Lecture No. 10

Held on: Wednesday, August 30, 2000

Notes by: Gaurav Singh

 

Aggregate Production Planning

Production may be defined as the process of converting raw materials into finished products. Management decisions regarding production planning may be classified in 3 categories.

1.      Strategic planning decisions.

2. Tactical planning decisions.
3. Operational decisions.

Tactical planning decisions: They focus on resource allocation process. Resource such as capacity, workforce availability, storage and distribution resources are focussed upon. Decisions in this category include

1.      Utilization of regular and overtime labor.

2.      Allocation of capacity to product families.

3.      Accumulation of seasonal inventories.

4.      Definition of distribution channels.

5.      Selection of transportation alternatives.

Models used to aid in tactical decision making are referred to as Aggregate production planning models.

Three basic ways of responding to changing demand

1.      Change the production rate to closely meet demand. This is called chase strategy. This can be done through

a)      Subcontracting.

b)      Hiring people.

c)      Overtime.

2.      Hold the production rate constant and use inventory to satisfy demand peaks.

3.      Turn away some demand permanently.

 

Costs to be used to compare alternate production plans include:

1.      Costs of over supply, inventory holding costs, obsolescence etc.

2.      Costs of not supplying the demand or not supplying it on time.

3.      Regular production cost.

4.      Cost of alternate methods of production for example using subcontracting, overtime, and hiring additional workers.

Subcontracting may raise issues such as:

---Why does supplier have extra capacity if demand is generally high.

---Why are their marginal costs of production lower.

Decisions to be made to structure a Production Planning model:

1.      Time units: Typically weeks or months. Larger the unit lower the computational complexity. Smaller the unit, lesser the work needed for detailed scheduling.

2.      Time horizon: If seasonality is a significant factor then one year or more is needed. With increasing demand the time horizon may be significantly higher.

3.      Level of aggregation (Products) Typically one aggregate product is considered.

4.      Level of aggregation (Facilities) Most aggregate models treat facilities as if they were single resource. For example treat workforce as one resource.

5.      Frequency of replanning.