Aggregate Planning - Introduction

Operations
Management
Aggregate Planning
Chapter 13
1
Outline
 The Planning Process

 Sales and Operations Planning (S&OP)
 The Nature of Aggregate Planning
 Aggregate Planning Strategies
 Capacity Options
 Demand Options
 Mixing Options to Develop a Plan
2
Outline – Continued
 Methods for Aggregate Planning
 Graphical Methods
 Mathematical Approaches
 Comparison of Aggregate Planning
Methods
 Aggregate Planning in Services
 Restaurants, Hospitals, National Chains
of Small Service Firms, Airline Industry
 Miscellaneous Services
 Revenue (Yield) Management
3
Learning Objectives
When you complete this chapter you should be able to:
1. Define sales and operations planning
and aggregate planning
2. Identify optional strategies for
developing an aggregate plan
3. Prepare a graphical aggregate plan
4. Solve an aggregate plan via the
transportation method and linear
programming
5. Understand and solve a revenue
(yield) management problem
4
Planning Horizons
Figure 13.1
Sales and Operations Planning (S&OP)
▶ Coordination of demand forecasts with
functional areas and the supply chain
▶ Typically done by cross-functional teams
▶ Determine which plans are feasible
▶ Limitations must be reflected
▶ Provides warning when resources do not
match expectations
▶ Output is an aggregate plan
Sales and Operations Planning (S&OP)
▶ Decisions must be tied to strategic planning
and integrated with all areas of the firm over
all planning horizons
▶ S&OP is aimed at
1. The coordination and integration of the
internal and external resources necessary
for a successful aggregate plan
2. Communication of the plan to those
charged with its execution
Sales and Operations Planning
▶ Requires
▶ 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 relevant costs
▶ A model that combines forecasts and costs
so that scheduling decisions can be made
for the planning period
Aggregate Planning
(or Aggregate Scheduling)
 Aggregate Planning is a high level approach
to planning. It translates annual and
quarterly business plans into intermediate
term production plans.
 Objective:
- To meet forecasted demand while minimizing cost
over the planning period
 Provides the quantity and timing of
production for intermediate future
 Usually 3 to 18 months into future
 Combines (‘aggregates’) production
9
ADM 3301 ~ Rim Jaber
Aggregate Planning
QUARTER 1
Jan. Feb. March
150,000 120,000 110,000
QUARTER 2
April May June
100,000 130,000 150,000
QUARTER 3
July Aug. Sept.
180,000 150,000 140,000
Aggregate Planning
 In manufacturing organizations
aggregate planning means determining
the size of the work-force, the rate of
production and inventory level that are
needed to implement a production plan.
 In service organizations aggregate
planning means scheduling staff to meet
customers' service needs.
11
S&OP
and the
Aggregate
Plan
Figure 13.2
Steps in Planning Process
 Forecasting the demand for the planning period:
 Total demand for each product is aggregated.
 Determination of the aggregate production plan:
 Production and work-force levels, as well as production
capacity requirements are determined.
 Determination of the Master Production Schedule
(MPS):
 Production levels by product type by time period over the
planning horizon are calculated.
13
Steps in Planning Process
 Material Requirements Planning (MRP):
 The master production schedule is “exploded" to obtain
requirements for sub-assemblies, components and raw
materials for each time period.
 Determination of the detailed job shop schedule:
 Detailed production schedules for components, sub-
assemblies and final products and order quantities for
raw materials are determined to meet the specification of
production quantities from the MRP system.
14
Aggregate Planning Goals
Meet demand
Meet inventory policy
Use capacity efficiently
Minimize cost
Labor
Inventory
Plant & equipment
Subcontract
15
Relevant Costs
 Hiring/firing costs:
 Hiring costs - recruitment, screening, training
 Lower initial productivity
 Firing costs - severance, employee benefits, redeployment of remaining
work-force
 Ill will, loss of morale.
 Overtime/idle time costs:
Overtime costs - overtime premiums
 Health costs
Idle time costs - opportunity cost.
 Part time/temporary labour costs:
 Lower rates and benefits, but possibly lower productivity.
16
Relevant Costs
 Subcontracting costs:
Usually more costly than in-house manufacture.
 Cooperative arrangement costs:
Usually lower cost.
 Inventory carrying costs:
Storage, financial opportunity cost, insurance, obsolescence;
Breakage, spoilage, deterioration.
 Back order or stockout costs:
Loss of goodwill (for back orders), loss of sales (for
stockouts).
17
Aggregate Planning Strategies
1. Should inventories be used to absorb
changes in demand?
2. Should changes be accommodated by
varying the size of the workforce?
3. Should part-timers, overtime, or idle time be
used to absorb changes?
4. Should subcontractors be used and
maintain a stable workforce?
5. Should prices or other factors be changed to
influence demand?
AGGREGATE SCHEDULING OPTIONS
(Aggregate Planning Pure Strategies)
Capacity Demand
 Inventory  Promotion & price
 Hire or layoff  Back ordering
 Overtime or idle  Counterseasonal
time product mixing
 Subcontract
19
 Part-time workers
Capacity Options
1. Changing inventory levels
▶ Increase inventory in low demand periods
to meet high demand in the future
▶ Increases costs associated with storage,
insurance, handling, obsolescence, and
capital investment
▶ Shortages may mean lost sales due to
long lead times and poor customer service
Capacity Options
2. Varying workforce size by hiring or
layoffs
▶ Match production rate to demand
▶ Training and separation costs for
hiring and laying off workers
▶ New workers may have lower
productivity
▶ Laying off workers may lower morale
and productivity
Capacity Options
3. Varying production rates through
overtime or idle time
▶ Allows constant workforce
▶ May be difficult to meet large increases
in demand
▶ Overtime can be costly and may drive
down productivity
▶ Absorbing idle time may be difficult
Capacity Options
4. Subcontracting
▶ Temporary measure during periods of peak
demand
▶ May be costly
▶ Assuring quality and timely delivery may be
difficult
▶ Exposes your customers to a possible
competitor
5. Using part-time workers

▶ Useful for filling unskilled or low skilled
positions, especially in services
Demand Options
1. 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
Demand Options
2. Back ordering during high-demand
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
Demand Options
3. Counterseasonal product and
service mixing
▶ Develop a product mix of
counterseasonal items
▶ May lead to products or services
outside the company’s areas of
expertise
Aggregate Planning Options
TABLE 13.1 Aggregate Planning Options
OPTION ADVANTAGES DISADVANTAGES COMMENTS
Changing Changes in Inventory holding Applies mainly to
inventory human resources cost may increase. production, not
levels are gradual or Shortages may service,
none; no abrupt result in lost sales. operations.
production
changes.
Varying Avoids the costs Hiring, layoff, and Used where size
workforce of other training costs may of labor pool is
size by alternatives. be significant. large.
hiring or
layoffs
Varying Matches seasonal Overtime premiums; Allows flexibility
production fluctuations tired workers; may within the
rates without hiring/ not meet demand. aggregate plan.
through training costs.
overtime or
idle time
Sub- Permits flexibility Loss of quality Applies mainly in

contracting and smoothing of control; reduced production
the firm’s output. profits; loss of future settings.
business.
Using part- Is less costly and High turnover/ Good for
time more flexible than training costs; unskilled jobs in
workers full-time workers. quality suffers; areas with large
scheduling difficult. temporary labor
pools.
Influencing Tries to use Uncertainty in Creates

demand excess capacity. demand. Hard to marketing ideas.
Discounts draw match demand to Overbooking
new customers. supply exactly. used in some
businesses.
Back May avoid Customer must be Many companies
ordering overtime. Keeps willing to wait, but back order.
during high- capacity constant. goodwill is lost.
demand
periods
Counter- Fully utilizes May require skills or Risky finding

seasonal resources; allows equipment outside products or
product and stable workforce. the firm’s areas of services with
service expertise. opposite demand
mixing patterns.
Determining the Aggregate Plan
 Step # 1: Collect relevant data:
Forecasts, inventory levels, desired final
inventory levels, current and future resource
availability, production times and costs.
 Step # 2: Analyze per unit costs for each
of the pure strategies:
Determine the preference thresholds by
estimating the cost of each option on a
homogeneous unit of measure.
31
Determining the Aggregate Plan
 Step # 3: Develop and evaluate alternative
plans:
Development of plans corresponding to dominant
strategies and evaluation of total cost (graphical
method, optimization, simulation, etc...).
 Step # 4: Integrate non quantifiable
variables and constraints:
Organizational culture, policies, external
environment, etc...
 Step # 5: Choose the aggregate plan:
The best plan is chosen and implemented.
32
Step # 3:Graphical Method
▶ Popular techniques
▶ Easy to understand and use
▶ Trial-and-error approaches that do not
guarantee an optimal solution
▶ Require only limited computations
33
Step # 3: Graphical method
 A chase strategy involves changing the production rates
or work-force levels to match the demand forecast for
each period. Inventory is not used to absorb demand
fluctuations. Favored by many service organizations.
 A level strategy involves the maintaining of a constant daily
production rate and work-force level for the duration of the
plan. Inventory is built up during periods of less than average
demand; alternatively, delivery lead times may be allowed to
grow during periods of high demand. Stable production leads
to better quality and productivity
 A mixed strategy involves periodic fluctuations in both
inventory levels and in work-force and production rates.

Step # 3: Graphical method
Level Chase
Strategy Strategy
Daily production Production equals

rate is constant demand forecast
35
Step # 3: Graphical Method
 Some combination of capacity options, a

mixed strategy, might be the best solution
 A mixed strategy may be the best way to
achieve minimum costs
 There are many possible mixed strategies
 Finding the optimal plan is not always
possible
36
Step # 3: Mathematical Methods
 Transportation Method/Linear Programming
 Produces an optimal plan
 Management Coefficients Model
 Model built around manager’s experience and
performance
 Other Models
 Linear Decision Rule
 Simulation
37
Management Coefficients Model
 Builds a model based on manager’s

experience and performance
 A regression model is constructed to define
the relationships between decision variables
 Objective is to remove inconsistencies in
decision making
38
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
39
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Operations

 The Planning Process

5. Using part-time workers

Sub- Permits flexibility Loss of quality Applies mainly in

Influencing Tries to use Uncertainty in Creates

Counter- Fully utilizes May require skills or Risky finding

ADM 3301 ~ Rim Jaber

Daily production Production equals

 Some combination of capacity options, a

Management Coefficients Model

 Builds a model based on manager’s

Linear Decision Rule

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