1

Operations Management

Aggregate Planning

OM AP

2

Aggregate Planning

Provides quantity and timing of production for the intermediate future (usually 3 to 18 months ahead)

Objective to minimize cost over the planning period while matching demand

Links firm’s strategic goals and production plans (manufacturing) or work force schedules (service)

OM AP

Long-range plans (over one year)Research and DevelopmentNew product plansCapital investmentsFacility location/expansion

Intermediate-range plans (3 to 18 months)Sales planningProduction planning and budgetingSetting employment, inventory,

subcontracting levelsAnalyzing operating plans

Short-range plans (up to 3 months)Job assignmentsOrderingJob schedulingDispatchingOvertimePart-time help

Top executives

Operations managers

Operations managers, supervisors, foremen

ResponsibilityResponsibility Planning tasks and horizonPlanning tasks and horizon

The Planning ProcessThe Planning Process

Quarter 1Quarter 1

JanJan FebFeb MarMar

150,000150,000 120,000120,000 110,000110,000

Quarter 2Quarter 2

AprApr MayMay JunJun

100,000100,000 130,000130,000 150,000150,000

Quarter 3Quarter 3

JulJul AugAug SepSep

180,000180,000 150,000150,000 140,000140,000

Aggregate PlanningAggregate Planning

5

Relationships of the Aggregate Plan

AggregatePlan for

Production

DemandForecasts,

orders

Master ProductionSchedule

MRP system

ExternalCapacity

Subcontractors

Inventory OnHand

Raw MaterialsAvailable

Work Force

Marketplaceand Demand

Research andTechnology

ProductDecisions

ProcessPlanning & Capacity

Decisions

Detailed WorkSchedules

OM AP

6

Aggregate Planning Goals

Meet demandUse capacity

efficientlyMeet inventory

policyMinimize cost

Labor Inventory Plant & equipment Subcontract

OM AP

7

Aggregate Planning Strategies

Capacity Options — change

capacity: changing inventory levels

varying work force size by hiring or layoffs

varying production capacity through

overtime or idle time

subcontracting

using part-time workers

OM AP

8

Aggregate Planning StrategiesPure Strategies

Demand Options — change

demand:

influencing demand

backordering during high demand periods

counterseasonal product mixing

OM AP

9

Aggregate Scheduling Options - Advantages and Disadvantages

Option AdvantageDisadvantage SomeComments

Changinginventory levels

Changes inhuman resourcesare gradual, notabruptproductionchanges

Inventoryholding costs;Shortages mayresult in lostsales

Applies mainlyto production,not service

Varyingworkforce sizeby hiring orlayoffs

Avoids use ofother alternatives

Hiring, layoff,and trainingcosts

Used where sizeof labor pool islarge

OM AP

10

Option AdvantageDisadvantageSomeComments

Varyingproduction ratesthrough overtimeor idle time

Matches seasonalfluctuationswithouthiring/trainingcosts

Overtimepremiums, tiredworkers, may notmeet demand

Allowsflexibility withinthe aggregateplan

Subcontracting Permitsflexibility and

smoothing of thefirm's output

Loss of qualitycontrol; reducedprofits; loss offuture business

Applies mainlyin productionsettings

Advantages/Disadvantages - Continued

OM AP

11

Advantages/Disadvantages - Continued

Option Advantage DisadvantageSomeComments

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.

OM AP

12

Advantage/Disadvantage - Continued

Option Advantage Disadvantage SomeComments

Back orderingduring high-demand periods

May avoidovertime. Keepscapacity constant

Customer mustbe willing towait, but

goodwill is lost.

Many companiesbackorder.

Counterseasonalproducts andservice mixing

Fully utilizesresources; allowsstable workforce.

May requireskills orequipmentoutside a firm'sareas ofexpertise.

Risky findingproducts orservices withopposite demandpatterns.

OM AP

13

The Extremes

Level Strategy

Chase Strategy

Production equals

demand

Production rate is constant

OM AP

14

Graphical & charting techniques Popular & easy-to-understand

Trial & error approach

Mathematical approaches Transportation method

Linear decision rule

Management coefficients model

Simulation

Aggregate Planning Methods

OM AP

15

The Graphical 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 or to stock levels

Develop alternative plans, and examine their total costs

OM AP

MonthMonth Expected DemandExpected DemandProduction Production

DaysDaysDemand Per Day Demand Per Day

(computed)(computed)

JanJan 900900 2222 4141

FebFeb 700700 1818 3939

MarMar 800800 2121 3838

AprApr 1,2001,200 2121 5757

MayMay 1,5001,500 2222 6868

JuneJune 1,1001,100 2020 5555

6,2006,200 124124

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

124124

Average Average requirementrequirement ==

Total expected demandTotal expected demand

Number of production daysNumber of production days

Roofing Supplier Roofing Supplier Example 1Example 1

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

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

Forecast demandForecast demand

Roofing Supplier Roofing Supplier Example 1Example 1

Table 13.3Table 13.3

Cost InformationCost Information

Inventory carrying costInventory carrying cost $ 5$ 5 per unit per month per unit per month

Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit

Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per per dayday))

Overtime pay rateOvertime pay rate$ 7$ 7 per hour per hour

((above above 88 hours per hours per dayday))

Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit

Cost of increasing daily production Cost of increasing daily production rate (hiring and training)rate (hiring and training)

$300$300 per unit per unit

Cost of decreasing daily production Cost of decreasing daily production rate (layoffs)rate (layoffs)

$600$600 per unit per unit

Plan 1 – constant workforce

Plan 1 – constant workforce

Roofing Supplier Roofing Supplier Example 2Example 2

Table 13.3Table 13.3

Cost InformationCost Information

Inventory carry costInventory carry cost $ 5$ 5 per unit per month per unit per month

Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit

Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per per dayday))

Overtime pay rateOvertime pay rate$ 7$ 7 per hour per hour

((above above 88 hours per hours per dayday))

Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit

Cost of increasing daily production Cost of increasing daily production rate (hiring and training)rate (hiring and training)

$300$300 per unit per unit

Cost of decreasing daily production Cost of decreasing daily production rate (layoffs)rate (layoffs)

$600$600 per unit per unit

Plan 1 – constant workforce

Plan 1 – constant workforce

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

1,850

Total units of inventory carried over from onemonth to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

Roofing Supplier Roofing Supplier Example 2Example 2

Table 13.3Table 13.3

Cost InformationCost Information

Inventory carry costInventory carry cost $ 5$ 5 per unit per month per unit per month

Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit

Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per per dayday))

Overtime pay rateOvertime pay rate$ 7$ 7 per hour per hour

((above above 88 hours per hours per dayday))

Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit

Cost of increasing daily production Cost of increasing daily production rate (hiring and training)rate (hiring and training)

$300$300 per unit per unit

Cost of decreasing daily production Cost of decreasing daily production rate (layoffs)rate (layoffs)

$600$600 per unit 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

1,850

Total units of inventory carried over from onemonth 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

Roofing Supplier Roofing Supplier Example 2Example 2

Table 13.3Table 13.3

Cost InformationCost Information

Inventory carrying costInventory carrying cost $ 5$ 5 per unit per month per unit per month

Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit

Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per per dayday))

Overtime pay rateOvertime pay rate$ 7$ 7 per hour per hour

((above above 88 hours per hours per dayday))

Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit

Cost of increasing daily production Cost of increasing daily production rate (hiring and training)rate (hiring and training)

$300$300 per unit per unit

Cost of decreasing daily production Cost of decreasing daily production rate (layoffs)rate (layoffs)

$600$600 per unit per unit

Roofing Supplier Roofing Supplier Example 3Example 3

Table 13.3Table 13.3

Cost InformationCost Information

Inventory carry costInventory carry cost $ 5$ 5 per unit per month per unit per month

Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit

Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per per dayday))

Overtime pay rateOvertime pay rate$ 7$ 7 per hour per hour

((above above 88 hours per hours per dayday))

Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit

Cost of increasing daily production Cost of increasing daily production rate (hiring and training)rate (hiring and training)

$300$300 per unit per unit

Cost of decreasing daily production Cost of decreasing daily production rate (layoffs)rate (layoffs)

$600$600 per unit per unit

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

= 4,712 units

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

Roofing Supplier Roofing Supplier Example 3Example 3

Table 13.3Table 13.3

Cost InformationCost Information

Inventory carry costInventory carry cost $ 5$ 5 per unit per month per unit per month

Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit

Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per per dayday))

Overtime pay rateOvertime pay rate$ 7$ 7 per hour per hour

((above above 88 hours per hours per dayday))

Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit

Cost of increasing daily production Cost of increasing daily production rate (hiring and training)rate (hiring and training)

$300$300 per unit per unit

Cost of decreasing daily production Cost of decreasing daily production rate (layoffs)rate (layoffs)

$600$600 per unit 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

Roofing Supplier Roofing Supplier Example 3Example 3

Table 13.2Table 13.2

MonthMonth Expected DemandExpected DemandProduction Production

DaysDaysDemand Per Day Demand Per Day

(computed)(computed)

JanJan 900900 2222 4141

FebFeb 700700 1818 3939

MarMar 800800 2121 3838

AprApr 1,2001,200 2121 5757

MayMay 1,5001,500 2222 6868

JuneJune 1,1001,100 2020 5555

6,2006,200 124124

Production = Expected DemandProduction = Expected Demand

Plan 3 – hiring and firing

Plan 3 – hiring and firing

Roofing Supplier Roofing Supplier Example 4Example 4

Table 13.3Table 13.3

Cost InformationCost Information

Inventory carrying costInventory carrying cost $ 5$ 5 per unit per month per unit per month

Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit

Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per per dayday))

Overtime pay rateOvertime pay rate$ 7$ 7 per hour per hour

((above above 88 hours per hours per dayday))

Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit

Cost of increasing daily production Cost of increasing daily production rate (hiring and training)rate (hiring and training)

$300$300 per unit per unit

Cost of decreasing daily production Cost of decreasing daily production rate (layoffs)rate (layoffs)

$600$600 per unit per unit

Roofing Supplier Roofing Supplier Example 4Example 4

Table 13.3Table 13.3

Cost InformationCost Information

Inventory carrying costInventory carrying cost $ 5$ 5 per unit per month per unit per month

Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit

Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per per dayday))

Overtime pay rateOvertime pay rate$ 7$ 7 per hour per hour

((above above 88 hours per hours per dayday))

Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit

Cost of increasing daily production Cost of increasing daily production rate (hiring and training)rate (hiring and training)

$300$300 per unit per unit

Cost of decreasing daily production Cost of decreasing daily production rate (layoffs)rate (layoffs)

$600$600 per unit 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

Table 13.4Table 13.4

Roofing Supplier Roofing Supplier Example 4Example 4

CostCost Plan 1Plan 1 Plan 2Plan 2 Plan 3Plan 3

Inventory carryingInventory carrying $ 9,250$ 9,250 $ 0$ 0 $ 0$ 0

Regular laborRegular labor 49,60049,600 37,69637,696 49,60049,600

Overtime laborOvertime labor 00 00 00

HiringHiring 00 00 9,0009,000

LayoffsLayoffs 00 00 9,6009,600

SubcontractingSubcontracting 00 14,88014,880 00

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

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

Comparison of Three Comparison of Three PlansPlans

28

Yield Management

Capacity decisions that determine the

allocation of resources to maximize

profits

Requirements

Multiple pricing structures must be feasible

and appear logical

Use and duration of use need to be

forecasted

OM AP

29

Yield Management

Characteristics that make YM interesting Service or product can be sold in advance of

consumption

Demand fluctuates whereas capacity is relatively fixed

Inventory is perishable

Demand can be segmented

Variable costs are low and fixed costs are high

OM AP