Aggregate Planning

Determine the quantity and timing of production for the immediate future
Objective is to minimize cost over the planning period by adjusting
Production rates
Labor levels
Inventory levels
Overtime work
Subcontracting rates
Other controllable variables
Across the Organization
TYPES OF PLANS WITH OPERATIONS PLANNING AND
SCHEDULING

Term Definition
Sales and operations plan A time-phased plan of future aggregate resource levels so that
(S&OP) supply is in balance with demand throughout the organization

Aggregate plan Another term for the sales and operations plan

Production plan A manufacturing firm’s sales and operations plan that centers on
production rates and inventory holdings
Staffing plan A sales and operations plan for a service firm, which centers on
staffing and on other human resource-related factors

Resource plan An intermediate, more detailed, step in the planning process that
lies between S&OP and scheduling
Schedule A detailed plan that allocates resources over shorter time
horizons to accomplish specific tasks

Stages in Planning and Scheduling

Aggregation
Product families
Workforce
The relationship of operations plans to other plans
A business plan
An annual plan or financial plan
Resource planning
The lowest planning level is scheduling
Stages in Planning and Scheduling

Sales and Operations Plans

Aggregate Planning Strategies

Use inventories to absorb changes in demand
Accommodate changes by varying workforce size
Use part-timers, overtime, or idle time to absorb changes
Use subcontractors and maintain a stable workforce
Change prices or other factors to influence demand
Capacity Options
Changing inventory levels
Increase inventory in low demand periods to meet high demand in the future
Increases costs associated with storage, insurance, handling, obsolescence, and capital investment 15% to 40%
Shortages can mean lost sales due to long lead times and poor customer service
Varying workforce size by hiring or layoffs
Match production rate to demand
Training and separation costs for hiring and laying off workers
New workers may have lower productivity
Laying off workers may lower morale and productivity
Varying production rate through overtime or idle time
Allows constant workforce
May be difficult to meet large increases in demand
Overtime can be costly and may drive down productivity
Absorbing idle time may be difficult
Subcontracting
Temporary measure during periods of peak demand
May be costly
Assuring quality and timely delivery may be difficult
Exposes your customers to a possible competitor
Using part-time workers
Useful for filling unskilled or low skilled positions, especially in services
Demand Options
 Influencing demand
 Use advertising or promotion to increase demand in low periods
 Attempt to shift
demand to slow
periods
 May not be sufficient to balance demand and capacity
 Back ordering during high- demand periods
 Requires customers to wait for an order without loss of goodwill or the order
 Most effective when there are few if any substitutes for the product or service
 Often results in lost sales
 Counterseasonal product and service mixing
 Develop a product mix of counterseasonal items
 May lead to products or services outside the company’s areas of expertise

Sales and Operations Plans

Constraints and costs
Six steps in the sales and operations planning process

| TYPES OF COSTS WITH SALES AND OPERATIONS PLANNING

Cost Definition
Regular time Regular-time wages plus benefits and pay for
vacations
Overtime Wages paid for work beyond the normal workweek
exclusive of fringe benefits
Hiring and layoff Cost of advertising jobs, interviews, training
programs, scrap caused by inexperienced
employees, exit interviews, severance pay, and
retraining
Inventory holding Capital, storage and warehousing, pilferage and
obsolescence, insurance, and taxes
Backorder and Costs to expedite past-due orders, potential cost of
stockout losing a customer

Aggregate Planning Options

Option Advantages Disadvantages Some Comments
Changing inventory Changes in human Inventory holding cost Applies mainly to
levels resources are may increase. production, not
gradual or none; Shortages may result service,
no abrupt in lost sales. operations.
production
changes.
Varying workforce Avoids the costs of Hiring, layoff, and Used where size of
size by hiring other training costs may labor pool is large.
or layoffs alternatives. be significant.
Varying production Matches seasonal Overtime premiums; tired Allows flexibility within
rates through fluctuations workers; may not the aggregate
overtime or idle without hiring/ meet demand. plan.
time training costs.
Sub-contracting Permits flexibility Loss of quality control; Applies mainly in
and smoothing reduced profits; loss production
of the firm’s of future business. settings.
output.
Using part-time Is less costly and High turnover/ training Good for unskilled
workers more flexible costs; quality jobs in areas with
than full-time suffers; scheduling large temporary
workers. difficult. labor pools.
Influencing demand Tries to use excess Uncertainty in demand. Creates marketing
capacity. Hard to match ideas.
Discounts draw demand to supply Overbooking used
new customers. exactly. in some
businesses.
Back ordering May avoid overtime. Customer must be willing Many companies back
during high- Keeps capacity to wait, but goodwill order.
demand constant. is lost.
periods
Counter-seasonal Fully utilizes May require skills or Risky finding products
product and resources; equipment outside or services with
service mixing allows stable the firm’s areas of opposite demand
workforce. expertise. patterns.
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
Chase Aggregate Plans
Produces exactly what is needed each period
Sets labor/equipment capacity to satisfy period demands
Disadvantage- constantly changing short term capacity

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

Developing the Aggregate Plan

Step 1- Choose strategy: level, chase, or Hybrid
Step 2- Determine the aggregate production rate
Step 3- Calculate the size of the workforce
Step 4- Test the plan as follows:
Calculate Inventory, expected hiring/firing, overtime needs
Calculate total cost of plan
Step 5- Evaluate performance: cost, service, human resources, and operations
Plan for Companies with Tangible Products – Plans A, B, C, D
Plan A: Level aggregate plan using inventories and back orders
Plan B: Level plan using inventories but no back orders
Plan C: Chase aggregate plan using hiring and firing
Plan D: Hybrid plan using initial workforce and overtime as needed
Problem Data for Plans A, B, C, D

A
4 C o s tD a ta
5 R e g ula rtim ela b o rc o s tp e rh our
6 O ve rtim ela b o rc o stp erhou r
7 S u b c o n tra ctin gc o stp e ru n it(la b o ro n ly)
8 B a cko rd e rc o s tp e ru nitp e rp erio d
9 In ve n to ryh o ldin gc o stp e ru n itp e rp erio d
1 0 H irin gc o stp ere mplo ye
1 1 F irin gc os tp e rem p
lo y
e
Plan A - Level Using Inventory &
1 2
Backorders
First calculate the level production rate (14400/8=1800)
1 3 C a p a c ityD a ta
D E
1 4 B eg inn in gw o rk forc e(e m plo ye es)
3 1 Plan
5 A: Level Aggregate Plan, B e giUsing
n ningin vInventorie
e n tory(units)
4 1 6 P rod uctio ns ta nd a rdp e ru nit(h o urs )
5 1 Compute
7 R e Level
g u la rtiProduction
m ea vaila bleRate
p erp e riod(h ou rs )
6 1 8 O ve rtim ea va ila b lTotal
ep e rDemand
pe rio d(h o u rs) 1440
7 1 9 Less: Beginning Inventory 0
8 2 0 D e m a n dD a ta(u nits )
Total Net Demand 1440
9 2 1 Average Demand Per Period 1800
10 2 2
11 2 3
Compute Workforce Needed
12 2 4 Units per Employee per Period 20
13 2 5
Plan A Evaluation
Back orders were 13.9% of demand (1380)
Employees Required 90
14 2 6 was period 2 at 21% of demand
Worst performance
Marketing will not be satisfied at these levels Number to Hire 0
No15
2
Workable plan 7for operations
employees hired or fired, no overtime or undertime needed, andNumber to Fire
output is constant 0
No human2 8
resource problems are anticipated
16
Plan B – Level, Inventory but No Backorders
2
Set the level 9equal to the peak cumulative demand/period
rate
17
3 0 T ota lN um b ero fPe riod
18 Detailed Plan Computations
19 1
 D E
38 Plan B: Level Aggregate Plan, Using Inve
39
40 Detailed Plan Computations
41 1
42 Dem and (units) (net of beg. Inventory) 1920
43 Cum ulative demand (units) 1920
44 Cum ulative dem and/periods 1920
45 Period production (units) 2040
46
Plan B Evaluation Cum ulative production (units)
Plan B costs $240 (16%) more than plan A and has ending inventory of 7980 units
2040
47 Cum .Dem . Minus Cum .Prod.
To be fair, Plan B built 1920 additional units ($192) which will be sold later
Plan B costs $2.58 more per unit (2.5%) -120
Marketing satisfied by 100% service level
48 Operations and HR plan- hire 12, noEnding
Workable Inventory
OT or UT, and level production (units) 120
49
Plan C – Chase Using Hires and Fires
The production rate equals the demand each period Backorders (units) 0
50 D E
51 Compute Level Production Rate and Workforce N
6528 P la n C : C h aProduction s e A g gRate r e g(units)
a t e P la n2040 , Us
6539 Units per Em ployee per Period 20
7540 B e g in n in g NEmu ployees m b e r oNeeded f E m p lo y9e0e102 s
7551 U n its p e r WNum o r kber e r to p eHirer P e r io 2 0d 12
56 Num ber to Fire 0
72
57
7583 DCost e t a ilCalculations
e d P la n C for o mPlan p u t aBt io n s
7594an additional $2 per unit more than Plan Regular
Plan C Evaluation
Costs B tim e labor cost 1 $1,632
Marketing is satisfied again by 100% service level

7605space, tools,
D e m a n updto 120
( u n its
From Operations and HR standpoint, not easy to implement:
Need equipment for people
High training costs and potential quality problems
) ( 6n
Overtime
in period e
and t
only o
havef 60bpeople
labor e g . In
incost
period 4v e
1 n
9 to
2 0r y )
7616 P r o d u Inventory
c tio n p e holding r p e r io cost d ( u n1its 9 2) 0 $79
62 Back order cost
Low morale likely due to poor job security

Plan D– Hybrid, Initial Workforce and OT as Needed

This is basically a level plan using OT to avoid backorders

D E
9 1 P la n D : H y b rid A g g re g a te P la n , U s in g
92
9 3 C o m p u te R e g u la r T im e P ro d u c tio n R a te
94 N u m b e r o f E m p lo y e e s 9 0
95 U n its p e r E m p lo y e e p e r P e rio d2 0
96 R e g u la r T im e P ro d u c tio n p e r P e rio1 8 d0 0
97
Plan D Evaluation
9 8 D e ta ile d P la n C o m p u ta tio n s
Cost is only $.61 (.6%) more than Plan A with a reasonable increase in ending inventory (+1440)
Marketing is satisfied as well with 100% service level

99 1
Not difficult for Operations to implement
Does not need excessive overtime
Uses overtime in just periods 1 and 2 (7%, 20%)

100 T o ta l D e m a n d in P e rio d1 9 2 0
Aggregate Plan Objective: Keep customer service high and costs low

1 0 1 N e t D e m a n d A f te r In v e n to ry C o n s id 1e 9re2d0
102 R e g u la r T im e P ro d u c tio n1 8 0 0
103 O v e rtim e P ro d u c tio n N e e d e 1d 2 0
104 E n d in g In v e n to ry 0
105
1 0 6C o s t C a lc u la tio n s fo r P la n C
107 R e g u la r tim e la b o r c o s t$ 1 ,4 4 0 ,0 0 0
108 O v e rtim e la b o r c o s t $ 7 2 ,0 0 0
109 In v e n to ry h o ld in g c o s t $ 2 8 ,2 0 0
110 B a c k o rd e r c o s t $0