Chapter 13 - Aggregate Planning

Operations Management
6th Edition
R. Dan Reid & Nada R. Sanders

Copyright © 2016 John Wiley & Sons, Inc.

 Learning Objectives
2

Explain business planning.

Discuss planning options.
Identify aggregate planning strategies.
Develop aggregate plans.

Copyright © 2016 John Wiley & Sons, Inc.

 Business Planning
3

Strategic business plan

 A statement of long-range strategy and revenue, cost, and profit
objectives.
Sales and operations planning
 The process that brings together all the functional business plans
(marketing, operations, engineering, and finance) into one integrated
plan.
Marketing plan
 Identifies the markets to be served, desired levels of customer service,
product competitive advantage, profit margins, and the market share
needed to achieve the objectives of the strategic business plan.

Copyright © 2016 John Wiley & Sons, Inc.

 Business Planning Cont’d
4

Financial plan
 Identifies the sources and uses of funds; projects cash flows, profits,
return on investment; and provides budgets in support of the strategic
business plan.
Engineering plan
 Identifies new products or modifications to existing products that are
needed to support the marketing plan.
Master production schedule
 The anticipated production schedule for the company expressed in
specific configurations, quantities, and dates.

Copyright © 2016 John Wiley & Sons, Inc.

 Aggregate Planning
5

Integral to part of the business planning process

Supports the strategic plan
Aggregate plan is also called Production Plan
Identifies resources required for operations for the next
6-18 months
Details the aggregate production rate and size of work
force required
Output used are units, gallons, pounds, standard hours
and dollars

Copyright © 2016 John Wiley & Sons, Inc.

The Business Planning Hierarchy
6

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 Aggregate Planning Options
7

Demand-based options
 Reactive:
 Finished goods inventory – absorb fluctuations and develop a stable
work environment
 Backorders for fluctuations (unfilled orders); can be costly
 Proactive:
 Shifts the demand – patterns (incentives) to minimize fluctuations e.g.
early bird dinner prices at a restaurant

Copyright © 2016 John Wiley & Sons, Inc.

 Aggregate Planning Options -cont’d
8

Capacity-based options
 Changes output capacity to meet demand
 Uses
 Overtime – cost of labor per unit increases; short term only
 Under time – more people than demand or build up of inventory; short
term only
 Subcontracting – provide extra capacity; med to long term
 Hiring & Firing – expensive; long term
 Part-timers
 Cost and operational implications

Copyright © 2016 John Wiley & Sons, Inc.

Aggregate Planning Options -cont’d
9

Copyright © 2016 John Wiley & Sons, Inc.

Evaluating The Current Situation
10

Important to evaluate current situation in terms

of:
 Point of departure
 Current % of normal capacity
 Options are different depending on present situation
 Magnitude of change
 Larger changes need more dramatic measures
 Duration of change
 Is the length of time a brief seasonal change?
 Is a permanent change in capacity needed?

Copyright © 2016 John Wiley & Sons, Inc.

 Aggregate Plan Strategies
11

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

 Uses Demand-Based Options

Copyright © 2016 John Wiley & Sons, Inc.

 Types of Aggregate Plans – cont’d
12

Chase Aggregate Plans

 Produces exactly what is needed each period
 Sets labor/equipment capacity to satisfy period demands

 Good for make-to-order products

 Disadvantage- constantly changing short term capacity

 Uses Capacity-Based Options

Copyright © 2016 John Wiley & Sons, Inc.

 Types of Aggregate Plans -cont'd
13

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
 Can use Demand-Based and/or Capacity-Based Options

Copyright © 2016 John Wiley & Sons, Inc.

 Developing the Aggregate Plan
14

Step 1- Choose strategy: level, chase, or hybrid

Step 2- Determine 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
Copyright © 2016 John Wiley & Sons, Inc.
Developing the Aggregate Plan – cont’d
15

Measurements to help you decide

how best to satisfy your company’s objectives

Copyright © 2016 John Wiley & Sons, Inc.

Aggregate Plans For Companies With Tangible Products
16

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

Copyright © 2016 John Wiley & Sons, Inc.

 Problem Data For Plans A & B
17

Data for
Sophisticated
Skates

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Plan A – Level Using Inventory & Backorders
18

First calculate
the level
production
rate (14400/8
=1800)
 Plan A - Evaluation
19

Fill rate is 83.9%

Fill rate is likely to low
Inventory levels seem to be okay
Human resources fires two employees

Copyright © 2016 John Wiley & Sons, Inc.

Plan B – Chase Aggregate Plan Using Hiring And Firing
20

Using the same

problem data
as previous
example,
develop a
chase
aggregate plan
using hires and
fires but no
overtime
production.
 Plan B - Evaluation
21

Plan B costs slightly less than the level plan.

Hiring demands ranges from two in November to
thirty-four in February
Utilization is highest, 70.6%, in December and even
lower in the other months
Space and equipment are underutilized in every other
month of the plan

Copyright © 2016 John Wiley & Sons, Inc.

 Aggregate Plans For Service Companies With
Non-Tangible Products
22

Options – level, chase, and hybrid plans

 Overtime and under time can be used
 Staff can be hired and fired
Inventory cannot be used to level the service plan
All demand must be satisfied or lose business to a
competing service provider

Copyright © 2016 John Wiley & Sons, Inc.

Problem Data For Plans C, D, and E
23

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 Plan C – Level Aggregate Plan With No Back
Orders Or Tangible Product
24

 Staff of 69 people creates excessive UT (averages 30% UT)

 Cost per service call is $46.15 ($708,000 Divided by 15360 calls)
Plan D – Hybrid Aggregate Plan Using Initial Workforce
and OT as Needed
25

 Costs reduced by $77K and under time to an average of 20%

 Cost per service call reduced to $41.13 (-$5.02)
 Plan E – Chase Aggregate Plan For Nontangible
Products Using Hiring And Firing
26

 Total cost reduced by $114K over Plan F, utilization improved to 100%, and cost
per service call now $33.72 (-$7.41)
 Workforce fluctuates from 30-69 people- morale problems
 Solution?? Compare smaller permanent workforce, more OT??
 Aggregate Planning Within OM: How It All Fits
Together
27

 Aggregate planning determines the resources available to operations to

support the overall business plan. It is critical that accurate demand
forecasts be available (Ch 8) so that a reasonable production plan can be
developed. A company needs to determine the aggregate production rate
output required to determine the appropriate size of the workforce.
 After these determinations have been made, the company can calculate its
inventory levels, back-order levels, capacity requirements, and customer
service levels. If the plan requires seven-day-a-week operations,
appropriate staff schedules need to be developed (Ch 15).
 The aggregate plan specifies the number of employees needed. This allows
company to determine how much equipment and workspace is needed, as
well as to provide the input needed for developing a workplace layout (Ch
9) within the operations area. Aggregate planning provides the resources
needed by operations to achieve the company’s strategic objective.

Copyright © 2016 John Wiley & Sons, Inc.

Aggregate Planning Across The Organization
28

Aggregate planning, MPS, and rough-cut capacity affect

functional areas throughout the organization
 Accounting is affected because aggregate plan details the
resources needed by operations
 Marketing as the aggregate plan supports the marketing plan
 Information systems maintains the databases that support
demand forecasts and other such information
 Other: Purchasing calculates long-term needs and discounts;
Manufacturing knows more about workforce and amount of
inventory to be held

Copyright © 2016 John Wiley & Sons, Inc.

 Chapter 13 Highlights
29

Planning begins with development of strategic business

plan that provides company direction & objectives for the
next two to ten years.
Sales and operations planning integrates plans from the
other functional areas and regularly evaluates company
performance.
The level aggregate plan maintains the same size
workforce and produces the same output each period.
Inventories and backorders absorb fluctuations in
demand. Chase aggregate plans change the capacity each
period to match demand.
Copyright © 2016 John Wiley & Sons, Inc.
 Chapter 13 Highlights - cont'd
30

Demand patterns can be smoothed through pricing

incentives, reduced prices for out-of-season
purchases, or nonprime service times.
The difference in aggregate planning for companies
that do not provide a tangible product is that the
option to use inventories is not available

Copyright © 2016 John Wiley & Sons, Inc.