Operations Management Aggregate Planning Chapter 13 © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Aggregation Clustering goods or services that have similar demand requirements and common processing, labor, and materials requirements: Individual 1040’s Trust returns Small business returns Tax planning Estate planning # returns –or– # forms –or– # hours # clients –or– # consultations –or– $ © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Aggregate Planning Responsibility Planning tasks and horizon Determining the quantity and timing of production for the intermediate future (3 – 18 months) © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Planning Horizons Planning Horizon 1 year 5 years Today 3 Months Short-range plans Job assignments Ordering Job scheduling Dispatching Intermediate-range plans Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans Long-range plans R&D New product plans Capital expenses Facility location, expansion Responsible: Operations managers, supervisors, foremen Responsible: Operations managers Responsible: Top executives Students should be asked about the characteristics of the decisions which must be made in each of these planning horizons. © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Inputs to Aggregate Plan Current machine capacities Plans for future capacities Workforce capacities Current staffing level Operations Customer needs Demand forecasts Competition behavior Distribution and marketing Supplier capabilities Storage capacity Materials availability Materials Aggregate plan Cost data Financial condition of firm Accounting and finance New products Product design changes Machine standards Engineering Labor-market conditions Training capacity Human resources © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Inputs to Aggregate Plan Physical limitations / constraints Managerial policy constraints © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Relationships of the Aggregate Plan Plan for Production Demand Forecasts, orders Master Schedule, and MRP systems Detailed Work Schedules External Capacity Subcontractors Inventory On Hand Raw Materials Available Work Force Marketplace and Demand Research and Technology Product Decisions Process Planning & Capacity This slide illustrates the relationship between the aggregate schedule and other decisions areas within the organization. © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Aggregate Planning Goals Meet demand (maximize customer service) Use capacity efficiently (minimize changes in workforce) Meet inventory policy (minimize inventory) Minimize cost (maximize profit) Labor Inventory Plant & equipment Subcontract Backorder / stockout costs At this point, we are making the decisions as to “how” we will meet the aggregate schedules, and “when” each major task with be performed. © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Aggregate Planning Options Capacity Options Demand Options Vary staffing (hire/fire, overtime, idle time, temporary workers) Subcontracting Change inventory levels Vary prices Vary promotion Change lead times (e.g., backorders) Offer complementary products REACTIVE AGGRESIVE © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Aggregate Planning Strategies Level Strategy Chase Strategy Mixed Strategy Production equals demand Production rate is constant It may be helpful to stress that the extremes depicted above are the opposite ends of a continuum. Aggregate Plan Worksheet © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Graphical Approach 22 18 21 21 22 20 70 Level production using 60 22 18 21 21 22 20 10 20 30 40 50 60 70 Production rate per working day Jan Feb Mar Apr May Jun Forecast Demand Level production using average monthly forecast demand © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Controlling the Cost of Labor in Service Firms Seek: Close control of labor hours to ensure quick response to customer demand On-call labor resource that can be added or deleted to meet unexpected demand Flexibility of individual worker skills to permit reallocation of available labor Flexibility of individual worker in rate of output or hours of work to meet demand Discuss how the “control of labor costs” can be linked to measures of efficiency in performance of the overall service. © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Yield Management The aggregate planning process of allocating resources to customers at prices that will maximize yield (revenue) Used where businesses have: perishable inventory service or product can be sold in advance demand fluctuates capacity is relatively fixed demand can be segmented variable costs are low and fixed costs are high Examples – airlines, hotels, cruise lines, etc. © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Hotel: Single Price Level Sales Demand Curve Potential customers exist who are willing to pay more than the $15 variable cost Passed up profit contributions $ Net Sales = net price * 50 rm. = ($150 - $15) * 50 = $6,750 Some customers who paid $150 for the room were actually willing to pay more Money left on the table Price $15 variable cost of room $150 price charged for room © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Hotel: Two Price Levels Sales Demand Net prices: Price #1 = $85 Price #2 = $185 $ Net Sales = $85 * 30 people + $185 * 30 people = $8100 Price $15 variable cost of room $100 Price #1 $200 Price #2 © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Making Yield Management Work Multiple pricing structures must be feasible and appear logical Manage forecasts of use and duration of use Manage the changes in demand. © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Yield Management Matrix Variable Price Fixed Price Quadrant 4 Continuing care hospitals Quadrant 3 Restaurants, Golf courses, ISP’s Unpredictable use Quadrant 2 Hotels, Airlines, Rental cars, Cruise lines Quadrant 1 Movies, Stadiums / arenas, Convention centers, Hotel meeting space Predictable use Durat ion o f use © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Summary Aggregate planning reconciles conflicting needs and objectives Aggregate plan specifies time-phased production rates, workforce levels and inventory holdings Aggregation: products / services are grouped into families labor may be grouped along family lines or by skills time may be aggregated (quarters, etc.) Two basic planning options: changing capacity and changing demand Aggregate planning strategies: Level – constant workforce or production level Chase – vary production to equal demand Air NZ video © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458