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Planning
Chapter 13
13 1
Learning Objectives
When you complete this chapter you
should be able to:
1. Define aggregate planning
2. Identify optional strategies for
developing an aggregate plan
3. Prepare a graphical aggregate plan
13 2
Learning Objectives
When you complete this chapter you
should be able to:
4. Solve an aggregate plan via the
transportation method of linear
programming
5. Understand and solve a yield
management problem
13 3
Definition
Aggregate planning is the process of developing, analyzing,
and maintaining a preliminary, approximate schedule of the
overall operations of an organization.
The aggregate plan generally contains targeted sales forecasts,
production levels, inventory levels, and customer backlogs.
The term aggregate implies that the planning is done for a
single overall measure of output or, at the most, a few
aggregated product categories.
The aim of aggregate planning is to set overall output levels in
the near to medium future in the face of fluctuating or uncertain
demands.
Aggregate planning might seek to influence demand as well as
supply.
13 4
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
13 5
Aggregate Planning
Required for aggregate planning
A logical overall unit for measuring sales
and output
A forecast of demand for an intermediate
planning period in these aggregate terms
A method for determining costs
A model that combines forecasts and
costs so that scheduling decisions can
be made for the planning period
13 6
Operations
managers
Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Setting employment, inventory,
subcontracting levels
Analyzing operating plans
Short-range plans
(up to 3 months)
Operations
managers,
supervisors,
foremen
Responsibility
Job assignments
Ordering
Job scheduling
Dispatching
Overtime
Part-time help
Figure 13.1
13 7
Aggregate Planning
Jan
150,000
Quarter 1
Feb
120,000
Mar
110,000
Apr
100,000
Quarter 2
May
130,000
Jun
150,000
Jul
180,000
Quarter 3
Aug
150,000
Sep
140,000
13 8
Aggregate
Planning
Figure 13.2
13 9
Aggregate Planning
Combines appropriate resources
into general terms
Part of a larger production planning
system
Disaggregation breaks the plan
down into greater detail
Disaggregation results in a master
production schedule
13 10
Aggregate Planning
Strategies
1. Use inventories to absorb changes in
demand
2. Accommodate changes by varying
workforce size
3. Use part-timers, overtime, or idle time to
absorb changes
4. Use subcontractors and maintain a stable
workforce
5. Change prices or other factors to
influence demand
13 11
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
13 12
Demand Options
Back ordering during highdemand 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
13 13
Demand Options
Counterseasonal product and
service mixing
Develop a product mix of
counterseasonal items
May lead to products or services
outside the companys areas of
expertise
13 14
Advantages
Disadvantages
Some Comments
Changing
inventory
levels
Changes in
Inventory
human
holding cost
resources are
may increase.
gradual or
Shortages may
none; no abrupt result in lost
production
sales.
changes.
Applies mainly to
production, not
service,
operations.
Varying
workforce
size by
hiring or
layoffs
Table 13.1
13 15
Advantages
Disadvantages
Some Comments
Allows flexibility
within the
aggregate plan.
Varying
production
rates
through
overtime or
idle time
Matches
seasonal
fluctuations
without hiring/
training costs.
Overtime
premiums; tired
workers; may
not meet
demand.
Subcontracting
Permits
flexibility and
smoothing of
the firms
output.
Loss of quality
Applies mainly in
control;
production
reduced profits; settings.
loss of future
business.
Table 13.1
13 16
Advantages
Disadvantages
Some Comments
High turnover/
training costs;
quality suffers;
scheduling
difficult.
Good for
unskilled jobs in
areas with large
temporary labor
pools.
Using parttime
workers
Is less costly
and more
flexible than
full-time
workers.
Influencing
demand
Tries to use
Uncertainty in
excess
demand. Hard
capacity.
to match
Discounts draw demand to
new customers. supply exactly.
Creates
marketing
ideas.
Overbooking
used in some
businesses.
Table 13.1
13 17
Advantages
Disadvantages
Some Comments
May avoid
overtime.
Keeps capacity
constant.
Customer must
be willing to
wait, but
goodwill is lost.
Many companies
back order.
May require
skills or
equipment
outside the
firms areas of
expertise.
Risky finding
products or
services with
opposite
demand
patterns.
CounterFully utilizes
seasonal
resources;
product
allows stable
and service workforce.
mixing
Table 13.1
13 18
13 19
Mixing Options to
Develop a Plan
Chase strategy
Match output rates to demand
forecast for each period
Vary workforce levels or vary
production rate
Favored by many service
organizations
13 20
Mixing Options to
Develop a Plan
Level strategy
Daily production is uniform
Use inventory or idle time as buffer
Stable production leads to better
quality and productivity
Graphical Methods
Popular techniques
Easy to understand and use
Trial-and-error approaches that do
not guarantee an optimal solution
Require only limited computations
13 22
Graphical Methods
1. Determine the demand for each period
2. Determine the capacity for regular time,
overtime, and subcontracting each period
3. Find labor costs, hiring and layoff costs,
and inventory holding costs
4. Consider company policy on workers and
stock levels
5. Develop alternative plans and examine
their total costs
13 23
Month
Expected Demand
Jan
900
22
41
Feb
700
18
39
Mar
800
21
38
Apr
1,200
21
57
May
1,500
22
68
June
1,100
20
55
6,200
124
Table 13.2
6,200
=
= 50 units per day
124
13 24
70
60
50
40
30
0
Jan
Feb
Mar
Apr
May
June
22
18
21
21
22
20
Figure 13.3
= Month
= Number of
working days
13 25
$ 7 per hour
(above 8 hours per day)
Table 13.3
orce
f
k
r
o
w
tant
s
n
o
c
Plan 1
13 26
Monthly
Demand Inventory
Ending
per unit per Inventory
month
Forecast $ 5Change
$10 +200
per unit
Average
Feb pay rate 900
900
700
800
$ 7 per
hour
+250
650
(above 8 hours per day)
Subcontracting
cost
per unit
Jan
1,100
Apr
1,050
1,200
May
1,100
1,500
Cost
of increasing
daily production
rate
(hiring and training)
June
1,000
1,100
Cost of decreasing daily production rate
(layoffs)
200
$ 5 per
hour ($40 per
day)
+200
400
-150
500
$300-400
per unit
100
-100
1,850
Total units of inventory carried over from one nt workforce
nsta = 1,850 units
onext
Table 13.3
c
month
to
the
1
Plan
Workforce required to produce 50 units per day = 10 workers
13 27
49,600
x $40
per
$ 5 workers
per
hour ($40
per
day)
700 (= 10
+200
400
day
xper
124
days)
$
7
hour
800
+250
650
-150
500
$300-400
per unit
100
-100
$600 per unit
0
1,850
6,000
Reduction
of inventory
5,000
4,000
3,000
6,200 units
Cumulative level
production using
average monthly
forecast
requirements
2,000
1,000
Cumulative forecast
requirements
Excess inventory
Jan
Feb
Mar
Apr
May
June
Figure 13.4
13 29
Month
Expected Demand
Jan
900
22
41
Feb
700
18
39
Mar
800
21
38
Apr
1,200
21
57
May
1,500
22
68
June
1,100
20
55
6,200
124
tin g
c
a
r
t
n
u b co
s
2
Plan
Table 13.2
70
60
Level production
using lowest
monthly forecast
demand
50
40
30
0
Jan
Feb
Mar
Apr
May
June
22
18
21
21
22
20
= Month
= Number of
working days
13 31
$ 7 per hour
(above 8 hours per day)
Table 13.3
13 32
In-housecost
production
Subcontracting
per unit
Average pay rate
Overtime pay rate
= 38$10units
per day
per unit
x $124
5 perdays
hour ($40 per day)
$ 7 perunits
hour
= 4,712
(above 8 hours per day)
Labor-hours
to produce a unit
Subcontract
units
1.6 hours
per unit
= 6,200
- 4,712
$300 per unit
Cost of increasing daily production rate
=
1,488
units
(hiring and training)
Cost of decreasing daily production rate
(layoffs)
Table 13.3
13 33
In-housecost
production
Subcontracting
per unit
Average pay rate
Overtime pay rate
= 38$10units
per day
per unit
x $124
5 perdays
hour ($40 per day)
$ 7 perunits
hour
= 4,712
(above 8 hours per day)
Labor-hours
to produce a unit
Costs Subcontract
units
1.6 hours
per unit
= Calculations
6,200
- 4,712
$300
per unit x $40 per
Cost
of increasing
daily production
rate
Regular-time
labor
$37,696
(=
7.6 workers
=
1,488
units
(hiring and training)
Total cost
$52,576
13 34
Month
Expected Demand
Jan
900
22
41
Feb
700
18
39
Mar
800
21
38
Apr
1,200
21
57
May
1,500
22
68
June
1,100
20
55
6,200
124
Plan
firing
d
n
a
ng
3 hiri
Table 13.2
70
60
50
40
30
0
Jan
Feb
Mar
Apr
May
June
22
18
21
21
22
20
= Month
= Number of
working days
13 36
$ 7 per hour
(above 8 hours per day)
Table 13.3
13 37
Cost Information
Extra Cost$of
5 perExtra
unitCost
perofmonth
Increasing
Decreasing
Production
Production
$10 per(layoff
unitcost) Total Cost
(hiring cost)
41
$ 7,200
$ 5 per hour
day)
($40 per$ 7,200
Feb
700
Overtime
pay rate39
5,600
$ 7 per hour
$1,200
6,800
(= 28x hours
$600) per day)
(above
Mar
800 to produce
38
6,400
Labor-hours
a unit
$600
1.6 hours
per
unit
(= 1 x
$600)
Average
pay
Jan
900 rate
7,000
Cost
of increasing
daily production
rate
$5,700 $300 per unit
Apr
1,200
57
9,600
(= 19 x $300)
(hiring and training)
15,300
Cost
rate
(= 11 x $300)
(layoffs)
15,300
June
1,100
Table 13.3
55
8,800
$49,600
$7,800
(= 13 x $600)
16,600
$9,000
$9,600
$68,200
Table 13.4
13 38
Plan 1
Plan 2
Inventory carrying
$ 9,250
Regular labor
49,600
37,696
49,600
Overtime labor
Hiring
9,000
Layoffs
9,600
Subcontracting
14,880
$58,850
$52,576
$68,200
Total cost
Plan 3
$
Table 13.5
13 39
Mathematical Approaches
Useful for generating strategies
Transportation Method of Linear
Programming
Produces an optimal plan
Other Models
Linear Decision Rule
Simulation
13 40
Transportation Method
Demand
Capacity:
Regular
Overtime
Subcontracting
Beginning inventory
Regular time
Overtime
Subcontracting
Carrying
Sales Period
Mar
Apr
May
800
1,000
750
700
700
50
50
150
150
100 tires
Costs
$40 per tire
$50 per tire
$70 per tire
$ 2 per tire per month
700
50
130
Table 13.6
13 41
Transportation Example
Important points
1. Carrying costs are $2/tire/month. If
goods are made in one period and held
over to the next, holding costs are
incurred
2. Supply must equal demand, so a
dummy column called unused
capacity is added
3. Because back ordering is not viable in
this example, cells that might be used to
satisfy earlier demand are not available
13 42
Transportation Example
Important points
4. Quantities in each column designate the
levels of inventory needed to meet
demand requirements
5. In general, production should be
allocated to the lowest cost cell
available without exceeding unused
capacity in the row or demand in the
column
13 43
Transportation
Example
Table 13.7
13 44
Management Coefficients
Model
Builds a model based on managers
experience and performance
A regression model is constructed
to define the relationships between
decision variables
Objective is to remove
inconsistencies in decision making
13 45
Other Models
Linear Decision Rule
Minimizes costs using quadratic cost curves
Operates over a particular time period
Simulation
Uses a search procedure to try different
combinations of variables
Develops feasible but not necessarily optimal
solutions
13 46
Summary of Aggregate
Planning Methods
Techniques
Graphical
methods
Solution
Approaches
Trial and
error
Transportation
Optimization
method of linear
programming
Important Aspects
Simple to understand and
easy to use. Many
solutions; one chosen
may not be optimal.
LP software available;
permits sensitivity
analysis and new
constraints; linear
functions may not be
realistic.
Table 13.8
13 47
Summary of Aggregate
Planning Methods
Techniques
Solution
Approaches
Important Aspects
Management
coefficients
model
Heuristic
Simulation
Change
parameters
Table 13.8
13 48
Aggregate Planning in
Services
Controlling the cost of labor is critical
1. Accurate scheduling of labor-hours to
assure quick response to customer
demand
2. An on-call labor resource to cover
unexpected demand
3. Flexibility of individual worker skills
4. Flexibility in rate of output or hours of
work
13 49
Hospitals
Responding to patient demand
13 50
Miscellaneous Services
Plan human resource
requirements
Manage demand
13 51
Labor-Hours Required
(2)
(3)
(4)
Forecasts
Best
Likely
Worst
(hours)
(hours)
(hours)
1,800
4,500
8,000
1,700
3,500
1,500
4,000
7,000
1,500
3,000
1,200
3,500
6,500
1,300
2,500
19,500
39
17,000
34
15,000
30
Capacity Constraints
(5)
(6)
Maximum
Number of
Demand in
Qualified
People
Personnel
3.6
9.0
16.0
3.4
7.0
4
32
15
6
12
Table 13.9
13 52
Yield Management
Allocating resources to customers at
prices that will maximize yield or
revenue
1. Service or product can be sold in
advance of consumption
2. Demand fluctuates
3. Capacity is relatively fixed
4. Demand can be segmented
5. Variable costs are low and fixed costs
are high
13 54
Demand
Curve
Potential customers exist who
are willing to pay more than the
$15 variable cost of the room
100
Passed-up
contribution
50
Total
$ contribution
= (Price) x
(50
rooms)
= ($150 $15)
x (50)
= $6,750
$15
Variable cost
of room
Money left
on the table
$150
Price charged
for room
Price
Figure 13.5
13 55
Room sales
100
Total $ contribution =
(1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =
$2,550 + $5,550 = $8,100
60
30
$15
Variable cost
of room
$100
Price 1
for room
$200
Price 2
for room
Price
Figure 13.6
13 56
Predictable
Unpredictable
Duration of use
Price
Tend to be fixed
Tend to be variable
Quadrant 1:
Quadrant 2:
Movies
Stadiums/arenas
Convention centers
Hotel meeting space
Hotels
Airlines
Rental cars
Cruise lines
Quadrant 3:
Quadrant 4:
Restaurants
Golf courses
Internet service
providers
Continuing care
hospitals
Figure 13.7
13 57
13 58
Thank You
13 59