Chapter 12 With Woodruff Modification Sales and Operations Planning – Aggregate Planning Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

12-2 Learning Objectives Understand what sales and operations planning is and how it coordinates manufacturing, logistics, service, and marketing plans. Construct aggregate plans that employ different strategies for meeting demand. Describe what yield management is and why it is an important strategy for leveling demand.

12-3 Additional Objective Understand how Aggregate Planning and Disaggregation fit in Planning Systems

12-4 What is Sales and Operations Planning? Sales and operations planning is a process that helps firms provide better customer service, lower inventory, shorten customer lead times, stabilize production rates, and give top management a handle on the business The process consists of a series of meetings, finishing with a high-level meeting where key intermediate-term decisions are made This must occur at an aggregate level and also at the detailed individual product level –By aggregate we mean at the level of major groups of products

12-5 Overview of Major Operations and Supply Planning Activities

12-6 Overview of Sales and Operations Planning Activities Sales and operations planning was coined by companies to refer to aggregate planning The new terminology is meant to capture the importance of cross- functional work Aggregation on the supply side is done by product families, and on the demand side it is done by groups of customers

12-7 Types of Planning Long-range planning: planning focusing on a horizon greater than one year –Generally is done annually Intermediate-range planning: planning focusing on a period from 3 to 18 months –Time increments that are weekly, monthly, or quarterly Short-range planning: planning covering a period from one day to six months –Daily or weekly time increments

12-8 The Aggregate Operations Plan 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 to18 months

12-9 Production Planning Environment In general, the external environment is outside the production planner’s direct control –In some firms, demand can be managed Complementary products work for firms facing cyclical demand fluctuations With services, cycles are more often measured in hours than months

12-10 Production Planning Strategies 1.Chase strategy Match the production rate by hiring and laying off employees Must have a pool of easily trained applicants to draw on 2.Stable workforce—variable work hours Vary the number of hours worked through flexible work schedules or overtime 3.Level strategy Demand changes are absorbed by fluctuating inventory levels, order backlogs, and lost sales

12-11 Production Planning Strategies Continued Pure strategy: when just one of these approaches is used to absorb demand fluctuations Mixed strategy: when two or more of the approaches are used In addition to these strategies, managers also may choose to subcontract some portion of production –Similar to the chase strategy, but hiring and laying off are translated into subcontracting

12-12 Relevant Costs 1.Basic production costs The fixed and variable costs incurred in producing a given product type in a given time period 2.Costs associated with changes in the production rate Hiring, training, and laying off personnel 3.Inventory holding costs 4.Backorder costs

12-13 Aggregate Planning Techniques Cut-and-try approach –Involves costing out various production planning alternatives and selecting the one that is best –Elaborate spreadsheets are developed to facilitate the decision process Linear programming Simulation

12-14 A Cut-and-Try Example: The JC Company

12-15 More Data In solving this problem, we can exclude the material costs Inventory at the beginning of the first period is 400 units Assume the safety stock should be one-quarter of the demand forecast The JC Company

12-16 Aggregate Production Planning Requirements The JC Company

12-17 Four Plans to Investigate 1.Produce to exact monthly production requirements by varying workforce size 2.Produce to meet expected average demand by maintaining a constant workforce 3.Produce to meet the minimum expected demand using a constant workforce and subcontract to meet additional requirements 4.Produce to meet expected demand for all but the first two months using a constant workforce and use overtime to meet additional output requirements The JC Company

12-18 Production Plan 1: Exact Production; Vary Workforce The JC Company

12-19 Production Plan 2: Constant Workforce; Vary Inventory and Stockout The JC Company

12-20 Production Plan 3: Constant Low Workforce; Subcontract The JC Company

12-21 Production Plan 4: Constant Workforce; Overtime The JC Company

12-22 Comparison of Four Plans The JC Company

12-23 Four Plans for Satisfying a Production Requirement The JC Company

12-24 Level Scheduling A level schedule holds production constant over a period of time It is something of a combination of the strategies we have mentioned here For each period, it keeps the workforce constant and inventory low, and depends on demand to pull products through

12-25 Advantages of Level Scheduling 1.The entire system can be planned to minimize inventory and work-in-process 2.Product modifications are up-to-date because of the low amount of work-in- process 3.There is a smooth flow throughout the production system. 4.Purchased items from vendors can be delivered when needed, often directly to the production line

12-26 Requirements to Use Level Scheduling 1.Production should be repetitive (assembly- line format) 2.The system must contain excess capacity 3.Output of the system must be fixed for a period of time 4.There must be a smooth relationship among purchasing, marketing, and production 5.The cost of carrying inventory must be high 6.Equipment costs must be low 7.The workforce must be multi-skilled

12-27 The Ugly Side of Aggregate Planning Aggregation is often from market segments through “SKUs” to Families Disaggregation is needed to Population the master schedule

12-28 Yield Management Yield management: the process of allocating the right type of capacity to the right type of customer at the right price and time to maximize revenue or yield –Can be a powerful approach to making demand more predictable Has existed as long as there has been limited capacity for serving customers Its widespread scientific application began with American Airlines’ computerized reservation system (SABRE)

12-29 Yield Management Most Effective When… 1.Demand can be segmented by customer 2.Fixed costs are high and variable costs are low 3.Inventory is perishable 4.Product can be sold in advance 5.Demand is highly variable

12-30 Yield Management at a Hotel Hotels offer one set of rates during the week and another set during the weekend The variable costs associated with a room are low in comparison to the cost of adding rooms to the property Available rooms cannot be transferred from night to night Blocks of rooms can be sold to conventions or tours Potential guests may cut short their stay or not show up at all

12-31 Operating Yield Management Systems Pricing structures must appear logical to the customer and justify the different prices Must handle variability in arrival or starting times, duration, and time between customers Must be able to handle the service process Must train employees to work in an environment where overbooking and price changes are standard occurrences that directly impact the customer The essence of yield management is the ability to manage demand

12-32 Price/Service Duration Matrix: Positioning of Selected Service Industries

12-33 Simple Overbooking Formula Use the following newsperson formula to pick B, which is the number to overbook: P(NS >= B) >= S / (U + S) NS is number of no shows, U gives cost of Unused capacity (opportunity) and S the Shortage cost (actual plus loss of goodwill)