Supply Chain Operations Management

Aggregate Planning

Trilc e Enc arnac ión

Aggregate Planning

UMSL 2
10/2/2024
Aggregate Planning Timeframe: 3-19 months out

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10/2/2024
The Aggregate Planning Problem

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10/2/2024
The Aggregate Planning Problem - Inputs

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10/2/2024
The Aggregate Planning Problem – Decision Variables

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10/2/2024
Identifying Aggregate Units

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10/2/2024
Identifying Aggregate Units

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10/2/2024
Aggregate Planning Strategies

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Chase Strategy

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10/2/2024
Flexible Strategy - Skeleton Force or Cadre Strategy

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10/2/2024
Flexible Strategy - Skeleton Force or Cadre Strategy

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10/2/2024
Flexible Strategy - Skeleton Force or Cadre Strategy

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10/2/2024
Level Strategy - Use Inventory as a Cushion

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10/2/2024
Level Strategy - Use Inventory as a Cushion

THE INVENTORY CUSHION INSULATES

THE FACTORY FROM DEMAND
FLUCTUATIONS

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10/2/2024
Hybrid Strategy
The
ALMOST ALWAYS,
“ 4th “
IT IS A MIXED or
Strategy
Hybrid STRATEGY
CHARACTERIZED
BY

More Complex (lots of different potential solutions)

Thus, Optimization Modeling is a Good Tool!

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10/2/2024
Aggregate Planning
Possible Plan
Costs

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10/2/2024
Aggregate Planning
Possible Data
Inputs

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10/2/2024
Aggregate Planning
Possible Decision
Variables

USEFUL FOR
DEVELOPING
ALTERNATIVE
PLANS
UNDER VARIOUS
STRATEGIES

UMSL 19
10/2/2024
Variability is
the Villain

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10/2/2024
 What are some sources of
Variability in Supply Chains?
• Customer Request Arrivals
• Customer no shows, last-minute changes to scheduling
• Employees Unavailability
• Downtimes we control (setups, preventive maintenance)
• Machine failures
• Materials shortages
• Quality Problems
• Request Variety
• Technological Change
• Employee Skill Level Differential
• Task Requests Vary
• Flow Variability (variability from a upstream process impacts
downstream).

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 Variability is the Villain!

Variability causes operating

problems and must be
managed and accounted for
in decision making processes.

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 Capacity planning decisions
• Rule of Thumb: 80% utilization when making
equipment/labor capacity planning decisions

Why?
• The nonlinear relationship between utilization and expected waiting times/WIP

• At 80% utilization, this typically balances need for high resource utilization with
reasonable WIP.

• This is a rule of thumb, and influenced by level of variability in the system (lower
variability – can have higher resource utilizations, higher variability in the system,
requires lower than 80% utilization).

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 Cycle Time vs. Utilization
24

22

20

18

16

Cycle Time (hrs)

14

12
High
10
Variability
8

6
Low
4 Variability
Capacity
2

0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2
Release Rate (entities/hr)

Utilization Law: If a station increases utilization without making any other change,
average number waiting and cycle time will increase in a highly nonlinear fashion
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 The Curse of Utilization & Variability
• 100% utilization may sound good from the
standpoint of resources being used to the maximum
potential, but this leads to poor service quality or
performance.
• Average cycle time [time in the system] will
skyrocket as resource utilization gets close to 100%.
– This is due to variability in the system.
– Only constant process times (no variability) can operate at
100% utilization.

Capacity Law: In steady state, systems should release work at

an average rate that is strictly less than average capacity.

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 We have to buffer with variability using
inventory, capacity, time or money.
•Reduced variability leads to reduced buffers.
•Goal should be to reduce variability.
•If you do not pay to reduce variability, you will pay in one or
more of the following ways:
–Lost throughput
–Wasted capacity
–Inflated Cycle Times
–Larger Waiting Line levels
–Long Lead times and/or poor customer service

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As Variability in Service Times Increases,
Waiting Times Increase

Figure 3. The expected waiting time in the queue increases with variability (data are
for an independent system with one server, and numbers on the curves denote the
variability factor).

http://archive.ite.journal.informs.org/Vol5No2/CattaniSchmidt/

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 The Curse of Variability
• As variability increases, then buffers increase as well
– E.g., line congestion and wait times increase
– E.g., extra capacity is needed.
• When you remove variance from service times, then
buffers decrease as well .

• To provide better quality service,

– systems with high variability should operate at lower
levels of resource utilization than systems with lower
variability.
 What can you do to reduce variability?
• Pooling of Resources
• Training of Employees
• Standard Operating Procedures
• Improving Quality
• Better forecasting of demand
• Augmenting performance with Automation or Tools
• Providing visibility (information into the process) to identify root
cause of variability
• Supply Chain Coordination
• Preventative Maintenance

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Which is more disruptive?

“The Netflix Effect”

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 Relevant Costs

1. Basic production The fixed and variable costs incurred in

costs. producing a given product type in a given
time period.
2. Costs associated with Hiring, training, and laying off personnel.
changes in the
production rate.
3. Inventory holding Capital, storing, insurance, taxes, spoilage,
costs. and obsolescence.
4. Backorder costs. • Hard to measure.
• Loss of goodwill.
• Loss of sales revenues.

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 Budgets
• Operations managers are generally required to submit annual
budget requests.
– Sometimes quarterly.
• Aggregate plan is key to the success of the budgeting process.
– Provides justification for the requested budget amount.

• Accurate medium-range planning increases the likelihood of:

1. Receiving the requested budget.
2. Operating within the limits of the budget.

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 Aggregate Planning Techniques
• Cut-and-try charting and graphic methods
– Involves costing out various production planning alternatives
and selecting the one that is best.
– Elaborate spreadsheets developed to facilitate the decision
process.
• Linear programming
– Use of mathematical analysis to determine an optimal plan.

• Simulation
– What-if analysis using simulated demand to evaluate
effectiveness of alternative plans.

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 A Cut-and-Try Example: The JC Company

• Demand and Working Days

January February March April May June Totals
Demand forecast 1,800 1,500 1,100 900 1,100 1,600 8,000
Number of working days 22 19 21 21 22 20 125

Costs
Materials $120/unit
Inventory holding cost $1.50/unit/month
Marginal cost of backordering $5.00/unit/month
Marginal cost of subcontracting $120/unit ($240 subcontracting cost
less $120 material savings)
Hiring and training cost $200.00/worker
Layoff cost $250.00/worker
Labor hours required 5/unit
Straight-time cost (first eight hours each day) $20.00/hour
Overtime cost (time and a half) $30.00/hour

Inventory
Beginning inventory 400 units
Safety stock 25% of month demand

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 A Cut-and-Try Example—More Data
• In solving this problem, we can exclude the material costs.
• Inventory at the beginning of the first period is 400 units.
• Assume the safety stock should be one-quarter of the demand forecast.
– It is often useful to convert demand forecasts into production requirements.
– Should take into account the safety stock estimates.

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 Aggregate Production Planning Requirements

January February March April May June

Beginning inventory 400 450 375 275 225 275
Demand forecast 1,800 1,500 1,100 900 1,100 1.600
Safety stock (0.25 × 450 375 275 225 275 400
Demand forecast)
Production requirement 1,850 1,425 1.000 850 1,150 1,725
(Demand forecast +
Safety stock − Beginning
inventory)
Ending inventory 450 375 275 225 275 400
(Beginning inventory +
Production requirement
− Demand forecast)

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 A Cut-and-Try Example—Evaluate Alternative
Plans
1. Produce to exact monthly production requirements by varying workforce size.
2. Produce to meet expected average demand by maintaining a constant workforce.
3. Produce to meet the minimum expected demand using a constant workforce and
subcontract to meet additional requirements.
4. Produce to meet expected demand for all but the first two months using a constant
workforce and use overtime to meet additional output requirements.

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 Plan 1: Exact Production; Vary Workforce
• Production Plan 1: Exact Production; Vary Workforce
January February March April May June Total
Production requirement (from Exhibit 19.3) 1,850 1,425 1,000 850 1,150 1,725
Production hours required (Production 9,250 7,125 5,000 4,250 5,750 8,625
requirement × 5 hr/unit)
Working days per month 22 19 21 21 22 20
Hours per month per worker (Working days × 8 176 152 168 168 176 160
hr/day)
Workers required (Production hours 53 47 30 26 33 54
required/Hours per month per worker)
New workers hired (assuming opening workforce 0 0 0 0 7 21
equal to first month's requirement of 53
workers)
Hiring cost (New workers hired × $2,000) $ 0 $ 0 $ 0 $ 0 $ 14,000 $ 42,000 $ 56,000
Workers laid off 0 6 17 4 0 0
Layoff cost (Workers laid off × $2,500) $ 0 $ 15,000 $ 42,500 $10,000 $ 0 $0 $ 67,500
Straight-time cost (Production hours required × $185,000 $142,500 $100,000 $85,000 $115,000 $172,500 $800,000
$20)
Total cost $923,500

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Plan 2: Constant Workforce; Vary Inventory and Stockout

• Production Plan 2: Constant Workforce; Vary Inventory and Backorder When

Needed
January February March April May June Total
Beginning inventory 400 8 −276 −32 412 720
Working days per month 22 19 21 21 22 20
Production hours available (Working days per 7,040 6,080 6,720 6,720 7,040 6,400
month × 8 hr/day × 40 workers)*
Actual production (Production hours available/5 1,408 1,216 1,344 1,344 1,408 1,280
hr/unit)
Demand forecast (from Exhibit 19.3) 1,800 1,500 1,100 900 1,100 1,600
Ending inventory (Beginning inventory + Actual 8 −276 −32 412 720 400
production − Demand forecast)
Backorder cost (Units short × $5) $ 0 $ 1,380 $ 160 $ 0 $ 0 $ 0 $ 1,540
Safety stock (from Exhibit 19.3) 450 375 275 225 275 400
Units excess (Ending inventory − Safety stock) 0 0 0 187 445 0
only if positive amount
Inventory cost (Units excess × $1.50) $ 0 $ 0 $ 0 $ 281 $ 668 $ 0 $ 948
Straight-time cost (Production hours available × $140,800 $121,600 $134,400 $134,400 $140,800 $128,000 $800,000
$20)
Total cost $802,488
"(Sum of production requirement in Exhibit 19.3 × 5 hr/unit)/(Sum of production hours available × 8 hr/day) = (8,000 × 5)/(125 × 8) =
40.

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 Plan 3: Constant Low Workforce; Subcontract

• Production Plan 3: Constant Low Workforce; Subcontract

January February March April May June Total
Production requirement (from Exhibit 1,850 1,425 1,000 850 1,150 1,725
19.3)
Working days per month 22 19 21 21 22 20
Production hours available (Working 4,400 3,800 4,200 4,200 4,400 4,000
days × 8 hr/day × 25 workers)*
Actual production (Production hours 880 760 840 840 880 800
available/5 hr per unit)
Units subcontracted (Production 970 665 160 10 270 925
requirement − Actual production)
Subcontracting cost (Units $116,400 $79,800 $19,200 $1,200 $32,400 $111,000 $360,000
subcontracted × $120)
Straight–time cost (Production hours $88,000 $15,200 $16,800 $16,800 $17,600 $16,000 $170,400
available × $20)
Total cost $530,400

'Minimum production requirement. In this example, April is minimum of 850 units. Number of workers required for April is (850 ×
5)/(21 × 8) = 25.

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 Plan 4: Constant Workforce; Overtime

• Production Plan 4: Constant Workforce Overtime

January February March April May June Total
Beginning inventory 400 0 0 177 554 792
Working days per month 22 19 21 21 22 20
Production hours available (Working days per month 6,688 5,776 6,384 6,384 6,688 6,080
× 8 hr/day × 38 workers)*
Regular shift production (Production hours 1,338 1,155 1,277 1,277 1,338 1,216
available/5hr/unit)
Demand forecast (from Exhibit 19.3) 1,800 1,500 1,100 900 1,100 1,600
Units available before overtime (Beginning inventory
+ Regular shift production − Demand forecast).
This number has been rounded to the nearest
integer. −62 −345 177 554 792 408
Units overtime 62 345 0 0 0 0
Overtime cost (Units overtime × 5 hr/unit × $30/hr,) $ 9,300 $ 51,750 $ 0 $ 0 $ 0 $ 0 $ 1,050
Safety stock (from Exhibit 19.3) (Note special end of 450 375 275 225 275 400
horizon Target)
Units excess (Units available before overtime − 0 0 0 329 517 8
Safety stock) only if positive amount
Inventory cost (Units excessive × $1.50) $ 0 $ 0 $ 0 $ 494 $ 776 $ 12 $ 1,281
Straight-time cost (Production hours available × $20) $133,760 $115,520 $127,680 $127,680 $133,760 $121,600 $760,000
Total cost $822,331
"Workers determined by trial and error. See text for explanation.

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 A Cut-and-Try Example—Comparison of Four
Plans

Plan 2: Constant
Plan 1: Exact Workforce; Vary Plan 3: Constant Plan 4: Constant
Production; Vary Inventory and; Low Workforce; Workforce;
Costs Workforce Backorder : Subcontract Overtime
Hiring $56.000 $0 $0 $0
Layoff 67,500 0 0 0
Excess inventory 0 948 0 1.281
Backorder 0 1,540 0 0
Subcontract 0 0 3,60,000 0
Overtime 0 0 0 61,050
Straight time 8,00,000 8,00,000 170.400 7,60,000
$9,23,500 $8,02,488 $5,30,400 $8,22,331

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