Aggregate Planning

9
Madam Afifah Hanim Md Pazil
[email protected]
Lower Cabin B2.

-ahmp- 1
 Outline
► The Planning Process
► Sales and Operations Planning
► The Nature of Aggregate Planning
► Aggregate Planning Strategies
► Methods for Aggregate Planning
► Aggregate Planning in Services
► Revenue Management

-ahmp- 2
 Learning Objectives
When you complete this chapter you
should be able to:
1. Define sales and operations planning
2. Define aggregate planning
3. Identify optional strategies for developing an
aggregate plan
4. Prepare a graphical aggregate plan
5. Understand and solve a revenue
management problem

-ahmp- 3
 The Planning Process
Long-range plans (over one year)
Capacity decisions critical to long range plans
Issues:
Research and Development
New product plans
Capital investments
Facility location/expansion
Top
executives Intermediate-range plans (3 to 18 months)
Issues:
Sales and operations planning
Production planning and budgeting
Operations Setting employment, inventory,
managers with subcontracting levels
sales and Analyzing operating plans
operations Short-range plans (up to 3 months)
planning team Scheduling techniques
Issues:
Job assignments
Operations Ordering
managers, Job scheduling
supervisors, Dispatching
foremen Overtime
Part-time help
Responsibility Planning tasks and time horizons
-ahmp- 4
 Sales and Operations Planning
▶ 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
S&OP and the Aggregate Plan

-ahmp- 6
 Sales and Operations Planning
▶ 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
-ahmp- 7
 Sales and Operations Planning
▶ Requires
▶ A logical unit for measuring sales and output
▶ A forecast of demand for a reasonable
intermediate planning period in aggregate
terms
▶ A method to determine the relevant costs
▶ A model that combines forecasts and costs so
scheduling decisions can be made for the
planning period
 Aggregate Planning

The objective of aggregate planning

is usually to meet forecast demand
while minimizing cost over the
planning period

-ahmp- 9
 Aggregate Planning
▶ Combines appropriate resources into
general terms
▶ Part of a larger production planning
system
▶ Disaggregation breaks the plan down
into greater detail
▶ Disaggregation results in a master
production schedule

-ahmp- 10
 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?
-ahmp- 11
 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

-ahmp- 12
 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

-ahmp- 13
 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

-ahmp- 14
 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

-ahmp- 15
 Capacity Options
5. Using part-time workers
▶ Useful for filling unskilled or low skilled
positions, especially in services

-ahmp- 16
 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

-ahmp- 17
 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

-ahmp- 18
 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

-ahmp- 19
 Aggregate Planning Options
Aggregate Planning Options
OPTION ADVANTAGES DISADVANTAGES COMMENTS
Changing Changes in human Inventory holding cost Applies mainly to
inventory resources are gradual may increase. Shortages production, not
levels or none; no abrupt may result in lost sales. service, operations.
production changes.

Varying Avoids the costs of Hiring, layoff, and Used where size of
workforce size other alternatives. training costs may be labor pool is large.
by hiring or significant.
layoffs

Varying Matches seasonal Overtime premiums; Allows flexibility

production fluctuations without tired workers; may not within the aggregate
rates through hiring/ training costs. meet demand. plan.
overtime or
idle time

-ahmp- 20
 Aggregate Planning Options
Aggregate Planning Options
OPTION ADVANTAGES DISADVANTAGES COMMENTS
Sub- Permits flexibility Loss of quality control; Applies mainly in
contracting and smoothing of reduced profits; loss of production settings.
the firm’s output. future business.

Using part- Is less costly and High turnover/ Good for unskilled
time workers more flexible than training costs; quality jobs in areas with
full-time workers. suffers; scheduling large temporary
difficult. labor pools.

Influencing Tries to use excess Uncertainty in Creates marketing

demand capacity. Discounts demand. Hard to ideas.
draw new match demand to Overbooking used
customers. supply exactly. in some
businesses.
-ahmp- 21
 Aggregate Planning Options
Aggregate Planning Options
OPTION ADVANTAGES DISADVANTAGES COMMENTS
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.

-ahmp-
22
Mixing Options to Develop a Plan
▶ 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

-ahmp- 23
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

-ahmp- 24
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

-ahmp- 25
Methods for Aggregate Planning
▶ Graphical Methods
▶ Popular techniques
▶ Easy to understand and use
▶ Trial-and-error approaches that do not
guarantee an optimal solution
▶ Require only limited computations

-ahmp- 26
 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 cost
 Roofing Supplier Example 1
TABLE 13.2 Monthly Forecasts
EXPECTED PRODUCTION DEMAND PER DAY
MONTH DEMAND DAYS (COMPUTED)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Average Total expected demand
requirement =
Number of production days
6,200
= = 50 units per day
124
 Roofing Supplier Example 1
Forecast demand
Production rate per working day

70 –
Level production using average
monthly forecast demand
60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
 Mathematical Approaches
▶ Useful for generating strategies
▶ Transportation Method of Linear Programming
▶ Produces an optimal plan
▶ Works well for inventories, overtime,
subcontracting
▶ Does not work when nonlinear or negative factors
are introduced
▶ Other Models
▶ General form of linear programming
▶ Simulation
 Aggregate Planning in Services
▶ Most services use combination strategies
and mixed plans
▶ 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
-ahmp- 31
 Five Service Scenarios
• Restaurants
1. Smoothing the production process
2. Determining the optimal workforce size
• Hospitals
– Responding to patient demand
• National Chains of Small Service Firms
– Planning done at national level and at local
level

-ahmp- 32
 Five Service Scenarios
• Miscellaneous Services
– Plan human resource requirements
– Manage demand
• Airline industry
– Extremely complex planning problem
1) Number of flights
2) Number of passengers on all flights
3) Air and ground personnel at each hub and airport
4) Allocation of seats to fare classes
 Revenue Management
▶ Allocating resources to customers at
prices that will maximize revenue or yield
1. Service or product can be sold in advance of
consumption
2. Demand fluctuates
3. Relatively fixed resource (capacity)
4. Segmentable demand
5. Low variable costs; high fixed costs
 Revenue Management Approaches

▶ Airlines, hotels, rental cars, etc.

▶ Tend to have predictable duration of service
and use variable pricing to control availability
and revenue
▶ Movies, arenas, performing arts centers
▶ Tend to have predicable duration and fixed
prices but use seating locations and times to
manage revenue
 Revenue Management Approaches

▶ Restaurants, golf courses

▶ Generally have unpredictable duration of
customer use and fixed prices, may use “off-
peak” rates to shift demand and manage
revenue
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
3. Managing changes in demand