SCM 302
OPERATIONS
MANAGEMENT
Aggregate Planning and S&OP
SCM 302 - Aggregate Planning
Chapter 13
Aggregate Planning and S&OP
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.
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SCM 302 - Aggregate Planning
Chapter 13
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?
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SCM 302 - Aggregate Planning
Chapter 13
4
The Operations Planning Hierarchy
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
SCM 302 - Aggregate Planning
Chapter 13
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
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
5
SCM 302 - Aggregate Planning
Chapter 13
S&OP and the Aggregate Plan
Figure 13.2
6
SCM 302 - Aggregate Planning
Chapter 13
Apple
3C products
Business Level
iPhone
Macbook
Product Types
Families
iPod
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
7
SCM 302 - Aggregate Planning
Chapter 13
8
Aggregate Planning Capacity Options
Change inventory levels
1.
Increase in low periods to meet high demand later
Costs: storage, insurance, handling, obsolescence, and capital
investment
• Shortages may mean lost sales
•
•
Varying workforce size by hiring or layoffs
2.
•
•
•
Training and separation costs for hiring and laying off workers
New workers may have lower productivity
Laying off workers may lower morale and productivity
Varying production rates through overtime or idle time
3.
•
•
•
May be difficult to meet large increases in demand
Overtime can be costly and may drive down productivity
Absorbing idle time may be difficult
Subcontracting
4.
•
•
•
Meet peak demand, may be costly
Assuring quality and timely delivery may be difficult
Exposes your customers to a possible competitor
Using part-time workers
5.
•
Useful for filling unskilled or low skilled positions
See Table 13.1 for advantages & disadvantages
SCM 302 - Aggregate Planning
Chapter 13
9
Aggregate Planning Demand Options
1.
Influencing demand
•
•
•
2.
Back ordering during high-demand
periods
•
•
3.
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
•
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
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
See Table 13.1 for advantages & disadvantages
SCM 302 - Aggregate Planning
Chapter 13
ABC Corp. Forecasts Demand for Six Months
10
SCM 302 - Aggregate Planning
Chapter 13
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
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SCM 302 - Aggregate Planning
Chapter 13
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
Production
Time
Demand
Production
Time
12
SCM 302 - Aggregate Planning
Chapter 13
Back to the ABC Example
Monthly Demand for Apple
Month
Demand
1
600
2
900
3
1200
4
2000
5
1400
6
800
Other Data
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: $50 per unit on backorder
at the end of each month
Imagine that you are the assistant to the VP of Mfg and need to
develop different scenarios for the production plan.
What is the best production plan?
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SCM 302 - Aggregate Planning
Chapter 13
14
The Chase Strategy
Produce The Required Demand Each Month
Month
Demand
Hire
Production
(Units)
1
600
600
0
2
900
900
300
3
1200
1200
300
4
2000
2000
5
1400
6
800
Layoff
(Units)
1050-600=450
450
Production
Costs
($)
(600)*100=
60,000
Hiring
Costs
($)
0
Firing
Costs
($)
(450)(70)=
31,500
(30)(300)=
(900-600)=
90,000
9,000
0
0
120,000
9,000
0
800
0
200,000
24,000
0
1400
0
600
140,000
0
42,000
800
0
600
80,000
0
42,000
Production
Hiring
0
Horizon Costs =
690,000
42,000
Total Horizon Cost =
Firing
115,500
847,500
There are many “right”
ways to set up the tables.
It depends on the data
provided and how you like
to organize it.
SCM 302 - Aggregate Planning
Chapter 13
The Level Strategy With Backorders
Produce the Average Demand Each Period
What assumptions does this scenario make?
Average Monthly Demand =1150
Month Demand
Production
Cumulative
Demand
(CD)
1
600
1150
600
1150
550
0
115,500
11,000
0
2
900
1150
1500
2300
800
0
115,500
16,000
0
3
1200
1150
2700
3450
750
0
115,500
15,000
0
4
2000
1150
4700
4600
0
100
115,500
0
5,000
5
1400
1150
6100
5750
0
350
115,500
0
17,500
6
800
1150
6900
6900
0
0
115,500
0
0
Ending Inventory = max(CP-CD,0)
Cumulative
Prod’tion
(CP)
Ending
Inventory
Ending
Backorders
Prod’ction
Costs
($)
Inventory
Costs
($)
Backorder
Costs
($)
Labor
Ending backorders = max(CD-CP,0)
Don’t forget hiring/firing at start of horizon:
Hire (1150-1050)=100 units @ cost of 30 100(30) =3000
690,000
Inventory
42,000
Total L/I/B Costs =
Backorders
22,500
754,500
Total Horizon Cost = 757,500
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SCM 302 - Aggregate Planning
Chapter 13
16
The Level Strategy With No Backorders
What assumptions does this plan make?
Month Demand
Cumulative
Demand
(CD)
Cumulative
Demand
(CD) /
Cumulative No.
of Periods
1
600
600
600
2
900
1500
750
3
1200
2700
900
4
2000
4700
1175
5
1400
6100
1220
6
800
6900
1150
(600)/1=
(600+9000/2=
(600+900+1200)/3
4700/4=
6100/5=
6900/6=
Produ
ction
Cumulative
Prod’tion
(CP)
Ending
Inventory
Ending
Backorders
Labor
Costs
($)
Inventory
Costs
($)
Backorder
Costs
($)
1220
1220
620
0
122,000
12,400
0
1220
2440
940
0
122,000
18,800
0
1220
3660
960
0
122,000
19,200
0
1220
4880
180
0
122,000
3,600
0
1220
6100
0
0
122,000
0
0
1220
7320
420
0
122,000
8,400
0
Maximum = 1330. Produce at this constant level.
Don’t forget hiring/firing at start of horizon: Hire (1220-1050)=170 workers @ cost of 170(30) =5100
Best suited for:
Competitive conditions, e.g. substitute products exist
Seasonal products: candy company
Customer service is important to you
Labor
732,000
Inventory
62,400
Backorders
0
Total L/I/B Costs =
794,400
Total Horizon Cost =
799,500
SCM 302 - Aggregate Planning
Chapter 13
Cumulative Demand and Production
Chase
Level – Allowing Backorders
8000
8000
6000
6000
4000
4000
2000
2000
0
0
1
2
3
4
5
6
1
Month
Cumulative
Demand
Cumulative
Production
3
Month
Level – No Backorders
Legend
2
8000
6000
4000
2000
0
1
2
3
Month
4
5
6
4
5
6
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SCM 302 - Aggregate Planning
Chapter 13
Exercise #1.A THE CHASE STRATEGY
Produce The Required Demand Each Month
Month
Demand Production
1
2800
2
3000
3
2400
4
1200
5
3600
6
2000
Units
Hired
Units
Fired
Production Hiring
Costs
Costs
Firing
Costs
Starting
Inventory
0
Target
Ending
Inventory
Last Month’s
Production
Unit
Production
Cost
Horizon Cost=
Total Horizon Cost=
3000
$200
Hiring Cost
$50
Firing Cost
$75
Inventory
Cost
$60
Backorder
Cost
$150
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SCM 302 - Aggregate Planning
Chapter 13
19
Exercise #1.B. THE LEVEL STRATEGY WITH BACKORDERS
Produce the Average Demand Each Period
Cum.
Cum.
Ending
Product
Ending
Month Demand ion Demand Producti Inventory Back(CD)
on (CP)
orders
Labor
Costs
Inventory
Costs
Back-order
Costs
Production Rate
1
2800
2500
Starting
Inventory
2
3000
2500
Target Ending
Inventory
3
2400
2500
Starting
Workers
3000
4
1200
2500
Labor Cost
$200
5
3600
2500
Hiring Cost
$50
6
2000
2500
Firing Cost
$75
Total
0
Inventory Cost $60
Total L/I/B Costs =
Backorder Cost $150
Total Horizon Cost=
SCM 302 - Aggregate Planning
Chapter 13
Starting and Ending Inventories
• What happens if you start the
planning horizon with inventory
• This can be used to fulfill demand in the
first few months
• What happens if you want to end the
planning horizon with inventory
• This is like having extra “demand” in
the last month that needs to be met
• The trick is to “net out” these
inventories from the demand to
create a net demand for each month
20
SCM 302 - Aggregate Planning
Chapter 13
Back to the Apple Example
Monthly Demand for Apple
Month
Demand
1
600
2
900
3
1200
4
2000
5
1400
6
800
Other Data
Production
Starting Inventory = 1000
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: $50 per unit on backorder
at the end of each month
Now you have a starting inventory of 1000 (all else the same)
What is the best production plan?
21
SCM 302 - Aggregate Planning
Chapter 13
22
The Level Strategy With No Backorders
Positive Starting Inventory
Month Demand
Net
Demand
Cumulative
Net
Demand
(CND)
CND/
Cumulative
No. of
Periods
Produ
ction
Cumulative
Actual
Demand
(CD)
Cumulative
Production
+ Starting
Inventory
(CPI)
Ending
Inventor
y
Ending
Backorders
Productio
n Costs
($)
Inventory
Costs
($)
Backorder
Costs
($)
0
0
1020
600
2020
1420
0
102,000
29,280
0
600-1000=--400
1
600
0
2
900
500
500
250
1020
1500
3040
1540
0
102,000
25,760
0
3
1200
1200
1700
566.67
1020
2700
4060
1360
0
102,000
7,840
0
4
2000
2000
3700
925
1020
4700
5080
380
0
102,000
1,920
0
5
1400
1400
5100
1020
1020
6100
6100
0
0
102,000
0
0
6
800
800
5900
983.33
1020
6900
7120
220
0
102,000
4,080
0
Labor
Inventory
Backorders
612,000
98,400
0
1500-1000=
Maximum = 1104. Produce at this constant level.
Don’t forget hiring/firing at start of horizon: Fire (1020-1050)=30 workers @ cost of 30(70) =2100
Total L/I/B Costs =
710,400
Total Horizon Cost =
712,500
SCM 302 - Aggregate Planning
Chapter 13
Aggregate Planning in Services
• Most services use combination strategies
and mixed plans
• Controlling the cost of labor is critical
• Accurate scheduling of labor-hours to
assure quick response to customer demand
• Use an on-call labor resource to cover
unexpected demand
• Increase flexibility of individual worker
skills
• Increase flexibility in rate of output or
hours of work
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SCM 302 - Aggregate Planning
Chapter 13
Service System:
The Level Strategy With No Backorders
Imagine ABC is a life insurance company.
Assuming they never wanted back-orders how
could a level strategy be implemented?
Month
Demand
No. of units
produced
Labor cost
200,000
1
600
2000
2
900
2000
3
1200
2000
4
2000
2000
5
1400
2000
6
800
2000
Maximum = 2000
Why can’t we use the approach from before?
200,000
=max {cumulative demand/cumulative no. of periods}
200,000
Must have enough staff to cover the busiest
period.
200,000
Assume demand is given in terms of no. of
insurance agent working hours needed.
200,000
200,000
Total Horizon Cost =
1,228,500
Therefore 2000 units needed
Don’t forget hiring/firing at start of horizon: Hire (2000-1050)=950 workers @ cost of 950(30) =28500
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SCM 302 - Aggregate Planning
Chapter 13
$!#%…There’s Way Too Many Plans I
have to Evaluate
• Optimization software exists to
make planning better and faster
• Can set up the production planning
problem as a linear program
• Use software to solve
• Almost always, we want to
modify the mathematically
optimal plan
• No math model captures all the real
world issues
• Managers may need to modify the
plan based on their insights
25
SCM 302 - Aggregate Planning
Chapter 13
Sales and Operations Planning is a Crucial
Business Process
Sales/Marketing Forecasts
Operational
capabilities/costs
Planning, Negotiation
and Revisions
Final Agreed
Plan
26
SCM 302 - Aggregate Planning
Chapter 13
SOP Seems to Assume Forecasts are Perfect
But We Know Forecasts are Wrong
Use Safety Stock
Set safety stock targets for the
expected inventory on hand at
the end of each month
• Safety stock should be high
enough to buffer against
forecast uncertainty to a
desired probability
Rolling Horizon Planning
Review production planning
on a monthly basis to
incorporate updated forecasts
• See following slides
27
SCM 302 - Aggregate Planning
Chapter 13
Rolling Horizon Planning
Revise Plan on a Monthly Basis Given Updated Forecasts
1.
Beginning of January: Do production plan for the year. Implement the January plan
Jan
2.
April
May
June
July
August
Sept.
Oct.
Nov
Dec
March
April
May
June
July
August
Sept.
Oct.
Nov
Dec
Jan
(next year)
Beginning of March 2010: Update demand forecasts and do production plan for the
following 12 months. Implement March plan.
March
4.
March
Beginning of February: Update demand forecasts. Do production plan for the
following 12 months. Implement February plan.
Feb
3.
Feb
April
etc. etc.
May
June
July
August
Sept.
Oct.
Nov
Dec
Jan
Feb
(next year) (next year)
28
SCM 302 - Aggregate Planning
Chapter 13
Changing the Plan after a Forecast Update
• What if you commit on Jan. 1 to production in Feb. and it’s too late to change these on Feb. 1?
• E.g. hire a subcontractor to produce 200 units in Feb., but forecast is updated to 100.
• Plans in the frozen zone (e.g. next 2 months) cannot be changed, even if forecast is updated.
• Vary by company: those with more flexibility can have shorter frozen zones
• Vary by type of planning decision
• e.g. subcontracting plans be frozen 3 months ahead but overtime decisions only 1 month ahead
1. Beginning of January: Do production plan for the year. Decisions about January and February are
frozen (i.e. cannot be changed at later date).
Jan
Feb
March
April
May
June
July
August
Sept.
Oct.
Nov
Dec
2. Beginning of February: Update demand forecasts. Do production plan for following 12 months.
Not allowed change decision already made for February. Decisions about March are now frozen
Feb
March
April
May
June
July
August
Sept.
Oct.
Nov
Dec
Jan
(next year)
3. Beginning of March. Update demand forecasts and do production plan for following 12 months.
Not allowed change decision already made for March. Decisions about April are now frozen
March
4. etc. etc.
April
May
June
July
August
Sept.
Oct.
Nov
Dec
Jan 2010
Feb
(next year)
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SCM 302 - Aggregate Planning
Chapter 13
Short Term Planning May Be in Weeks
not Months
1. Beginning of January: Do production plan for the year. Decisions about January and February broken
down into individual weeks. Decision for March, April etc are at the month level
Jan
Feb
March
April
May
June
July
August
Sept.
Oct.
Nov
Dec
Week 1
Week 2
Week 3
Week 4
Week 5
Week 6
Week 7
Week 8
Showing example with a 6
week frozen zone
2. Beginning of February 2010: Update forecasts. Do production plan next 12 months. Decisions about
February and March broken down into individual weeks. Decision for April, May, etc. are at the month
level
Feb
March
April
May
June
July
August
Sept.
Week 5
Week 6
Week 7
Week 8
Week 9
Week 10 Week 11 Week 12
Oct.
Nov
Dec
Jan
(next year)
Showing example with a 6
week frozen zone
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SCM 302 - Aggregate Planning
Chapter 13
Aggregation & Disaggregation
• Sounds like an awful lot of data to collect!!!
• Sales/Marketing: Forecasts for each product for the next 12-18 months
• Operations: capabilities and current costs
•
•
•
•
Current Capacities/ Inventories
Capacity adjustment options
Capacity, Inventory, Labor costs
Existing commitments
• Companies reduce the data needed using aggregation
• Toyota does not need to know whether car will be red or blue when sourcing components
• Grouping similar products reduces complexity of the planning problem
• Grouping similar products companies can increase plan accuracy. Why?
• Demand side aggregation
• Group products (or customer) into families sharing similar sales prices, demand patterns
• E.g. Plan Toyota Corollas rather than Toyota Corolla CE, LE and S types
• Supply side aggregation
• Group products using similar resources (equipment, labor, etc.), processing capabilities or costs.
• E.g. Plan plant’s production rather than production for each individual assembly line.
• At some point, the aggregate plan needs to be disaggregated for production scheduling
• E.g. The plant eventually needs to know whether it is building a CE, LE or S Corolla
• Disaggregation often occurs for the initial 0-3 months of a plan
• Because decisions regarding actual products and resources need to be finalized (frozen)
31
SCM 302 - Aggregate Planning
Chapter 13
32
SOP Exercise #2.A. THE CHASE STRATEGY
Produce The Required Demand Each Month
Month
Num.
Num.
Workers Workers Workers
Demand
(before
(after
Hired
Rounding) Rounding)
1
600
2
500
3
1400
4
1200
5
1100
6
500
Workers
Fired
Labor
Costs
Hiring
Costs
Firing
Costs
Production
Rate
Starting
Inventory
Target
Ending
Inventory
Starting
Workers
15
0
70
Labor Cost $1,600
Hiring Cost
$500
Firing Cost $1,000
Horizon Cost=
Total Horizon Cost=
Inventory
Cost
$20
Backorder
Cost
$50
SCM 302 - Aggregate Planning
Chapter 13
33
SOP EXERCISE #2.B. THE LEVEL STRATEGY WITH BACKORDERS
Produce the Average Demand Each Period
Cum.
Cum.
Ending
Month Demand Workers Demand Production
Inventory
(CD)
(CP)
1
Ending
Backorders
Labor
Costs
Inventory
Costs
600
2
500
3
1400
4
1200
5
1100
6
500
Total L/I/B Costs =
Total Horizon Cost=
Backorder
Costs
Production
Rate
15
Starting
Inventory
0
Starting
Workers
70
Labor Cost
$1,600
Hiring Cost
$500
Firing Cost
$1,000
Inventory
Cost
$20
Backorder
Cost
$50
SCM 302 - Aggregate Planning
Chapter 13
34
SOP EXERCISE #2.C. THE LEVEL STRATEGY WITH NO BACKORDERS
Produce the Average Demand Each Period
Cum.
Cum.
Ending
Month Demand Workers Demand Production
Inventory
(CD)
(CP)
1
Ending
Backorders
Labor
Costs
Inventory
Costs
600
2
500
3
1400
4
1200
5
1100
6
500
Total L/I/B Costs =
Total Horizon Cost=
Backorder
Costs
Production
Rate
15
Starting
Inventory
0
Starting
Workers
70
Labor Cost
$1,600
Hiring Cost
$500
Firing Cost
$1,000
Inventory
Cost
$20
Backorder
Cost
$50