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Chapter 14
Aggregate Sales and
Operations Planning

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OBJECTIVES

Sales and Operations Planning

The Aggregate Operations Plan

Examples: Chase and Level


strategies

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Exhibit
Exhibit14.1
14.1

Process planning

Long
range

Strategic capacity planning

Intermediat Forecasting
& demand
e
management
range
Manufacturing

Sales and operations (aggregate) planning


Sales plan

Aggregate operations plan

Services

Master scheduling
Material requirements planning

Short
range
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Order scheduling

Weekly workforce and


customer scheduling
Daily workforce and customer scheduling
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Sales and Operations Planning


Activities

Long-range planning

Medium-range planning

Greater than one year planning horizon


Usually performed in annual increments

Six to eighteen months


Usually with weekly, monthly or quarterly
increments

Short-range planning

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One day to less than six months


Usually with weekly or daily 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 3
to 18 months

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Balancing Aggregate Demand


and Aggregate Production Capacity
Suppose
Supposethe
thefigure
figureto
to
the
theright
rightrepresents
represents
forecast
forecastdemand
demandin
in
units
units
Now
Nowsuppose
supposethis
this
lower
lowerfigure
figurerepresents
represents
the
theaggregate
aggregatecapacity
capacity
of
ofthe
thecompany
companyto
to
meet
meetdemand
demand

10000

10000

8000

8000
6000

7000
6000

5500
4500

4000
2000
0
Jan

Feb

Mar
9000

10000

Apr

May

Jun

8000

8000

What
Whatwe
wewant
wantto
todo
doisis
balance
balanceout
outthe
the
production
productionrate,
rate,
workforce
workforcelevels,
levels,and
and
inventory
inventoryto
tomake
make
these
figures
these figuresmatch
matchup
up
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6000

6000
4500

4000

Jan

Feb

4000

4000
2000
0
Mar

Apr

May

Jun

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Required Inputs to the Production


Planning System
Competitors
behavior
External
capacity

Current
physical
capacity

Raw material
availability

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External
to firm

Economic
conditions

Planning
for
production

Current
workforce

Market
demand

Inventory
levels

Activities
required
for
production

Internal
to firm

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Key Strategies for Meeting Demand


Chase

Level

Some

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combination of the two


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Aggregate Planning Examples: Unit


Demand and Cost Data
Suppose
Supposewe
wehave
havethe
thefollowing
followingunit
unit
demand
demandand
andcost
costinformation:
information:
Demand/mo

Jan

Feb

Mar

Apr

May

Jun

4500

5500

7000

10000

8000

6000

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
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$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
Giventhe
thedemand
demandand
andcost
costinformation
informationbelow,
below,what
what
are
arethe
theaggregate
aggregatehours/worker/month,
hours/worker/month,units/worker,
units/worker,and
and
dollars/worker?
dollars/worker?
Demand/mo
Jun

Jan

Feb

Mar

Apr

May

4500

5500

7000

10000

8000

6000

Productive hours/worker/day
Paid straight hrs/day

22x8hrsx$8=$140
Jan
8
Days/mo
22
Hrs/worker/mo
159.5
Units/worker
1063.33
$/worker
$1,408
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Feb
19
137.75
918.33
1,216

7.25
8

Mar
21
152.25
1015
1,344

7.25x2
2

7.25x0.15=48.33
&
Apr
May
Jun
84.33x22=1063.33
21
22
20
152.25
159.5
145
1015 1063.33 966.67
1,344
1,408
1,280

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Chase Strategy
(Hiring & Firing to meet demand)
Days/mo
Hrs/worker/mo
Units/worker
$/worker

Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory
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J an
22
159.5
1,063.33
$1,408

J an
4,500
250
4,250
3.997
3
4
0

Lets
Letsassume
assumeour
ourcurrent
currentworkforce
workforceisis77
workers.
workers.

First, calculate net requirements for


production, or 4500-250=4250 units
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
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Days/mo
Hrs/worker/mo
Units/worker
$/worker

Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory
McGraw-Hill/Irwin

J an
22
159.5
1,063
$1,408

Feb
19
137.75
918
1,216

Mar
21
152.25
1,015
1,344

Apr
21
152.25
1,015
1,344

May
22
159.5
1,063
1,408

J un
20
145
967
1,280

J an
4,500
250
4,250
3.997

Feb
5,500

Mar
7,000

Apr
10,000

May
8,000

J un
6,000

5,500
5.989
2

7,000
6.897
1

10,000
9.852
3

8,000
7.524

6,000
6.207

2
8
0

1
7
0

3
4
0

6
0

7
0

10
0

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Below are the complete calculations for the remaining months in


the six month planning horizon with the other costs included
J an
4,500
250
4,250
3.997

Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory

Material
Labor
Hiring cost
Firing cost

3
4
0

Feb
5,500

Mar
7,000

Apr
10,000

May
8,000

Jun
6,000

5,500
5.989
2

7,000
6.897
1

10,000
9.852
3

8,000
7.524

6,000
6.207

2
8
0

1
7
0

6
0

7
0

10
0

J an
Feb
Mar
Apr
May
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

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

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14

Level Workforce Strategy (Surplus


and Shortage Allowed)
Lets
Letstake
takethe
thesame
sameproblem
problemas
as
before
beforebut
butthis
thistime
timeuse
usethe
the
Level
LevelWorkforce
Workforcestrategy
strategy
This
Thistime
timewe
wewill
willseek
seekto
touse
use
aaworkforce
workforcelevel
levelof
of66workers
workers

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

J an
4,500
250
4,250
6
6,380
2,130
2,130

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Below
Below are
arethe
thecomplete
complete calculations
calculationsfor
for the
the remaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon

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

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

May
8,000
-2,680
10,680
6
6,380
-1,300

Jun
6,000
-1,300
7,300
6
5,800
-1,500

2,680

1,300

1,500

Note,
Note, ifif we
we recalculate
recalculate this
this sheet
sheet with
with 77 workers
workers
we
we would
would have
have aa surplus
surplus
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Below
Below are
are the
the complete
complete calculations
calculations for
for the
the
remaining
remaining months
months in
in the
the six
six month
month planning
planning
horizon
horizon with
with the
the other
other costs
costs included
included
Jan
4,500
250
4,250
6
6,380
2,130
2,130

Jan
$8,448
31,900
2,130

Feb
5,500
2,130
3,370
6
5,510
2,140
2,140

Feb
$7,296
27,550
2,140

Mar
7,000
10
4,860
6
6,090
1,230
1,230

Mar
$8,064
30,450
1,230

Apr
10,000
-910
8,770
6
6,090
-2,680

May
8,000
-3,910
10,680
6
6,380
-1,300

Jun
6,000
-1,620
7,300
6
5,800
-1,500

2,680

1,300

1,500

Apr
$8,064
30,450

May
$8,448
31,900

Jun
$7,680
29,000

3,350

1,625

1,875

Note,
Note,total
total
costs
costs under
under
this
thisstrategy
strategy
are
areless
lessthan
than
Chase
Chaseat
at
$260.408.62
$260.408.62
$48,000.00
181,250.00
5,500.00
6,850.00

Labor
Material
Storage
Stockout

$241,600.00
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17

Yield Management

Operating Yield Management Systems


Addresses

problems like
Overbooking
Fare Classes
Premium Seats
Single Order Quantities

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18

Strategic Capacity
Capacity Management Concepts
Management

Economies and Diseconomies of Scale


Learning Curve

Capacity Planning
Decision tree as a tool to evaluate capacity
alternatives

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19

Decision Tree

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