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10/13/2017

Outline
Aggregate
Scheduling 13 Global Company Profile:
Frito-Lay
The Planning Process
Sales and Operations Planning
PowerPoint presentation to accompany The Nature of Aggregate Planning
Heizer and Render
Operations Management, Global Edition, Eleventh Edition
Aggregate Planning Strategies
Principles of Operations Management, Global Edition, Ninth Edition

PowerPoint slides by Jeff Heyl

© 2014
© 2014
Pearson
Pearson
Education
Education 13 - 1 © 2014 Pearson Education 13 - 2

Outline - Continued Learning Objectives


When you complete this chapter you
Methods for Aggregate Planning should be able to:
Aggregate Planning in Services
1. Define sales and operations planning
Revenue Management
2. Define aggregate planning
3. Identify optional strategies for
developing an aggregate plan

© 2014 Pearson Education 13 - 3 © 2014 Pearson Education 13 - 4

Aggregate Planning at
Learning Objectives
Frito-Lay
When you complete this chapter you
should be able to:
More than three dozen brands, 15 brands
sell more than $100 million annually, 7 sell
4. Prepare a graphical aggregate plan over $1 billion
5. Solve an aggregate plan via the Planning processes covers 3 to 18 months
transportation method
Unique processes and specially designed
6. Understand and solve a revenue equipment
management problem
High fixed costs require high volumes and
high utilization

© 2014 Pearson Education 13 - 5 © 2014


© 2014
Pearson
Pearson
Education
Education 13 - 6

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Aggregate Planning at The Planning Process


Frito-Lay Long-range plans (over one year)
Figure 13.1 Capacity decisions critical to long range plans
Issues:
Research and Development
New product plans
Demand profile based on historical sales, Capital investments
Facility location/expansion
forecasts, innovations, promotion, local Top
executives Intermediate-range plans (3 to 18 months)
demand data Issues:
Sales and operations planning
Production planning and budgeting
Match total demand to capacity, expansion Operations Setting employment, inventory,
managers with subcontracting levels
plans, and costs sales and Analyzing operating plans
operations Short-range plans (up to 3 months)
Quarterly aggregate plan goes to 36 planning team Scheduling techniques
Issues:
plants in 17 regions Operations
Job assignments
Ordering
managers, Job scheduling
Each plant develops 4-week plan for supervisors,
foremen
Dispatching
Overtime
product lines and production runs Part-time help
Responsibility Planning tasks and time horizons
© 2014
© 2014
Pearson
Pearson
Education
Education 13 - 7 © 2014 Pearson Education 13 - 8

Sales and Operations Planning S&OP


and the
▶ Coordination of demand forecasts with
functional areas and the supply chain Aggregate
▶ Typically done by cross-functional teams Plan
▶ Determine which plans are feasible
▶ Limitations must be reflected
▶ Provides warning when resources do not
match expectations
▶ Output is an aggregate plan Figure 13.2

© 2014 Pearson Education 13 - 9 © 2014 Pearson Education 13 - 10

Sales and Operations Planning Sales and Operations Planning


▶ Decisions must be tied to strategic ▶ Requires
planning and integrated with all areas of ▶ A logical overall unit for measuring sales and
the firm over all planning horizons output
▶ S&OP is aimed at ▶ A forecast of demand for an intermediate
1. The coordination and integration of the planning period in these aggregate terms
internal and external resources necessary ▶ A method for determining relevant costs
for a successful aggregate plan ▶ A model that combines forecasts and costs so
2. Communication of the plan to those charged that scheduling decisions can be made for the
with its execution planning period

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Aggregate Planning Aggregate Planning


QUARTER 1
The objective of aggregate planning Jan. Feb. March
150,000 120,000 110,000
is usually to meet forecast demand
while minimizing cost over the QUARTER 2
planning period April May June
100,000 130,000 150,000

QUARTER 3
July Aug. Sept.
180,000 150,000 140,000

© 2014 Pearson Education 13 - 13 © 2014 Pearson Education 13 - 14

Aggregate Planning Aggregate Planning Strategies


▶ Combines appropriate resources into 1. Should inventories be used to absorb
general terms changes in demand?
▶ Part of a larger production planning 2. Should changes be accommodated by
varying the size of the workforce?
system
3. Should part-timers, overtime, or idle time be
▶ Disaggregation breaks the plan down used to absorb changes?
into greater detail
4. Should subcontractors be used and
▶ Disaggregation results in a master maintain a stable workforce?
production schedule 5. Should prices or other factors be changed to
influence demand?
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Capacity Options Capacity Options


1. Changing inventory levels 2. Varying workforce size by hiring or layoffs
▶ Increase inventory in low demand periods to ▶ Match production rate to demand
meet high demand in the future ▶ Training and separation costs for hiring and
▶ Increases costs associated with storage, laying off workers
insurance, handling, obsolescence, and ▶ New workers may have lower productivity
capital investment
▶ Laying off workers may lower morale and
▶ Shortages may mean lost sales due to long productivity
lead times and poor customer service

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Capacity Options Capacity Options


3. Varying production rates through overtime 4. Subcontracting
or idle time ▶ Temporary measure during periods of peak
▶ Allows constant workforce demand
▶ May be difficult to meet large increases in ▶ May be costly
demand ▶ Assuring quality and timely delivery may be
▶ Overtime can be costly and may drive down difficult
productivity ▶ Exposes your customers to a possible
▶ Absorbing idle time may be difficult competitor

© 2014 Pearson Education 13 - 19 © 2014 Pearson Education 13 - 20

Capacity Options Demand Options


1. Influencing demand
5. Using part-time workers
▶ Use advertising or promotion to increase
▶ Useful for filling unskilled or low skilled demand in low periods
positions, especially in services
▶ Attempt to shift
demand to slow
periods
▶ May not be
sufficient to
balance demand
and capacity

© 2014 Pearson Education 13 - 21 © 2014 Pearson Education 13 - 22

Demand Options Demand Options


2. Back ordering during high-demand 3. Counterseasonal product and service
periods mixing
▶ Requires customers to wait for an order ▶ Develop a product mix of counterseasonal
without loss of goodwill or the order items
▶ Most effective when there are few if any ▶ May lead to products or services outside the
substitutes for the product or service company’s areas of expertise
▶ Often results in lost sales

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Aggregate Planning Options Aggregate Planning Options


TABLE 13.1 Aggregate Planning Options TABLE 13.1 Aggregate Planning Options
OPTION ADVANTAGES DISADVANTAGES COMMENTS OPTION ADVANTAGES DISADVANTAGES COMMENTS
Changing Changes in Inventory holding Applies mainly to Varying Matches seasonal Overtime premiums; Allows flexibility
inventory human resources cost may increase. production, not production fluctuations tired workers; may within the
levels are gradual or Shortages may service, rates without hiring/ not meet demand. aggregate plan.
none; no abrupt result in lost sales. operations. through training costs.
production overtime or
changes. idle time

Varying Avoids the costs Hiring, layoff, and Used where size Sub- Permits flexibility Loss of quality Applies mainly in
workforce of other training costs may of labor pool is contracting and smoothing of control; reduced production
size by alternatives. be significant. large. the firm’s output. profits; loss of future settings.
hiring or business.
layoffs

© 2014 Pearson Education 13 - 25 © 2014 Pearson Education 13 - 26

Aggregate Planning Options Aggregate Planning Options


TABLE 13.1 Aggregate Planning Options TABLE 13.1 Aggregate Planning Options
OPTION ADVANTAGES DISADVANTAGES COMMENTS OPTION ADVANTAGES DISADVANTAGES COMMENTS
Using part- Is less costly and High turnover/ Good for Back May avoid Customer must be Many companies
time more flexible than training costs; unskilled jobs in ordering overtime. Keeps willing to wait, but back order.
workers full-time workers. quality suffers; areas with large during high- capacity constant. goodwill is lost.
scheduling difficult. temporary labor demand
pools. periods

Influencing Tries to use Uncertainty in Creates Counter- Fully utilizes May require skills or Risky finding
demand excess capacity. demand. Hard to marketing ideas. seasonal resources; allows equipment outside products or
Discounts draw match demand to Overbooking product and stable workforce. the firm’s areas of services with
new customers. supply exactly. used in some service expertise. opposite demand
businesses. mixing patterns.

© 2014 Pearson Education 13 - 27 © 2014 Pearson Education 13 - 28

Mixing Options to Develop a Plan Mixing Options to Develop a Plan


▶ A mixed strategy may be the best way ▶ Chase strategy
to achieve minimum costs
▶ Match output rates to demand forecast for
▶ There are many possible mixed each period
strategies ▶ Vary workforce levels or vary production
▶ Finding the optimal plan is not always rate
possible ▶ Favored by many service organizations

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Mixing Options to Develop a Plan Methods for Aggregate Planning


▶ Level strategy ▶ Graphical Methods
▶ Daily production is uniform ▶ Popular techniques
▶ Use inventory or idle time as buffer ▶ Easy to understand and use
▶ Stable production leads to better quality ▶ Trial-and-error approaches that do not
and productivity guarantee an optimal solution
▶ Some combination of capacity options, ▶ Require only limited computations
a mixed strategy, might be the best
solution

© 2014 Pearson Education 13 - 31 © 2014 Pearson Education 13 - 32

Graphical Methods Roofing Supplier Example 1


TABLE 13.2 Monthly Forecasts
1. Determine the demand for each period EXPECTED PRODUCTION DEMAND PER
MONTH DEMAND DAYS DAY (COMPUTED)
2. Determine the capacity for regular time, Jan 900 22 41
overtime, and subcontracting each period Feb 700 18 39
Mar 800 21 38
3. Find labor costs, hiring and layoff costs, Apr 1,200 21 57
and inventory holding costs May 1,500 22 68
June 1,100 20 55
4. Consider company policy on workers and 6,200 124
stock levels
Average Total expected demand
5. Develop alternative plans and examine requirement =
Number of production days
their total cost
6,200
= = 50 units per day
124
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Roofing Supplier Example 1 Roofing Supplier Example 2


Forecast demand Figure 13.3
TABLE 13.3 Cost Information
Production rate per working day

70 – Inventory carrying cost $ 5 per unit per month


Level production using average
monthly forecast demand Subcontracting cost per unit $20 per unit
60 –
Average pay rate $10 per hour ($80 per day)
50 – $17 per hour
Overtime pay rate
(above 8 hours per day)
40 – 1.6 hours per unit
Labor-hours to produce a unit
30 – Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
0 – (layoffs)
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
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Roofing Supplier Example 2 Roofing Supplier Example 2


PRODUCTION MONTHLY COST PRODUCTION MONTHLY
CALCULATIONS
PRODUCTION AT 50 UNITS DEMAND INVENTORY ENDING PRODUCTION AT 50 UNITS DEMAND INVENTORY ENDING
MONTH DAYS PER DAY FORECAST CHANGE INVENTORY MONTH
Inventory DAYS
carrying PER$9,250
DAY FORECAST CHANGE
(= 1,850 units carried xINVENTORY
$5 per
Jan 22 1,100 900 +200 200 Jan 22 1,100 900
unit) +200 200
Feb 18 900 700 +200 400 Feb 18 900 700 +200 400
Regular-time labor 99,200 (= 10 workers x $80 per day x
Mar 21 1,050 800 +250 650 Mar 21 1,050 800
124 days) +250 650
Apr 21 1,050 1,200 –150 500 Apr 21 1,050 1,200 –150 500
May 22 1,100 1,500 –400 100 Other
May costs (overtime,
22 1,100 1,500 –400 100
June 20 1,000 1,100 –100 0
hiring,
June
layoffs, 20 1,000 1,100 –100 0
subcontracting) 0
1,850 1,850
Total cost $108,450

Total units of inventory carried over from one Total units of inventory carried over from one
month to the next = 1,850 units month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers Workforce required to produce 50 units per day = 10 workers

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Roofing Supplier Example 3 Roofing Supplier Example 3


In-house production = 38 units per day Forecast demand
Production rate per working day

x 124 days 70 –
= 4,712 units Level production
60 – using lowest
Subcontract units = 6,200 – 4,712 monthly forecast
50 – demand
= 1,488 units
40 –
COST CALCULATIONS
30 –
Regular-time labor $75,392 (= 7.6 workers x $80 per day x
124 days)
Subcontracting 29,760 (= 1,488 units x $20 per unit) 0 –
Jan Feb Mar Apr May June = Month
Total cost $105,152      
22 18 21 21 22 20 = Number of
working days
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Roofing Supplier Example 4 Roofing Supplier Example 4


TABLE 13.4 Cost Computations for Plan 3 Forecast demand and
BASIC monthly production
Production rate per working day

PRODUCTION
COST EXTRA COST OF EXTRA COST OF
DAILY (DEMAND X INCREASING DECREASING 70 –
FORECAST PROD 1.6 HRS/UNIT PRODUCTION PRODUCTION TOTAL
MONTH (UNITS) RATE X $10/HR) (HIRING COST) (LAYOFF COST) COST
60 –
Jan 900 41 $ 14,400 — — $ 14,400

Feb 700 39 11,200 —


$1,200
12,400
50 –
(= 2 x $600)

Mar 800 38 12,800 —


$600
13,400 40 –
(= 1 x $600)

Apr 1,200 57 19,200


$5,700
— 24,900
30 –
(= 19 x
$300)
$3,300
May 1,500 68 24,000 (= 11 x — 24,300
$300) 0 –
$7,800 Jan Feb Mar Apr May June = Month
June 1,100 55 17,600 — (= 13 x 25,400      
$600)
22 18 21 21 22 20 = Number of
$99,200 $9,000 $9,600 $117,800
working days
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Comparison of Three Plans Mathematical Approaches


▶ Useful for generating strategies
TABLE 13.5 Comparison of the Three Plans ▶ Transportation Method of Linear Programming
COST PLAN 1 PLAN 2 PLAN 3
Inventory carrying $ 9,250 $ 0 $ 0 ▶ Produces an optimal plan
Regular labor 99,200 75,392 99,200 ▶ Works well for inventories, overtime,
Overtime labor 0 0 0 subcontracting
Hiring 0 0 9,000
Layoffs 0 0 9,600
▶ Does not work when nonlinear or negative factors
Subcontracting 0 29,760 0
are introduced
Total cost $108,450 $105,152 $117,800 ▶ Other Models
▶ General form of linear programming
Plan 2 is the lowest cost option
▶ Simulation
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Transportation Method Transportation Example


TABLE 13.6 Farnsworth’s Production, Demand, Capacity, and Cost Data
SALES PERIOD ▶ Important points
MAR. APR. MAY
Demand 800 1,000 750
1. Carrying costs are $2/tire/month. If goods
Capacity: are made in one period and held over to the
Regular 700 700 700 next, holding costs are incurred.
Overtime 50 50 50
Subcontracting 150 150 130
2. Supply must equal demand, so a dummy
Beginning inventory 100 tires column called “unused capacity” is added.
COSTS 3. Because back ordering is not viable in this
Regular time $40 per tire example, cells that might be used to satisfy
Overtime $50 per tire earlier demand are not available.
Subcontracting $70 per tire
Carrying cost $ 2 per tire per month
© 2014 Pearson Education 13 - 45 © 2014 Pearson Education 13 - 46

DEMAND FOR

Transportation Example Transportation


TOTAL
Unused CAPACITY
Period 1 Period 2 Period 3 Capacity AVAILABLE
SUPPLY FROM (Mar) (Apr) (May) (dummy) (supply)

4. Quantities in each column designate the


Example Beginning inventory
P
100
0

40
2

42
4

44
0

0
100

e
levels of inventory needed to meet demand r
i
Regular time 700
50 52 54 0
700

requirements o
d
Overtime
70
50
72 74 0
50

5. In general, production should be allocated to 1


P
Subcontract 150
40 42 0
150

the lowest cost cell available without e


r
Regular time X 700
50 52 0
700
i
exceeding unused capacity in the row or o
d
Overtime X 50 50

demand in the column 2 Subcontract X 50


70 72
100
0
150
P 40 0
e
Regular time X X 700 700
r
i 50 0
o Overtime X X 50 50
d
70 0
3 Subcontract X X 130 130
TOTAL DEMAND 800 1,000 750 230 2,780
Table 13.7
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Aggregate Planning in Services Five Service Scenarios


▶ Most services use combination strategies ▶ Restaurants
and mixed plans 1. Smoothing the production process
▶ Controlling the cost of labor is critical 2. Determining the optimal workforce size
1. Accurate scheduling of labor-hours to assure
▶ Hospitals
quick response to customer demand
▶ Responding to patient demand
2. An on-call labor resource to cover
unexpected demand ▶ National Chains of Small Service Firms
3. Flexibility of individual worker skills ▶ Planning done at national level and at
local level
4. Flexibility in rate of output or hours of work
© 2014 Pearson Education 13 - 49 © 2014 Pearson Education 13 - 50

Five Service Scenarios Revenue Management


▶ Miscellaneous Services ▶ Allocating resources to customers at
▶ Plan human resource requirements prices that will maximize revenue
▶ Manage demand 1. Service or product can be sold in advance of
▶ Airline industry consumption
▶ Extremely complex planning problem 2. Demand fluctuates
▶ Involves number of flights, number of 3. Capacity is relatively fixed
passengers, air and ground personnel, 4. Demand can be segmented
allocation of seats to fare classes
5. Variable costs are low and fixed costs are
▶ Resources spread through the entire system high
© 2014 Pearson Education 13 - 51 © 2014 Pearson Education 13 - 52

Revenue Management Revenue Management


Example Figure 13.5
Example Figure 13.6
Room sales Demand Room sales Demand
Curve Curve
Total $ contribution =
Potential customers exist who are (1st price) x 30 rooms + (2nd price) x 30 rooms =
100 willing to pay more than the $15 100
($100 - $15) x 30 + ($200 - $15) x 30 =
variable cost of the room, but not $2,550 + $5,550 = $8,100
$150

Passed-up Some customers who paid 60


contribution $150 were actually willing to
Total 50 pay more for the room
$ contribution
= (Price) x (50
rooms) 30
= ($150 - $15)
x (50) Money left
= $6,750 on the table

$15 $150 Price $15 $100 $200 Price


Variable cost Price charged Variable cost Price 1 Price 2
of room for room of room for room for room
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Revenue Management Approaches Revenue Management Approaches

▶ Airlines, hotels, rental cars, etc. ▶ Restaurants, golf courses, ISPs


▶ Tend to have predictable duration of service ▶ Generally have unpredictable duration of
and use variable pricing to control availability customer use and fixed prices, may use “off-
and revenue peak” rates to shift demand and manage
revenue
▶ Movies, stadiums, performing arts centers
▶ Tend to have predicable duration and fixed ▶ Health care businesses, etc.
prices but use seating locations and times to ▶ Tend to have unpredictable duration of
manage revenue service and variable pricing, often attempt to
control duration of service

© 2014 Pearson Education 13 - 55 © 2014 Pearson Education 13 - 56

Making Revenue Management


Work
1. Multiple pricing structures must be
feasible and appear logical to the
customer
2. Forecasts of the use and duration of
use
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