Download - Sales & Operations Planning
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Sales & Operations PlanningSales & Operations PlanningSales & Operations PlanningSales & Operations Planning
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OverviewOverviewOverviewOverview
Production-Planning HierarchyProduction-Planning Hierarchy Aggregate PlanningAggregate Planning Master Production SchedulingMaster Production Scheduling Types of Production-Planning and Control SystemsTypes of Production-Planning and Control Systems Wrap-Up: What World-Class Companies DoWrap-Up: What World-Class Companies Do
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Production Planning HierarchyProduction Planning HierarchyProduction Planning HierarchyProduction Planning Hierarchy
Master Production Scheduling Master Production Scheduling
Production Planning and Control SystemsProduction Planning and Control Systems
Pond DrainingPond DrainingSystemsSystems
Aggregate PlanningAggregate Planning
PushPushSystems Systems
PullPullSystemsSystems
Focusing onFocusing onBottlenecksBottlenecks
Long-Range Capacity PlanningLong-Range Capacity Planning
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Production Planning HorizonsProduction Planning HorizonsProduction Planning HorizonsProduction Planning Horizons
Master Production Scheduling Master Production Scheduling
Production Planning and Control SystemsProduction Planning and Control Systems
Pond DrainingPond DrainingSystemsSystems
Aggregate PlanningAggregate Planning
PushPushSystems Systems
PullPullSystemsSystems
Focusing onFocusing onBottlenecksBottlenecks
Long-Range Capacity PlanningLong-Range Capacity PlanningLong-RangeLong-Range
(years)(years)
Medium-RangeMedium-Range(6-18 months)(6-18 months)
Short-RangeShort-Range(weeks)(weeks)
Very-Short-RangeVery-Short-Range(hours - days)(hours - days)
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Production Planning: Units of MeasureProduction Planning: Units of MeasureProduction Planning: Units of MeasureProduction Planning: Units of Measure
Master Production SchedulingMaster Production Scheduling
Production Planning and Control SystemsProduction Planning and Control Systems
Pond DrainingPond DrainingSystemsSystems
Aggregate PlanningAggregate Planning
PushPushSystems Systems
PullPullSystemsSystems
Focusing onFocusing onBottlenecksBottlenecks
Long-Range Capacity PlanningLong-Range Capacity PlanningEntire Entire
Product LineProduct Line
ProductProductFamilyFamily
SpecificSpecificProduct ModelProduct Model
Labor, Materials,Labor, Materials,MachinesMachines
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Capacity Planning, Aggregate Planning, Master Schedule, and Short-Term Capacity Planning, Aggregate Planning, Master Schedule, and Short-Term SchedulingScheduling
Capacity Planning1. Facility Size2. Equipment Procurement
Aggregate Planning1. Facility Utilization2. Personnel needs3. Subcontracting
Master Schedule1. MRP2. Disaggregation of master plan
Short-term Scheduling1. Work center loading2. Job sequencing
Long-term
Intermediate-term
Intermediate-term
Short-term
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Relationships Between OM ElementsRelationships Between OM Elements
Marketplaceand Demand
Research and Technology
Product Decisions
Process Planning & Decisions
Aggregate Plan for Production
Detailed Work Schedules
Master Production Schedule
PriorityPlanning &Scheduling
Demand Forecasts, orders
External Capacity
Plant Capacity
Raw Materials Available
Inventory On Hand
Work Force
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Hierarchical Production PlanningHierarchical Production Planning
Annual demand byitem and by region
Monthly demandfor 15 months by
product type
Monthly demandfor 5 months by
item
Forecasts needed
Allocatesproduction
among plants
Determinesseasonal plan by
product type
Determines monthlyitem production
schedules
Decision ProcessDecision Level
Corporate
Plant manager
Shopsuperintendent
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Aggregate PlanningAggregate Planning
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Why Aggregate Planning Is NecessaryWhy Aggregate Planning Is NecessaryWhy Aggregate Planning Is NecessaryWhy Aggregate Planning Is Necessary
Fully load facilities and minimize overloading and Fully load facilities and minimize overloading and underloadingunderloading
Make sure enough capacity available to satisfy Make sure enough capacity available to satisfy expected demandexpected demand
Plan for the orderly and systematic change of Plan for the orderly and systematic change of production capacity to meet the peaks and valleys of production capacity to meet the peaks and valleys of expected customer demandexpected customer demand
Get the most output for the amount of resources Get the most output for the amount of resources availableavailable
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InputsInputsInputsInputs
A forecast of aggregate demand covering the selected A forecast of aggregate demand covering the selected planning horizon (6-18 months)planning horizon (6-18 months)
The alternative means available to adjust short- to The alternative means available to adjust short- to medium-term capacity, to what extent each medium-term capacity, to what extent each alternative could impact capacity and the related costsalternative could impact capacity and the related costs
The current status of the system in terms of The current status of the system in terms of workforce level, inventory level and production rate workforce level, inventory level and production rate
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OutputsOutputsOutputsOutputs
A production plan: aggregate decisions for each A production plan: aggregate decisions for each period in the planning horizon aboutperiod in the planning horizon about workforce levelworkforce level inventory levelinventory level production rateproduction rate
Projected costs if the production plan was Projected costs if the production plan was implementedimplemented
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Medium-Term Capacity AdjustmentsMedium-Term Capacity AdjustmentsMedium-Term Capacity AdjustmentsMedium-Term Capacity Adjustments
Workforce levelWorkforce level Hire or layoff full-time workersHire or layoff full-time workers Hire or layoff part-time workersHire or layoff part-time workers Hire or layoff contract workers Hire or layoff contract workers
Utilization of the work forceUtilization of the work force OvertimeOvertime Idle time (undertime) Idle time (undertime) Reduce hours workedReduce hours worked
. . . more. . . more
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Medium-Term Capacity AdjustmentsMedium-Term Capacity AdjustmentsMedium-Term Capacity AdjustmentsMedium-Term Capacity Adjustments
Inventory levelInventory level Finished goods inventoryFinished goods inventory Backorders/lost salesBackorders/lost sales
SubcontractSubcontract
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ApproachesApproachesApproachesApproaches
Informal or Trial-and-Error ApproachInformal or Trial-and-Error Approach Mathematically Optimal ApproachesMathematically Optimal Approaches
Linear ProgrammingLinear Programming Linear Decision RulesLinear Decision Rules
Computer SearchComputer Search HeuristicsHeuristics
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Comparison of Aggregate Planning MethodsComparison of Aggregate Planning Methods
MethodMethod AdvantagesAdvantages LimitationsLimitations
GraphicalGraphical Simple, easy to use and
understand
Many solutions; solution need not be optimal
Linear Linear ProgrammingProgramming
Provides optimal solution Popular in many industries Sensitivity & dual analysis
provide useful information Sensitivity & dual analysis
provide useful information Constraints readily added
Mathematical functions must be linear, and deterministic -- not necessarily a realistic assumption
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Comparison of Aggregate Planning MethodsComparison of Aggregate Planning Methods
MethodMethod AdvantagesAdvantages LimitationsLimitations
Linear Decision Rules
Provide optimal solution Handle non-deterministic
demand
Incorporates some non-standard costs
Skilled personal required Quadratic model not always realistic Values of variables are
unconstrained Feasible solution is optimal if it
exists - not guaranteed
Management Coefficients
Model
Simple, easy to use and understand
Attempts to duplicate manager’s decision-making process
Simplest, least disruptive, easiest to implement
Solution need not be optimal Assumes past decisions are good Built on individual’s invalidate
model
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Comparison of Aggregate Planning MethodsComparison of Aggregate Planning Methods
MethodMethod AdvantagesAdvantages LimitationsLimitations
Simulation
Places no restrictions on mathematical structure or cost functions
Can test many relationships
No optimal solution guaranteed Often a long, costly, process
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Pure Strategies for the Informal ApproachPure Strategies for the Informal ApproachPure Strategies for the Informal ApproachPure Strategies for the Informal Approach
Matching DemandMatching Demand Level CapacityLevel Capacity
Buffering with inventoryBuffering with inventory Buffering with backlogBuffering with backlog Buffering with overtime or subcontractingBuffering with overtime or subcontracting
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Matching Demand StrategyMatching Demand StrategyMatching Demand StrategyMatching Demand Strategy
Capacity (Production) in each time period is varied to Capacity (Production) in each time period is varied to exactly match the forecasted aggregate demand in exactly match the forecasted aggregate demand in that time periodthat time period
Capacity is varied by changing the workforce levelCapacity is varied by changing the workforce level Finished-goods inventories are minimalFinished-goods inventories are minimal Labor and materials costs tend to be high due to the Labor and materials costs tend to be high due to the
frequent changesfrequent changes
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Developing and EvaluatingDeveloping and Evaluatingthe Matching Production Planthe Matching Production Plan
Developing and EvaluatingDeveloping and Evaluatingthe Matching Production Planthe Matching Production Plan
Production rate is dictated by the forecasted Production rate is dictated by the forecasted aggregate demandaggregate demand
Convert the forecasted aggregate demand into the Convert the forecasted aggregate demand into the required workforce level using production time required workforce level using production time informationinformation
The primary costs of this strategy are the costs of The primary costs of this strategy are the costs of changing workforce levels from period to period, i.e., changing workforce levels from period to period, i.e., hirings and layoffshirings and layoffs
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Level Capacity StrategyLevel Capacity StrategyLevel Capacity StrategyLevel Capacity Strategy
Capacity (production rate) is held level (constant) Capacity (production rate) is held level (constant) over the planning horizonover the planning horizon
The difference between the constant production rate The difference between the constant production rate and the demand rate is made up (buffered) by and the demand rate is made up (buffered) by inventory, backlog, overtime, part-time labor and/or inventory, backlog, overtime, part-time labor and/or subcontractingsubcontracting
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Developing and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production PlanDeveloping and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production Plan
Assume that the amount produced each period is Assume that the amount produced each period is constant, no hirings or layoffsconstant, no hirings or layoffs
The gap between the amount planned to be produced The gap between the amount planned to be produced and the forecasted demand is filled with either and the forecasted demand is filled with either inventory or backorders, i.e., no overtime, no idle inventory or backorders, i.e., no overtime, no idle time, no subcontractingtime, no subcontracting
. . . more. . . more
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Developing and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production PlanDeveloping and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production Plan
The primary costs of this strategy are inventory The primary costs of this strategy are inventory carrying and backlogging costscarrying and backlogging costs
Period-ending inventories or backlogs are determined Period-ending inventories or backlogs are determined using the inventory balance equation:using the inventory balance equation:
EIEItt = EI = EIt-1t-1 + (P + (Ptt - D - Dt t ))
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Aggregate Plans for ServicesAggregate Plans for ServicesAggregate Plans for ServicesAggregate Plans for Services
For standardized services, aggregate planning may be For standardized services, aggregate planning may be simpler than in systems that produce productssimpler than in systems that produce products
For customized services,For customized services, there may be difficulty in specifying the nature and there may be difficulty in specifying the nature and
extent of services to be performed for each extent of services to be performed for each customercustomer
customer may be an integral part of the production customer may be an integral part of the production systemsystem
Absence of finished-goods inventories as a buffer Absence of finished-goods inventories as a buffer between system capacity and customer demandbetween system capacity and customer demand
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Preemptive TacticsPreemptive TacticsPreemptive TacticsPreemptive Tactics
There may be ways to manage the extremes of There may be ways to manage the extremes of demand:demand: Discount prices during the valleys.... have a saleDiscount prices during the valleys.... have a sale Peak-load pricing during the highs .... electric Peak-load pricing during the highs .... electric
utilities, Nucorutilities, Nucor
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A small manufacturing company with 200 employees produces umbrellas. The company produces the following three product lines: 1) the Executive Line, 2) the Durable Line and 3) the Compact line, as shown in the below
Executive Line
Durable Line
Compact Line
Aggregate Planning ExampleAggregate Planning ExampleAggregate Planning ExampleAggregate Planning Example
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0
2000
4000
6000
8000
10000
J a n Fe b Ma r Apr Ma y J un
45005500
7000
10000
8000
6000
Number of working days:Jan: 22Feb: 19Mar: 21Apr: 21May: 22Jun: 20
Aggregate Planning Example: Aggregate Planning Example: Demand for Executive UmbrellasDemand for Executive UmbrellasAggregate Planning Example: Aggregate Planning Example:
Demand for Executive UmbrellasDemand for Executive Umbrellas
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Aggregate Planning Example: Aggregate Planning Example: Cost Information for Executive UmbrellasCost Information for Executive Umbrellas
Aggregate Planning Example: Aggregate Planning Example: Cost Information for Executive UmbrellasCost Information for Executive Umbrellas
Materials $5.00 /unitHolding costs $1.00 /unit/monthMarginal cost of stockout $1.25 /unit/monthHiring & training cost $200.00 /workerLayoff costs $250.00 /workerLabor hours required 0.15 hrs/unit
Straight time labor cost $8.00 /hrBeginning inventory 250 unitsProductive hours 7.25 hrs/worker/dayPaid straight hours 8 hrs/dayBeginning # of workers 7 workers
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Aggregate Planning Example: Aggregate Planning Example: Determining Straight Labor Costs and Output for Executive UmbrellasDetermining Straight Labor Costs and Output for Executive Umbrellas
Aggregate Planning Example: Aggregate Planning Example: Determining Straight Labor Costs and Output for Executive UmbrellasDetermining Straight Labor Costs and Output for Executive Umbrellas
Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67$/worker $1,408 1,216 1,344 1,344 1,408 1,280
January159.5 = 22 [days/month] * 7.25 [productive hrs/worker]1063.33 = 159.5 [hrs/worker/month] / .15 [hrs/unit]$1,408 = 8 [$/hr] * 8 [paid hrs/day] * 22 [days/month]
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Aggregate Planning Example: Aggregate Planning Example: Determining Straight Labor Costs and Output for Executive UmbrellasDetermining Straight Labor Costs and Output for Executive Umbrellas
Aggregate Planning Example: Aggregate Planning Example: Determining Straight Labor Costs and Output for Executive UmbrellasDetermining Straight Labor Costs and Output for Executive Umbrellas
Aggregate Planning ProblemJan Feb Mar Apr May Jun
Days/month 22 19 21 21 22 20Hrs/worker/month 160 138 152 152 160 145Units/worker 1,063 918 1,015 1,015 1,063 967Labor cost/worker $1,408.00 $1,216.00 $1,344.00 $1,344.00 $1,408.00 $1,280.00
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• 4,500 units is the demand in January (any combination of firm orders and forecast
• 250 is the starting inventory position• 4,250 = 4,500 – 250• 3.997 = 4,250 / 1,063.33• 7 = workforce level at the beginning of
January• 3 = 7 – 4 = workers fired• 4 = workforce level at end of January• 0 = ending inventory level
JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408
JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0
Aggregate Planning ExampleAggregate Planning ExampleChase Strategy for Executive UmbrellasChase Strategy for Executive Umbrellas
Aggregate Planning ExampleAggregate Planning ExampleChase Strategy for Executive UmbrellasChase Strategy for Executive Umbrellas
• Objective: Adjust workforce level so as to eliminate the need to carry inventory from period to period
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Aggregate Planning ExampleAggregate Planning ExampleChase Strategy for Executive UmbrellasChase Strategy for Executive Umbrellas
Aggregate Planning ExampleAggregate Planning ExampleChase Strategy for Executive UmbrellasChase Strategy for Executive Umbrellas
Chase StrategyJan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000Beginning inventory 250 0 0 0 0 0Net requirements 4,250 5,500 7,000 10,000 8,000 6,000Beginning # of workers 7 4 6 7 10 8Required workers 4 6 7 10 8 6Workforce adjustment -3 2 1 3 -2 -1Production quantity 4,250 5,500 7,000 10,000 8,000 6,000Ending inventory 0 0 0 0 0 0
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Aggregate Planning ExampleAggregate Planning ExampleChase Strategy for Executive UmbrellasChase Strategy for Executive Umbrellas
Aggregate Planning ExampleAggregate Planning ExampleChase Strategy for Executive UmbrellasChase Strategy for Executive Umbrellas
January costs: $21,250.00 = 4,250 [units] * $5 [$/unit]$ 5,627.59 = 3.997 [workers] * 1,408 [$/worker]$ 750.00 = 3 [workers fired] * 250 [$/worker fired]
Chase Strategy CostsJan Feb Mar Apr May Jun
Material cost $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 $203,750.00Labor cost $5,628.00 $7,283.00 $9,269.00 $13,242.00 $10,594.00 $7,945.00 $53,961.00Hiring cost $0.00 $400.00 $200.00 $600.00 $0.00 $0.00 $1,200.00Firing cost $750.00 $0.00 $0.00 $0.00 $500.00 $250.00 $1,500.00Inventory holding cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Inventory stockout cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
TOTAL: $260,411.00
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Aggregate Planning ExampleAggregate Planning ExampleLevel Strategy for Executive UmbrellasLevel Strategy for Executive Umbrellas
JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6Production 6,380Ending inventory 2,130Surplus 2,130Shortage
• Objective: Adjust inventory level so as to eliminate the need to hire or fire workers from period to period
• Assume that January is started with 6 employees
• 6,380 = 6 [employees] * 1,063.33 [units/worker]
• 2,130 = 6,380 – 4,250 (surplus)
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Aggregate Planning ExampleAggregate Planning ExampleLevel Strategy for Executive UmbrellasLevel Strategy for Executive Umbrellas
Level Capacity StrategyJan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000Beginning inventory 250 2,130 2,140 1,230 -2,680 -4,300Net requirements 4,250 3,370 4,860 8,770 10,680 10,300Beginning # of workers 6 6 6 6 6 6Required workers 4 4 5 9 10 11Workforce adjustment 0 0 0 0 0 0Production quantity 6,380 5,510 6,090 6,090 6,380 5,800Ending inventory 2,130 2,140 1,230 -2,680 -4,300 -4,500
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Aggregate Planning ExampleAggregate Planning ExampleLevel Strategy for Executive UmbrellasLevel Strategy for Executive Umbrellas
January costs: $8,448 = 6 [workers] * $1,408 [$/worker]$ 31,900 = 6,380 [units] * $5 [$/unit]$ 2,130 = 2,130 [surplus units] * $1 [$/unit held/month]
Level Capacity Strategy CostsJan Feb Mar Apr May Jun Total
Material cost $31,900.00 $27,550.00 $30,450.00 $30,450.00 $31,900.00 $29,000.00 $181,250.00Labor cost $8,448.00 $7,296.00 $8,064.00 $8,064.00 $8,448.00 $7,680.00 $48,000.00Hiring cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Firing cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Inventory holding cost $2,130.00 $2,140.00 $1,230.00 $0.00 $0.00 $0.00 $5,500.00Inventory stockout cost $0.00 $0.00 $0.00 $3,350.00 $5,375.00 $5,625.00 $14,350.00
TOTAL: $249,100.00
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Aggregate Planning ExampleAggregate Planning ExampleWhich Plan is Cheaper?Which Plan is Cheaper?
Level CapacityLevel Capacity ChaseChase
$249,100.00 $260,411.00
Clearly, the level capacity plan is cheaper over the selected time horizon
Note: Be cautious in using the chase strategy as many intangibles, such as employee loyalty and commitment to the organization are adversely affected
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Production Plan ExampleProduction Plan Example
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400
1500 —
1250 —
1000 —
750 —
500 —
250 —
0 —| | | |1 2 3 4
Quarter
Pai
nt
(th
ou
san
ds
of
gal
lon
s)
510
300
Inventoryconsumption
Production plan
Requirements
Inventoryaccumulation
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Staffing Strategies in Services: Level StrategyStaffing Strategies in Services: Level Strategy
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Staffing Strategies in Services: Chase StrategyStaffing Strategies in Services: Chase Strategy
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Aggregate Planning Example via ExcelAggregate Planning Example via Excel
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Aggregate Planning Example via LPAggregate Planning Example via LP
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Aggregate Planning ExampleAggregate Planning Example Computer ApplicationComputer Application
Aggregate Planning ExampleAggregate Planning Example Computer ApplicationComputer Application
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Aggregate Planning ExampleAggregate Planning Example Computer ApplicationComputer Application
Aggregate Planning ExampleAggregate Planning Example Computer ApplicationComputer Application
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Aggregate Planning ExampleAggregate Planning ExampleAggregate Planning ExampleAggregate Planning Example
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The EndThe End