Supply Chain Chapter 8: Aggregate Planning in a Supply Chain
There are essentially three distinct aggregate planning strategies for achieving balance among these costs.
1. Chase strategy—using capacity as the lever: 2. Flexibility strategy—using utilization as the lever: 3. Level strategy—using inventory as the lever:
Constraints
1. Workforce, hiring, and layoff constraints 2. Capacity constraints 3. Inventory balance constraints 4. Overtime limit constraints
Master Production Schedule
From an aggregate plan, a planner must disaggregate the available information and build a rough master production schedule (MPS) that identifies the batches produced in each period at the level of each product family. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 224). Pearson Education. Kindle Edition.
The aggregate planner's main objective is to identify the following operational parameters over the specified time horizon:.
Production rate: the number of units to be completed per unit time (such as per week or per month) Workforce: the number of workers or units of labor capacity required Overtime: the amount of overtime production planned Machine capacity level: the number of units of machine capacity needed for production Subcontracting: the subcontracted capacity required over the planning horizon Backlog: demand not satisfied in the period in which it arises, but is carried over to future periods Inventory on hand: the planned inventory carried over the various periods in the planning horizon
Aggregate Planning
a process by which a company determines planned levels of capacity, production, subcontracting, inventory, stockouts, and even pricing over a specified time horizon. The goal of aggregate planning is to build a plan that satisfies demand while maximizing profit. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 210). Pearson Education. Kindle Edition.
Safety inventory
as inventory held to satisfy demand that is higher than forecast Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 223). Pearson Education. Kindle Edition.
Safety capacity
capacity used to satisfy demand that is higher than the forecast
Linear Programming
finds the solution that creates the highest profit while satisfying the constraints that the company faces.
The objective function is to
minimize the total cost
Workforce hired/laid off
used to determine any labor issues likely to be encountered Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 212). Pearson Education. Kindle Edition.
Backlog/stockout quantity
used to determine customer service levels Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 212). Pearson Education. Kindle Edition.
Production quantity from regular time, overtime, and subcontracted time: Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 212). Pearson Education. Kindle Edition.
used to determine number of workers and supplier purchase levels Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 212). Pearson Education. Kindle Edition.
Inventory Held
used to determine the warehouse space and working capital required Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 212). Pearson Education. Kindle Edition.
Machine capacity increase/decrease
used to determine whether new production equipment should be purchased or available equipment idled Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 212). Pearson Education. Kindle Edition.
An aggregate planner requires the following information:
• Aggregate demand forecast Ft for each Period t in a planning horizon that extends over T periods • Production costs • Labor costs: regular time ($/hour), and overtime costs ($/hour) • Cost of subcontracting production ($/unit or $/hour) • Cost of changing capacity; specifically, cost of hiring/laying off workforce ($/worker) and cost of adding or reducing machine capacity ($/machine) • Labor/machine hours required per unit • Inventory holding cost ($/unit/period) • Stockout or backlog cost ($/unit/period) • Constraints • Limits on overtime • Limits on layoffs • Limits on capital available • Limits on stockouts and backlogs • Constraints from suppliers to the enterprise
In general, a company attempts to use a combination of the three costs to best meet demand. Therefore, the fundamental trade-offs available to a planner are among the following: Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 213). Pearson Education. Kindle Edition.
• Capacity (regular time, overtime, subcontracted) • Inventory • Backlog/lost sales because of delay Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 213). Pearson Education. Kindle Edition.
The cost incurred has the following components
• Regular-time labor cost • Overtime labor cost • Cost of hiring and layoffs • Cost of holding inventory • Cost of stocking out • Cost of subcontracting • Material cost Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 216). Pearson Education. Kindle Edition.
A company can create a buffer for forecast error using safety inventory and safety capacity in a variety of ways, Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 224). Pearson Education. Kindle Edition.
• Use overtime as a form of safety capacity. • Carry extra workforce permanently as a form of safety capacity. • Use subcontractors as a form of safety capacity. • Build and carry extra inventories as a form of safety inventory. • Purchase capacity or product from an open or spot market as a form of safety capacity. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 224). Pearson Education. Kindle Edition.