Copyright 2006 John Wiley & Sons, Inc. Beni Asllani University of Tennessee at Chattanooga Aggregate Planning Operations Management - 5 th Edition Chapter 13 Roberta Russell & Bernard W. Taylor, III

Copyright 2006 John Wiley & Sons, Inc.13-2 Lecture Outline  Aggregate Planning Process  Strategies for Adjusting Capacity  Strategies for Managing Demand  Quantitative Techniques for Aggregate Production Planning  Hierarchical Nature of Planning  Aggregate Planning for Services

Copyright 2006 John Wiley & Sons, Inc.13-3 Aggregate Planning   Determine the resource capacity needed to meet demand over an intermediate time horizon Aggregate refers to product lines or families Aggregate planning matches supply and demand   Objectives Establish a company wide game plan for allocating resources Develop an economic strategy for meeting demand

Copyright 2006 John Wiley & Sons, Inc.13-4 Aggregate Planning Process

Copyright 2006 John Wiley & Sons, Inc.13-5 Meeting Demand Strategies  Adjusting capacity Resources necessary to meet demand are acquired and maintained over the time horizon of the plan Resources necessary to meet demand are acquired and maintained over the time horizon of the plan Minor variations in demand are handled with overtime or under-time Minor variations in demand are handled with overtime or under-time  Managing demand Proactive demand management Proactive demand management

Copyright 2006 John Wiley & Sons, Inc.13-6 Strategies for Adjusting Capacity  Level production Producing at a constant rate and using inventory to absorb fluctuations in demand Producing at a constant rate and using inventory to absorb fluctuations in demand  Chase demand Hiring and firing workers to match demand Hiring and firing workers to match demand  Peak demand Maintaining resources for high-demand levels Maintaining resources for high-demand levels  Overtime and under-time Increasing or decreasing working hours Increasing or decreasing working hours  Subcontracting Let outside companies complete the work Let outside companies complete the work  Part-time workers Hiring part time workers to complete the work Hiring part time workers to complete the work  Backordering Providing the service or product at a later time period Providing the service or product at a later time period

Copyright 2006 John Wiley & Sons, Inc.13-7 Level Production Demand Units Time Production

Copyright 2006 John Wiley & Sons, Inc.13-8 Chase Demand Demand Units Time Production

Copyright 2006 John Wiley & Sons, Inc.13-9 Strategies for Managing Demand   Shifting demand into other time periods Incentives Sales promotions Advertising campaigns   Offering products or services with counter- cyclical demand patterns   Partnering with suppliers to reduce information distortion along the supply chain

Copyright 2006 John Wiley & Sons, Inc Quantitative Techniques For APP   Pure Strategies   Mixed Strategies   Linear Programming   Transportation Method   Other Quantitative Techniques

Copyright 2006 John Wiley & Sons, Inc Pure Strategies Hiring cost= $100 per worker Firing cost= $500 per worker Regular production cost per pound = $2.00 Regular production cost per pound = $2.00 Inventory carrying cost= $0.50 pound per quarter Inventory carrying cost= $0.50 pound per quarter Production per employee= 1,000 pounds per quarter Production per employee= 1,000 pounds per quarter Beginning work force= 100 workers Beginning work force= 100 workers QUARTERSALES FORECAST (LB) Spring80,000 Summer50,000 Fall120,000 Winter150,000 Example:

Copyright 2006 John Wiley & Sons, Inc Level Production Strategy Level production = 100,000 pounds (50, , , ,000) 4 Spring80,000100,00020,000 Summer50,000100,00070,000 Fall120,000100,00050,000 Winter150,000100, ,000140,000 Cost of Level Production Strategy (400,000 X $2.00) + (140,00 X $.50) = $870,000 SALESPRODUCTION QUARTERFORECASTPLANINVENTORY

Copyright 2006 John Wiley & Sons, Inc Chase Demand Strategy Spring80,00080, Summer50,00050, Fall120,000120, Winter150,000150, SALESPRODUCTIONWORKERSWORKERSWORKERS SALESPRODUCTIONWORKERSWORKERSWORKERS QUARTERFORECASTPLANNEEDEDHIREDFIRED Cost of Chase Demand Strategy (400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

Copyright 2006 John Wiley & Sons, Inc Mixed Strategy   Combination of Level Production and Chase Demand strategies   Examples of management policies no more than x% of the workforce can be laid off in one quarter inventory levels cannot exceed x dollars   Many industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time

Copyright 2006 John Wiley & Sons, Inc General Linear Programming (LP) Model   LP gives an optimal solution, but demand and costs must be linear   Let W t = workforce size for period t P t =units produced in period t I t =units in inventory at the end of period t F t =number of workers fired for period t H t = number of workers hired for period t

Copyright 2006 John Wiley & Sons, Inc LP MODEL Minimize Z =$100 (H 1 + H 2 + H 3 + H 4 ) + $500 (F 1 + F 2 + F 3 + F 4 ) + $0.50 (I 1 + I 2 + I 3 + I 4 ) Subject to P 1 - I 1 = 80,000(1) DemandI 1 + P 2 - I 2 = 50,000(2) constraintsI 2 + P 3 - I 3 = 120,000(3) I 3 + P 4 - I 4 = 150,000(4) Production1000 W 1 = P 1 (5) constraints1000 W 2 = P 2 (6) 1000 W 3 = P 3 (7) 1000 W 4 = P 4 (8) H 1 - F 1 = W 1 (9) Work forceW 1 + H 2 - F 2 = W 2 (10) constraintsW 2 + H 3 - F 3 = W 3 (11) W 3 + H 4 - F 4 = W 4 (12)

Copyright 2006 John Wiley & Sons, Inc Transportation Method Regular production cost per unit$20 Overtime production cost per unit$25 Subcontracting cost per unit$28 Inventory holding cost per unit per period$3 Beginning inventory300 units EXPECTEDREGULAROVERTIMESUBCONTRACT QUARTERDEMANDCAPACITYCAPACITYCAPACITY

18 Transportation Tableau Unused PERIOD OF PRODUCTION1234CapacityCapacity Beginning0369 Inventory300———300 Regular —1000 Overtime Subcontract500 Regular1200——1200 Overtime Subcontract Regular1300—1300 Overtime200—200 Subcontract Regular Overtime Subcontract Demand PERIOD OF USE

Copyright 2006 John Wiley & Sons, Inc Burruss’ Production Plan Total REGULARSUB-ENDING PERIODDEMANDPRODUCTIONOVERTIMECONTRACTINVENTORY

Copyright 2006 John Wiley & Sons, Inc Other Quantitative Techniques  Linear decision rule (LDR)  Search decision rule (SDR)  Management coefficients model

Copyright 2006 John Wiley & Sons, Inc Hierarchical Nature of Planning Items Product lines or families Individual products Components Manufacturing operations Resource Level Plants Individual machines Critical work centers Production Planning Capacity Planning Resource requirements plan Rough-cut capacity plan Capacity requirements plan Input/ output control Aggregate production plan Master production schedule Material requirements plan Shop floor schedule All work centers

Copyright 2006 John Wiley & Sons, Inc Available-to-Promise (ATP)   Quantity of items that can be promised to the customer   Difference between planned production and customer orders already received AT in period 1 = (On-hand quantity + MPS in period 1) – - (CO until the next period of planned production) ATP in period n = (MPS in period n) – - (CO until the next period of planned production)

Copyright 2006 John Wiley & Sons, Inc ATP: Example

Copyright 2006 John Wiley & Sons, Inc ATP: Example (cont.)

Copyright 2006 John Wiley & Sons, Inc ATP: Example (cont.) ATP in April = (10+100) – 70 = 40 ATP in May = 100 – 110 = -10 ATP in June = 100 – 50 = 50 = 30 = 0 Take excess units from April

Copyright 2006 John Wiley & Sons, Inc Rule Based ATP Product Request Is the product available at this location? Is an alternative product available at an alternate location? Is an alternative product available at this location? Is this product available at a different location? Available- to-promise Allocate inventory Capable-to- promise date Is the customer willing to wait for the product? Available- to-promise Allocate inventory Revise master schedule Trigger production Lose sale Yes No Yes No Yes No Yes No Yes No

Copyright 2006 John Wiley & Sons, Inc Aggregate Planning for Services 1.Most services can’t be inventoried 2.Demand for services is difficult to predict 3.Capacity is also difficult to predict 4.Service capacity must be provided at the appropriate place and time 5.Labor is usually the most constraining resource for services

Copyright 2006 John Wiley & Sons, Inc Yield Management

Copyright 2006 John Wiley & Sons, Inc Yield Management (cont.)

Copyright 2006 John Wiley & Sons, Inc Yield Management: Example NO-SHOWSPROBABILITYP(N < X) Optimal probability of no-shows P(n < x)  = =.517 C u C u + C o Hotel should be overbooked by two rooms

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