1

Aggregate Planning-
Sales & Operations
Planning
Sales & Operations Planning
Planning production to meet the
firms strategic objectives
Demand vs. Supply
Volume
Mix
How is sales plan different from
operations plan?
Demand > Supply
Demand < Supply
2
Balance Supply & Demand
Intermediate Term (3-18 months)
APP = Competitive Advantage:
Anheuser-Busch- 40% of US beer
Production of certain brands in specific
plants
High volume & low variety/plant
Labor requirements
Meticulous cleaning between batches
Inventory Capacity
Goal:
High facility utilization
Why?
Production Stages
Raw Material Selection
QA
Delivery
Brewing: (Milling to Aging)
Packaging
Distribution
Temp-controlled delivery
Storage
Resource limitations at each stage
Scheduling Challenges????
3
Hierarchical Planning
Annual demand by
item and by region
Monthly demand
for 15 months by
product family
Monthly demand
for quarter by
item
Forecasts needed
Allocates
production
among plants
Determines
seasonal plan by
product family
Determines monthly
item production
schedules
Decision Process Decision Level
Corporate
Plant manager
Shop
superintendent
At this stage
Generally Planning for a product line or
family (AGGREGATE) not individual SKUs
How much beer at each plant of each type
Not container types, etc.
Inputs
Strategic objectives, demand forecasts,
company policy, financial constraints,
capacity constraints.
Outputs
Size of workforce, production per month (units
or $), inventory levels, and units
subcontracted, back ordered, or lost.
4
Aggregate Planning
Goal: Specify the optimal combination of
the following variables to minimize cost
production rate (units completed per unit of
time)
workforce level (number of workers)
inventory on hand (inventory carried from
previous period)
Balancing Aggregate Demand
and Aggregate Production Capacity
0
2000
4000
6000
8000
10000
J an Feb Mar Apr May J un
4500
5500
7000
10000
8000
6000
0
2000
4000
6000
8000
10000
J an Feb Mar Apr May J un
4500 4000
9000
8000
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.
5
Key Strategies for Meeting Demand
Chase
Level
Some combination of the two
Aggregate Planning Examples: Unit
Demand and Cost Data
Materials $5/unit
Holding costs $1/unit per mo.
Marginal cost of stock-out $1.25/unit per mo.
Hiring and training cost $200/worker
Layoff costs $250/worker
Labor hours required .15 hrs/unit
Straight time labor cost $8/hour
Beginning inventory 250 units
Productive hours/worker/day 7.25
Paid straight hrs/day 8
Suppose we have the following unit demand and cost information:
Demand/mo J an Feb Mar Apr May J un
4500 5500 7000 10000 8000 6000
6
Cut-and-Try Example: Determining
Straight Labor Costs and Output
J an Feb Mar Apr May J un
Days/mo 22 19 21 21 22 20
Hrs/worker/mo
Units/worker
$/worker
Productive hours/worker/day 7.25
Paid straight hrs/day 8
Demand/mo J an Feb Mar Apr May J un
4500 5500 7000 10000 8000 6000
Given the demand and cost information below, what are the
aggregate hours/worker/month, units/worker, and dollars/worker?
Cut-and-Try Example: Determining
Straight Labor Costs and Output
Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/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 7.25
Paid straight hrs/day 8
Demand/mo J an Feb Mar Apr May J un
4500 5500 7000 10000 8000 6000
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
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Chase Strategy
(Hiring & Firing to meet demand)
J an
Days/mo 22
Hrs/worker/mo 159.5
Units/worker 1,063.33
$/worker $1,408
J an
Demand 4,500
Beg. inv. 250
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory 0
Lets assume our current workforce is 7 workers.
First, calculate net requirements for
production, or Demand-Begin Inv.
Then, calculate number of workers
needed to produce the net
requirements, or Net req/Units per
worker or #workers
Finally, determine the number of
workers to hire/fire. Current Workers-
Required =(-) hire or (+) fire
Chase Strategy
(Hiring & Firing to meet demand)
J an
Days/mo 22
Hrs/worker/mo 159.5
Units/worker 1,063.33
$/worker $1,408
J an
Demand 4,500
Beg. inv. 250
Net req. 4,250
Req. workers 3.997
Hired
Fired 3
Workforce 4
Ending 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 **Round-up
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.
8
J an Feb Mar Apr May J un
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1,063 918 1,015 1,015 1,063 967
$/worker $1,408 1,216 1,344 1,344 1,408 1,280
J an Feb Mar Apr May J un
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0
Below are the complete calculations for the remaining months
in the six month planning horizon.
J an Feb Mar Apr May J un
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0
J an Feb Mar Apr May J un Costs
Material $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00
Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62
Hiring cost 400.00 200.00 600.00 1,200.00
Firing 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.
9
Level Workforce Strategy (Surplus
and Shortage Allowed)
J an
Demand 4,500
Beg. inv. 250
Net req. 4,250
Workers 6
Production 6,380
Ending inventory 2,130
Surplus 2,130
Shortage
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.
J an Feb Mar Apr May J un
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300
Net req. 4,250 3,370 4,860 8,770 10,680 7,300
Workers 6 6 6 6 6 6
Production 6,380 5,510 6,090 6,090 6,380 5,800
Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500
Surplus 2,130 2,140 1,230
Shortage 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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J an Feb Mar Apr May J un
4,500 5,500 7,000 10,000 8,000 6,000
250 2,130 10 -910 -3,910 -1,620
4,250 3,370 4,860 8,770 10,680 7,300
6 6 6 6 6 6
6,380 5,510 6,090 6,090 6,380 5,800
2,130 2,140 1,230 -2,680 -1,300 -1,500
2,130 2,140 1,230
2,680 1,300 1,500
J an Feb Mar Apr May J un
$8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.00
31,900 27,550 30,450 30,450 31,900 29,000 181,250.00
2,130 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.
Labor
Material
Storage
Stock-out
Note, the total costs under this strategy are less than under Chase.
Graphical Methods
124 6200
55 20 1100 June
68 22 1500 May
58 21 1200 Apr
38 21 800 Mar
39 18 700 Feb
41 22 900 Jan
Demand
per Day
Production
Days
Expected
Demand
Month
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Level = 6200/124= 50 units/day
1000
1100
1050
1050
900
1100
Level
Production
1100
1500
1200
800
700
900
Estimated
Demand/
Month
-100 June
-400 May
-150 Apr
+250 Mar
+200 Feb
+200 Jan
Difference
Build vs.
Deplete Inv
Month
0
1000
2000
3000
4000
5000
6000
7000
Jan Feb Mar April May June
Level
Estimate
Level demand: plotted cumulatively
Build Inv.
Deplete Inv
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Determining the Optimal Mix Strategy
Try multiple attempts with different
scenarios
OR
Use Linear Programming (LP)
You will need to install Solver on your laptop
In Excel:
Click Tools
Click Add-ins
Click Solver Add-in
We can use LP to address many
production planning & distribution
problems.
What is Linear Programming?
A sequence of steps that will lead to
an optimal solution.
Used to
allocate scarce resources
assign workers
determine transportation schemes
solve blending problems
solve many other types of problems
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Five essential conditions:
Explicit Objective: What are we
maximizing or minimizing? Usually profit,
units, costs, labor hours, etc.
Limiting resources create constraints:
workers, equipment, parts, budgets,etc.
Linearity (2 is twice as good as 1, if it
takes 3 hours to make 1 part then it takes
6 hours to make 2 parts)
Homogeneity (machines make identical
parts)
Farm Resource Allocation
A farmer owns 45 acres of land. The
farmer is gong to plant each acre
with wheat (W) or corn (C). Each
acre planted with wheat yields $200
profit while corn yields $300 profit.
An acre of wheat requires 3 workers
and 2 tons fertilizer
An acre of corn requires 2 workers and
4 tons of fertilizer.
100 workers and 120 tons of fertilizer
are available
How many acres of Wheat or Corn should
be planted?
14
Graphical Approach (2 variables)
Formulate the problem in
mathematical equations
Plot all the Equations
Determine the area of feasibility
Maximizing problem: feasible area is on
or below the lines
Minimization: feasible area is on or
above the lines
Plot a few Profit line (Iso-profit) by
setting profit equation = different
values.
Answer point will be one of the corner
points (most extreme)
Equations
Maximize Profit : $200 C + $300 W
Constrained Resources
2 C + 3 W < 100 (Worker resource)
4 C + 2 W < 120 (Fertilizer resource)
C + W < 45 (available land resource)
W>0; C>0 (non-negative)
C = acres of planted corn ?
W =acres of planted wheat ?
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Wheat & Corn
0
10
20
30
40
50
0 50 100
Labor
Fer t
Land
Wheat = 20, Corn = 20
Profit = 10000
C
o
r
n

Wheat
Solver Set-up on Excel
Wheat Corn LSE RSE
VARIABLES 0 0
Profit 200 300 0
Labor 3 2 0 100
Fertilizer 2 4 0 120
Land 1 1 0 45
=SUMPRODUCT(C2:D2,C3:D3)
=SUMPRODUCT(C2:D2,C5:D5)
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Report Created: 1/17/2006 3:04:11 PM
Target Cell (Max)
Cel l Name Ori gi nal Val ue Fi nal Val ue
$E$3 Profit LSE 10000 10000
Adjustable Cells
Cel l Name Ori gi nal Val ue Fi nal Val ue
$C$2 VARIABLES Wheat 0 20
$D$2 Corn 0 20
Constraints
Cel l Name Cel l Val ue Formul a Status Sl ack
$E$5 Labor LSE 100 $E$5<=$F$5 Binding 0
$E$6 Fertilizer LSE 120 $E$6<=$F$6 Binding 0
$E$7 Land LSE 40 $E$7<=$F$7 Not Binding 5