1. 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

2. 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

3. 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

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

5. 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

6. 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

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

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

9. 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

10. Copyright 2006 John Wiley & Sons, Inc.13-10 Quantitative Techniques For APP   Pure Strategies   Mixed Strategies   Linear Programming   Transportation Method   Other Quantitative Techniques

11. Copyright 2006 John Wiley & Sons, Inc.13-11 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:

12. Copyright 2006 John Wiley & Sons, Inc.13-12 Level Production Strategy Level production = 100,000 pounds (50,000 + 120,000 + 150,000 + 80,000) 4 Spring80,000100,00020,000 Summer50,000100,00070,000 Fall120,000100,00050,000 Winter150,000100,0000 400,000140,000 Cost of Level Production Strategy (400,000 X $2.00) + (140,00 X $.50) = $870,000 SALESPRODUCTION QUARTERFORECASTPLANINVENTORY

13. Copyright 2006 John Wiley & Sons, Inc.13-13 Chase Demand Strategy Spring80,00080,00080020 Summer50,00050,00050030 Fall120,000120,000120700 Winter150,000150,000150300 10050 SALESPRODUCTIONWORKERSWORKERSWORKERS SALESPRODUCTIONWORKERSWORKERSWORKERS QUARTERFORECASTPLANNEEDEDHIREDFIRED Cost of Chase Demand Strategy (400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

14. Copyright 2006 John Wiley & Sons, Inc.13-14 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

15. Copyright 2006 John Wiley & Sons, Inc.13-15 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

16. Copyright 2006 John Wiley & Sons, Inc.13-16 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) 100 + 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)

17. Copyright 2006 John Wiley & Sons, Inc.13-17 Transportation Method 19001000100500 215001200150500 316001300200500 430001300200500 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. 18 Transportation Tableau Unused PERIOD OF PRODUCTION1234CapacityCapacity Beginning0369 Inventory300———300 Regular600300100—1000 Overtime100100 Subcontract500 Regular1200——1200 Overtime150150 Subcontract250250500 Regular1300—1300 Overtime200—200 Subcontract500500 Regular13001300 Overtime200200 Subcontract500500 Demand900150016003000250 12341234 PERIOD OF USE 20232629 25283134 28313437 202326 252831 283134 2023 2528 2831 20 25 28

19. Copyright 2006 John Wiley & Sons, Inc.13-19 Burruss’ Production Plan 190010001000500 215001200150250600 3160013002005001000 4300013002005000 Total7000480065012502100 REGULARSUB-ENDING PERIODDEMANDPRODUCTIONOVERTIMECONTRACTINVENTORY

20. Copyright 2006 John Wiley & Sons, Inc.13-20 Other Quantitative Techniques  Linear decision rule (LDR)  Search decision rule (SDR)  Management coefficients model

21. Copyright 2006 John Wiley & Sons, Inc.13-21 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

22. Copyright 2006 John Wiley & Sons, Inc.13-22 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) – - (CO until the next period of planned production)

23. Copyright 2006 John Wiley & Sons, Inc.13-23 ATP: Example

24. Copyright 2006 John Wiley & Sons, Inc.13-24 ATP: Example (cont.)

25. Copyright 2006 John Wiley & Sons, Inc.13-25 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

26. Copyright 2006 John Wiley & Sons, Inc.13-26 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

27. Copyright 2006 John Wiley & Sons, Inc.13-27 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

28. Copyright 2006 John Wiley & Sons, Inc.13-28 Yield Management

29. Copyright 2006 John Wiley & Sons, Inc.13-29 Yield Management (cont.)

30. Copyright 2006 John Wiley & Sons, Inc.13-30 Yield Management: Example NO-SHOWSPROBABILITYP(N < X) 0.15.00 1.25.15 2.30.40 3.30.70 Optimal probability of no-shows P(n < x)  = =.517 C u C u + C o 75 75 + 70.517 Hotel should be overbooked by two rooms

31. Copyright 2006 John Wiley & Sons, Inc.13-31 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.