F O U R T H E D I T I O N

Aggregate Planning

© The McGraw-Hill Companies, Inc., 2003

chapter 15

DAVIS

AQUILANO

CHASE

PowerPointPresentation

byCharlieCook

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–2

Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter Objectives

• Demonstrate how aggregate planning links long-range strategic planning and short-range scheduling.

• Present alternate strategies for matching supply and demand: adjusting supply (an operations function) or adjusting demand (a marketing function).

• Introduce strategies for developing aggregate plans and ways to identify their strengths and weaknesses.

• Define marginal costs and total costs as they pertain to aggregate planning.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–3

Chapter Objectives (cont’d)Chapter Objectives (cont’d)Chapter Objectives (cont’d)Chapter Objectives (cont’d)

• Introduce the concept of yield management as a tool for matching supply and demand in service operations.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–4

Managerial IssuesManagerial IssuesManagerial IssuesManagerial Issues

• Translating long-range strategic plans into daily work schedules for the shop floor.

• Using aggregate planning to develop intermediate-range plans that link the long-range strategic plan and the short-range operational plan.

• Developing aggregate plans that match the demand for products with the firm’s ability to supply the products and to do so at minimum cost.

• Coordinating marketing management and operations to develop an aggregate plan that is both effective and efficient.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–5

Overview of Operational Overview of Operational Planning ActivitiesPlanning Activities

Overview of Operational Overview of Operational Planning ActivitiesPlanning Activities

• Long-Range Planning–Focuses on strategic issues relation to capacity,

process, selection, and plant location.

• Intermediate-Range Planning–Focuses on tactical issues pertaining to

aggregate workforce and material requirements for the coming year.

• Short-Range Planning–Addresses day-to-day issues of scheduling

workers on jobs at assigned work stations.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–6

Aggregate PlanningAggregate PlanningAggregate PlanningAggregate Planning

• Aggregate Production Planning–The process for determining the most cost

effective way to match supply and demand over the next 12–18 months.

• Master Production Scheduling (MPS)–Short-term scheduling of specific end product

requirements for the next several quarters.

• Rough-Cut or Resource Capacity Planning–Determining that adequate production capacity

and warehousing are available to meet demand.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–7

Overview of Overview of ManufacturinManufacturin

g Planning g Planning ActivitiesActivities

Overview of Overview of ManufacturinManufacturin

g Planning g Planning ActivitiesActivities

Exhibit 15.1Exhibit 15.1

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–8

Aggregate Production PlanningAggregate Production PlanningAggregate Production PlanningAggregate Production Planning

• Production Rate–The capacity of output per unit of time (such as

units per day or units per week.

• Workforce Level–Number of workers required to provide a

specified level of production.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–9

Aggregate Production Planning Aggregate Production Planning (cont’d)(cont’d)

Aggregate Production Planning Aggregate Production Planning (cont’d)(cont’d)

• Inventory on Hand–The surplus of units that results when

production exceeds demand in a given time period.

• Backlog (or Stockout)–The deficit in units that results when demand

exceeds the number of units produced in a given time period.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–10

Required Inputs to the Production Planning Required Inputs to the Production Planning SystemSystem

Required Inputs to the Production Planning Required Inputs to the Production Planning SystemSystem

Exhibit 15.2Exhibit 15.2

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–11

Production Planning StrategiesProduction Planning StrategiesProduction Planning StrategiesProduction Planning Strategies

• Chase Strategy–Matching the production rate to exactly meet the

order rate by hiring and laying off workers as the order rate varies.

• Stable Workforce—Variable Work Hours–Varying output by varying the number of hours

worked through flexible schedules or overtime.

• Level Strategy–Maintain a stable workforce working at constant

output rate; absorb demand variations with inventory, backlogs, or lost sales.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–12

Production Planning Strategies Production Planning Strategies (cont’d)(cont’d)

Production Planning Strategies Production Planning Strategies (cont’d)(cont’d)

• Pure Strategy–Either a chase strategy when product exactly

matches demand or a level strategy when production remains constant over a specified number of periods.

• Mixed Strategy–A combination of chase and level strategies to

match supply and demand.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–13

Pure Chase and Pure Level StrategiesPure Chase and Pure Level StrategiesPure Chase and Pure Level StrategiesPure Chase and Pure Level Strategies

Exhibit 15.3Exhibit 15.3

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–14

Aggregate Production PlanningAggregate Production PlanningAggregate Production PlanningAggregate Production Planning

• Relevant Costs–Basic production costs (fixed and variable)–Costs associated with changes in the

production rate (e.g., labor costs)–Inventory holding costs–Backlog (stockout) costs

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–15

Aggregate Planning TechniquesAggregate Planning TechniquesAggregate Planning TechniquesAggregate Planning Techniques

• Trial and Error–Costing out the production alternatives and

choosing the one with the lowest cost.

• Linear Programming• Linear Decision Rule• Various Heuristic Methods

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–16

Aggregate Planning Techniques Aggregate Planning Techniques (cont’d)(cont’d)

Aggregate Planning Techniques Aggregate Planning Techniques (cont’d)(cont’d)

• Full Costs–All of the actual, out-of-pocket costs associated

with a particular aggregate plan.–Used for developing a labor and material

budget.

• Marginal (Incremental) Costs–Unique costs attributable to a particular

aggregate plan that are above and beyond those required to build the product by its most economical means.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–17

Forecasted Forecasted Demand and Demand and Workdays for Workdays for

C&A C&A CompanyCompany

Forecasted Forecasted Demand and Demand and Workdays for Workdays for

C&A C&A CompanyCompany

Exhibit 15.4Exhibit 15.4

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–18

First Alternative: Pure Chase StrategyFirst Alternative: Pure Chase StrategyFirst Alternative: Pure Chase StrategyFirst Alternative: Pure Chase Strategy

Exhibit 15.5Exhibit 15.5

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–19

Second Second Alternative: Alternative: Pure Level Pure Level StrategyStrategy

Second Second Alternative: Alternative: Pure Level Pure Level StrategyStrategy

Exhibit 15.6Exhibit 15.6

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–20

Third Third Alternative: Alternative:

Minimum Minimum Workforce with Workforce with SubcontractingSubcontracting

Third Third Alternative: Alternative:

Minimum Minimum Workforce with Workforce with SubcontractingSubcontracting

Exhibit 15.7Exhibit 15.7

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–21

Constant Constant WorkforcWorkforc

e with e with OvertimOvertim

e e StrategyStrategy

Constant Constant WorkforcWorkforc

e with e with OvertimOvertim

e e StrategyStrategy

Exhibit 15.8Exhibit 15.8

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–22

Summary of Costs for Aggregate PlansSummary of Costs for Aggregate PlansSummary of Costs for Aggregate PlansSummary of Costs for Aggregate Plans

Exhibit 15.9Exhibit 15.9

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–23

Aggregate Planning Applied to Services:Aggregate Planning Applied to Services:Tucson Parks and Recreation Tucson Parks and Recreation

DepartmentDepartment

Aggregate Planning Applied to Services:Aggregate Planning Applied to Services:Tucson Parks and Recreation Tucson Parks and Recreation

DepartmentDepartment• Actual Demand Requirement for Full-Time Direct

Employees and Full-Time Equivalent (FTE) Part-Time Employees

Exhibit 15.10Exhibit 15.10

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–24

Three Possible Plans for the Parks and Recreation Three Possible Plans for the Parks and Recreation DepartmentDepartment

Three Possible Plans for the Parks and Recreation Three Possible Plans for the Parks and Recreation DepartmentDepartment

Exhibit 15.11Exhibit 15.11

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–25

Comparison of Costs for All Three Comparison of Costs for All Three AlternativesAlternatives

Comparison of Costs for All Three Comparison of Costs for All Three AlternativesAlternatives

Exhibit 15.12Exhibit 15.12

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–26

Yield ManagementYield ManagementYield ManagementYield Management

• Yield (Revenue) Management–The concept used in service operations with

high-fixed costs and low-variable costs that attempts to match supply and demand (a chase strategy) to maximize capacity utilization.

• Yield Management Requires:–The ability to segment the market –High-fixed and low-variable costs where

additional sales create more profits–Product perishability (cannot be inventoried)–Lower-priced capacity that can be presold