1. Reid & Sanders, Operations Management © Wiley 2002 Aggregate Planning 13 C H A P T E R

2. Reid & Sanders, Operations Management © Wiley 2002 Page 2 Learning Objectives Explain business, sales & operations planning Identify different aggregate planning strategies Identify options for changing demand & capacity Develop aggregate plans & calculate costs Evaluate the impact of aggregate plans on functional areas Describe the differences between plans for services & manufacturing companies

3. Reid & Sanders, Operations Management © Wiley 2002 Page 3 Business Planning Hierarchy

4. Reid & Sanders, Operations Management © Wiley 2002 Page 4 Sales and Operations Planning Medium-term functional plans designed to operationalize the long-term strategic plan: –Marketing plan: defines the target customers –Aggregate production plan: identifies the desired inventory levels & staffing –Financial plan: identifies the source of funds, cash flows, & sets budgets –Engineering plan: explores needed product & process changes

5. Reid & Sanders, Operations Management © Wiley 2002 Page 5 Aggregate Planning Based on composite (representative) products: –Simplifies calculations –Forecasts for grouped items are more accurate Considers trade-offs between holding inventory & short-term capacity based on workforce

6. Reid & Sanders, Operations Management © Wiley 2002 Page 6 Master Production Schedule Breaks apart the composite product used in Aggregate Planning: –Identifies specific product configurations, quantities & dates –Used by marketing to determine units available to promise to customers

7. Reid & Sanders, Operations Management © Wiley 2002 Page 7 Planning Approaches Reactive approach: –Allow volume forecasts based on Marketing plan to drive production planning Proactive approach: –Coordinate Marketing & Production plans to level demand using advertising & price incentives

8. Reid & Sanders, Operations Management © Wiley 2002 Page 8 Aggregate Plan Strategies Level plans: –Use a constant workforce & produce similar quantities each time period. –Use inventories & backorders to absorb demand peaks & valleys Chase plans: –Minimize finished good inventories by trying to keep pace with demand fluctuations

9. Reid & Sanders, Operations Management © Wiley 2002 Page 9 Hybrid Strategies Use a combination of options: –Build-up inventory ahead of rising demand & use backorders to level extreme peaks –Layoff or furlough workers during lulls –Subcontract production or hire temporary workers to cover short-term peaks –Reassign workers to preventive maintenance during lulls

10. Reid & Sanders, Operations Management © Wiley 2002 Page 10 Demand-based Options Finished goods inventories: –Anticipate demand Back orders & lost sales: –Delay delivery or allow demand to go unfilled Shift demand to off-peak times: –Proactive marketing

11. Reid & Sanders, Operations Management © Wiley 2002 Page 11 Capacity-based Options Overtime: Short-term option –Pay workers a premium to work longer hours Undertime: Short-term option –Slow the production rate or send workers home early (lowers labor productivity, but doesn’t tie up capital in finished good inventories) Subcontracting: Medium-term option Hire & fire workers: Long-term option –Change the size of the workforce

12. Reid & Sanders, Operations Management © Wiley 2002 Page 12 Preliminary Considerations Identify the point of departure: –How much capacity is currently in use? Identify the magnitude of change needed Identify the anticipated duration the modified capacity is necessary

13. Reid & Sanders, Operations Management © Wiley 2002 Page 13 Developing Aggregate Plan Choose the basic strategy: –Level, chase, or hybrid Determine the production rate: –Level plan with back orders: rate = average demand over the planning horizon –Level plan without back orders: rate is set to meet all demand on time –Chase plan: assign regular production, amount of overtime & subcontracted work to meet demand

14. Reid & Sanders, Operations Management © Wiley 2002 Page 14 Developing the Aggregate Plan Calculate the size of the workforce needed Calculate period-to-period inventory levels, shortages, expected hiring & firings, and overtime Calculate period-by-period costs, then sum for total costs of the plan Evaluate the plan’s impact on customer service and human resource issues

15. Reid & Sanders, Operations Management © Wiley 2002 Page 15 Evaluating Alternative Plans Level strategy plan Chase strategy plan

16. Reid & Sanders, Operations Management © Wiley 2002 Page 16 Level Strategy

17. Reid & Sanders, Operations Management © Wiley 2002 Page 17 Non-Financial Criteria Operations perspective: –Smooth & even flow is easy to manage Human resources perspective: –Nobody hired or fired, no overtime or furloughs, so employee morale should be fine Marketing perspective: –All demand met, so no customer service issues

18. Reid & Sanders, Operations Management © Wiley 2002 Page 18 Chase Strategy

19. Reid & Sanders, Operations Management © Wiley 2002 Page 19 Non-Financial Criteria Operations perspective: –Can operations ramp up & back down this quickly? –Much more difficult to accomplish Human resources perspective: –Will employees tolerate being hired & fired so rapidly? –What about training & learning curve issues? Marketing perspective: –All demand is met (assuming no strikes)

20. Reid & Sanders, Operations Management © Wiley 2002 Page 20 Service Planning Issues Intangible products can’t be inventoried Possible approaches: –Try to proactively shift demand away from peaks –Use overtime or subcontracting to handle peaks –Allow lost sales

21. Reid & Sanders, Operations Management © Wiley 2002 Page 21 The End Copyright © 2002 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions 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 contained herein.