CHAPTER 3 AGGREGATE PLANNING. LEARNING OBJECTIVES Define aggregate planning and how it is useful Identify optional strategies for developing an aggregate

CHAPTER 3CHAPTER 3

AGGREGATE AGGREGATE PLANNINGPLANNING

LEARNING OBJECTIVESLEARNING OBJECTIVES

Define aggregate planning and how it is useful

Identify optional strategies for developing an aggregate plan.

Prepare and solve an aggregate plan via graphical and quantitative method.

Understand and Solve a yield management problem.

Aggregate Planning Aggregate Planning Intermediate-range capacity planning,

usually covering 3 to 18 months.Determine the quantity and timing of

production for the immediate future

Shortrange

Intermediate range

Long range

Now 2 months 1 Year

Aggregate PlanningAggregate Planning

Objective is to minimize cost over the planning period by adjusting Production rates Labor levels Inventory levels Overtime work Subcontracting rates Other controllable variables

Planning Sequence

Business PlanEstablishes operationsand capacity strategiesEstablishes operationsand capacity strategies

Aggregate plan Establishesoperations capacity

Establishesoperations capacity

Master schedule Establishes schedulesfor specific products

Establishes schedulesfor specific products

Corporatestrategies

and policies

Economic,competitive,and political conditions

Aggregatedemand

forecasts

Aggregate Planning

Begin with forecast of aggregate demandForecast intermediate range General plan to meet demand by setting

Output levels Employment Finished goods inventory level

Production plan is the output of aggregate planning

Aggregate Planning Inputs

Resources Workforce Facilities

Demand forecastPolicies

Subcontracting Overtime Inventory levels Back orders

Costs Inventory carrying Back orders Hiring/firing Overtime Inventory changes Subcontracting

Aggregate Planning Outputs

Total cost of a plan

Projected levels of inventory Inventory Output Employment Subcontracting Backordering

Aggregate Planning Strategies

Proactive Alter demand to match capacity

Reactive Alter capacity to match demand

Mixed Some of each

Demand Options

Pricing

Promotion

Back orders

Counterseasonal

Capacity Options

Inventories

Hire and layoff workers

Overtime/slack time

Subcontracting

Part-time workers

Aggregate Planning Options

Option Advantages Disadvantages Some 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.

Mixing Options

Chase demand strategy: Matching capacity to demand; the planned

output for a period is set at the expected demand for that period

Level capacity strategy: Maintaining a steady rate of regular-time

output while meeting variations in demand by a combination of options.

Chase Approach

Advantages Investment in inventory is low

Labor utilization in high

Disadvantages The cost of adjusting output rates and/or

workforce levels

Level Approach

Advantages Stable output rates and workforce

Disadvantages Greater inventory costs

Increased overtime and idle time

Resource utilizations vary over time

Graphical Methods

Popular techniquesEasy to understand and useTrial-and-error approaches that do not

guarantee an optimal solutionRequire only limited computations

Techniques for Aggregate Planning

1. Determine demand for each period

2. Determine capacities for each period

3. Determine units costs

4. Identify policies that are pertinent

5. Develop alternative plans and costs

6. Select the best plan that satisfies objectives. Otherwise return to step 5.

Roofing Supplier Example 1

Table 13.2Table 13.2

Month Expected Demand Production DaysDemand Per Day

(computed)

Jan 900 22 41

Feb 700 18 39

Mar 800 21 38

Apr 1,200 21 57

May 1,500 22 68

June 1,100 20 55

6,200 124

= = 50= = 50 units per day units per day6,2006,200

124124

Average Average requirementrequirement ==

Total expected demandTotal expected demand

Number of production daysNumber of production days

Figure 13.3Figure 13.3

70 70 –

60 60 –

50 50 –

40 40 –

30 30 –

0 0 –JanJan FebFeb MarMar AprApr MayMay JuneJune == MonthMonth

2222 1818 2121 2121 2222 2020 == Number ofNumber ofworking daysworking days

Pro

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day

Level production using average Level production using average monthly forecast demandmonthly forecast demand

Forecast demandForecast demand



Cost Information

Inventory carrying cost $ 5 per unit per month

Subcontracting cost per unit $10 per unit

Average pay rate $ 5 per hour ($40 per day)

Overtime pay rate$ 7 per hour

(above 8 hours per day)

Labor-hours to produce a unit 1.6 hours per unit

Cost of increasing daily production rate (hiring and training)

$300 per unit

Cost of decreasing daily production rate (layoffs)

$600 per unit

Plan 1 – constant workforce




Cost Information

Inventory carry cost $ 5 per unit per month







$300 per unit


$600 per unit



MonthProduction at

50 Units per DayDemand Forecast

Monthly Inventory Change

Ending Inventory

Jan 1,100 900 +200 200

Feb 900 700 +200 400

Mar 1,050 800 +250 650

Apr 1,050 1,200 -150 500

May 1,100 1,500 -400 100

June 1,000 1,100 -100 0

1,850Total units of inventory carried over from one

month to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers



Cost Information








$300 per unit


$600 per unit

MonthProduction at

50 Units per DayDemand Forecast

Monthly Inventory Change

Ending Inventory

Jan 1,100 900 +200 200

Feb 900 700 +200 400

Mar 1,050 800 +250 650

Apr 1,050 1,200 -150 500

May 1,100 1,500 -400 100

June 1,000 1,100 -100 0

1,850Total units of inventory carried over from one

month to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

Costs Calculations

Inventory carrying $9,250 (= 1,850 units carried x $5 per unit)

Regular-time labor 49,600 (= 10 workers x $40 per day x 124 days)

Other costs (overtime, hiring, layoffs, subcontracting) 0

Total cost $58,850


Figure 13.4Figure 13.4

Cu

mu

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eman

d u

nit

sC

um

ula

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dem

and

un

its

7,000 7,000 –

6,000 6,000 –

5,000 5,000 –

4,000 4,000 –

3,000 3,000 –

2,000 –

1,000 –

–JanJan FebFeb MarMar AprApr MayMay JuneJune

Cumulative forecast Cumulative forecast requirementsrequirements

Cumulative level Cumulative level production using production using average monthly average monthly

forecast forecast requirementsrequirements

Reduction Reduction of inventoryof inventory

Excess inventoryExcess inventory

6,200 units6,200 units




(computed)

Jan 900 22 41

Feb 700 18 39

Mar 800 21 38

Apr 1,200 21 57

May 1,500 22 68

June 1,100 20 55

6,200 124

Minimum requirementMinimum requirement = 38 = 38 units per day units per day

Plan 2 – subcontracting

Plan 2 – subcontracting


70 70 –

60 60 –

50 50 –

40 40 –

30 30 –



Pro

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Level production Level production using lowest using lowest

monthly forecast monthly forecast demanddemand

Forecast demandForecast demand



Cost Information








$300 per unit


$600 per unit



Cost Information








$300 per unit


$600 per unit

In-house production = 38 units per day x 124 days

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units



Cost Information








$300 per unit


$600 per unit

In-house production = 38 units per day x 124 days

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units

Costs Calculations

Regular-time labor $37,696 (= 7.6 workers x $40 per day x 124 days)

Subcontracting 14,880 (= 1,488 units x $10 per unit)

Total cost $52,576




(computed)

Jan 900 22 41

Feb 700 18 39

Mar 800 21 38

Apr 1,200 21 57

May 1,500 22 68

June 1,100 20 55

6,200 124

Production = Expected DemandProduction = Expected DemandPlan 3 – hiring and firing

Plan 3 – hiring and firing


70 70 –

60 60 –

50 50 –

40 40 –

30 30 –



Pro

du

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day Forecast demand and Forecast demand and

monthly productionmonthly production



Cost Information








$300 per unit


$600 per unit



Cost Information








$300 per unit


$600 per unit

MonthForecast

(units)

Daily Prod Rate

Basic Production

Cost (demand x 1.6 hrs/unit

x $5/hr)

Extra Cost of Increasing Production (hiring cost)

Extra Cost of Decreasing Production (layoff cost) Total Cost

Jan 900 41 $ 7,200 — — $ 7,200

Feb 700 39 5,600 —$1,200

(= 2 x $600)6,800

Mar 800 38 6,400 —$600

(= 1 x $600)7,000

Apr 1,200 57 9,600$5,700

(= 19 x $300)— 15,300

May 1,500 68 12,000$3,300

(= 11 x $300)— 15,300

June 1,100 55 8,800 —$7,800

(= 13 x $600)16,600

$49,600 $9,000 $9,600 $68,200



Comparison of Three Plans


Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0

Regular labor 49,600 37,696 49,600

Overtime labor 0 0 0

Hiring 0 0 9,000

Layoffs 0 0 9,600

Subcontracting 0 14,880 0

Total cost $58,850 $52,576 $68,200

Plan 2 is the lowest cost optionPlan 2 is the lowest cost option

Mathematical Approaches

Transportation Method of Linear Programming

Management Coefficients ModelOther Models

o Linear Decision Ruleo Simulation

Transportation Method


CostsCostsRegular timeRegular time $40$40 per tireper tireOvertimeOvertime $50$50 per tireper tireSubcontractingSubcontracting $70$70 per tireper tireCarryingCarrying $ 2$ 2 per tire per monthper tire per month

Sales PeriodSales PeriodMarMar AprApr MayMay

DemandDemand 800800 1,0001,000 750750Capacity:Capacity: RegularRegular 700700 700700 700700 OvertimeOvertime 5050 5050 5050 SubcontractingSubcontracting 150150 150150 130130Beginning inventoryBeginning inventory 100100 tirestires

Important pointsImportant points

1.1. Carrying costs are Carrying costs are $2$2/tire/month. If /tire/month. If goods are made in one period and held goods are made in one period and held over to the next, holding costs are over to the next, holding costs are incurredincurred

2.2. Supply must equal demand, so a Supply must equal demand, so a dummy column called “unused dummy column called “unused capacity” is addedcapacity” is added

3.3. Because back ordering is not viable in Because back ordering is not viable in this example, cells that might be used to this example, cells that might be used to satisfy earlier demand are not availablesatisfy earlier demand are not available

Transportation Example

Important pointsImportant points

4.4. Quantities in each column designate the Quantities in each column designate the levels of inventory needed to meet levels of inventory needed to meet demand requirementsdemand requirements

5.5. In general, production should be In general, production should be allocated to the lowest cost cell allocated to the lowest cost cell available without exceeding unused available without exceeding unused capacity in the row or demand in the capacity in the row or demand in the columncolumn

Transportation Example


TransportationExample

Yield Management

Allocating company scarce resources to customers at prices that will maximize yield or revenue.

Charging different prices Discount

Passed-up contribution

Money left on the table

Yield Management ExampleDemand Demand

CurveCurve

Potential customers exist who Potential customers exist who are willing to pay more than the are willing to pay more than the $15$15 variable cost of the room variable cost of the room

Some customers who paid Some customers who paid $150$150 were actually willing were actually willing to pay more for the roomto pay more for the roomTotalTotal

$ $ contributioncontribution ==((PricePrice)) x x (50(50roomsrooms))==($150 - $15)($150 - $15)x x (50)(50)==$6,750$6,750

PricePrice

Room salesRoom sales

100100

5050

$150$150Price charged Price charged

for room for room

$15$15Variable costVariable cost

of roomof room

Yield Management Example

Total $ contribution =Total $ contribution =(1(1st pricest price) x 30 ) x 30 roomsrooms + (2 + (2ndnd price) x 30 rooms = price) x 30 rooms =

($100 - $15) x 30 + ($200 - $15) x 30 =($100 - $15) x 30 + ($200 - $15) x 30 =$2,550 + $5,550 = $8,100$2,550 + $5,550 = $8,100

Demand Demand CurveCurve

PricePrice

Room salesRoom sales

100100

6060

3030

$100$100Price 1Price 1

for roomfor room

$200$200Price 2Price 2

for roomfor room

$15$15Variable costVariable cost

of roomof room

Yield Management Matrix

Du

rati

on

of

use

Un

pre

dic

tab

le

Pre

dic

tab

le

Price

Tend to be fixed Tend to be

variable

Quadrant 1: Quadrant 2:

Movies HotelsStadiums/arenas Airlines

Convention centers Rental carsHotel meeting space Cruise lines

Quadrant 3: Quadrant 4:

Restaurants Continuing careGolf courses hospitals

Internet serviceproviders

Making Yield Management Work

Multiple pricing structures must be feasible and appear logical to the customer

Forecasts of the use and duration of use

Changes in demand

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Documents

CHAPTER 3 AGGREGATE PLANNING. LEARNING OBJECTIVES Define aggregate planning and how it is useful Identify optional strategies for developing an aggregate