1. Aggregate Planning 2 2

2. Planning Horizon
Aggregate planning: Intermediate-range capacity planning, usually covering 6 to 18 months.
Short
range
Intermediate range
Long range
Now
6 months
18 months

4. Long range Intermediate Manufacturing Services Short Master scheduling
Material requirements planning
Order scheduling
Weekly workforce and
customer scheduling
Daily workforce and customer scheduling
Process planning
Strategic capacity planning
Sales and operations (aggregate) planning
Long
range
Intermediate
Short
Manufacturing
Services
Sales plan
Aggregate operations plan
Forecasting & demand management

5. Operations Planning Activities
Long-range planning
Greater than one year planning horizon
Usually performed in annual increments
Medium-range planning
Six to eighteen months
Usually with monthly or quarterly increments
Short-range planning
One day to less than six months
Usually with weekly increments 3 3

6. Planning Tasks and Responsibilities

7. Aggregate Production Planning (APP)
Matches market demand to company resources
Plans production 6 months to 18 months in advance
Expresses demand, resources, and capacity in general terms
Develops a strategy for economically meeting demand
Establishes a company-wide game plan for allocating resources

8. Balancing Aggregate Demand and Aggregate Production Capacity
10000
Suppose the figure to the right represents forecast demand in units
10000
8000
8000
7000
6000
5500
6000
4500
4000
Now suppose this lower figure represents the aggregate capacity of the company to meet demand
2000
Jan
Feb
Mar
Apr
May
Jun
10000
9900
9500
9500
9000
9000
8800
8000
What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up
6000
4000
2000
Jan
Feb
Mar
Apr
May
Jun

9. Aggregate Plan: Relationships
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

10. Inputs and Outputs to APP
Company
Policies
Strategic
Objectives
Capacity
Constraints
Units or dollars
subcontracted,
backordered, or lost
Size of
Workforce
Production
per month
(in units or $)
Inventory
Levels
Financial
Demand
Forecasts
Aggregate
Planning

11. Aggregate Planning Inputs
Resources
Workforce
Facilities
Demand forecast
Policies
Subcontracting
Overtime
Inventory levels
Back orders
Common unit for measuring outputs
Costs
Inventory carrying
Back orders
Hiring/firing
Overtime
Inventory changes
Subcontracting

12. Aggregate Planning Outputs
A plan that specifies 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
Subcontracting levels (if any)
Backordering levels (if any) 6 6

13. Aggregate Planning Goals
Meet demand
Use capacity efficiently
Meet inventory policy
Minimize total cost

14. Aggregate Planning Strategies
Proactive
Alter demand to match capacity
Reactive
Alter capacity to match demand
Mixed
Some of each

15. Demand Management
Shifting demand into other periods by incentives, promotions, advertising campaigns, pricing, etc.
Offering product or services with counterseasonal demand patterns (counterseasonal product mixing)
Backordering
Creation of new demand
Partnering with suppliers to reduce information distortion along the supply chain

16. Options of Adjusting Capacity to Meet Demand (1 of 2)
Producing at a constant rate and using inventories to absorb fluctuations in demand ie. changing inventory levels
Varying work force size (hiring and firing workers) so that production matches demand
Varying production capacity by increasing or decreasing working hours (overtime or idle time)

17. Options of Adjusting Capacity to Meet Demand (2 of 2)
Using part-time workers to change production rate
Subcontracting work to other firms
Providing the service or product at a later time period (backordering)

18. Strategy Details
Overtime & undertime - common when demand fluctuations are not extreme
Subcontracting - useful if supplier meets quality & time requirements
Part-time workers - feasible for unskilled jobs or if labor pool exists
Backordering - only works if customer is willing to wait for product/services

19. Capacity Options - Advantages and Disadvantages (1 of 4)
Some
Comments
Changing
inventory levels
Changes in
human resources
are gradual, not
abrupt
production
changes
Inventory
holding costs;
Shortages may
result in lost
sales
Applies mainly
to production,
not service,
operations
Varying
workforce size
by hiring or
layoffs
Avoids use of
other alternatives
Hiring, layoff,
and training
costs
Used where size
of labor pool is
large

20. Advantages/Disadvantages (2 of 4)
Option
Advantage
Disadvantage
Some
Comments
Varying
production rates
through overtime
or idle time
Matches seasonal
fluctuations
without
hiring/training
costs
Overtime
premiums, tired
workers, may not
meet demand
Allows
flexibility within
the aggregate
plan
Subcontracting
Permits
flexibility and
smoothing of the
firm's output
Loss of quality
control; reduced
profits; loss of
future business
Applies mainly
in production
settings

21. Advantages/Disadvantages (3 of 4)
Option
Advantage
Disadvantage
Some
Comments
Using part-time
Less costly and
High
Good for
workers
more flexible
turnover/training
unskilled jobs in
than full-time
costs; quality
areas with large
workers
suffers;
temporary labor
scheduling
pools
difficult
Influencing
Tries to use
Uncertainty in
Creates
demand
excess capacity.
demand. Hard to
marketing ideas.
Discounts draw
match demand to
Overbooking
new customers.
supply exactly.
used in some
businesses.

22. Advantages/Disadvantages (4 of 4)
Option
Advantage
Disadvantage
Some
Comments
Back ordering
during high-
demand periods
May avoid
overtime. Keeps
capacity constant
Customer must
be willing to
wait, but
goodwill is lost.
Many companies
backorder.
Counterseasonal
products and
service mixing
Fully utilizes
resources; allows
stable workforce.
May require
skills or
equipment
outside a firm's
areas of
expertise.
Risky finding
products or
services with
opposite demand
patterns.

23. The Extremes Level Strategy Chase Strategy Production equals demand
Production rate is constant

24. Basic Aggregate Planning Strategies for Meeting Demand
Level capacity strategy:
Keeping work force constant and maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options (such as using inventories + subcontracting)
Chase demand strategy:
Changing workforce levels so that production matches demand (the planned output for a period is set at the expected demand for that period.)
Maintaining resources for high demand levels
Ensures high levels of customer service

25. Level Production
Production
Demand
Units
Time

26. Chase Demand
Production
Demand
Units
Time

27. Level Strategy: Forecast and Average Forecast Demand

28. Level Strategy: Cumulative Demand Graph
Jan Feb Mar Apr May Jun
Cumulative forecast requirements
Cumulative level production using average monthly forecast requirements
Reduction of inventory
Excess inventory
Cumulative Demand (Units)
7,000
6,000
5,000
4,000
3,000
2,000
1,000

29. Level Approach Advantages Disadvantages
Stable output rates and workforce
Disadvantages
Greater inventory costs
Increased overtime and idle time
Resource utilizations vary over time

30. Chase Approach Advantages Disadvantages Investment in inventory is low
Labor utilization in high
Disadvantages
The cost of adjusting output rates and/or workforce levels

31. Aggregate Planning Methods
Graphical & charting techniques
Popular & easy-to-understand
Trial & error approach
Mathematical approaches
Linear programming
Transportation method
Linear decision rule (LDR)
Search decision rule (SDR)
Management coefficients model
Simulation

32. Summary of Planning Techniques

33. Steps of Trial & Error Method
Forecast demand for each period
Determine capacities (for regular time, overtime, subcontracting) for each period
Identify policies that are pertinent
Determine costs (labor, hiring/firing, holding etc.)
Develop alternative plans and costs
Select the best plan that satisfies objectives. Otherwise return to step 5.

34. Aggregate Planning Using Pure Strategies (Example 1)
QUARTER SALES FORECAST (LB)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000
Hiring cost = $100 per worker
Firing cost = $500 per worker
Inventory carrying cost = $0.50 pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers

35. Level Production Strategy (1 of 2)
QUARTER SALES FORECAST (LB)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000
Level production
= 100,000 pounds
(50, , , ,000) 4

36. Level Production Strategy (2 of 2)
Spring 80, ,000 20,000
Summer 50, ,000 70,000
Fall 120, ,000 50,000
Winter 150, ,000 0
Total 400, ,000
Cost = 140,000 pounds x 0.50 per pound = $70,000
SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY

37. Chase Demand Strategy Spring 80,000 80,000 80 0 20
Summer 50,000 50,
Fall 120, ,
Winter 150, ,
100 50
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED
Cost = (100 workers hired x $100) + (50 workers fired x $500)
= $10, ,000 = $35,000

38. APP Using Mixed Strategies
January 1000 July 500
February 400 August 500
March 400 September 1000
April 400 October 1500
May 400 November 2500
June 400 December 3000
MONTH DEMAND (CASES) MONTH DEMAND (CASES)
Production per employee = 100 cases per month
Wage rate = $10 per case for regular production
= $15 per case for overtime
= $25 for subcontracting
Hiring cost = $1000 per worker
Firing cost = $500 per worker
Inventory carrying cost = $1.00 case per month
Beginning work force = 10 workers

39. Aggregate Planning (Example 2)
Suppose we have the following unit demand and cost information:
Demand/mo Jan Feb Mar Apr May Jun
Materials $5/unit
Holding costs $1/unit per mo.
Marginal cost of stockout $1.25/unit per mo.
Hiring and training cost $200/worker
Layoff costs $250/worker
Labor hours required hrs/unit
Straight time labor cost $8/hour
Beginning inventory units
Productive hours/worker/day 7.25
Paid straight hrs/day 8

40. Cut-and-Try Example: Determining Straight Labor Costs and Output
Demand/mo Jan Feb Mar Apr May Jun
Given the demand and cost information below, what
are the aggregate hours/worker/month, units/worker, and dollars/worker?
7.25x22
7.25/0.15=48.33 & 48.33x22=
22x8hrsx$8=$1408

41. Chase Strategy (Hiring & Firing to meet demand)
Lets assume our current workforce is 7 workers.
First, calculate net requirements for production, or =4250 units
Then, calculate number of workers needed to produce the net requirements, or 4250/ =3.997 or 4 workers
Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired.

42. Below are the complete calculations for the remaining months in the six month planning horizon

43. Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included

44. Level Workforce Strategy (Surplus and Shortage Allowed)
Lets take the same problem as before but this time use the Level Workforce strategy
This time we will seek to use a workforce level of 6 workers

45. Below are the complete calculations for the remaining months in the six month planning horizon
Note, if we recalculate this sheet with 7 workers we would have a surplus

46. Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
Note, total costs under this strategy are less than Chase at $
Labor
Material
Storage
Stockout

47. APP by Linear Programming
Minimize Z = $100 (H1 + H2 + H3 + H4)
+ $500 (F1 + F2 + F3 + F4)
+ $0.50 (I1 + I2 + I3 + I4)
Subject to
P1 - I1 = 80,000 (1)
Demand I1 + P2 - I2 = 50,000 (2)
constraints I2 + P3 - I3 = 120,000 (3)
I3 + P4 - I4 = 150,000 (4)
Production W1 = P1 (5)
constraints W2 = P2 (6)
1000 W3 = P3 (7)
1000 W4 = P4 (8)
100 + H1 - F1 = W1 (9)
Work force W1 + H2 - F2 = W2 (10)
constraints W2 + H3 - F3 = W3 (11)
W3 + H4 - F4 = W4 (12)
where
Ht = # hired for period t
Ft = # fired for period t
It = inventory at end
of period t
Pt = units produced
in period t
Wt = workforce size
for period t

48. APP by the 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 inventory units
EXPECTED REGULAR OVERTIME SUBCONTRACT
QUARTER DEMAND CAPACITY CAPACITY CAPACITY

49. The Transportation Tableau
Unused
PERIOD OF PRODUCTION Capacity Capacity
Beginning
Inventory 300 — — — 300
Regular —
Overtime
Subcontract
Regular — —
Overtime
Subcontract
Regular —
Overtime — 200
Subcontract
Regular
Overtime
Demand 1 2 3 4
PERIOD OF USE
20 23
25 28
28 31 20 25 28

50. Burruss’ Production Plan
Total
REGULAR SUB- ENDING
PERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY

51. Other Quantitative Techniques
Linear decision rule (LDR)
Search decision rule (SDR)
Management coefficients model
Linear decision rule (LDR)
payroll, staffing, over/undertime, inventory costs
Search decision rule (SDR)
find minimum cost combination of labor levels & production rates
Management coefficients model
uses regression analysis to improve consistency of planning 20

52. Hierarchical Planning Process
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

53. Aggregate Plan to Master Schedule
Aggregate Planning
Disaggregation
Master Schedule

54. Disaggregating the Aggregate Plan
Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items needed to meet demand for a scheduled horizon.
Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.

55. Master Scheduling Process
Figure 13.6
Master Scheduling Process
Master
Scheduling
Beginning inventory
Forecast
Customer orders
Inputs
Outputs
Projected inventory
Master production schedule
Uncommitted inventory

56. Projected On-hand Inventory
Inventory from previous week
Current week’s requirements - =

57. Projected On-hand Inventory
Figure 13.8
Beginning Inventory
Customer orders are larger than forecast in week 1
Forecast is larger than Customer orders in week 2
Forecast is larger than Customer orders in week 3

58. Time Fences
Time Fences – points in time that separate phases of a master schedule planning
horizon.

59. “slushy” somewhat firm
Time Fences in MPS
Figure 13.12
Period 1 2 3 4 5 6 7 8 9
“frozen” (firm or fixed)
“slushy” somewhat firm
“liquid” (open)

60. Available-to-Promise
PERIOD
ON-HAND =
Forecast
Customer orders
Master production schedule
Available to promise
PERIOD
ON-HAND =
Forecast
Customer orders
Master production schedule
Available to promise
ATP in period 1 = ( ) - ( ) = 40
ATP in period 3 = ( ) = 0
ATP in period 5 = ( ) = 170

61. Available-to-Promise
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?
Revise master schedule
Trigger production
Lose sale
Yes No

62. Aggregate Planning for Services
Most services can’t be inventoried
Demand for services is difficult to predict
Capacity availability is also difficult to predict
Service capacity must be provided at the appropriate place and time
Labor is usually the most constraining resource for services
Labor flexibility can be an advantage in services

63. Characteristics That Make Yield Management Work
Service or product can be sold in advance of consumption
Demand fluctuates
Capacity is relatively fixed
Demand can be segmented
Variable costs are low and fixed costs are high

64. 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
Some customers who paid $150 for the room were actually willing to pay more
$sales = Net price * 50 rooms
=150*50
=$7500
Money left on the table
$15 variable cost of room
Price
$150 Price charged for room
$ Sales = $ 6,750

65. Hotel: Two Price Levels
Demand
Sales
$100
Price #1
$200
Price #2
Total sales =
1st net price *30 + 2nd net price *30
= $8100
Net prices are:
Price #1 => $85
Price #2 => $175
$15 variable cost of room
$Sales = $ 8,100

66. Yield Management Cu Cu + Co P(n < x)  where n = number of no-shows
x = number of rooms or seats overbooked
Cu = cost of underbooking; i.e., lost sale
Co = cost of overbooking; i.e., replacement cost
P = probability

67. Yield Management
NO-SHOWS PROBABILITY
2 .30
3 .30

68. Yield Management NO-SHOWS PROBABILITY P(N < X) 0 .15 .00 1 .25 .15
.517
Expected number of no shows
0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75
Optimal probability of no-shows
P(n < x)  = = .517 Cu
Cu + Co 75

69. Yield Management NO-SHOWS PROBABILITY P(N < X) Cost of overbooking
[2(.15) + 1(.25)]$70 = $38.50 Cost of bumping customers
(.30)$75 = $22.50 Lost revenue from no-shows
$61.00 Total cost of overbooking by
2 rooms
Expected savings = ($ $61) = $70.25 a night
NO-SHOWS PROBABILITY P(N < X)
Expected number of no shows
0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75
Optimal probability of no-shows
P(n < x)  = = .517 Cu
Cu + Co 75
.517