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

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.

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.

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

5. Meeting Demand Strategies
Adjusting capacity
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
Managing demand
Proactive demand management
Copyright 2006 John Wiley & Sons, Inc.

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

7. Level Production Demand Production Units Time
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8. Chase Demand Demand Production Units Time
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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.

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

11. Pure Strategies Example: 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
Regular production cost per pound = $2.00
Inventory carrying cost = $0.50 pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers
Copyright 2006 John Wiley & Sons, Inc.

12. Level Production Strategy
= 100,000 pounds
(50, , , ,000) 4
Spring 80, ,000 20,000
Summer 50, ,000 70,000
Fall 120, ,000 50,000
Winter 150, ,000 0
400, ,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,00 X $.50) = $870,000
SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
Copyright 2006 John Wiley & Sons, Inc.

13. Chase Demand Strategy Cost of Chase Demand Strategy
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000 80,
Summer 50,000 50,
Fall 120, ,
Winter 150, ,
100 50
Cost of Chase Demand Strategy
(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000
Copyright 2006 John Wiley & Sons, Inc.

14. 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.

15. General Linear Programming (LP) Model
LP gives an optimal solution, but demand and costs must be linear
Let
Wt = workforce size for period t
Pt =units produced in period t
It =units in inventory at the end of period t
Ft =number of workers fired for period t
Ht = number of workers hired for period t
Copyright 2006 John Wiley & Sons, Inc.

16. LP MODEL 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)
Copyright 2006 John Wiley & Sons, Inc.

17. 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
Copyright 2006 John Wiley & Sons, Inc.

18. 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

19. Burruss’ Production Plan
Total
REGULAR SUB- ENDING
PERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY
Copyright 2006 John Wiley & Sons, Inc.

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

21. 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.

22. 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) –
Copyright 2006 John Wiley & Sons, Inc.

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

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

26. Rule Based ATP Copyright 2006 John Wiley & Sons, Inc. 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
Copyright 2006 John Wiley & Sons, Inc.

27. Aggregate Planning for Services
Most services can’t be inventoried
Demand for services is difficult to predict
Capacity 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
Copyright 2006 John Wiley & Sons, Inc.

28. Yield Management
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29. Yield Management (cont.)
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30. Yield Management: Example
NO-SHOWS PROBABILITY P(N < X)
.517
Optimal probability of no-shows
P(n < x)  = = .517 Cu
Cu + Co 75
Hotel should be overbooked by two rooms
Copyright 2006 John Wiley & Sons, Inc.

31. Copyright 2006 John Wiley & Sons, Inc. All rights reserved
Copyright 2006 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.
Copyright 2006 John Wiley & Sons, Inc.