© Wiley Chapter 13 – Sales and Operations Planning Operations Management by R. Dan Reid & Nada R. Sanders 4th Edition © Wiley 2010

© Wiley Learning Objectives Explain business planning Explain sales and operations planning Identify different aggregate planning strategies & options for changing demand and/or capacity in aggregate plans Develop aggregate plans, calculate associated costs, and evaluate the plan in terms of operations, marketing, finance, and human resources Describe differences between aggregate plans for service and manufacturing companies

© Wiley The Role of Aggregate Planning Integral to part of the business planning process Supports the strategic plan Also known as the production plan Identifies resources required for operations for the next 6-18 months Details the aggregate production rate and size of work force required

© Wiley The Role of the Aggregate Plan

© Wiley Types of Aggregate Plans Level Aggregate Plans Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products like appliances Disadvantage- builds inventory and/or uses back orders Chase Aggregate Plans Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage- constantly changing short term capacity

© Wiley Level Plan Example Level production rate= 28,000 units/7 periods= 4000 units Level workforce= (4000 units x.64 std.)/160 = 16 people

© Wiley Chase Plan Example Chase hires and fires staff to exactly meet each periods demand Period 1 = (500 units x.64 std.)/160 = 2 people, need to fire 16 people

© Wiley Types of Aggregate Plans con’t Hybrid Aggregate Plans Uses a combination of options Options should be limited to facilitate execution May use a level workforce with overtime & temps May allow inventory buildup and some backordering May use short term sourcing

© Wiley Aggregate Planning Options Demand-based options Reactive: uses finished goods inventories and backorders for fluctuations Proactive: shifts the demand patterns to minimize fluctuations e.g. early bird dinner prices at a restaurant Capacity-based options Changes output capacity to meet demand Uses overtime, under time, subcontracting, hiring, firing, and part-timers – cost and operational implications

© Wiley Evaluating the Current Situation Important to evaluate current situation in terms of: Point of Departure Current % of normal capacity Options are different depending on present situation Magnitude of change Larger changes need more dramatic measures Duration of change Is the length of time a brief seasonal change? Is a permanent change in capacity needed?

© Wiley Developing the Aggregate Plan Step 1- Choose strategy: level, chase, or Hybrid Step 2- Determine the aggregate production rate Step 3- Calculate the size of the workforce Step 4- Test the plan as follows: Calculate Inventory, expected hiring/firing, overtime needs Calculate total cost of plan Step 5- Evaluate performance: cost, service, human resources, and operations

© Wiley Aggregate Plans for Companies with Tangible Products Plan A: Level aggregate plan using inventories and back orders Plan B: Chase aggregate plan using hiring and firing

© Wiley Problem Data for Plans A & B Data for Sophisticated Skates

© Wiley Plan A - Level Using Inventory & Backorders First calculate the level production rate (14400/8= 1800)

© Wiley Plan A Evaluation Fill rate is 83.9% Fill rate is likely to low Inventory levels seem to be okay Human resources fires two employees

© Wiley Plan B – Chase Aggregate Plan Using Hiring and Firing Using the same problem data as previous example, develop a chase aggregate plan using hires and fires but no overtime production.

© Wiley Plan B Evaluation Plan B costs slightly less than the level plan. Hiring demands ranges from two in November to thirty-four in February Utilization is highest, 70.6%, in December and even lower in the other months Space and equipment are underutilized in every other month of the plan

© Wiley Aggregate Plans for Service Companies with Non-Tangible Products Options remain the same – level, chase, and hybrid plans Overtime and under time can be used Staff can be hired and fired Inventory cannot be used to level the service plan All demand must be satisfied or lose business to a competing service provider

© Wiley Problem Data for Plans C, D, and E

© Wiley Plan C – Level Aggregate Plan with No Back Orders or Tangible Product Staff of 69 people creates excessive UT (averages 30% UT) Cost per service call is $46.15 ($708,000 Divided by calls)

© Wiley Plan D – Hybrid Aggregate Plan Using Initial Workforce and OT as Needed Costs reduced by $77K and under time to an average of 20% Cost per service call reduced to $41.13 (-$5.02)

© Wiley Plan E – Chase Aggregate Plan for Nontangible Products Using Hiring and Firing Total cost reduced by $114K over Plan F, utilization improved to 100%, and cost per service call now $33.72 (-$7.41) Workforce fluctuates from people- morale problems Solution?? Compare smaller permanent workforce, more OT??

© Wiley Aggregate Planning Bottom Line The Aggregate plan must balance several perspectives Costs are important but so are: Customer service Operational effectiveness Workforce morale A successful AP considers each of these factors

© Wiley Aggregate Planning within OM: How it all fits together Aggregate planning determines the resources available to operations to support the overall business plan. It is critical that accurate demand forecasts be available (Ch 8) so that a reasonable production plan can be developed. A company needs to determine the aggregate production rate output required to determine the appropriate size of the workforce. After these determinations have been made, the company can calculate its inventory levels, back-order levels, capacity requirements, and customer service levels. If the plan requires seven-day-a-week operations, appropriate staff schedules need to be developed (Ch 15). The aggregate plan specifies the number of employees needed. This allows company to determine how much equipment and workspace is needed, as well as to provide the input needed for developing a workplace layout (Ch 9) within the operations area. Aggregate planning provides the resources needed by operations to achieve the company’s strategic objective.

© Wiley Aggregate Planning Across the Organization Aggregate planning, MPS, and rough-cut capacity affection functional areas throughout the organization Accounting is affected because aggregate plan details the resources needed by operations Marketing as the aggregate plan supports the marketing plan Information systems maintains the databases that support demand forecasts and other such information

© Wiley Chapter 13 Highlights Planning begins with the development of the strategic business plan that provides company direction & objectives for the next two to ten years. Sales and operations planning integrates plans from the other functional areas and regularly evaluates company performance. The level aggregate plan maintains the same size workforce and produces the same output each period. Inventories and backorders absorb fluctuations in demand. Chase aggregate plans change the capacity each period to match demand.

© Wiley Chapter 13 Highlights con’t Demand patterns can be smoothed through pricing incentives, reduced prices for out-of- season purchases, or nonprime service times. The difference in aggregate planning for companies that do not provide a tangible product is that the option to use inventories is not available

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