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Chapter 14
Aggregate Sales and Operations Planning

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OBJECTIVES
Sales The

and Operations Planning

Aggregate Operations Plan

Examples:

Chase and Level

strategies

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Exhibit 14.1

Process planning Strategic capacity planning

Long range Intermediate Forecasting & demand range management Manufacturing

Master scheduling

Sales and operations (aggregate) planning Sales plan Aggregate operations plan

Services

Material requirements planning Weekly workforce and customer scheduling Daily workforce and customer scheduling
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Short range
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Order scheduling

Sales and Operations Planning Activities

Long-range planning

Greater than one year planning horizon Usually performed in annual increments

Medium-range planning

Six to eighteen months Usually with weekly, monthly or quarterly increments

Short-range planning

One day to less than six months Usually with weekly or daily increments

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The Aggregate Operations Plan

Main purpose: Specify the optimal combination of production rate (units completed per unit of time) workforce level (number of workers) inventory on hand (inventory carried from previous period) Product group or broad category (Aggregation) This planning is done over an intermediate-range planning period of 3 to18 months

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Balancing Aggregate Demand and Aggregate Production Capacity

10000

Suppose the figure to the right represents forecast demand in units Now suppose this lower figure represents the aggregate capacity of the company to meet demand What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up
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10000 8000 8000 6000 4000 5500 4500 7000 6000

2000
0 Jan Feb Mar 9000 8000 6000 Apr May Jun

10000 8000

6000
4000 2000 0

4500

4000

4000

Jan

Feb

Mar

Apr

May

Jun

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Required Inputs to the Production Planning System

Competitors behavior External capacity Raw material availability Market demand Economic conditions

External to firm

Planning for production

Current physical capacity

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Current workforce

Inventory levels

Activities required for production

Internal to firm

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Key Strategies for Meeting Demand

Chase

Level

Some

combination of the two

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Aggregate Planning Examples: Unit Demand and Cost Data

Suppose we have the following unit demand and cost information:
Demand/mo Jan 4500 Feb 5500 Mar 7000 Apr 10000 May 8000 Jun 6000

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Materials Holding costs Marginal cost of stockout Hiring and training cost Layoff costs Labor hours required Straight time labor cost Beginning inventory Productive hours/worker/day Paid straight hrs/day
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$5/unit $1/unit per mo. $1.25/unit per mo. $200/worker $250/worker .15 hrs/unit $8/hour 250 units 7.25 8
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Cut-and-Try Example: Determining Straight Labor Costs and Output

Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker?

Demand/mo Jun
6000

Jan
4500

Feb
5500

Mar
7000

Apr
10000

May
8000 7.25x22

Productive hours/worker/day Paid straight hrs/day

7.25 8
Mar 21 152.25 1015 1,344

22x8hrsx$8=$140 Jan 8
Days/mo Hrs/worker/mo Units/worker $/worker 22 159.5 1063.33 $1,408

Feb 19 137.75 918.33 1,216

7.25x0.15=48.33 & Apr May Jun 84.33x22=1063.33

21 152.25 1015 1,344 22 159.5 1063.33 1,408 20 145 966.67 1,280

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Chase Strategy (Hiring & Firing to meet demand)

Days/m o Hrs/wo rker/m o Units/wo rker $ /wo rker Jan 22 1 5 9 .5 1 ,0 6 3 .3 3 $ 1 ,4 0 8

Lets assume our current workforce is 7 workers.

First, calculate net requirements for production, or 4500-250=4250 units

Dem and Beg. inv. Net req. Req. wo rkers Hired Fired W o rkfo rce Ending invento ry
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Jan 4 ,5 0 0 250 4 ,2 5 0 3 .9 9 7 3 4 0

Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers
Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired.
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Below are the complete calculations for the remaining months in the six month planning horizon
Days/mo Hrs/worker/mo Units/worker $/worker Jan 22 159.5 1,063 $1,408 Feb 19 137.75 918 1,216 Mar 21 152.25 1,015 1,344 Apr 21 152.25 1,015 1,344 May 22 159.5 1,063 1,408 Jun 20 145 967 1,280

Demand Beg. inv. Net req. Req. workers Hired Fired Workforce Ending inventory
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Jan 4,500 250 4,250 3.997 3 4 0

Feb 5,500 5,500 5.989 2 6 0

Mar 7,000 7,000 6.897 1 7 0

Apr 10,000 10,000 9.852 3 10 0

May 8,000 8,000 7.524 2 8 0

Jun 6,000 6,000 6.207 1 7 0

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Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
Demand Beg. inv. Net req. Req. workers Hired Fired W orkforce Ending inventory Jan 4,500 250 4,250 3.997 3 4 0 Feb 5,500 5,500 5.989 2 6 0 Mar 7,000 7,000 6.897 1 7 0 Apr 10,000 10,000 9.852 3 10 0 May 8,000 8,000 7.524 2 8 0 Jun 6,000 6,000 6.207 1 7 0

Material Labor Hiring cost Firing cost

Jan Feb Mar Apr May Jun $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 400.00 200.00 600.00 750.00 500.00 250.00

Costs 203,750.00 53,958.62 1,200.00 1,500.00

$260,408.62

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Level Workforce Strategy (Surplus and Shortage Allowed)

Lets take the same problem as before but this time use the Level Workforce strategy This time we will seek to use a workforce level of 6 workers

Demand Beg. inv. Net req. W orkers P roduction Ending inventory Surplus Shortage

Jan 4,500 250 4,250 6 6,380 2,130 2,130

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Below are the complete calculations for the remaining months in the six month planning horizon
Jan 4,500 250 4,250 6 6,380 2,130 2,130 Feb 5,500 2,130 3,370 6 5,510 2,140 2,140 Mar 7,000 2,140 4,860 6 6,090 1,230 1,230 Apr 10,000 1,230 8,770 6 6,090 -2,680 2,680 May 8,000 -2,680 10,680 6 6,380 -1,300 1,300 Jun 6,000 -1,300 7,300 6 5,800 -1,500 1,500

Demand Beg. inv. Net req. Workers Production Ending inventory Surplus Shortage

Note, if we recalculate this sheet with 7 workers we would have a surplus

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Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
Jan 4,500 250 4,250 6 6,380 2,130 2,130 Feb 5,500 2,130 3,370 6 5,510 2,140 2,140 Mar 7,000 10 4,860 6 6,090 1,230 1,230 Apr 10,000 -910 8,770 6 6,090 -2,680 2,680 Jan $8,448 31,900 2,130 Feb $7,296 27,550 2,140 Mar $8,064 30,450 1,230 Apr $8,064 30,450 3,350 May 8,000 -3,910 10,680 6 6,380 -1,300 1,300 May $8,448 31,900 1,625 Jun 6,000 -1,620 7,300 6 5,800 -1,500 1,500 Jun $7,680 29,000 1,875

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Note, total costs under this strategy are less than Chase at $260.408.62
$48,000.00 181,250.00 5,500.00 6,850.00 $241,600.00

Labor Material Storage Stockout

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End of Chapter 14

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