Agenda

¨ The planning process

¨ Aggregate planning strategies
¨ Methods for aggregate planning
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

Aggregate planning

¨ Required for aggregate planning

¤ 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 costs

¤ A model that combines forecasts and costs so that

scheduling decisions can be made for the planning period
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
Operations Setting employment, inventory,
managers subcontracting levels
Analyzing operating plans

Short-range plans
(up to 3 months)
Job assignments
Operations Ordering
managers, Job scheduling
supervisors, Dispatching
foremen Overtime
Part-time help

Responsibility Planning tasks and horizon

Aggregate planning: An example
¨ For each month in the upcoming three quarters, the aggregate plan for a
manufacturer might have the following output
tput (in units of production)

Quarter 1
Jan Feb Mar
150,000 120,000 110,000

Quarter 2
Apr May Jun
100,000 130,000 150,000

Quarter 3
Jul Aug Sep
180,000 150,000 140,000
Relationships of the aggregate plan
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
Agenda

¨ The planning process

¨ Aggregate planning strategies
¨ Methods for aggregate planning
Aggregate planning strategies

¨ Use inventories to absorb changes in demand

¨ Accommodate changes by varying workforce size
¨ Use part-timers, overtime, or idle time to absorb
changes
¨ Use subcontractors and maintain a stable workforce
¨ Change prices or other factors to influence demand
Aggregate planning options

¨ Capacity options
¤ Do not try to change demand but attempt to absorb the
fluctuations in it

¨ Demand options
¤ Smooth out changes in the demand pattern over the
planning period
Capacity options

¨ 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 can mean lost sales due to long lead times and
poor customer service
Capacity options

¨ 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

¨ Varying production rate 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

¨ Subcontracting
¤ Temporary capacity during periods of peak demand
¤ May be costly

¤ Assuring quality and timely delivery may be difficult

Capacity options

¨ Using part-time workers

¤ Useful for filling unskilled or low skilled positions,
especially in services
Demand options

¨ 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

¨ 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

¨ Counter-seasonal product and service mixing

¤ Develop a product mix of counter-seasonal items
¤ May lead to products or services outside the company’s
areas of expertise
Aggregate planning options

Option Advantages Disadvantages Some Comments

Changing Changes iin Inventory hoholding Applies mainly to
inventor
inventory human cost may production,
production not
levels resources are increase
increase. service
service,
gradual or n
none; Shortages m may operations.
no abrupt result in lost
production sales.
changes.

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

Option Advantages Disadvantages Some Comments

Varying Matches seaso
seasonal Overtime
O Allows flexibi
flexibility
production
product fluctuations premiums; tired within the
rates without hiring/ workers; may no
not aggregate plan.
through training costs. meet demand.
overtime oor
idle time

Su
Sub
ub-
ub- Permits flexibility Loss of quality Applies mainly in
contracting and smoothing control; reduced production
of the firm’s
firm profits; loss of settings.
output. future business.
Aggregate planning options

Option Advantages Disadvantages Some Comments

Using pa
part
art
artt- Is less costly and an High training Good for unskilled
time workers more flexi
fl
flexible
fle
exiib ble costs; qua
quality jobs in areas with
than fu
full
ullll--time
ul tiim suffers; large tempora
temporary
workers. schedulin
scheduling labor pools.
difficult.

Influencing Tries to use Uncertainty in Creates m

marketing
demand excess capac
capacity. demand. Hard to
demand ideas
ideas.
Discounts draw match demand tto Overbooking
Overboo
new customers. supply exactly. used in some
businesses.
Aggregate planning options

Option Advantages Disadvantages Some Comments

Back May avoid Customer must b be M
Many compan
companies
orderin
ordering overtime. K
overtime Keeps willing to wait
wait, back order.
during hig
high
gh-
g
ghh capacity but go
goodwill is
demand constant. lost.
periods

Counte
Counter
err-
e Fully utilizes May require skills Risky finding
seaso
seasonal
onal
onal resources; or equipment products or
product a and allows stable outside the firm’s services with
service workforce. areas of opposite ddemand
mixing expertise. patterns.
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
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

Production = Forecasted demand

Mixing options to develop a plan

¨ Level strategy
¤ Maintaining a constant output rate, production rate, or
workforce level
¤ Use inventory or idle time as buffer

¤ Stable production leads to better quality and productivity

Agenda

¨ The planning process

¨ Aggregate planning strategies
¨ Methods for aggregate planning
Methods for aggregate planning

¨ Graphical methods
¨ Mathematical programming approaches
Graphical methods

¨ Popular techniques
¨ Easy to understand and use
¨ Trial-and-error approaches that do not guarantee an
optimal solution
¨ Require only limited computations
Graphical methods

¨ Consist of five steps

¤ Determine the demand for each period
¤ Determine the capacity for regular time, overtime, and
subcontracting each period
¤ Find labor costs, hiring and layoff costs, and inventory
holding costs
¤ Consider company policy on workers and stock levels

¤ Develop alternative plans and examine their total costs

Example 1: Roofing supplier
Production
roductio Demand Per Day
Month Expected Demand Days
y (computed)
p
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr
p 1,200
, 21 57
Mayy 1,500
, 22 68
June 1,100
, 20 55
6,200 124

Average Total expected

p demand
requirement =
Number of production days
6,200
= = 50
0 units per day
124
 Example 1: Roofing supplier
Forecast demand

70 –
Production rate per working day

Averagee monthly forecast demand

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
ê ê ê ê ê ê
22 18 21 21 22 20 = Number
N of
working days
Example 1: Roofing supplier

¨ Alternative plans for meeting the forecast

¤ PLAN 1: To maintain a constant workforce throughout the
6-month period (see Example 2)
¤ PLAN 2: To maintain a constant workforce at a level
necessary to meet the lowest demand month and to meet
all demand above this level by subcontracting (see
Example 3)
¤ PLAN 3: To hire and lay off workers as needed to produce
exact monthly requirements (see Example 4)

LEVEL STRATEGY OR CHASE STRATEGY?

Example 1: Roofing supplier

¨ PLAN 1 and PLAN 2: Level strategies

¨ PLAN 3: Chase strategy
Example 2: Roofing supplier

¨ PLAN 1: To maintain a constant workforce throughout the

6-month period
Example 2: Roofing supplier
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10
0 per unit
Average pay rate $ 5 per hour
ur ($40
0 per day
y)
ay
$ 7 per
p hou
hour
ouurr
Overtime pay rate
(abovee 8 hours per
p dayy)
ay
Labor
or-
r-hours to produce a unit 1.6
6 hours per unit
Cost of increasing daily production rate $300
0 per unit
((hiring
g and training)
g)
Cost of decreasing
dec daily production rate $600
0 per unit
(layoffs)
Example 2: Roofing supplier
Average demand
Monthly
Cost Information
Production at Demand Inventory Ending
Inventory 50 Units
Month carry cost per Day Forecast $ 5Change
per unit per Inventory
month
Jan 50 xcost
Subcontracting 22 =per
1,100
unit 900 $10
0 +200
per unit 200
Feb pay50rate
Average x 18 = 900 700 +200
$ 5 per ur ($40
hour 400
0 per y)
day
ay
Mar 50 x 21 = 1,050 800 +250
$ 7 per
p hou
hour
ouurr 650
Overtime pay rate
(abovee 8 hours per
Apr 50 x 21 = 1,050 1,200 –150 500ayy)
p day
Labor
or-
r-hours50
toxproduce a unit 1.6
6 hours per unit
May 22 = 1,100 1,500 –400 100
Cost of increasing daily production rate $3000 per unit
June
((hiring
50 x 20 g)
= 1,000
g and training)
1,100 –100 0
Cost of decreasing
dec daily production rate $6000 per unit 1,850
(layoffs)
Total units of inventory carried over from one
Table 13.3 month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
?
Example 2: Roofing supplier

¨ Labor-hours to produce a unit = 1.6 hours per unit

¨ There are 8 work hours in a day
¨ How many units can one worker produce in a day?
¤ 8/1.6 = 5
¨ What is the workforce required to produce 50 units per
day?
¤ 50/5 = 10
Example 2: Roofing supplier
Monthly
Costs
Cost InformationProduction at Demand Calculations
Inventory Ending
Month carry
Inventory
Inventory 50 Units
cost per Day $9,250
carrying Forecast $ 5Change
perunits
(= 1,850 unit per Inventory
monthx $5
carried
Jan
Subcontracting 1,100
cost per unit 900 per $10unit)
0 +200
per unit 200
Regular-time
Feb pay rate
Average labor
900 49,600
700 (= 10
$ 5 workers
+200
per hour x $40
ur ($40 per
400
0 per day
ayy)
Mar 1,050 800 day x+250
124 days) 650
$ 7 per
p hou
hour
ouurr
Overtime pay rate
(above e 8 hours per
Other
Apr costs (overtime,
1,050 1,200 -150 500ayy)
p day
hiring,
Laboror-
r- layoffs,
hours to produce a unit 1.6
6 hours per unit
May 1,100 1,500 22 + -400
18 + … + 20 =100 124
subcontracting) 0
Cost of increasing daily production rate $3000 per unit
June
Total cost
((hiring
1,000
g and training)
g)
1,100
$58,850 -100 0
Cost of decreasing
dec daily production rate $600 0 per unit 1,850
(layoffs)
Total units of inventory carried over from one
Table 13.3 month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
Example 2: Roofing supplier
7,000 –

6,000 – Reduction
of inventory
Total demand
de
emaand
5,000 – Cumulative level = 6,2000 units
Cumulative demand units

production using
average monthly
4,000 – forecast requirements

3,000 –

2,000 – Cumulative for

forecast
requirements

1,000 – Excess inventory

–
Jan Feb Mar Apr May June
Example 3: Roofing supplier

¨ PLAN 2: To maintain a constant workforce at a level

necessary to meet the lowest demand month and to
meet all demand above this level by subcontracting
Example 3: Roofing supplier
Production
roductio Demand Per Day
Month Expected Demand Days
y (computed)
p
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr
p 1,200
, 21 57
Mayy 1,500
, 22 68
June 1,100
, 20 55
6,200 124

Minimum requirement
nt = 38
8 units per day
 Example 3: Roofing supplier
Forecast demand

70 –
Production rate per working day

Level
evel production using
60 – lowest monthly
forecast demand
50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
ê ê ê ê ê ê
22 18 21 21 22 20 = Number
N of
working days
Example 3: Roofing supplier
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10
0 per unit
Average pay rate $ 5 per hour
ur ($40
0 per day
y)
ay
$ 7 per
p hou
hour
ouurr
Overtime pay rate
(abovee 8 hours per
p dayy)
ay
Labor
or-
r-hours to produce a unit 1.6
6 hours per unit
Cost of increasing daily production rate $300
0 per unit
((hiring
g and training)
g)
Cost of decreasing
dec daily production rate $600
0 per unit
(layoffs)
Example 3: Roofing supplier
Cost Information
Inventory carry cost $ 5 per unit per month
In-house production
Subcontracting cost per unit
= 38$10units per day
0 per unit
Average pay rate x 124
$ 5 perdaysur ($40
hour 0 per day
y)
ay

Overtime pay rate

= 4,712 p units
$ 7 per hou
hour
ou
urr
(above
e 8 hours per
p dayy)
ay
Labor
or- Subcontract
r-hours to produce units
a unit = 6,200
1.6 – 4,712
6 hours per unit

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

Cost of decreasing
dec daily production rate $600
0 per unit
(layoffs)
Example 3: Roofing supplier
Cost Information
Inventory carry cost $ 5 per unit per month
In-house production
Subcontracting cost per unit
= 38$10units per day
0 per unit
Average pay rate x 124
$ 5 perdaysur ($40
hour 0 per day
y)
ay

Overtime pay rate

= 4,712 p units
$ 7 per hou
hour
ou
urr
(above
e 8 hours per
p dayy)
ay
Costs
Labor
or- Subcontract
r-hours to produce units
a unit = 6,200
1.6 - 4,712
Calculations
6 hours
?
per unit
Regular-time
Cost labor
of increasing $37,696
daily production =
rate (= 7.60workers
1,488
$300 per unit x $40 per
units
((hiring
g and training)
g) day x 124 days)
Cost of decreasing
dec
Subcontracting 14,880rate (= $600
daily production 0 per
1,488 unitx $10 per
units
(layoffs)
unit)
Table 13.3
Total cost $52,576
Example 3: Roofing supplier

¨ Labor-hours to produce a unit = 1.6 hours per unit

¨ There are 8 work hours in a day
¨ How many units can one worker produce in a day?
¤ 8/1.6 = 5
¨ 38 units will be produced per day
¨ What is the workforce required to produce 38 units per
day?
¤ 38/5 = 7.6
Example 4: Roofing supplier

¨ PLAN 3: To hire and lay off workers as needed to produce

exact monthly requirements
Example 4: Roofing supplier
Production
roductio Demand Per Day
Month Expected Demand Days
y (computed)
p
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr
p 1,200
, 21 57
Mayy 1,500
, 22 68
June 1,100
, 20 55
6,200 124

Production = Expected Demand

 Example 4: Roofing supplier

Forecast demand and

monthly production
70 –
Production rate per working day

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
ê ê ê ê ê ê
22 18 21 21 22 20 = Number
N of
working days
Example 4: Roofing supplier
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10
0 per unit
Average pay rate $ 5 per hour
ur ($40
0 per day
y)
ay
$ 7 per
p hou
hour
ouurr
Overtime pay rate
(abovee 8 hours per
p dayy)
ay
Labor
or-
r-hours to produce a unit 1.6
6 hours per unit
Cost of increasing daily production rate $300
0 per unit
((hiring
g and training)
g)
Cost of decreasing
dec daily production rate $600
0 per unit
(layoffs)
Example 4: Roofing supplier
Basic
Cost Information Production
Cost Extra Cost of Extra Cost of
Inventory carrying cost
Daily (demand x $
Increasing 5 per unit per month
Decreasing
Forecast Prod 1.6 hrs/unit x Production Production
Subcontracting
Month (units) cost
Rate per unit
$5/hr) $10
(hiring cost) 0 per unitcost) Total Cost
(layoff
Average
Jan pay
900 rate 41 $ 7,200 — $ 5 per hour
— ($40
ur 0 per$ 7,200
dayy)
ay
$7
41 – 39 $1,200
p = 2hou
per hour
ouurr
Feb
Overtime 700
pay rate39 5,600 — 6,800
(= 2 x $600)
(above
e 8 hours per
p dayy)
ay
$600
Maror-
Labor 800 to produce
r-hours 38 6,400
a unit — 1.6
6 hours per
(= 1 x unit
$600)
7,000

Cost $5,700$300 0 per unit

Apr of increasing
1,200 57daily production
9,600 rate — 15,300
((hiring
g and training)
g) (= 19 x $300)
$3,300
Cost
May of decreasing
dec
1,500 68 daily production
12,000 rate $600
(= 11 x $300)
0 per unit
— 15,300
(layoffs)
$7,800
June 1,100 55 8,800 — 16,600
(= 13 x $600)
Table 13.3
$49,600 $9,000 $9,600 $68,200
Comparison of three plans

Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0
Regular labor 49,600 37,696 49,600
Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 14,880 0
Total cost $58,850 $52,576 $68,200

Plan 2 is the lowest cost option

Example 5

¨ A large distribution center must develop a staffing plan

that minimizes total costs using part-time stock pickers
¨ A chase strategy
¨ A level strategy
¤ Try the workforce level that meets demand with the
minimum use of undertime and not consider vacation
scheduling

1 2 3 4 5 6 Total
Forecasted demand (number
6 12 18 15 13 14 78
of part-time employees)
Example 5

¨ Each part-time employee can work a maximum of 20

hours per week on regular time
¨ Instead of paying undertime, each worker’s day is
shortened during slack periods and overtime can be
used during peak periods
Example 5

¨ Currently, 10 part-time clerks are employed. They have

not been subtracted from the forecasted demand
shown. Constraints are as follows:
¤ The size of training facilities limits the number of new hires
in any period to no more than 10.
¤ No backorders are permitted.

¤ Overtime cannot exceed 20 percent of the regular-time

capacity in any period. The most that any part-time
employee can work is 1.20(20) = 24 hours per week.
Example 5

¨ The following costs can be assigned:

Regular-time wage rate $2,000/time period at 20 hrs/week

Overtime wages 150% of the regular-time rate
Hires $1,000 per person
Layoffs $500 per person
Example 5

¨ Chase strategy
¤ Adjusting the workforce as needed to meet demand
¤ A large number of hirings and layoffs begin with laying off
4 part-time employees immediately because the current
staff is 10 and the staff level required in period 1 is only 6.
¤ The total cost is $173,500, and most of the cost increase
comes from frequent hiring and layoffs, which add $17,500
to the cost of utilized regular-time costs.
Regular-time wage rate $2,000/time period at 20 hrs/week
Overtime wages 150% of the regular-time rate
Hires $1,000 per person
Layoffs $500 per person

Chase strategy
Example 5

¨ Level strategy
¤ In order to minimize undertime, the maximum use of
overtime possible must occur in the peak period.
¤ For this particular level strategy (other workforce options
are possible), the most overtime that the manager can use
is 20 percent of the regular-time capacity, w, so

1.20w = 18 employees required in peak period (period 3)

18
w= = 15 employees
1.20
Example 5

¨ Level strategy
¤ A 15-employee staff size minimizes the amount of
undertime for this level strategy.
¤ Because the staff already includes 10 part-time employees,
the manager should immediately hire 5 more.
¤ The total cost is $164,000.
Regular-time wage rate $2,000/time period at 20 hrs/week
Overtime wages 150% of the regular-time rate
Hires $1,000 per person
Layoffs $500 per person

Level strategy
Next class

¨ Methods for aggregate planning

¤ Graphical methods (cont.’d)
¤ Mathematical programming approaches