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Chapter 13
Aggregate Planning

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OBJECTIVES
Sales and Operations Planning The Aggregate Operations Plan Examples: Chase and Level strategies

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Exhibit 13.1

Process planning Strategic capacity planning

Long range Intermediate Forecasting & demand range management Manufacturing

Sales and operations (aggregate) planning Sales plan Aggregate operations plan

Master scheduling Material requirements planning

Services

Short range

Order scheduling

Weekly workforce and customer scheduling Daily workforce and customer scheduling
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Sales and Operations Planning Activities

Long-range planning

Greater than one year planning horizon Usually performed in annual increments

Medium-range planning

Six to eighteen months Usually with monthly or quarterly increments

Short-range planning

One day to less than six months Usually with weekly increments
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The Aggregate Operations Plan

Main purpose: Specify the optimal combination of production rate (units completed per unit of time) workforce level (number of workers) inventory on hand (inventory carried from previous period) Product group or broad category (Aggregation) This planning is done over an intermediate-range planning period of 6 to18 months

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Balancing Aggregate Demand and Aggregate Production Capacity

10000

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

10000 8000 8000 6000 4000 2000 0 Jan Feb Mar 9000 8000 6000 6000 4000 2000 0 Jan Feb Mar Apr May Jun 4500 4000 4000 Apr May Jun 5500 4500 7000 6000

10000 8000

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Required Inputs to the Production Planning System

Competitors behavior External capacity Raw material availability Market demand Economic conditions External to firm

Planning for production

Current physical capacity

Current workforce

Inventory levels

Activities required for production

Internal to firm

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Key Strategies for Meeting Demand Chase

Level

Some combination of the two

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Aggregate Planning Examples: Unit Demand and Cost Data

Suppose we have the following unit demand and cost information:
Demand/mo Jan 4500 Feb 5500 Mar 7000 Apr 10000 May 8000 Jun 6000

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Materials Holding costs Marginal cost of stockout Hiring and training cost Layoff costs Labor hours required Straight time labor cost Beginning inventory Productive hours/worker/day Paid straight hrs/day

$5/unit $1/unit per mo. $1.25/unit per mo. $200/worker $250/worker .15 hrs/unit $8/hour 250 units 7.25 8
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Cut-and-Try Example: Determining Straight Labor Costs and Output

Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker?
d/ J J M M y 10000 8000 7 5

7 5x

7000 P d c v h4500 / 5500 /d y 6000 gh h /d y P d

8
M

x8h x 8= 140 8
y/ / U / / /

J 19 1 7 75 918 1, 16

7 5x0 15=48 & My 84 x =106

1 15 5 1015 1, 44 159 5 106 1,408

J 0 145 966 67 1, 80

159 5 106 1,408

1 15 5 1015 1, 44

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Chase Strategy (Hiring & Firing to meet demand)

Lets assume our current workforce is 7 workers.
22 1 1 1

First, calculate net requirements for production, or 4500-250=4250 units

N R

2 2

Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers 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.
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Below are the complete calculations for the remaining months in the six month planning horizon
Da s/mo Hrs/wor er/mo nits/wor er /wor er Ja 22 1 . 1 3 1 e 1 13 . 1 1 21 ar 21 1 2.2 1 1 13 r 21 1 2.2 1 1 13 a 22 1 . 1 3 1 Jun 2 1 12

Jan Demand Be . inv. Net re . Re . wor ers Hired Fired or force nding inventor 4, 2 4,2 3. 3 4 , , .

Fe , , . 2

ar 1 , 1 , . 1 1

r ,

a ,

Jun

2 3

, . 24 2

, .2 1

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Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
Jan Demand eg. nv. et req. Req. rkers red Fired W rkforce Ending inventory 4, 4, 3. 3 4 , , . 2 6 Feb , , . 1 7 1 ar 1 , 1 , . 3 2 1 7 Apr , , . ay , , 6. Jun

aterial Labor Hiring cost Firing cost

Jan Feb ar Apr ay Jun $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 400.00 200.00 600.00 750.00 500.00 250.00

Costs 203,750.00 53,958.62 1,200.00 1,500.00 $260,408.62

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Level Workforce Strategy (Surplus and Shortage Allowed)

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

an De and Beg. inv. Net req. W orkers P roduction Ending inventory Surplus Shortage 45 25 4 25 3 2 13 2 13

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Below are the complete calculations for the remaining months in the six month planning horizon
Jan 4,500 250 4,250 6 6,380 2,130 2,130 Feb 5,500 2,130 3,370 6 5,510 2,140 2,140 Mar 7,000 2,140 4,860 6 6,090 1,230 1,230 Apr 10,000 1,230 8,770 6 6,090 -2,680 2,680 May 8,000 -2,680 10,680 6 6,380 -1,300 1,300 Jun 6,000 -1,300 7,300 6 5,800 -1,500 1,500

Demand Beg. inv. Net req. Workers Production Ending inventory Surplus Shortage

Note, if we recalculate this sheet with 7 workers we would have a surplus

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Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
Jan 4,500 250 4,250 6 6,380 2,130 2,130 Feb 5,500 2,130 3,370 6 5,510 2,140 2,140 Mar 7,000 10 4,860 6 6,090 1,230 1,230 Apr 10,000 -910 8,770 6 6,090 -2,680 2,680 Jan $8,448 31,900 2,130 Feb $7,296 27,550 2,140 Mar $8,064 30,450 1,230 Apr $8,064 30,450 3,350 May 8,000 -3,910 10,680 6 6,380 -1,300 1,300 May $8,448 31,900 1,625 Jun 6,000 -1,620 7,300 6 5,800 -1,500 1,500 Jun $7,680 29,000 1,875

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Note, total costs under this strategy are less than Chase at $260.408.62
$48,000.00 181,250.00 5,500.00 6,850.00 $241,600.00
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Labor Material Storage Stockout

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End of Chapter 13

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