Operations Management

Aggregate Planning

OM AP

Aggregate Planning

Provides quantity and timing of production for the intermediate future (usually 3 to 18 months ahead)

Objective to minimize cost over the planning period while matching demand
Links firms strategic goals and production plans (manufacturing) or work force schedules (service)
OM AP 2

The Planning Process

Long-range plans (over one year)
Research and Development New product plans Capital investments Facility location/expansion Top executives

Intermediate-range plans (3 to 18 months)

Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans

Operations managers

Short-range plans (up to 3 months)

Operations managers, supervisors, foremen Responsibility Job assignments Ordering Job scheduling Dispatching Overtime Part-time help Planning tasks and horizon

Aggregate Planning

Jan 150,000

Quarter 1 Feb 120,000

Quarter 2 May

Mar 110,000

Apr

Jun

100,000

130,000
Quarter 3

150,000

Jul 180,000

Aug 150,000

Sep 140,000

Relationships of the Aggregate Plan

Marketplace and Demand Product Decisions Process Planning & Capacity Decisions Aggregate Plan for Production Master Production Schedule Research and Technology

Demand Forecasts, orders

Work Force

Raw Materials Available External Capacity Subcontractors

Inventory On Hand

MRP system Detailed Work Schedules

5

OM AP

Aggregate Planning Goals

Meet demand Use capacity efficiently Meet inventory policy Minimize cost

Labor Inventory Plant & equipment Subcontract

6

OM AP

Aggregate Planning Strategies

Capacity Options change

capacity:

changing inventory levels varying work force size by hiring or layoffs varying production capacity through

overtime or idle time

OM AP

subcontracting using part-time workers

7

Aggregate Planning Strategies Pure Strategies

Demand Options change demand:

influencing demand backordering during high demand periods counterseasonal product mixing

OM AP

Aggregate Scheduling Options - Advantages and Disadvantages

Option Advantage Disadvantage Some Comments
Changing Changes in Inventory Applies mainly inventory levels human resourcesholding costs; to production, are gradual, not Shortages may not service abrupt result in lost production sales changes Varying workforce size by hiring or layoffs Avoids use of Hiring, layoff, other alternativesand training costs Used where size of labor pool is large

OM AP

Advantages/Disadvantages Continued
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

OM AP

10

Advantages/Disadvantages Continued
Option Advantage Disadvantage Some Comments
Using part-time Less costly and workers more flexible than full-time workers High Good for turnover/training unskilled jobs in costs; quality areas with large suffers; temporary labor scheduling pools difficult Tries to use Uncertainty in Creates excess capacity. demand. Hard tomarketing ideas. Discounts draw match demand toOverbooking new customers. supply exactly. used in some businesses.

Influencing demand

OM AP

11

Advantage/Disadvantage Continued
Option Advantage Disadvantage Some Comments
Back ordering May avoid Customer must Many companies during highovertime. Keeps be willing to backorder. demand periods capacity constantwait, but goodwill is lost. CounterseasonalFully utilizes May require products and resources; allowsskills or service mixing stable workforce. equipment outside a firm's areas of expertise. Risky finding products or services with opposite demand patterns.

OM AP

12

The Extremes

Level Strategy Production rate is constant

Chase Strategy Production equals demand

OM AP

13

Aggregate Planning Methods

Graphical & charting techniques

Popular & easy-to-understand Trial & error approach

Mathematical approaches

Transportation method

Linear decision rule

Management coefficients model Simulation
14

OM AP

The Graphical Approach to Aggregate Planning

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
OM AP 15

Roofing Supplier Example 1

Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55

Average requirement

Total expected demand Number of production days

6,200 = = 50 units per day 124

Roofing Supplier Example 1

Forecast demand Production rate per working day

70 60 50 40 30

Level production using average monthly forecast demand

Jan

Feb

Mar

Apr

May

June

= Month
= Number of working days

22

18

21

21

22

20

Roofing Supplier Example 2

Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs) Table 13.3 $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit $600 per unit

Roofing Supplier Example 2

Monthly Cost Information Production at Demand Inventory Ending per unit per month Month 50 Units Change Inventory Inventory carry costper Day Forecast $ 5
Subcontracting cost per unit Jan 1,100

Feb pay rate 900 Average Mar 1,050 Apr 1,050 Overtime pay rate May 1,100 Labor-hours to produce June 1,000 a unit

900 700 800 1,200 1,500 1,100

$10 per unit +200

Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production $600 per unit Total units of inventory carried over from one rate (layoffs) month to the next = 1,850 Table 13.3

200 $ 5 per hour ($40 per +200 400 day) +250 650 $ 7 per hour -1508 hours per 500 (above day ) -400 100 1.6 hours -100 per unit 0 $300 per unit 1,850

units Workforce required to produce 50 units per day = 10 workers

Roofing Supplier Example 2

Monthly Cost Information Costs Calculations Production at Demand Inventory Ending 5 perunits unit per month Month 50 Units Forecast Change Inventory Inventory carry costper Day $9,250 Inventory carrying (= $ 1,850 carried x per unit ) $10 per unit Subcontracting cost per unit Jan 1,100 900 $5 +200 200 Regular-time labor 49,600 10 x $40 per 5 workers per hour ($40 per Feb pay rate 900 700(= $ +200 400 Average day ) 124 days) day x Mar 1,050 800 +250 650 $ 7 per hour Other costs (overtime, Apr 1,050 1,200 -1508 hours per 500 Overtime pay rate (above hiring, layoffs, day ) May 1,100 1,500 -400 100 subcontracting) 0 Labor-hours to produce June 1,000 a unit 1,100 1.6 hours -100 per unit 0 Total cost $58,850 Cost of increasing daily production $300 per unit 1,850

rate (hiring and training) Cost of decreasing daily production $600 per unit Total units of inventory carried over from one rate (layoffs) month to the next = 1,850 Table 13.3

units Workforce required to produce 50 units per day = 10 workers

Roofing Supplier Example 3

Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs) Table 13.3 $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit $600 per unit

Roofing Supplier Example 3

Cost Information
Inventory carry cost

In-housecost production Subcontracting per unit

Average pay rate Overtime pay rate

= 38 units per day $10 per unit x $124 5 per days hour ($40 per day) = 4,712 units
$ 7 per hour (above 8 hours per 6,200 day) - 4,712 1.6 hours per unit 1,488 units $300 per unit $600 per unit

$ 5 per unit per month

Subcontract units = = Labor-hours to produce a unit

Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs) Table 13.3

Roofing Supplier Example 3

Cost Information
Inventory carry cost

In-housecost production Subcontracting per unit

Average pay rate Overtime pay rate

= 38 units per day $10 per unit x $124 5 per days hour ($40 per day) = 4,712 units

$ 5 per unit per month

Subcontract units = Regular-time $37,696 = Labor-hours to labor produce a unit

Costs
Cost of increasing daily production Subcontracting 14,880 rate (hiring and training) Cost of decreasing daily production rate (layoffs) Table 13.3

$ 7 per hour (above 8 hours per Calculations 6,200 day) - 4,712 (= 7.6hours workers x $40 per 1.6 per unit 1,488 units

day x 124 days)

$300 per unit

(= 1,488 units x $10 per unit ) per unit $600

Total cost

$52,576

Roofing Supplier Example 4

Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55
Table 13.2

Production = Expected Demand

Roofing Supplier Example 4

Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs) Table 13.3 $ 5 per unit per month $10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit $600 per unit

Roofing Supplier Example 4

Basic Production Cost Inventory carrying cost Daily (demand x Forecast Prod 1.6 hrs/unit Subcontracting cost perxunit Month (units) Rate $5/hr)

Cost Information

Extra Cost of Extra Cost of $ 5 per unit per month Increasing Decreasing Production Production Total $10 unit (hiring cost ) per (layoff cost) Cost

Jan 900 Average pay rate41 Feb 700 39

$ 7,200 5,600 6,400

Overtime pay rate Mar 800 38

Apr 1,200 to produce 57 9,600 Labor-hours a unit

(= 19 x $300)

$ 5 per hour ($40 per $ 7,200 day) $1,200 6,800 (=hour 2 x $600) $ 7 per (above$600 8 hours per 7,000 day)(= 1 x $600) $5,7001.6 hours per unit 15,300
15,300 16,600 $68,200

Cost of increasing daily production $3,300$300 per unit May 1,500 68 12,000 (= 11 x $300) rate (hiring and training) $7,800 Cost June of decreasing 1,100 55 daily production 8,800 $600 per unit (= 13 x $600) rate (layoffs) Table 13.3
$49,600 $9,000 $9,600

Table 13.4

Comparison of Three Plans

Cost Inventory carrying Regular labor Overtime labor Plan 1 $ 9,250 49,600 0 Plan 2 $ 0 Plan 3 $ 0

37,696 0

49,600 0

Hiring
Layoffs Subcontracting Total cost

0
0 0 $58,850

0
0 14,880 $52,576

9,000
9,600 0 $68,200

Plan 2 is the lowest cost option

Yield Management

Capacity decisions that determine the

allocation of resources to maximize profits

Requirements

Multiple pricing structures must be feasible and appear logical

Use and duration of use need to be forecasted

OM AP

28

Yield Management
Characteristics that make YM interesting

Service or product can be sold in advance of consumption

Demand fluctuates whereas capacity is relatively fixed

Inventory is perishable Demand can be segmented Variable costs are low and fixed costs are high
OM AP

29