Aggregate Planning and S&OP

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QUESTION
 
 
How much to produce? When to produce?
1. Define & explain sales and operations planning
and aggregate planning.
2. Compute chase and level strategies and their
horizon costs.
3. Explain techniques for addressing uncertainty
in production plans.
4. Describe how aggregate planning fits into the
overall production planning process.
Chapter 13
SCM 302 – Aggregate Planning
2
Test Your IQ: Frito Lays
• More than three dozen brands, 15 brands sell more
than $100 million annually, 7 sell over $1 billion
• Planning processes covers 3 to 18 months
• Unique processes and specially designed equipment
• High fixed costs require high volumes and high
utilization
• Demand profile based on historical sales, forecasts,
innovations, promotion, local demand data
• Match total demand to capacity, expansion plans, and
costs
• Quarterly aggregate plan goes to 36 plants in 17
regions
• Each plant develops 4-week plan for product lines and
production runs
• What information would you like to know
before developing the plan?
Chapter 13
SCM 302 – Aggregate Planning
3
The Operations Planning Hierarchy
Chapter 13
SCM 302 – Aggregate Planning
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Long Range Planning
(1-5 years)
Support the strategic plan
• Top Executives
• Expensive decisions, take significant time to implement
• Research & Development
• New product introduction
• Capital investments
• Facility location/expansion
Medium Range Planning
(3-18 months)
Support the sales plan
• Operations Managers, S&OP Team
• Capacity/production decisions for existing
resources
• Sales and operations planning
• Production planning and budgeting
• Employment, inventory, subcontracting levels
• Analyzing operating plans
Short Range Planning
(0-3 months)
Support existing orders
• Operations Managers, Floor Supervisors
• Daily/weekly scheduling and allocation decisions
• Job assignments
• Ordering
• Job scheduling
• Dispatching
• Overtime
• Part-time help
What are S&OP and Aggregate Planning?
• Sales & Operation Planning (S&OP)
• Integrate functional areas around a production plan which satisfies the
sales plan and meets business objectives.
• What is feasible? Which resources are below expectations?
• Coordinate internal and external resources
• Communication within cross functional teams.
• Aggregate Planning
• Determine quantity and timing of production for intermediate range
• Meet forecasted demand while minimizing cost
• Disaggregation: breaking down plan into greater detail.
• Master Production Schedule: a timetable of what is to be made when.
• 4 things needed for aggregate planning
1. Unit for measuring sales and output
2. Aggregate demand forecast for planning period
3. Method for determining relevant costs
4. Model that combines forecasts and costs to inform scheduling decisions
Chapter 13
SCM 302 – Aggregate Planning
5
QUARTER 1
Jan. Feb. March
150,000 120,000 110,000
QUARTER 2
April May June
100,000 130,000 150,000
QUARTER 3
July Aug. Sept.
180,000 150,000 140,000
S&OP and the Aggregate Plan
Figure 13.2
Chapter 13
SCM 302 – Aggregate Planning
6
Product Types
Families
Business Level
Product family: group of SKUs with similar design (e.g.
hard drive size)
• Share manufacturing resources.
• Demand patterns are similar, often planned as a unit
• Costs are often expressed at this level.
SKU’s Stock-keeping Units
3C products
Apple
Chapter 13
SCM 302 – Aggregate Planning
7
iPhone
iPod
Macbook
Aggregate Planning Capacity Options
1. Change inventory levels
• Increase in low periods to meet high demand later
• Costs: storage, insurance, handling, obsolescence, and capital
investment
• Shortages may mean lost sales
2. Varying workforce size by hiring or layoffs
• Training and separation costs for hiring and laying off workers
• New workers may have lower productivity
• Laying off workers may lower morale and productivity
3. Varying production rates through overtime or idle time
• May be difficult to meet large increases in demand
• Overtime can be costly and may drive down productivity
• Absorbing idle time may be difficult
4. Subcontracting
• Meet peak demand, may be costly
• Assuring quality and timely delivery may be difficult
• Exposes your customers to a possible competitor
5. Using part-time workers
• Useful for filling unskilled or low skilled positions
Chapter 13
SCM 302 – Aggregate Planning
8
See Table 13.1 for advantages & disadvantages
Aggregate Planning Demand Options
1. Influencing demand
• Use advertising or promotion to increase
demand in low periods
• Attempt to shift demand to slow periods
• May not be sufficient to balance demand and
capacity
2. Back ordering during high-demand
periods
• Requires customers to wait for an order
without loss of goodwill or the order
• Most effective when there are few if any
substitutes for the product or service
• Often results in lost sales
3. Counterseasonal product and service
mixing
• Develop a product mix of counterseasonal
items
• May lead to products or services outside the
company’s areas of expertise
Chapter 13
SCM 302 – Aggregate Planning
9
See Table 13.1 for advantages & disadvantages
ABC Corp. Forecasts Demand for Six Months
Chapter 13
SCM 302 – Aggregate Planning
10
Method for Aggregate Planning
• Select a plan that best meets your chosen objective
• Lowest cost
• Hiring / firing costs
• Inventory carrying costs. Backorder or stock-out costs
• Overtime / slack time costs
• Part time / temporary labor costs. Subcontracting costs
• Highest profit
• Minimum workforce disruption,
• While meeting your requirements (constraints ) e.g.
• no demand is ever backlogged
• must end horizon with certain amount of inventory
• Methods
1. Determine the demand for each period
2. Determine the capacity for regular time, overtime, and subcontracting each period
3. Find labor costs, hiring and layoff costs, and inventory holding costs
4. Consider company policy on workers and stock levels
5. Develop alternative plans and examine their total cost
Chapter 13
SCM 302 – Aggregate Planning
11
Production Planning Strategies
• Chase Strategy
• Workforce levels are adjusted to
match demand requirements over
planning horizon.
• No inventory or backorders
• Level Strategy
• A constant work force level is
maintained over planning horizon.
• Inventory / demand backorders
are built and dissipated.
• Mixed Strategy
• Workforce levels are allowed to
change and inventory/ backorders
can be used.
Demand
Time
Production
Demand
Time
Production
Chapter 13
SCM 302 – Aggregate Planning
12
Back to the ABC Example
Monthly Demand for Apple
Production
Starting Inventory = 0
No specific Ending Inventory Target
Previous Month’s Production = 1050
Costs
Production Cost: $100 per unit
Hiring: $30 per unit hired
Firing: $70 per unit fired
Inventory: $20 per unit in inventory at
the end of the month
Backorders: $50 per unit on backorder
at the end of each month
Other Data
Imagine that you are the assistant to the VP of Mfg and need to
develop different scenarios for the production plan.
What is the best production plan?
Chapter 13
SCM 302 – Aggregate Planning
13
Month Demand
1 600
2 900
3 1200
4 2000
5 1400
6 800
The Chase Strategy
Produce The Required Demand Each Month
Month Demand
1 600
Hire
(Units)
Layoff
(Units)
Production
Costs
($)
Hiring
Costs
($)
Firing
Costs
($)
Total Horizon Cost = 847,500
60,000 31,500
(600)*100=
0
(450)(70)=
2 900 300 0
90,000 9,000 0
(30)(300)=
3 1200 300 0 120,000 9,000 0
4 2000 800 0 200,000 24,000 0
5 1400 0 600 140,000 0 42,000
6 800 0 600 80,000 0 42,000
Horizon Costs = 690,000 42,000 115,500
Production Hiring Firing
0 450
1050-600=450
Chapter 13
SCM 302 – Aggregate Planning
14
Production
600
900
1200
2000
1400
800
(900-600)=
There are many “right”
ways to set up the tables.
It depends on the data
provided and how you like
to organize it.
The Level Strategy With Backorders
Produce the Average Demand Each Period What assumptions does this scenario make?
Month Demand
1 600
2 900
3 1200
4 2000
5 1400
6 800
Production
1150
1150
1150
1150
1150
1150
Cumulative
Demand
(CD)
600
1500
2700
4700
6100
6900
Cumulative
Prod’tion
(CP)
1150
2300
3450
4600
5750
6900
Inventory
Costs
($)
11,000
16,000
15,000
0
0
0
Backorder
Costs
($)
0
0
0
5,000
17,500
0
Prod’ction
Costs
($)
115,500
115,500
115,500
115,500
115,500
115,500
690,000 42,000 22,500
Labor Inventory Backorders
Total L/I/B Costs = 754,500
Don’t forget hiring/firing at start of horizon:
Hire (1150-1050)=100 units @ cost of 30 100(30) =3000
Total Horizon Cost = 757,500
Ending
Inventory
550
800
750
0
0
0
Ending Inventory = max(CP-CD,0)
Ending
Backorders
0
0
0
100
350
0
Ending backorders = max(CD-CP,0)
Average Monthly Demand =1150
Chapter 13
SCM 302 – Aggregate Planning
15
The Level Strategy With No Backorders
What assumptions does this plan make?
Month Demand
1 600
2 900
3 1200
4 2000
5 1400
6 800
Cumulative
Demand
(CD)
600
1500
2700
4700
6100
6900
Cumulative
Prod’tion
(CP)
1220
2440
3660
4880
6100
7320
Inventory
Costs
($)
12,400
18,800
19,200
3,600
0
8,400
Backorder
Costs
($)
0
0
0
0
0
0
Labor
Costs
($)
122,000
122,000
122,000
122,000
122,000
122,000
732,000 62,400 0
Labor Inventory Backorders
Total L/I/B Costs = 794,400
Don’t forget hiring/firing at start of horizon: Hire (1220-1050)=170 workers @ cost of 170(30) =5100
Total Horizon Cost = 799,500
Ending

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