Operations

Management
Aggregate Planning
Chapter 13

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♦ AGG RE GATE P LANNI NG S TR ATE GI ES
♦ Cap acit y Option s
♦ Dem and Opt ions
♦ Mixing O ptions to Dev elop a Plan

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♦ ME THO DS FOR A GGR EG ATE PLAN NI NG
♦ Gra phic al a nd Cha rt ing M eth od s
♦ Mat hem at ic al Ap pro ac hes to Pl anning

♦ AGG RE GA TE P LANN ING I N S ERV ICE S

♦ Re st aur an ts
♦ Ho sp ital
♦ Miscellan eou s Se rv ice s
♦ Na tion al Cha ins of S ma ll Se rv ice F irms
♦ Airli ne I nd ust ry

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 An heuser- Bu sch
♦ Anheuser-Busch produces nearly 40% of the beer
consumed in the U.S.
♦ Matches fluctuating demand by brand to specific
plant, labor, and inventory capacity
♦ High facility utilization requires
♦ meticulous cleaning between batches
♦ effective maintenance
♦ efficient employees
♦ efficient facility scheduling

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 Ag gregate Pl anning Re quir es

♦ Logical overall unit for measuring sales and

outputs
♦ Forecast of demand for intermediate planning
period in these aggregate units
♦ Method for determining costs
♦ Model that combines forecasts and costs so that
planning decisions can be made

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 Pl anning
♦ Setting goals & objectives
♦ Example: Meet demand within the limits
of available resources at the least cost
♦ Determining steps to achieve goals
♦ Example: Hire more workers
♦ Setting start & completion dates
♦ Example: Begin hiring in Jan.; finish, Mar.
♦ Assigning responsibility

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 Pl anning Tasks and
Re sponsib ilitie s

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 Pl an ning Hori zon s
Re sponsib l
Short- ran ge p la ns e:
Job a ssign ments Ope ratio ns
Order in g man ag ers
Job s che dul in g In te rmed ia te -range p la ns
Sale s p la nn in g Re sponsib le:
Dispatc hi ng
Prod ucti on p la nnin g an d Top
bu dge tin g executives
Re spo nsib le Lo ng- ran ge p la ns
: O pe rat ions Sett in g e mpl oy ment , in vento ry,
R&D
man age rs , sub con tr actin g le vels
New p rodu ct pl ans
superv isors , Ana ly zin g o per ati ng p la ns
Capi ta l e xpens es
foremen
Fa cil ity l oc at io n, ex pan sio n

Tod ay 3 Mon th s 1 ye ar 5 ye ar s
Plan ning Hor iz on

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 Rela tio nships of the Agg re gate
Plan
Marketplace Product Research and
and Demand Decisions Technology

Demand Process
Forecasts, Planning & Capacity
orders Decisions Work Force
Raw Materials
Available
Agg re gat e Inventory On
Pla n fo r Hand
Pro du ctio n External
Capacity
Master Subcontractors
Production
Schedule, and MRP systems

Detailed Work
Schedules

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 Wha t’s Nee de d f or Aggr eg ate
Pla nnin g
A mathematically based aggregate planning model requires
considerable:
♦ time
♦ problem definition
♦ model development
♦ model verification
♦ model application
♦ expertise
♦ people who understand the problem
♦ people who understand both the modeling process, and the
specific model
♦ money
♦ money to pay for all of the above
♦ often requires funding for several people for several months!
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 Ag gregate Pl anning

♦ Provides the quantity and timing of production for

intermediate future
♦ Usually 3 to 18 months into future
♦ Combines (‘aggregates’) production
♦ Often expressed in common units
♦ Example: Hours, dollars, equivalents
(e.g., FTE students)
♦ Involves capacity and demand variables

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 Ag gre gate Pl anning G oals
♦ Meet demand
♦ Use capacity efficiently
♦ Meet inventory policy
♦ Minimize cost
♦ Labor
♦ Inventory
♦ Plant & equipment
♦ Subcontract

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 The Ex tre me s

Le vel Cha se
St ra teg y St rat eg
y

Production rate Production

is constant equals
demand

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 Ag gregate Pl anning
St rategie s
Pu re St ra tegies
♦ Capacity Options — change capacity:
♦ changing inventory levels
♦ varying work force size by hiring or layoffs
♦ varying production capacity through overtime or idle
time
♦ subcontracting
♦ using part-time workers

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 Ag gregate Pl anning
St rategie s
Pu re St ra tegies
♦ Demand Options — change demand:
♦ influencing demand
♦ backordering during high demand periods
♦ counterseasonal product mixing

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 Ag gregate Sc heduli ng
Optio ns - Ad vantages and
Dis advantages
Option Advantage Disadvantage Some
Comments
Changing Changes in Inventory Applies mainly
inventory levels human resources holding costs; to production,
are gradual, not Shortages may not service,
abrupt result in lost operations
production sales
changes

Varying Avoids use of Hiring, layoff, Used where size

workforce size other alternatives and training of labor pool is
by hiring or costs large
layoffs

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 Ad vanta ges/Di sadvantages -
Co ntinued
Option Advantage Disadvantage Some
Comments
Varying Matches seasonal Overtime Allows
production rates fluctuations premiums, tired flexibility within
through overtime without workers, may not the aggregate
or idle time hiring/training meet demand plan
costs
Subcontracting Permits Loss of quality Applies mainly
flexibility and control; reduced in production
smoothing of the profits; loss of settings
firm's output future business

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 Ad vanta ges/Di sadvantages -
Co ntinued
Option Advantage Disadvantage Some
Comments
Using part-time Less costly and High Good for
workers more flexible turnover/training unskilled jobs in
than full-time costs; quality areas with large
workers suffers; temporary labor
scheduling pools
difficult
Influencing Tries to use Uncertainty in Creates
demand excess capacity. demand. Hard to marketing ideas.
Discounts draw match demand to Overbooking
new customers. supply exactly. used in some
businesses.

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 Ad vantage/Di sadvantage -
Co ntinued
Option Advantage Disadvantage Some
Comments
Back ordering May avoid Customer must Many companies
during high- overtime. Keeps be willing to backorder.
demand periods capacity constant wait, but
goodwill is lost.
Counterseasonal Fully utilizes May require Risky finding
products and resources; allows skills or products or
service mixing stable workforce. equipment services with
outside a firm's opposite demand
areas of patterns.
expertise.

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 Ag gregate Pl anning
Str ategies
♦ Mixed strategy
♦ Combines 2 or more aggregate scheduling options
♦ Level scheduling strategy
♦ Produce same amount every day
♦ Keep work force level constant
♦ Vary non-work force capacity or demand options
♦ Often results in lowest production costs

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 Ag gregate Pla nning Me thods
♦ Graphical & charting techniques
♦ Popular & easy-to-understand
♦ Trial & error approach

♦ Mathematical approaches
♦ Transportation method
♦ Linear decision rule
♦ Management coefficients model
♦ Simulation

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 The Graphical Ap proach to
Ag gregate Pl anning
♦ Forecast the demand for each period
♦ Determine the capacity for regular time, overtime,
and subcontracting, for each period
♦ Determine the labor costs, hiring and firing costs,
and inventory holding costs
♦ Consider company policies which may apply to the
workers or to stock levels
♦ Develop alternative plans, and examine their total
costs

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 Forecast and Av erage
Production rate per working day Forecast De ma nd
70
Forecast
Level production using
60 Demand
average monthly
50 forecast demand

40

30

20

10

0
Jan Feb Mar Apr May Jun

22 18 21 21 22
20
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Cu mu lativ e De ma nd Graph for
Pl an 1
7,000
6,000
Cumulative Demand (Units)

Reduction of
Cumulative level
5,000 production using
inventory
average monthly
4,000
forecast
3,000 requirements

2,000 Cumulative forecast

requirements
1,000
Excess inventory

Jan Feb Mar Apr May Jun

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 Co mp arison o f Thre e Major
Ag gregate Pl anning Me thods
Tech niq ue s Ap pr oa che s
As pec ts
Charting/graphical Trial and error Simple to understand, easy to
methods use. Many solutions; one
chosen may not be optimal
Transportation method Optimization LP software available;permits
sensitivity analysis and
constraints. Linear function
may not be realistic
Management
Simple, easy to implement;
coefficient model
Heuristic tries to mimic manager’s
decision process; uses
regression

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 Co ntroll ing the Cost of Labor
in Se rvic e F irms
Seek:
♦ Close control of labor hours to ensure quick response
to customer demand
♦ On-call labor resource that can be added or deleted to
meet unexpected demand
♦ Flexibility of individual worker skills to permit
reallocation of available labor
♦ Flexibility of individual worker in rate of output or hours
of work to meet demand

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 Ho tel: Si ngle Pr ice Level
Sales

Demand Curve

Potential customers exist who are willing

to pay more than the $15 variable cost
Passed up
Some customers who
$sales = Net price profit
* 50 rooms contributions paid $150 for the room
=150*50 were actually willing to
=$7500 pay more
Money left
on the table
$15 variable cost Price
$150 Price
of room charged for room
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 Ho te l: Two Pr ice Levels
Sales Net prices are:
Price #1 => $85
Demand Price #2 => $175
Total sales =
1st net price *30 +
2nd net price *30
= $8100

$15 variable $100 $200

cost of room Price #1 Price #2
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