregate planning is medium-term
capacity planning that is used in
Aggregate preparing the level of labor requirements,
production outputs, inventories, and sub-
Planning contracts, for prodducts at the aggregate
level (level of product family)
Period of Time

Agregate Planning: Intermediate-range

capacity planning, usually covering 2 to 12
months.
Long range

Intermediate
range
Short
range

Now 2 months 1 Year

The Concept of Aggregate Planning

For example, paint The aggregate plan is to

manufacturing companies produce 100,000 gallons of
produce paints with various paint for (for example) a year.
types of colors (red, brown, Later the results of planning
blue, etc); An aggregate plan is can be disaggregated into how
carried out to determine the much production for each type
amount of paint to be of paint color
produced without specifying
the production requirements
for red, brown, etc.
 Optimizing the use of production
facilities; minimize overloading and
underloading

The Ensuring available capacity to meet

Importance demand

of
Aggregate Can plan changes in production capacity
systematically to meet demand fluctuation
Planning (high and low demand)

Can plan the maximum amount of output

that can be produced based on available
capacity
 6
Should inventory be used to absorb changes in
demand, especially during peak periods?

Can changes in demand be accommodated by

varying the number of workers?

Decisions Should it use part-time workforce, or is the

in aggregate overtime option used to meet fluctuations in
demand?
planning
Should sub-contract options be chosen to maintain
the level of labor utilization?

Are price factors controlled in such a way as to

influence demand?
  Hax & Meal proposes the following
product categories:
1. items, 2. families, and 3. types.

• Items: lowest level. For example, a

The proposed refrigerator manufacturer
aggregation distinguishes one-door refrigerators
and two-door refrigerators as
method Hax different items
& Meal • Family: in the context of the example
above, the family category is a
refrigerator in general
• Type: family collection. In this case
kitchen equipment (kitchen
appliance)
Aggregate Unit

 Actual production unit

 Volume/weight (iron steel in tons)
 Money (sales value)
 Labor (processing time per unit, wage)
Example: Determine the aggregate unit

Company X produces 6 models of washing machines

Model # hrs. Price/unit % expected sales

A 5532 4.2 285 32
K 4242 4.9 345 21
L 9898 5.1 395 17
L 3800 5.2 425 14
M 2624 5.4 525 10
M 3880 5.8 725 6

Question: How to determine the aggregate unit on example above?

  Aggregate unit: Hours of work
0.32(4.2) + 0.21(4.9) + . . . +
Example 0.06(5.8)
= 48.644 worker hours.
 Aggregate planning is also
called macro production
planning

Aggregate planning starts with

forecasting demand
Aggregate
Planning An aggregate planning
mechanism is developed to Staffing
translate demand forecasts into Production level
a blueprint for planning:

within the planning horizon

 Change in the
number of labor
Smoothing Costs Changes in the
number of
production units

Holding Costs Save cost

Costs in
Aggregate
Planning Shortage Costs Costs not fulfilled
demand

Other Costs: payroll, overtime,

idle cost, subcontracting.
Cost: Change in
the number of
Labor
Cost: Inventory status

$ Cost
Slope = Ci

Slope = CP

Back-orders Positive inventory

Inventory
General Definitions The Problem of
Aggregate Planning

 For example D1, D2,.., DT is the demand forecast during the

planning horizon (T period)
 Problem: Determine the amount of labor (Wt) and production
level (Pt) with aim of minimizing total costs in the planning
horizon
Example:  Washing machine manufacturers want to
determine labor requirements and production
Aggregate levels for the next 8 months. January –
Planning August demand forecast is 420, 280, 260,
Issues 190, 310, 145, 110, 125 units. Inventories at
the beginning of January are 200 units and
the company wants to have 100 units at end
of August. Determine a monthly production
plan
Technique 1: Cumulative Graph
Step 1: Determine the “net” request
Month Net Predicted Cum. Net
Demand Demand
1(Jan) 220(420-200) 220
2(Feb) 280 220+280=500
3(Mar) 460 500+460=960
4(Apr) 190 960+190=1150
5(May) 310 1150+310=1460
6(June) 145 1460+145=1605
7(July) 110 1605+110=1715
8(Aug) 225(125+100) 1715+225=1940
Step 2: Describe the request graphically
500
400
300
individu
200
100
0
0 1 2 3 4 5 6 7 8 9
2500
2000
1500
Kumulatif
1000
500
0
0 1 2 3 4 5 6 7 8 9
  Constant production rate (Leveling
production):
level strategy:
– Maintaining regular production
levels, anticipating fluctuations in
demand with supply, overtime,
Basic Strategies subcontracting or a combination
 Zero Inventory (Matching Demand)
Chase strategy:
– Match capacity with demand
(Produce as many requests)
Level vs. Chase Strategy
 Chase Strategy
• Reduced inventory costs
• Labor utility level is high
• The cost of recruiting and
Advantages reducing labor
and • Influence the labor morale
Disadvantages
Level Strategy
• The level of production and
number of Labor are stable
• High inventory costs
 For example, you want to make an
aggregate production plan without
changing the number of Labor (fixed)
during the planning horizon
Aggregate
Plans: Level How:

Strategy From the previous graph, draw a straight

line form the starting point to 1940 units
(in the 8th month). The slope of a line
represents the average number of units
produced each month
 Monthly production = 1940/8 = 242.2 = 243 units
But there was a stockout!

2500
2000
1500
1000 Cumulative
500 stockout
0
0 1 2 3 4 5 6 7 8 9 500

400
300
200
100
Individual
0
0 1 2 3 4 5 6 7 8 9
Shift the straight line (with affixed slope) until it
touches the maximum point on the cumulative demand
curve

Level Strategy tanpa Stockout

3000
2500
2000
1500
1000
500
0
0 straight
On the graph, the 1 2 line
3 pertains
4 5 6to cumulative
7 8 9 demand in
period 3. So that monthly production can be calculated: 960/3 =
320. Then calculate the ending inventory every month
 Level Strategy tanpa Stockout
3000
2500
2000
cumulative
1500
1000
500
0
0 1 2 3 4 5 6 7 8 9

500 Individual; prod rate = 243 500 Individual; prod rate = 320
400 400
300 300
200 200
100 100
0 0
0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9
Month Cum. Net. Dem. Cum. Prod. Invent.
1(Jan) 220 320 100
2(Feb) 500 640 140
3(Mar) 960 960 0
4(Apr.) 1150 1280 130
5(May) 1460 1600 140
6(June) 1605 1920 315
On the graph, the straight line pertains to cumulative demand in
7(July) 1715 production2240
period 3. So that monthly 525 960/3 =
can be calculated:
320. Then calculate1940
8(Aug) the ending inventory
2560every month620
 But, the level strategy is not
realistic….

• Because all months do not have the same number of working days,
the level of production will be different each month
 affect inventory
 28

Assumption:
• the number of working
days/month in known...
The
• (more realistic)
settlement
…. Calculate the “factor K”,
where:
• K = number of aggregate units
produced by one labor in a day
 Additional information (from
past data)

Calculate It was found that in 40 days,

520 units could be completed
the value of by 38 workers.
K • K = 520/(38*40) = 0.3421

So, on average 0.3421 units are

produced by 1 person per day
 30

If known the number of working days/month from January

in a row: 22, 16, 23, 20, 21, 22, 21, 22 days.
• March is a critical month

January – March cumulative net demand = 960 units

Strategy
Level : Number of cumulative working days = 22 + 16 + 23 = 61
days

Realistic Therefore:
Calculations
Total production per day = 960/61 = 15,737 units/day

Number of labor needed per day = 15,737/0,3421 = 46

labor people
 By looking at the graph, March is a “trigger
Why March? point” because March is the “peak” with the
highest demand.

31
 Level Strategy tanpa Stockout
3000
2500 Level
2000 Strategy
1500 with no
1000 Stockout
500
0
0 1 2 3 4 5 6 7 8 9
 Production Plan with Constant Labor
Numbers
   Mo      Working day/ Prod.     Cum  Cum Net     End Inv
                    month         Level     Prod            Dem
Jan 22 346 346 220 126
Feb 16 252 598 500 98
Mar 23 362 960 960 0
Apr 20 315 1275 1150 125
May 21 330 1605 1460 145
Jun 22 346 1951 1605 346
Jul 21 330 2281 1715 566
Aug 22 346 2627 1940 687
From previous calculations:
Total production per day = 15,737 units/day
So, January: Prod. level = 15,737 * 22 days = 346 units
Additional Information: Fees

 Save cost (per unit per month) : $ 8.50

 Labor recruitment fee : $ 800/person
 Labor reduction fee : $1,250/person
 Wage : $75/Labor/day
 Shortage of inventory costs: $50 unit/month
 Strategy Level : Total Cost

• Assumption: Labor is available at the end of December the previous

year = 40 people
• Cost of recruiting 6 people Labor = 6 * 800 = $ 4,800
• Inventory costs: Cumulative ending inventory = (126 + 98 + 0 + 687)
= 2093. Plus 100 units of inventory are planned at the end of August,
bringing the total inventory to 2193 units.
Total inventory cost = 2193 * 8.5 = $18,640.5
• Wages = ($75/Labor/day)(46 workers)(167 days) = $576,150

• Total Cost = $4,800 + $18,640.5 + $576,150 = $599,590.5

  The idea is to change capacity every
Zero Inventory month by matching production levels
Plan (Chase with demand. In other words, produce as
much demand. The goal is to keep
Strategy) inventory as low as possible
 37

Chase Strategy
#Units/
worker/ Forecast Workers
Month # Work Days month Demand net needed
Jan 22 7.53 220 30
Feb 16 5.47 280 51
Mar 23 7.87 460 59
Apr 20 6.84 190 27
May 21 7.18 310 43
Jun 22 7.53 145 20
Jul 21 7.18 110 15
Aug 22 7.53 225 30
K = 0.3421 units/Labor/day
Unit/Labor/month = 0.3421 * 22 days/month = 7.53 units/month

January: Total Workers = 220 units/7.53 units/Labor/month= 30 people

 Chase Strategy: Labor Costs 38

• Manpower available at the beginning of January = 40people

Workers Pe"+"an Cost Cost
needed Labor Pe"-"an Labor Pe"+"an Pe"-"an
Month (people) (people) (people) Labor Labor
Jan 30 - 10 - 12500
Feb 51 21 - 16800 -
Mar 59 8 - 6400 -
Apr 27 - 31 - 38750
May 43 15 - 12000 -
Jun 20 - 23 - 28750
Jul 15 - 5 - 6250
Aug 30 15 - 12000 -
 Total Labor Costs: $133,450
 39
Chase Strategy: Total Cost

Employment costs: Total: $ 560,275 Better than the level

strategy
Recruiment/Labor 599,590.50 – 560,275 = 39,316
reduction costs = $133,450
Wage
= (wage/labor/day) (work
day/month) (number of
labor/month)
= $426,825
 Example 2: Spreadsheet Sheet Technique

Known demand for the next 8 quarters (forecast results see next slide)
Production fee :
Regular time (Cr): 10 (US$/unit)
Over time (Co): 30 (US$/unit)
Cost of increasing production rate (Ch) : 100 US$/unit (hiring cost)
Cost of reducing production levels (Cl): 150 US$/unit  (lay-off cost)
Inventory fee(Ci): 50 $/quarter
Subcontracting Cost (Cs): 80 $/unit
Regular production capacity = 200 units/quarter
The maximum over time policy is half of the maximum regular capacity (100
units/quarter).
40
 Forecasted Demand per kuartal

DEMAND PER KUARTAL

Quarter Demand (unit) (UNIT)
800
1 220
2 170
600
3 400
4 600
400
5 380
6 200 200

7 130
8 300 0
1 2 3 4 5 6 7 8
Total 2400

41
 Chase Strategy
Total
total cost subcon
deman changin Hiring lay off
Reg OT Subcon prod (i)=(b* cost
Quarter d (unit) g prod cost cost
(b) (c) (d) (e)=(b+ cr)+ (j)=(d*
(a) f (g) (h)
c) (c*Co) Cs)
+g+h
1 220 200 20  0 220 0 0 0 2,600 0
2 170 170 0 0 170 -50   7,500 9,200 0
3 400 200 100 100 300 +130 13,000   18,000 8,000
4 600 200 100 300 300 0     5,000 24,000
5 380 200 100 80 300 0     5,000 6,400
6 200 200 0 0 200 -100   15,000 17,000 0
7 130 130 0 0 130 -70   10,500 11,800 0
8 300 200 100 0 300 +170 17,000   22,000 0
                  90,600 38,400

Cost of regular production = $10/unit Total costs = $ 129,000

Overtime production cost = $ 30/unit
Cost of adding labor = $ 100/labor
Assumption:
Labor cost reduction = $ 150/labor
Subcontract fee = $ 80/unit 1 Manpower produces 1 unit of product
42
 Level Strategy
Production level = average demand
End Inv Production
demand Initial Regular Over
e= Inv cost cost
Quarter (unit) Inventory Time
b+c+d- f =e*ci g=(c*cr)+
(a) (b) (c) (d)
a (d*co)
1 220 270 200 100 350 17,500 5,000
2 170 350 200 100 480 24,000 5,000
3 400 480 200 100 380 19,000 5,000
4 600 380 200 100 80 4,000 5,000
5 380 80 200 100 0 0 5,000
6 200 0 200 100 100 5,000 5,000
7 130 100 200 100 270 13,500 5,000
8 300 270 200 100 270 13,500 5,000
Total 2400         $. 96,500 $. 40,000
          total $. 136,500
*) Initial inventory: 270

Biaya inventory = $50/unit

Average demand = 2400/8 = 300
43
 Subcontract Strategy
Production level = constant regular (130) and lack of capacity at
the subcontract
demand Prod
Quarter (unit) Cost Subcon
a Regular Subcon d= Cost
b c b*cr e = c*cs
1 220 130 90 1,300 7,200
2 170 130 40 1,300 3,200
3 400 130 270 1,300 21,600
4 600 130 470 1,300 37,600
5 380 130 250 1,300 20,000
6 200 130 70 1,300 5,600
7 130 130 0 1,300 0
8 300 130 170 1,300 13,600
        10,400 108,800

Total cost = $. 119,200

44
 Mixed Strategy
dema total changi prod subcon Inv
Hiring lay off End
Quarte nd Regular OT Subcon prod ng cost cost cost
cost cost Inv
r (unit) b c d e=b+ prod i = b*cr j= l=
g h k
a c f + c*co d*cs k*ci
0                     270  
1 220 0 0 0 0 0 0 0 0 0 50 2,500
2 170 200 0 0 200 200 20,000  0 22,000 0 80 4,000
3 400 200 100 20 300 100 10,000  0 15,000 1,600 0 0
4 600 200 100 300 300 0 0 0 5,000 24,000 0 0
5 380 200 100 80 300 0 0  0 5,000 6,400 0 0
6 200 200 0 0 200 100  0 15000 17,000 0 0 0
7 130 200 0 0 200 0  0 0 2,000 0 70 3,500
8 300 200 0 30 200 0 0  0 2,000 2,400 0 0
                  68,000 34,400   10,000

Total cost = $. 112,400

Note: Almost the same as a chase strategy, it’s just that there is inventory available
45
 Example 3: Transportation
Engineering
Supply capacity
Period Demand
RT OT Subcontract
1 700 250 500 500
2 800 250 500 800
3 900 250 500 1700
4 500 250 500 900

Initial inventory: 100 units

Desired ending inventory: 150 units
RT fee : $100/unit
OT fee: $125/unit
SC fee: $150/unit
Save cost: $20/unit/perioda
46
Transportation Engineering

Sales Period Unused Available

Source
Product 1 2 3 4 Capacity Capacity
period Initial inventory 100
RT 700
1 OT 250
SC 500
RT 800
2 OT 250
SC 500
RT 900
3 OT 250
SC 500
RT 500
4 OT 250
SC 500
47 Demand 500 800 1700 900 6000
 3-48

48
Transportation
Engineering

Cost :
[(400+800+900
+500)*100))
+(300*140)]+
[(2*250*125)+
(250*145 )]+
(300*140)
 = $. 445,750
 3-49

Transportation Engineering 49

Cost…????
  Precision Transfer Inc. (PT Inc.) makes more
than 300 types of gears. The manufacturing
operations of each type of gear are similar to
each other, but the time and type of material
used varies. Due to the similarity, the
aggregate unit used is the gear. Aggregate
demand for the next 6 months is shown in
table 1. Last year PT Inc. producing 41,383
gear units of various types. There are 260
working days with an average of 40 workers
Practice employed. Means, one worker can make
41,383 units/(260 days x 40 workers) = 4
gears/day. Inventory costs are
$5/gear/month, Labor costs are $450/Labor,
Labor costs are $600/Labor, and Labor
wages are $15/hour. Manpower works 8
hours/day, and currently the number of
available manpower is 35 people.
 Chase Strategy (1)
    Jan Feb March April May June Total
1 Days 21 20 23 21 22 22 129
2 Units/worker 84 80 92 84 88 88 516
3 Demand 2760 3320 3970 3540 3180 2900 19670
4 Workers needed 33 42 44 43 37 33 232
5 Workers available 35 33 42 44 43 37 na
6 Workers hired 0 9 2 0 0 0 11
7 Hiring Cost 0 4050 900 0 0 0 4950
8 Workers laid off 2 0 0 1 6 4 13
9 Lay off cost 1200 0 0 600 3600 2400 7800
10 Workers used 33 42 44 43 37 33 232
11 Labor cost 83160 100800 121440 108360 97680 87120 598560
12 Unit produced 2760 3320 3970 3540 3180 2900 19670
13 Net inventory 0 0 0 0 0 0 na
14 Holding Cost 0 0 0 0 0 0 0
15 Backorder Cost 0 0 0 0 0 0 0
  Total 84360 104850 122340 108960 101280 89520 611310
• Production = 4 unit/worker wages & benefits = $120/worker/day
• Hiring Cost = $450/worker laid-off Cost = $600/worker
• Holding Cost = $5/unit/month Backorder Cost = $15/unit/month
  January
 With 21 working days, 1 Manpower is able to
produce = 21 x 4 = 84 gears/month (row 2)
 Number of workers for 1 month = 2760 / 84 =
33 people (row 4)
 Hired labor=
 max{0, worker needed- worker available}

Chase Layoffs=
Max{0, worker available-worker needed}
Strategy (2)


worker available = 35, worker needed = 33,

so there is a reduction in labor of 2 people
Layoff Cost= $600 x 2 org = $1200 (row 9)
 Wage & Benefit Cost = $15/hour x 8
hours/day x 21 days x 33 workers
= $83,160 (row 11)
Chase Strategy (3)

 February
 At the beginning of the month, workers available = 33
(January, row 10). While workers are needed 42. Means
the need for the addition of 9 people.
Hiring Cost = $450 x 9 = $4050 (row 7)
 Capacity = Labor x number of days/month x number of
units/Labor
2772 = 33 x 21 x 4
Units produced = min{demand, capacity}
= min {2760, 2772}
= 2760
 Because of “zero inventory”, capacity is always as big as
demand
 Level Strategy (1)
    Jan Feb March April May June Total
1 Days 21 20 23 21 22 22 129
2 Units/worker 84 80 92 84 88 88 516
3 Demand 2760 3230 3970 3540 3180 2900 19670
4 Workers needed 39 39 39 39 39 39 234
5 Workers available 35 39 39 39 39 39 na
6 Workers hired 4 0 0 0 0 0 4
7 Hiring Cost 1800 0 0 0 0 0 1800
8 Workers laid off 0 0 0 0 0 0 0
9 Lay off cost 0 0 0 0 0 0 0
10 Workers used 39 39 39 39 39 39 234
11 Labor cost 98280 93600 107640 98280 102960 102960 603720
12 Unit produced 3276 3120 3588 3276 3432 2978 19670
13 Net inventory 516 316 -66 -330 -78 0 na
14 Holding Cost 2580 1580 0 0 0 0 4160
15 Backorder Cost 0 0 990 4950 1170 0 7110
  Total 102660 95180 108630 103230 104130 102960 616790
• Production = 4 unit/worker wages & benefits = $120/worker/day
• Hiring Cost = $450/worker Firing Cost = $600/worker
• Holding Cost = $5/unit/month Backorder Cost = $15/unit/month
Level Strategy (2)
 January
 The number of workers per month is constant
Labor = Total demand / (Total work days x number of
units/day/Labor)
= 19670 /(129 x 4) = 39 people
 Number produced = work day x number of labor x number of
units/day/labor
= 21 x 39 x 4 = 3276 units
 Net inventory = 3276(row 12) – 2760(row 3) = 516 (row 13)
 Holding cost = unit holding cost x net inventory
= $5 x 516 = $2580 (row 14)
  February
 Net Inventory =
Net inventory January +
[(unit/day/labor x work days x
number of units) - demand]
516 + [((4 x 20 x 39) - 3320] = 316
units

Level Strategy  March

 Net inventory = -66, become a
(3) backorder and will be sent later
 Backorder Cost = $15 x 66 = $990
 June
 Unit produced = 2978 units
 Net inventory = 2978 – 2900 –
cumulative backorder from May
=0
Thank
You