1. Aggregate Planning_Introduction

Operations Operations ManagementManagementAggregate PlanningAggregate Planning

Chapter 13Chapter 13

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Outline

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The Planning Process Sales and Operations Planning

(S&OP) The Nature of Aggregate Planning Aggregate Planning Strategies

Capacity Options Demand Options Mixing Options to Develop a Plan

Outline – Continued

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Methods for Aggregate Planning Graphical Methods Mathematical Approaches Comparison of Aggregate

Planning Methods Aggregate Planning in Services

Restaurants, Hospitals, National Chains of Small Service Firms, Airline Industry

Miscellaneous Services Revenue (Yield) Management

Learning Objectives

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When you complete this chapter you should be able to:1. Define sales and operations planning

and aggregate planning2. Identify optional strategies for

developing an aggregate plan3. Prepare a graphical aggregate plan4. Solve an aggregate plan via the

transportation method and linear programming

5. Understand and solve a revenue (yield) management problem

Planning Horizons

Figure 13.1

Sales and Operations Planning (S&OP)

▶Coordination of demand forecasts with functional areas and the supply chain

▶Typically done by cross-functional teams▶Determine which plans are feasible▶Limitations must be reflected▶Provides warning when resources do not

match expectations▶Output is an aggregate plan

Sales and Operations Planning (S&OP)

▶Decisions must be tied to strategic planning and integrated with all areas of the firm over all planning horizons

▶S&OP is aimed at1. The coordination and integration of the

internal and external resources necessary for a successful aggregate plan

2. Communication of the plan to those charged with its execution

Sales and Operations Planning▶ Requires

▶A logical overall unit for measuring sales and output

▶A forecast of demand for an intermediate planning period in these aggregate terms

▶A method for determining relevant costs▶A model that combines forecasts and costs

so that scheduling decisions can be made for the planning period

Aggregate Planning (or Aggregate Scheduling)

ADM 3301 ~ Rim Jaber9

Aggregate Planning is a high level approach to planning. It translates annual and quarterly business plans into intermediate term production plans.

Objective: - To meet forecasted demand while minimizing cost

over the planning periodProvides the quantity and timing of

production for intermediate futureUsually 3 to 18 months into future

Combines (‘aggregates’) production

Aggregate Planning

QUARTER 1Jan. Feb. March

150,000 120,000 110,000

QUARTER 2April May June

100,000 130,000 150,000

QUARTER 3July Aug. Sept.

180,000 150,000 140,000

Aggregate Planning

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In manufacturing organizations aggregate planning means determining the size of the work-force, the rate of production and inventory level that are needed to implement a production plan.

In service organizations aggregate planning means scheduling staff to meet customers' service needs.

ADM 3301 ~ Rim Jaber

S&OP and theAggregatePlan

Figure 13.2

Steps in Planning Process

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Forecasting the demand for the planning period:Total demand for each product is aggregated.

Determination of the aggregate production plan:Production and work-force levels, as well as

production capacity requirements are determined.Determination of the Master Production

Schedule (MPS):Production levels by product type by time period over

the planning horizon are calculated.


Steps in Planning Process

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Material Requirements Planning (MRP):The master production schedule is “exploded"

to obtain requirements for sub-assemblies, components and raw materials for each time period.

Determination of the detailed job shop schedule:Detailed production schedules for components,

sub-assemblies and final products and order quantities for raw materials are determined to meet the specification of production quantities from the MRP system.


Aggregate Planning Goals

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Meet demandMeet inventory policyUse capacity efficientlyMinimize cost

LaborInventoryPlant & equipmentSubcontract


Relevant Costs

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Hiring/firing costs:Hiring costs - recruitment, screening, training

Lower initial productivityFiring costs - severance, employee benefits,

redeployment of remaining work-force Ill will, loss of morale.

Overtime/idle time costs:Overtime costs - overtime premiums

Health costsIdle time costs - opportunity cost.

Part time/temporary labour costs:Lower rates and benefits, but possibly lower

productivity.ADM 3301 ~ Rim Jaber

Relevant Costs

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Subcontracting costs:Usually more costly than in-house manufacture.

Cooperative arrangement costs:Usually lower cost.

Inventory carrying costs:Storage, financial opportunity cost, insurance,

obsolescence;Breakage, spoilage, deterioration.

Back order or stockout costs:Loss of goodwill (for back orders), loss of sales

(for stockouts).ADM 3301 ~ Rim Jaber

Aggregate Planning Strategies1. Should inventories be used to absorb

changes in demand?2. Should changes be accommodated by

varying the size of the workforce?3. Should part-timers, overtime, or idle time be

used to absorb changes?4. Should subcontractors be used and

maintain a stable workforce?5. Should prices or other factors be changed to

influence demand?

AGGREGATE SCHEDULING OPTIONS (Aggregate Planning Pure Strategies)

ADM 3301 ~ Rim Jaber19

Promotion & price

Back orderingCounterseasonal

product mixing

Capacity Demand Inventory Hire or layoff Overtime or idle

time Subcontract Part-time

workers

Capacity Options

1. Changing inventory levels▶Increase inventory in low demand periods

to meet high demand in the future▶Increases costs associated with storage,

insurance, handling, obsolescence, and capital investment

▶Shortages may mean lost sales due to long lead times and poor customer service

Capacity Options2. Varying workforce size by hiring or

layoffs▶Match production rate to demand▶Training and separation costs for

hiring and laying off workers ▶New workers may have lower

productivity▶Laying off workers may lower morale

and productivity

Capacity Options3. Varying production rates through

overtime or idle time▶Allows constant workforce▶May be difficult to meet large

increases in demand▶Overtime can be costly and may drive

down productivity▶Absorbing idle time may be difficult

Capacity Options4. Subcontracting

▶Temporary measure during periods of peak demand

▶May be costly▶Assuring quality and timely delivery may be

difficult▶Exposes your customers to a possible

competitor

5. Using part-time workers▶Useful for filling unskilled or low skilled

positions, especially in services

Demand Options1. Influencing demand

Use advertising or promotion to increase demand in low periods

Attempt to shift demand to slow periods

May not be sufficient to balance demand and capacity

Demand Options2. Back ordering during high-demand

periods▶Requires customers to wait for an order

without loss of goodwill or the order▶Most effective when there are few if any

substitutes for the product or service▶Often results in lost sales

Demand Options3. Counterseasonal product and

service mixing▶Develop a product mix of

counterseasonal items▶May lead to products or services

outside the company’s areas of expertise

Aggregate Planning Options

TABLE 13.1 Aggregate Planning Options

OPTION ADVANTAGES DISADVANTAGES COMMENTS

Changing inventory levels

Changes in human resources are gradual or none; no abrupt production changes.

Inventory holding cost may increase. Shortages may result in lost sales.

Applies mainly to production, not service, operations.

Varying workforce size by hiring or layoffs

Avoids the costs of other alternatives.

Hiring, layoff, and training costs may be significant.

Used where size of labor pool is large.




Varying production rates through overtime or idle time

Matches seasonal fluctuations without hiring/ training costs.

Overtime premiums; tired workers; may not meet demand.

Allows flexibility within the aggregate plan.

Sub-contracting

Permits flexibility and smoothing of the firm’s output.

Loss of quality control; reduced profits; loss of future business.

Applies mainly in production settings.




Using part-time workers

Is less costly and more flexible than full-time workers.

High turnover/ training costs; quality suffers; scheduling difficult.

Good for unskilled jobs in areas with large temporary labor pools.

Influencing demand

Tries to use excess capacity. Discounts draw new customers.

Uncertainty in demand. Hard to match demand to supply exactly.

Creates marketing ideas. Overbooking used in some businesses.




Back ordering during high-demand periods

May avoid overtime. Keeps capacity constant.

Customer must be willing to wait, but goodwill is lost.

Many companies back order.

Counter-seasonal product and service mixing

Fully utilizes resources; allows stable workforce.

May require skills or equipment outside the firm’s areas of expertise.

Risky finding products or services with opposite demand patterns.

Determining the Aggregate Plan

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Step # 1: Collect relevant data:Forecasts, inventory levels, desired final

inventory levels, current and future resource availability, production times and costs.

Step # 2: Analyze per unit costs for each of the pure strategies:Determine the preference thresholds by

estimating the cost of each option on a homogeneous unit of measure.


Determining the Aggregate Plan

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Step # 3: Develop and evaluate alternative plans:Development of plans corresponding to dominant

strategies and evaluation of total cost (graphical method, optimization, simulation, etc...).

Step # 4: Integrate non quantifiable variables and constraints:Organizational culture, policies, external

environment, etc...Step # 5: Choose the aggregate plan:

The best plan is chosen and implemented.


Step # 3:Graphical Method

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▶Popular techniques▶Easy to understand and use▶Trial-and-error approaches that do not

guarantee an optimal solution▶Require only limited computations

Step # 3: Graphical methodA chase strategy involves changing the production rates

or work-force levels to match the demand forecast for each period. Inventory is not used to absorb demand fluctuations. Favored by many service organizations.

A level strategy involves the maintaining of a constant daily production rate and work-force level for the duration of the plan. Inventory is built up during periods of less than average demand; alternatively, delivery lead times may be allowed to grow during periods of high demand. Stable production leads to better quality and productivity

A mixed strategy involves periodic fluctuations in both inventory levels and in work-force and production rates.


Level Strategy

Chase Strategy

Production equals demand forecast

Daily production rate is constant

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Step # 3: Graphical method


Step # 3: Graphical Method

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Some combination of capacity options, a mixed strategy, might be the best solution

A mixed strategy may be the best way to achieve minimum costs

There are many possible mixed strategiesFinding the optimal plan is not always

possible

Step # 3: Mathematical Methods

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Transportation Method/Linear Programming Produces an optimal plan

Management Coefficients Model Model built around manager’s experience and

performance Other Models

Linear Decision Rule Simulation

Management Coefficients Model

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Builds a model based on manager’s experience and performance

A regression model is constructed to define the relationships between decision variables

Objective is to remove inconsistencies in decision making


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Linear Decision Rule Minimizes costs using quadratic cost curves Operates over a particular time periodSimulation

Uses a search procedure to try different combinations of variables

Develops feasible but not necessarily optimal solutions


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Documents

1. Aggregate Planning_Introduction