Aggregate Planning

Dr. R K Singh IIFT, Delhi

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Aggregate Planning
Determine the quantity and timing of production for the immediate future
Objective is to minimize cost over the planning period by adjusting
Production rates Labor levels Inventory levels Overtime work Subcontracting rates Other controllable variables
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The Planning Process

Long-range plans (over one year)
Research and Development New product plans Capital investments Facility location/expansion Top executives

Intermediate-range plans (3 to 18 months)

Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans

Operations managers

Short-range plans (up to 3 months)

Operations managers, supervisors, foremen Responsibility Job assignments Ordering Job scheduling Dispatching Overtime Part-time help Planning tasks and horizon
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Aggregate Planning
Jan 150,000 Quarter 1 Feb 120,000 Quarter 2 May 130,000 Quarter 3 Aug 150,000 Mar 110,000

Apr 100,000

Jun 150,000

Jul 180,000

Sep 140,000
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Aggregate Planning Strategies

Capacity Options 1. Use inventories to absorb changes in demand 2. Accommodate changes by varying workforce size 3. Use part-timers, overtime, or idle time to absorb changes 4. Use subcontractors and maintain a stable workforce
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Demand Options
Influencing demand Back ordering during highdemand periods Counter seasonal product and service mixing

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Aggregate Planning Options

Option Changing inventory levels Advantages Disadvantages Some Comments Applies mainly to production, not service, operations. Changes in Inventory human holding cost resources are may increase. gradual or Shortages may none; no abrupt result in lost production sales. changes. Avoids the costs Hiring, layoff, of other and training alternatives. costs may be significant.

Varying workforce size by hiring or layoffs

Used where size of labor pool is large.

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Aggregate Planning Options

Option Varying production rates through overtime or idle time Subcontracting Advantages Matches seasonal fluctuations without hiring/ training costs. Permits flexibility and smoothing of the firms output. Disadvantages Overtime premiums; tired workers; may not meet demand. Some Comments Allows flexibility within the aggregate plan.

Loss of quality Applies mainly in control; production reduced profits; settings. loss of future business.

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Aggregate Planning Options

Option Using parttime workers Advantages Is less costly and more flexible than full-time workers. Disadvantages High turnover/ training costs; quality suffers; scheduling difficult. Some Comments Good for unskilled jobs in areas with large temporary labor pools. Creates marketing ideas. Overbooking used in some businesses.

Influencing demand

Tries to use Uncertainty in excess demand. Hard capacity. to match Discounts draw demand to new customers. supply exactly.

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Aggregate Planning Options

Option Advantages Disadvantages Some Comments

Back ordering during highdemand periods

Counterseasonal product and service mixing

May avoid overtime. Keeps capacity constant.

Customer must be willing to wait, but goodwill is lost.

Many companies back order.

Fully utilizes resources; allows stable workforce.

May require skills or equipment outside the firms areas of expertise.

Risky finding products or services with opposite demand patterns.

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Methods for Aggregate Planning

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

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Mixing Options to Develop a Plan

Chase strategy
Match output rates to demand forecast for each period Vary workforce levels or vary production rate

Favored by many service organizations

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Mixing Options to Develop a Plan

Level strategy
Daily production is uniform Use inventory or idle time as buffer Stable production leads to better quality and productivity

Some combination of capacity options, a mixed strategy, might be the best solution
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Graphical Methods
1. Determine the demand for each period 2. Determine the capacity for regular time, overtime, and subcontracting each period 3. Find labor costs, hiring and layoff costs, and inventory holding costs 4. Consider company policy on workers and stock levels 5. Develop alternative plans and examine their total costs
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Roofing Supplier Example 1

Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55

Total expected demand Average requirement = Number of production days 6,200 = = 50 units per day 124
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Roofing Supplier Example 1

Production rate per working day Forecast demand

70 60 50 40 30

Level production using average monthly forecast demand

Jan

Feb

Mar

Apr

May

June

= Month
= Number of working days
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22

18

21

21

22

20

Plan 1 constant workforce

Roofing Supplier Example 2

Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs)

$ 5 per unit per month

$10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit

$600 per unit

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Plan 1 constant workforce

Roofing Supplier Example 2

Cost Information Production at Month 50 Units Inventory carry cost per Day
Subcontracting cost per unit Jan 1,100

Monthly Demand Inventory Ending Forecast $ 5Change per Inventory per unit month
$10 +200 per unit

900 Feb 700 Average pay rate 900 Mar 1,050 800 Overtime pay rate Apr 1,050 1,200 Labor-hours to produce a unit May 1,100 1,500 Cost of increasing daily production rate June and training) 1,000 1,100 (hiring
Cost of decreasing daily production rate (layoffs)

200 $ 5 per hour ($40 per day) +200 400 +250 650 $ 7 per hour (above 8 hours per day) -150 500 1.6 hours per unit -400 100 $300 per unit -100 0 1,850 $600 per unit

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

Roofing Supplier Example 2

Monthly Costs Calculations Cost Information Production at Demand Inventory Ending Month carrying Forecast 1,850 unitsper Inventory per unit month Inventory carry cost per Day $9,250 Inventory 50 Units (= $ 5Change carried x $5 $10 +200 per Subcontracting cost per unit Jan 1,100 900 per unit) unit 200 Regular-time labor 49,600 (= 10 workers ($40 per day) per $ 5 per hour x $40 400 Feb 700 +200 Average pay rate 900 124 Mar 1,050 800 day7x+250 days) 650 $ per hour Overtime pay rate (above 8 hours per day) Other costs (overtime, Apr 1,050 1,200 -150 500 hiring, layoffs, 1.6 hours per unit Labor-hours to produce a unit May 1,100 1,500 -400 100 subcontracting) 0 Cost of increasing daily production rate $300 per unit June and training) 1,000 1,100 -100 0 Total cost $58,850 (hiring 1,850 Cost of decreasing daily production rate $600 per unit
(layoffs)

Total units of inventory carried over from one month to the next = 1,850 units Table 13.3 Workforce required to produce 50 units per day = 10 workers
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Plan 2 subcontracting

Roofing Supplier Example 3

Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55

Minimum requirement = 38 units per day

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Roofing Supplier Example 3

Production rate per working day Forecast demand

70 60 50 40 30
Level production using lowest monthly forecast demand

Jan

Feb

Mar

Apr

May

June

= Month
= Number of working days
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22

18

21

21

22

20

Roofing Supplier Example 3

Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs)

$ 5 per unit per month

$10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit

$600 per unit

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Roofing Supplier Example 3

Cost Information
Inventory carry cost Average pay rate Overtime pay rate Labor-hours to produce a unit Subcontract units

In-house production Subcontracting cost per unit

= 38 units per day $10 per unit x $ 5 perdays per day) 124 hour ($40 = 4,712 units $ 7 per hour
(above 8 hours per day) 1.6 hours per unit 6,200 - 4,712

$ 5 per unit per month

= Cost of increasing daily production rate 1,488per unit = $300 units (hiring and training)
Cost of decreasing daily production rate (layoffs) $600 per unit

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Roofing Supplier Example 3

Cost Information
Inventory carry cost Average pay rate Overtime pay rate

In-house production Subcontracting cost per unit

= 38 units per day $10 per unit x $ 5 perdays per day) 124 hour ($40 = 4,712 units $ 7 per hour
(above 8 hours per day) 1.6 hours per Calculations unit 6,200 - 4,712

$ 5 per unit per month

Costs Subcontract units Labor-hours to produce a unit

= Regular-time labor $37,696= 1,488 units 7.6 workers Cost of increasing daily production rate (= $300 per unit x $40 per (hiring and training)
day x 124 days) unit)
Cost of decreasing daily production rate (= $600 per unitx $10 per Subcontracting 14,880 1,488 units (layoffs)
Table 13.3

Total cost

$52,576

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Plan 3 hiring and firing

Roofing Supplier Example 4

Month Jan Feb Mar Apr May June Expected Demand 900 700 800 1,200 1,500 1,100 6,200 Production Days 22 18 21 21 22 20 124 Demand Per Day (computed) 41 39 38 57 68 55

Production = Expected Demand

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Roofing Supplier Example 4

Production rate per working day

70 60 50 40 30

Forecast demand and monthly production

Jan

Feb

Mar

Apr

May

June

= Month
= Number of working days
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22

18

21

21

22

20

Roofing Supplier Example 4

Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs)

$ 5 per unit per month

$10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit

$600 per unit

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Roofing Supplier Example 4

Basic Production Cost Inventory carrying cost (demand x Daily Forecast Prod 1.6 hrs/unit x Subcontracting cost per unit Month (units) Rate $5/hr)

Cost Information

Extra Cost of Extra Cost of $ unit per Increasing 5 perDecreasing month Production Production $10 per unitcost) Total Cost (hiring cost) (layoff

Jan 900 Average pay rate

41

$ 7,200 5,600

$ 5 per hour ($40 per 7,200 $ day)

$1,200 $ 7 per hour 6,800 (= 2 x $600) (above 8 hours per day) $600 7,000 1.6 hours x $600) (= 1 per unit

Feb Overtime 700 rate39 pay

Mar 800 38 6,400 Labor-hours to produce a unit

$5,700$300 per unit Cost of increasing daily production rate Apr 1,200 57 9,600 (= 19 x $300) (hiring and training) $3,300 Cost of decreasing daily production (= 11 x $300) per unit rate $600 May 1,500 68 12,000 (layoffs)

15,300 15,300 16,600 $68,200

June

1,100

55

8,800 $49,600

$9,000

Table 13.3

$7,800 (= 13 x $600)

$9,600

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Comparison of Three Plans

Cost Inventory carrying Regular labor Overtime labor
Hiring Layoffs Subcontracting Total cost

Plan 1 $ 9,250 49,600 0

0 0 0 $58,850

Plan 2 $ 0

Plan 3 $ 0

37,696 0
0 0 14,880 $52,576

49,600 0
9,000 9,600 0 $68,200

Plan 2 is the lowest cost option

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Fourth Plan
Maintain a constant workforce of eight people and use overtime whenever necessary to meet the demand. Assume beginning and ending inventory equal to zero.
Total Cost=$53968

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Roofing Supplier Example 4

Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs)

$ 5 per unit per month

$10 per unit $ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit $300 per unit

$600 per unit

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Month

Prodn days

Prodn at 40/day

Beginning of month inventory

Forecast demand

Overtime Prodn needed

Ending inventory

Jan Feb March April May June

22 18 21 21 22 20

900 700 800 1200 1500 1100

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Month

Prodn days

Prodn at 40/day

Beginning of month inventory

Forecast demand

Overtime Prodn needed

Ending inventory

Jan

22

880

900

20

Feb

18

720

700

20

March

21

840

20

800

60

April

21

840

60

1200

300

May

22

880

1500

620

June

20

800

1100

300

Total

1240

80

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Cost (Workforce of 8 plus overtime)

Carrying cost=80x5=400$
Regular Pay=8 workersx40$x124days=39680 $ Overtime pay= 1240x1.6x$7=13888$ Total=53968$

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A plant has a constant workforce and meets all its demand.Allocate production capacity to satisfy demand at a minimum cost
Period Regular time capacity 300 Overtime Subcontract Demand (Units)

50

200

450

2
3

400
450 Other Data

50
50

200
200

550
750

Initial inventory units Regular time cost per unit Overtime cost per unit Subcontract cost per unit Carrying cost per unit per period

50 $50 $65 $80 $1

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Aggregate Planning in Services

Controlling the cost of labor is critical
1. Accurate scheduling of labor-hours to assure quick response to customer demand 2. An on-call labor resource to cover unexpected demand

3. Flexibility of individual worker skills

4. Flexibility in rate of output or hours of work
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Service Scenarios
Restaurants
Smoothing the production process Determining the optimal workforce size

Hospitals
Responding to patient demand

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Service Scenarios
Airline industry
Extremely complex planning problem Involves number of flights, number of passengers, air and ground personnel, allocation of seats to fare classes

Resources spread through the entire system

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Yield Management
Allocating resources to customers at prices that will maximize yield or revenue
1. Service or product can be sold in advance of consumption 2. Demand fluctuates 3. Capacity is relatively fixed 4. Demand can be segmented 5. Variable costs are low and fixed costs are high
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Yield Management Example

Room sales
100

Demand Curve Potential customers exist who are willing to pay more than the $15 variable cost of the room

Passed-up contribution Total 50 $ contribution = (Price) x (50 rooms) = ($150 - $15) x (50) = $6,750 $15 Variable cost of room

Some customers who paid $150 were actually willing to pay more for the room

Money left on the table $150 Price charged for room Price
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Yield Management Example

Room sales
100

Demand Curve
Total $ contribution = (1st price) x 30 rooms + (2nd price) x 30 rooms = ($100 - $15) x 30 + ($200 - $15) x 30 = $2,550 + $5,550 = $8,100

60

30

$15 Variable cost of room

$100 Price 1 for room

$200 Price 2 for room

Price
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Making Yield Management Work

1. Multiple pricing structures must be feasible and appear logical to the customer 2. Forecasts of the use and duration of use 3. Changes in demand

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