aggregate sales and operations...

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Islamic University of Gaza - Palestine

Introduction to Principles of Production Management

WS 2013/2014

Chapter 14 – Aggregate sales and Operations Planning

Presented by

Dr. Eng. Abed Schokry


Learning Outcomes

• Explain business planning• Explain sales and operations planning • Identify different aggregate planning strategies &

options for changing demand and/or capacity in aggregate plans

• Develop aggregate plans, calculate associated costs, and evaluate the plan in terms of operations, marketing, finance, and human resources

• Describe differences between aggregate plans for service and manufacturing companies

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The Role of Aggregate Planning

• Integral to part of the business planning process• Supports the strategic plan• Also known as the production plan• Identifies resources required for operations for the next 6-

18 months• Details the aggregate production rate and size of work

force required


• Sales and Operations Planning

• The Aggregate Operations Plan

• Examples: Chase and Level strategies

Objectives

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Sales and Operations Planning Activities

• Long-range planning– Greater than one year planning horizon– Usually performed in annual increments

• Medium-range planning– Six to eighteen months – Usually with weekly, monthly or quarterly increments

• Short-range planning– One day to less than six months– Usually with weekly or daily increments


The Role of the Aggregate Plan

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Types of Aggregate Plans

• Level Aggregate Plans– Maintains a constant workforce– Sets capacity to accommodate average demand– Often used for make-to-stock products like

appliances– Disadvantage- builds inventory and/or uses back

orders


Types of Aggregate Plans

• Chase Aggregate Plans– Produces exactly what is needed each period– Sets labor/equipment capacity to satisfy period

demands– Disadvantage- constantly changing short term

capacity

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Types of Aggregate Plans (cont.)

• Hybrid Aggregate Plans– Uses a combination of options– Options should be limited to facilitate execution– May use a level workforce with overtime & temps– May allow inventory buildup and some backordering– May use short term sourcing


Aggregate Planning Options

• Demand-based options– Reactive: uses finished goods inventories and

backorders for fluctuations– Proactive: shifts the demand patterns to minimize

fluctuations e.g. early bird dinner prices at a restaurant

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Aggregate Planning Options

• Capacity-based options– Changes output capacity to meet demand– Uses overtime, under time, subcontracting, hiring, firing, and

part-timers – cost and operational implications


• Aggregate planning is the development of a long-term output and resource plan in aggregate units of measure.

• These typically define output levels over a planning horizon of 1 to 2 years, focusing on product families or total capacity requirements.

• Aggregate planning later translates into monthly or quarterly production plans, taking into account capacity limitations such as supply availability, equipment, and labor.

Aggregate planning

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• Level 2 planning, or disaggregation, is the process of translating aggregate plans into short-term operational plans that provide the basis for weekly and daily schedules and detailed resource requirements.

• Level 3 focuses on execution, moving work from one workstation to another, assigning people to tasks, setting priorities for jobs, scheduling equipment, and controlling processes.

Aggregate planning (cont.)


• Aggregate planning is most challenging when demand fluctuates over time.

• Managers have a variety of options in developing aggregate plans in the face of fluctuating demand:

Ø Demand managementØ Production-rate changesØ Workforce changesØ Inventory smoothingØ Facilities, equipment, and transportation

Aggregate planning (cont.)

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• Most service organizations do not require as many levels of intermediate planning (Level 2) as goods-producing firms.

• Level 1 and 2 planning are often combined in service businesses.

• One way to think of disaggregation in services is to go from aggregate planning (Levels 1 and 2) to front line resource (staff) capacity and scheduling decisions (Level 3). Manufacturers use and need an intermediate level of planning (Level 2), where work-in-process and subassemblies reside.

Disaggregating Service Plans


Dealing with the Problem Complexity through Decomposition

Aggregate Planning

Master Production Scheduling

Materials Requirement Planning

Aggregate UnitDemand

End Item (SKU)Demand

Corporate Strategy

Capacity and Aggregate Production Plans

Stock Keeping Units (SKU)-level Production Plans

Manufacturingand Procurementlead times

Component Production lots and due dates

Part processplans

(Plan. Hor.: 1 year, Time Unit: 1 month)

(Plan. Hor.: a few months, Time Unit: 1 week)

(Plan. Hor.: a few months, Time Unit: 1 week)

Shop floor-level Production Control(Plan. Hor.: a day or a shift, Time Unit: real-time)

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Aggregate Planning Problem

Aggregate Planning

AggregateUnit Demand

AggregateUnit Availability(Current InventoryPosition)

Aggregate Production Plan

Required Production Capacity

Aggr. Unit, Production Reqs Corporate Strategy

Aggregate Production Plan:•Aggregate Production levels•Aggregate Inventory levels•Aggregate Backorder levels

Production Capacity Plan:•Workforce level(s)•Overtime level(s)•Subcontracted Quantities


Figure 14.1

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Example Aggregate Planning Variables and Revenue/Cost Implications


• Meet demand (Sales Forecast)

• Use capacity efficiently• Meet inventory policy• Minimize cost

– Labor– Inventory– Plant & equipment– Subcontract

Aggregate Planning Goals

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Aggregate Scheduling Options - Advantages and disadvantages

Option Advantage Disadvantage SomeComments

Changinginventory levels

Changes inhuman resourcesare gradual, notabruptproductionchanges

Inventoryholding costs;Shortages mayresult in lostsales

Applies mainlyto production,not serviceoperations

Varyingworkforce sizeby hiring orlayoffs

Avoids use ofother alternatives

Hiring, layoff,and trainingcosts

Used where sizeof labor pool islarge



Varyingproduction ratesthrough overtimeor idle time

Matches seasonalfluctuationswithouthiring/trainingcosts

Overtimepremiums, tiredworkers, may notmeet demand

Allowsflexibility withinthe aggregateplan

Subcontracting Permitsflexibility andsmoothing of thefirm's output

Loss of qualitycontrol; reducedprofits; loss offuture business

Applies mainlyin productionsettings

Advantages and disadvantages (cont.)

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Using part-timeworkers

Less costly andmore flexiblethan full-timeworkers

Highturnover/trainingcosts; qualitysuffers;schedulingdifficult

Good forunskilled jobs inareas with largetemporary laborpools

Influencingdemand

Tries to useexcess capacity.Discounts drawnew customers.

Uncertainty indemand. Hard tomatch demand tosupply exactly.

Createsmarketing ideas.Overbookingused in somebusinesses.




Back orderingduring high-demand periods

May avoidovertime. Keepscapacity constant

Customer mustbe willing towait, butgoodwill is lost.

Many companiesbacklog.

Counterseasonalproducts andservice mixing

Fully utilizesresources; allowsstable workforce.

May requireskills orequipmentoutside a firm'sareas ofexpertise.

Risky findingproducts orservices withopposite demandpatterns.


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The Extremes

Level Strategy

Chase Strategy

Production equals sales

forecastProduction rate

is constant


• 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

• Chase scheduling strategy– Vary the amount of production to match (chase) the sales forecast– This requires changing the workforce (hiring & firing)

• Mixed strategy– Combines 2 or more aggregate scheduling options

Aggregate Planning Strategies

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Chase Demand Strategies

plan for matching output to customer demand

a production control plan that attempts to match capacity to the varying levels of forecast demand. Chase demand plans require flexible working practices and place varying demands on equipment requirements. Pure chase demand plans are difficult to achieve and are most commonly found in operations where output cannot be stored or where the organization is seeking to eliminate stores of finished goods.


The Trial & Error 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,

overtime, outsourcing, or to inventory levels• Develop alternative plans, and examine their total costs

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Materials Requirements Planning (MRP)

• Materials Requirements Planning (MRP) is a forward-looking, demand-based approach for planning the production of manufactured goods and ordering materials and components to minimize unnecessary inventories and reduce costs.

• The output of an MRP system is a schedule for obtaining raw materials and purchased parts, a detailed schedule for manufacturing and controlling inventories, and financial information that drives cash flow, budget, and financial needs.

Disaggregation in Manufacturing


1. Dependent demand is demand that is directly related to the demand of other Stock Keeping Units (SKUs) and can be calculated without needing to be forecasted. Demand for materials needed to produce finished goods is dependent on the number of finished goods planned.

2. Time phasing: all dependent demand requirements do not need to be ordered at the same time, but rather are time-phased as necessary.

3. Lot sizing is the process of determining the appropriate amount and timing of ordering to reduce costs.

Three Major Concepts of MRP Systems

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MRP explosion is the process of using the logic of dependent demand to calculate the quantity and timing of orders for all subassemblies and components that go into and support the production of finished goods.

Lot sizing is the process of determining the appropriate amount and timing of ordering to reduce costs.

• There are three common lot sizing methods for MRP:

1. Lot-for-lot (LFL)2. Fixed order quantity (FOQ)3. Periodic order quantity (POQ)4. Economic Order Quantity (EOQ)

Each of these is illustrated in the following examples.

MRP explosion


Sales and Operations Planning Activities

• Long-range planning– Greater than one year planning horizon– Usually performed in annual increments

• Medium-range planning– Six to eighteen months – Usually with weekly, monthly or quarterly increments

• Short-range planning– One day to less than six months– Usually with weekly or daily increments

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The Aggregate Operations Plan

• Main purpose: Specify the optimal combination of– production rate (units completed per unit of time)– workforce level (number of workers)– inventory on hand (inventory carried from previous period)

• Product group or broad category (Aggregation)

• This planning is done over an intermediate-range planning period of 3 to18 months


Balancing Aggregate Demand and Aggregate Production Capacity

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

45005500

7000

10000

8000

6000

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

4500 4000

90008000

4000

6000

Suppose the figure to the right represents forecast demand in units

Now suppose this lower figure represents the aggregate capacity of the company to meet demand

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

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Islamic University of Gaza - PalestineRequired Inputs to the Production Planning System

Planning for production

External capacity

Competitors’behavior

Raw material availability

Market demand

Economic conditions

Currentphysical capacity

Current workforce

Inventory levels

Activities required for production

External to firm

Internal to firm

Islamic University of Gaza - PalestineAggregate Planning Examples: Unit Demand and Cost Data

Materials $5/unitHolding costs $1/unit per mo.Marginal cost of stockout $1.25/unit per mo.Hiring and training cost $200/workerLayoff costs $250/workerLabor hours required .15 hrs/unitStraight time labor cost $8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8

Suppose we have the following unit demand and cost information:

Demand/mo Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000

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Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Productive hours/worker/day 7.25Paid straight hrs/day 8

Demand/mo Jan Feb Mar Apr MayJun

4500 5500 7000 10000 80006000

Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker?

7.25x22

7.25 / 0.15=48.33 & 48.33x22=1063.33

22x8hrsx$8=$1408

Cut-and-Try Example: Determining Straight Labor Costs and Output

Islamic University of Gaza - PalestineChase Strategy /(Hiring & Firing to meet demand)

JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408

JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0

Lets assume our current workforce is 7 workers.

First, calculate net requirements for production, or 4500-250=4250 units

Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers

Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired.

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Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1,063 918 1,015 1,015 1,063 967$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

Below are the complete calculations for the remaining months in the six month planning horizon

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Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

Jan Feb Mar Apr May Jun CostsMaterial $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62Hiring cost 400.00 200.00 600.00 1,200.00Firing cost 750.00 500.00 250.00 1,500.00

$260,408.62

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included

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Islamic University of Gaza - PalestineLevel Workforce Strategy (Surplus and Shortage Allowed)

JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6Production 6,380Ending inventory 2,130Surplus 2,130Shortage

Lets take the same problem as before but this time use the Level Workforce strategy

This time we will seek to use a workforce level of 6 workers

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Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300Net req. 4,250 3,370 4,860 8,770 10,680 7,300Workers 6 6 6 6 6 6Production 6,380 5,510 6,090 6,090 6,380 5,800Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500Surplus 2,130 2,140 1,230Shortage 2,680 1,300 1,500

Note, if we recalculate this sheet with 7 workers we would have a surplus

Below are the complete calculations for the remaining months in the six month planning horizon

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Jan Feb Mar Apr May Jun4,500 5,500 7,000 10,000 8,000 6,000

250 2,130 10 -910 -3,910 -1,6204,250 3,370 4,860 8,770 10,680 7,300

6 6 6 6 6 66,380 5,510 6,090 6,090 6,380 5,8002,130 2,140 1,230 -2,680 -1,300 -1,5002,130 2,140 1,230

2,680 1,300 1,500

Jan Feb Mar Apr May Jun$8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.0031,900 27,550 30,450 30,450 31,900 29,000 181,250.002,130 2,140 1,230 5,500.00

3,350 1,625 1,875 6,850.00

$241,600.00

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included

Note, total costs under this strategy are less than Chase at $260.408.62

LaborMaterialStorageStockout


Aggregate Planning Examples: Unit Demand and Cost Data

Materials $5/unitHolding costs $1/unit per mo. based on ending inv.Marginal cost of backorder $1.25/unit per mo.Hiring and training cost $200/workerLayoff costs $250/workerLabor hours required .15 hrs/unitStraight time labor cost $8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8

Suppose we have the following unit demand and cost information:


4500 7500 10500 11000 8000 5000

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Example: Determining Straight Labor Costs and Output


4500 7500 10500 11000 8000 5000

Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker?

Jan Feb Mar Apr May JunDays/mo 20 20 20 20 20 20Productive Hrs/worker/mo 145 145 145 145 145 145Units/worker/month 966.7 966.7 966.7 966.7 966.7 966.7$/worker $1,280 $1,280 $1,280 $1,280 $1,280 $1,280

Productive hours/worker/day 7.25Paid straight hrs/day 8


JanDays/mo 20Productive Hrs/worker/mo 145Units/worker/month 966.7$/worker $1,280

JanDemand 4500Beg. inv. 250Net req. 4250Req. workers 5Beg. Workers 7Hired 0Fired 2Workforce 5Production 4834Ending inventory 584

Chase Strategy (Hiring & Firing to meet demand/ No Shortage)

Lets assume our current workforce is 7 workers.

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Below are the complete calculations for January with the other costs included.

JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 5Beg. Workers 7Hired 0Fired 2Workforce 5Production 4834Ending inventory 584Costs:Material $24,170Labor $6,400Hiring cost $0Firing cost $500Holding Cost $584


Now complete calculations for Feb. and MarchFeb

DemandBeg. inv.Net req.Req. workersBeg. WorkersHiredFiredWorkforceProductionEnding inventoryCosts:Material $0Labor $0Hiring cost $0Firing cost $0Holding Cost $0

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Now complete calculations for Feb. and MarchMarch

DemandBeg. inv.Net req.Req. workersBeg. WorkersHiredFiredWorkforceProductionEnding inventoryCosts:Material $0Labor $0Hiring cost $0Firing cost $0Holding Cost $0


The IDES Sales Forecast for 2003

Unit Sales ForecastFor 2003

Quarter 1 307,200

Quarter 2 379,200

Quarter 3 360,000

Quarter 4 489,600

Total 1,536,000

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IDES Manufacturing Example

• IDES Manufacturing wants to compare the annual (year 2003) costs associated with scheduling using the following three (3) options:

• Option 1 – Maintain a constant work force during the entire year (Level).

• Option 2 – Maintain the present work force of 150 and use overtime and sub-contracting as needed (Mixed)

• Option 3 – Hire/layoff (stop) workers as needed to produce the required output (Chase).


IDES Cost Information

• Inventory Carrying Cost (per quarter) $ 0.50/unit

• Subcontracting cost $ 7/unit• Pay rate – regular time $20/hr• Pay rate – overtime $30/hr• Labor standard per unit 0.2 hrs• Cost to increase production $ 3/unit• Cost to decrease production $ 2/unit• IDES has 0 units in inventory• Each Quarter has 60 working days• At end of 2002, IDES has 150 prod. workers• IDES Policy – Maximum of 72,000 units/qtr produced using overtime

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Option 1 – Constant Workforce without overtime or subcontracting

• First, determine the number of workers required to produce the units forecast for 2003.

• Ave. Prod/day = 1,536,000 = 6,400/day240 days

• Then determine how many workers are needed.• Workers needed = 6,400/day = 160

5 units/hr X 8 hrs


Option 1 Continued:Calculate Inventory Carrying Costs

Qtr Production @ 6400/day

Sales Forecast

Inventory Change

Ending Inventory

1 384,000 307,200 +76,800 76,800

2 384,000 379,200 + 4,800 81,600

3 384,000 360,000 +24,000 105,600

4 384,000 489,600 -105,600 0

Total 1,536,000 1,536,000 264,000

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Option 1 Continued: Calculation of Annual Costs

• Inventory carrying cost:264,000 units X $0.50/unit = $ 132,000

• Cost to increase capacity:(384,000-360,000) units X $5/unit = $ 120,000

• Regular time labor cost:1,536,000 units X $4/unit = $6,144,000

• Total Annual Cost for Option 1 = $6,396,000


Option 2 – Present Workforce (150) using O/T & subcontracting

Qtr SalesForecast

In-house Production

InvChange

EndInv

UnitsReq’d

O/T OutSource

1 307,200 360,000 +52,800 52,800 0 0 0

2 379,200 360,000 -19,200 33,600 0 0 0

3 360,000 360,000 0 33,600 0 0 0

4 489,600 360,000 -33,600 0 96,000 72,000 24,000

Total 1,536,000 1,440,000 0 72,000 24,000

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Option 2 Continued: Calculation of Annual Costs

• Inventory Carrying Costs 120,000 units X $.50/unit = $ 60,000

• Regular time labor (150 workers)$4/unit X 1,440,000 units = $5,760,000

• Overtime labor$6/unit X 72,000 units = $ 432,000

• Out-sourcing$7/unit X 24,000 units = $ 168,000

• Total Annual Costs for Option 2 = $6,420,000


Option 3 – Vary Production (Workforce) to match Sales Forecast

QtrSales

ForecastBeginningCapacity

CapacityChangeNeeded

Cost ofCapacityChange

1 307,200 360,000 -52,800 $105,600

2 379,200 307,200 +72,000 216,000

3 360,000 379,200 -19,200 38,400

4 489,600 360,000 +129,600 388,800

Total 1,536,000 $748,800

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Option 3 calculation of Annual Costs (Cont.)

• Regular time labor costs1,536,000 units X $4/unit = $6,144,000

• Capacity Change Costs = $ 748,800• Total Annual Cost - Option 3 = $6,892,800


Annual Cost Comparison of the Aggregate Scheduling Strategies

Option Annual Cost

1. Level – No use of O/T or Outsourcing

$6,396,000

2. Mixed – Present work force w/ O/T & Outsourcing

$6,420,000

3. Chase – Vary Production (workforce)

$6,892,800

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The IDES Sales Forecast for 2003 revised

Unit Sales ForecastFor 2003

Quarter 1 388,000

Quarter 2 440,000

Quarter 3 400,000

Quarter 4 500,000

Total 1,728,000


IDES Cost Information - Revised

• Inventory Carrying Cost (per quarter) $ 0.75/unit

• Subcontracting cost $ 7.50/unit• Pay rate – regular time $20/hr• Pay rate – overtime $30/hr• Labor standard per unit 0.2 hrs• Cost to increase production $ 1.50/unit• Cost to decrease production $ 1/unit• IDES has 0 units in inventory• Each Quarter has 60 working days• At end of 2000, IDES has 140 prod. workers• IDES Policy – Maximum of 78,000 units/qtr produced using overtime

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Capacity Requirements Planning (CRP) is the process of determining the amount of labor and machine resources required to accomplish the tasks of production on a more detailed level, taking into account all component parts and end items in the materials plan.

• This information is provided in a work center load report.

Capacity Requirements Planning (CRP)


• Basic MRP does not consider capacity limitations (assumes infinite capacity so no rescheduling, etc.), so CRP addresses this issue.

Chapter 13 Resource Management

Capacity Requirements Planning (CRP) (cont.)

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Aggregate Planning for Services

• Most services cannot be inventoried• Demand for services is difficult to predict• Capacity is also difficult to predict• Service capacity must be provided at the appropriate

place and time• Labor is usually the most constraining resource for

services


(End of Chapter 14)

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