what are some key issues to consider when picking an aggregate unit of analysis?

AGGREGATE PLANNING

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Aggregate planning is the process of developing, analyzing, and maintaining a preliminary, approximate schedule of the overall operations of an organization. The amass plan generally contains targeted sales forecasts, production levels, inventory levels, and customer backlogs. This schedule is intended to satisfy the demand forecast at a minimum cost. Properly done, aggregate planning should minimize the effects of shortsighted, day-to-day scheduling, in which small amounts of material may be ordered i week, with an accompanying layoff of workers, followed by ordering larger amounts and rehiring workers the next week. This longer-term perspective on resource use tin can help minimize short-term requirements changes with a resulting toll savings.

In simple terms, amass planning is an endeavour to remainder capacity and demand in such a fashion that costs are minimized. The term "aggregate" is used because planning at this level includes all resources "in the aggregate;" for example, equally a product line or family. Aggregate resources could exist total number of workers, hours of machine fourth dimension, or tons of raw materials. Aggregate units of output could include gallons, feet, pounds of output, as well as aggregate units appearing in service industries such as hours of service delivered, number of patients seen, etc.

Aggregate planning does not distinguish among sizes, colors, features, and so forth. For example, with auto manufacturing, aggregate planning would consider the total number of cars planned for not the individual models, colors, or options. When units of assemblage are difficult to determine (for example, when the variation in output is extreme) equivalent units are usually determined. These equivalent units could be based on value, cost, worker hours, or some similar measure.

Aggregate planning is considered to be intermediate-term (equally opposed to long- or short-term) in nature. Hence, most aggregate plans cover a period of 3 to 18 months. Aggregate plans serve equally a foundation for future short-range blazon planning, such equally production scheduling, sequencing, and loading. The primary production schedule (MPS) used in fabric requirements planning (MRP) has been described equally the amass plan "disaggregated."

Steps taken to produce an amass programme begin with the determination of demand and the determination of current chapters. Capacity is expressed as full number of units per fourth dimension period that can be produced (this requires that an average number of units be computed since the full may include a product mix utilizing distinctly unlike production times). Demand is expressed as total number of units needed. If the two are non in rest (equal), the firm must decide whether to increase or decrease capacity to meet demand or increase or decrease demand to meet capacity. In gild to accomplish this, a number of options are bachelor.

Options for situations in which demand needs to be increased in order to match capacity include:

1. Pricing. Varying pricing to increase demand in periods when demand is less than peak. For case, matinee prices for movie theaters, off-season rates for hotels, weekend rates for telephone service, and pricing for items that experience seasonal demand.
2. Promotion. Advertising, straight marketing, and other forms of promotion are used to shift need.
3. Back ordering. By postponing delivery on current orders demand is shifted to period when chapters is not fully utilized. This is really only a form of smoothing need. Service industries are able to polish demand by taking reservations or past making appointments in an effort to avoid walk-in customers. Some refer to this as "segmentation" demand.
4. New demand creation. A new, but complementary demand is created for a product or service. When eating place customers accept to expect, they are frequently diverted into a complementary (simply non gratuitous) service, the bar. Other examples include the addition of video arcades within movie theaters, and the expansion of services at convenience stores.

Options which tin can exist used to increase or decrease capacity to match current need include:

1. Hire/lay off. By hiring additional workers as needed or by laying off workers not currently required to meet need, firms can maintain a residue between chapters and need.
2. Overtime. By asking or requiring workers to work actress hours a day or an extra day per week, firms tin can create a temporary increment in capacity without the added expense of hiring additional workers.
3. Part-fourth dimension or casual labor. By utilizing temporary workers or coincidental labor (workers who are considered permanent simply only work when needed, on an on-call basis, and typically without the benefits given to full-time workers).
4. Inventory. Finished-goods inventory can be built upwards in periods of slack demand and then used to fill up demand during periods of loftier demand. In this manner no new workers accept to be hired, no temporary or coincidental labor is needed, and no overtime is incurred.
5. Subcontracting. Frequently firms cull to allow another manufacturer or service provider to provide the product or service to the subcontracting business firm's customers. By subcontracting piece of work to an alternative source, additional chapters is temporarily obtained.
6. Cantankerous-training. Cross-trained employees may be able to perform tasks in several operations, creating some flexibility when scheduling chapters.
7. Other methods. While varying workforce size and utilization, inventory buildup/backlogging, and subcontracting are well-known alternatives, in that location are other, more novel ways that find use in industry. Amidst these options are sharing employees with counter-cyclical companies and attempting to detect interesting and meaningful projects for employees to practise during slack times.

AGGREGATE PLANNING STRATEGIES

There are ii pure planning strategies available to the aggregate planner: a level strategy and a chase strategy. Firms may choose to employ one of the pure strategies in isolation, or they may opt for a strategy that combines the ii.

LEVEL STRATEGY.

A level strategy seeks to produce an amass programme that maintains a steady production rate and/or a steady employment level. In order to satisfy changes in client demand, the firm must raise or lower inventory levels in anticipation of increased or decreased levels of forecast need. The firm maintains a level workforce and a steady charge per unit of output when demand is somewhat low. This allows the business firm to establish higher inventory levels than are currently needed. As need increases, the business firm is able to continue a steady production rate/steady employment level, while assuasive the inventory surplus to blot the increased demand.

A second alternative would be to use a backlog or backorder. A backorder is just a hope to deliver the product at a later engagement when it is more readily available, commonly when capacity begins to catch upwardly with diminishing demand. In essence, the backorder is a device for moving demand from 1 menses to some other, preferably one in which demand is lower, thereby smoothing need requirements over time.

A level strategy allows a firm to maintain a abiding level of output and however see need. This is desirable from an employee relations standpoint. Negative results of the level strategy would include the toll of excess inventory, subcontracting or overtime costs, and backorder costs, which typically are the toll of expediting orders and the loss of client goodwill.

Hunt STRATEGY.

A chase strategy implies matching demand and capacity period by period. This could issue in a considerable amount of hiring, firing or laying off of employees; insecure and unhappy employees; increased inventory carrying costs; bug with labor unions; and erratic utilization of plant and equipment. It likewise implies a great bargain of flexibility on the firm's role. The major advantage of a chase strategy is that it allows inventory to be held to the lowest level possible, and for some firms this is a considerable savings. Almost firms embracing the only-in-fourth dimension production concept utilize a chase strategy approach to aggregate planning.

Most firms find information technology advantageous to utilize a combination of the level and hunt strategy. A combination strategy (sometimes chosen a hybrid or mixed strategy) tin can exist found to better meet organizational goals and policies and achieve lower costs than either of the pure strategies used independently.

TECHNIQUES FOR Aggregate
PLANNING

Techniques for aggregate planning range from informal trial-and-error approaches, which ordinarily employ elementary tables or graphs, to more formalized and advanced mathematical techniques. William Stevenson's textbook Production/Operations Management contains an informal but useful trial-and-error process for aggregate planning presented in outline form. This general procedure consists of the following steps:

1. Make up one's mind demand for each menstruum.
2. Determine capacity for each menstruum. This capacity should friction match demand, which ways it may crave the inclusion of overtime or subcontracting.
3. Identify visitor, departmental, or spousal relationship policies that are pertinent. For example, maintaining a certain condom stock level, maintaining a reasonably stable workforce, backorder policies, overtime policies, inventory level policies, and other less explicit rules such as the nature of employment with the private manufacture, the possibility of a bad image, and the loss of goodwill.
4. Make up one's mind unit costs for units produced. These costs typically include the basic production costs (fixed and variable costs as well every bit straight and indirect labor costs). Also included are the costs associated with making changes in capacity. Inventory holding costs must also be considered, as should storage, insurance, taxes, spoilage, and obsolescence costs. Finally, backorder costs must be computed. While difficult to measure out, this generally includes expediting costs, loss of customer goodwill, and acquirement loss from cancelled orders.
5. Develop alternative plans and compute the cost for each.
6. If satisfactory plans sally, select the 1 that all-time satisfies objectives. Frequently, this is the plan with the least toll. Otherwise, return to pace five.

An instance of a completed informal aggregate programme tin be seen in Figure 1. This programme is an example of a program determined utilizing a level strategy. Discover that employment levels and output levels remain constant while inventory is allowed to build up in earlier periods merely to be drawn back down in later periods as demand increases. Also, note that backorders are utilized in order to avert overtime or subcontracting. The computed costs for the individual variables of the plan are equally follows:

Output costs:

Regular time = $5 per unit

Overtime = $eight per unit

Subcontracted = $12 per unit

Other costs:

Inventory carrying cost = $iii per unit per menstruation applied to boilerplate inventory

Backorders = $10 per unit per period

Cost of aggregate programme utilizing a level strategy:

Output costs:

Regular time = $five × ane,500 = $seven,500

Overtime = $eight × 0 = 0

Subcontracted = $10 × 0 = 0

Other costs:

Inventory carrying cost = $3 × 850 = $2,400

Backorders = $x × 100 = $i,000

Total price = $x,900

A second example, shown in Figure two, presents the same scenario as in Figure 1 but demonstrates the use of a combination strategy (i.e., a combination of level and chase) to meet demand and seek to minimize costs. For this example, permit's assume that company

Figure 1

policy prevents us from utilizing backorders and limits our program to no more than 50 units of overtime per period. Notice that the regular output level is abiding, implying a level workforce, while overtime and subcontracting are used to come across demand on a period by period basis (hunt strategy). I will notice that the cost of the combination plan is slightly lower than the cost of the level plan.

Output costs:

Regular time = $5 × i,200 = $6,000

Overtime = $8 × 100 = 800

Subcontracted = $12 × 250 = 2,500

Other costs:

Inventory carrying price = $3 × 325 = 975

Backorders = $10 × 0 = 0

Full price = $x,275

MATHEMATICAL APPROACHES
TO AGGREGATE PLANNING

The following are some of the improve known mathematical techniques that can be used in more complex aggregate planning applications.

LINEAR PROGRAMMING.

Linear programming is an optimization technique that allows the user to find a maximum profit or revenue or a minimum cost based on the availability of limited resources and sure limitations known as constraints. A special blazon of linear programming known as the Transportation Model can exist used to obtain amass plans that would allow balanced capacity and demand and the minimization of costs. However, few existent-world aggregate planning decisions are compatible with the linear assumptions of linear programming. Supply Chain Direction: Strategy, Planning and Operation, by Sunil Chopra and Peter Meindl, provides an excellent example of the utilise of linear programming in aggregate planning.

MIXED-INTEGER PROGRAMMING.

For aggregate plans that are prepared on a product family unit ground, where the plan is essentially the summation of the plans for individual product lines, mixed-integer programming may prove to exist useful. Mixed-integer programming tin can provide a method for determining the number of units to be produced in each production family.

LINEAR DECISION Rule.

Linear decision rule is another optimizing technique. Information technology seeks to minimize full production costs (labor, overtime, hiring/lay off, inventory carrying toll) using a gear up of cost-approximating functions (three of which are quadratic) to obtain a single quadratic equation. Then, past using calculus, ii linear equations can be derived from the quadratic equation, one to exist used to plan the output for each period and the other for planning the workforce for each period.

MANAGEMENT COEFFICIENTS MODEL.

The management coefficients model, formulated past E.H. Bowman, is based on the suggestion that the product rate for

Figure two

any period would exist prepare by this general decision rule:
P _t = aW _t-1 − bI _{t -i} + cF _t+1 + G, where
P _t = the production rate set for menses t
Westward _{t - i} = the workforce in the previous period
I _t-1 = the ending inventory for the previous menstruation
F _t+ane = the forecast of demand for the adjacent menstruation
a, b, c, and K are constants

It and then uses regression assay to estimate the values of a, b, c, and K. The cease event is a decision rule based on past managerial beliefs without any explicit price functions, the assumption existence that managers know what is important, even if they cannot readily state explicit costs. Essentially, this method supplements the application of experienced judgment.

SEARCH DECISION RULE.

The search decision rule methodology overcomes some of the limitations of the linear cost assumptions of linear programming. The search decision rule allows the user to state cost information inputs in very general terms. Information technology requires that a computer program be synthetic that volition unambiguously evaluate any production plan's cost. It then searches among alternative plans for the 1 with the minimum cost. All the same, unlike linear programming, there is no assurance of optimality.

SIMULATION.

A number of simulation models can be used for aggregate planning. By developing an aggregate plan within the environment of a simulation model, it can be tested under a variety of conditions to detect acceptable plans for consideration. These models can also exist incorporated into a conclusion support organisation, which tin aid in planning and evaluating alternative control policies. These models can integrate the multiple conflicting objectives inherent in manufacturing strategy past using different quantitative measures of productivity, customer service, and flexibility.

FUNCTIONAL OBJECTIVE SEARCH APPROACH.

The functional objective search (FOS) system is a computerized aggregate planning arrangement that incorporates a broad range of actual planning conditions. It is capable of realistic, depression-cost operating schedules that provide options for attaining dissimilar planning goals. The organisation works by comparing the planning load with available capacity. After direction has called its desired actions and associated planning objectives for specific load weather condition, the system weights each planning goal to reflect the functional emphasis behind its achievement at a certain load condition. The estimator then uses a computer search to output a plan that minimizes costs and meets delivery deadlines.

Aggregate PLANNING IN SERVICES.

For manufacturing firms the luxury of building upwards inventories during periods of slack demand allows coverage of an anticipated time when need will exceed chapters. Services cannot be stockpiled or inventoried and then they practice non accept this option. Also, since services are considered "perishable," any capacity that goes unused is essentially wasted. An empty hotel room or an empty seat on a flying cannot be held and sold after, as can a manufactured item held in inventory.

Service capacity tin can also be very difficult to measure. When capacity is dictated somewhat past machine capability, reasonably authentic measures of capacity are not extremely difficult to develop. However, services generally have variable processing requirements that go far difficult to institute a suitable mensurate of capacity.

Historically, services are much more labor intensive than manufacturing, where labor averages 10 percent (or less) of total cost. This labor intensity can actually be an advantage because of the multifariousness of service requirements an individual can handle. This can provide quite a degree of flexibility that tin can make aggregate planning easier for services than manufacturing.

WHAT'S NEW IN AGGREGATE PLANNING.

Rudy Hung, in his Production and Inventory Management Journal article entitled "Annualized Hours and Aggregate Planning," presents a new, useful idea for amass planning called Annualized Hours (AH). Under AH, employees are contracted to work for a certain number of hours (say 1,800 hours) per year, for a sure sum of money. Employees can exist asked to put in more hours during busy periods and fewer hours in slow periods. Typically, employees receive equal monthly or weekly payments so that hourly workers in issue take gained salaried status. Overtime is paid only when employees accept worked beyond their almanac hours.

AH is also known as flexiyear, as it can exist seen equally an extension of flextime, in which employees can vary their work hours within limits. This concept is used almost exclusively in Europe, peculiarly in the United Kingdom. The Scandinavian lurid and paper industries pioneered AH in the mid-1970s. Around that time, some Due west German firms, particularly those in the retail industry, also used AH.

AH gives employers much flexibility. AH serves to cutting labor costs by offer employees an annual sum less than their previous almanac earnings with overtime. Even though their total earnings may fall, their boilerplate earnings per hour would remain the aforementioned or fifty-fifty ascent. Effective earnings could rise even more so if the employer is unable to consume all contracted hours. Employees have greater income security with no worries about layoffs. There is likewise increased morale because bluish-collar workers are at present salaried.

Some other development affecting aggregate planning is postponement. This refers to delaying the "finish" of a product until the moment of sale. Firms that rely on the postponement strategy, such as PC-maker Dell Inc. or wear franchise Benetton Group Sp.A., depend upon the availability of aggregate inventories of components that can be assembled to order shortly after, or fifty-fifty immediately, as an order is taken.

R. Anthony Inman

FURTHER READING:

Chopra, Sunil and Peter Meindl. Supply Chain Management: Strategy, Planning, and Operation. Upper Saddle River, NJ: Pearson Prentice Hall, 2004.

Dejonckheere, J., S.M. Disney, M. Lambrecht, and D.R. Towill. "The Dynamics of Amass Planning." Production Planning & Command 14, no. half-dozen, (2003): 497–516.

Finch, Byron J. Operations At present. Boston: McGraw-Hill Irwin, 2004.

Hung, Rudy. "Annualized Hours and Aggregate Planning." Production and Inventory Management Journal 38, no. 4 (1997).

Iyer, Ananth V., Vinayak Deshpande, and Zhengping Wu. "A Postponement Model for Demand Management." Management Science 49, no. viii, (2003): 983–1002.

Stevenson, William J. Production Operations Direction. Boston: McGraw-Loma Irwin, 2004.

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