Aggregate Planning Chapter 11 MIS 373: Basic Operations Management.

Aggregate Planning Chapter 11 MIS 373: Basic Operations Management

Learning Objectives After this lecture, students will be able to
Explain what aggregate planning is and how it is useful. Identify the variables decision makers have to work with in aggregate planning. Describe some of the graphical and quantitative techniques planners use. Prepare aggregate plans and compute their costs. Discuss aggregate planning in services. MIS 373: Basic Operations Management

Motivations McDonald's
Do you need to know the demand for each burger to plan your labor force?

The Planning Sequence Long-term planning Intermediate-term planning
Short-term detailed planning MIS 373: Basic Operations Management

The Concept of Aggregation
Aggregate planning is essentially a “big-picture” approach to planning. avoid focusing on individual products or services focus on a group of similar products or services For purposes of aggregate planning, it is often convenient to think of capacity in terms of labor hours or machine hours per period, or output rates (barrels per period, units per period), without worrying about how much of a particular item will actually be involved. MIS 373: Basic Operations Management

Aggregate Planning The main idea behind aggregate planning:
Aggregate planning translates business plans into rough labor schedules and production plans Issues to consider for aggregate planning Production rate: “aggregate units” per worker per unit time Workforce level: available workforce in terms of hours Actual production: Production rate x Workforce level Inventory: Units carried over from previous periods Costs: production, changing workforce, inventory MIS 373: Basic Operations Management

Aggregate Planning What does aggregate planning do?
Given an aggregate demand forecast , determine production levels, inventory levels, and workforce levels, in order to minimize total relevant costs over the planning horizon Why do organizations need to do aggregate planning? It takes time to implement plans (e.g. hiring). It is not possible to predict with accuracy the timing and volume of demand for individual items. Planning is connected to the budgeting process which is usually done annually on an aggregate (e.g., departmental) level. It can help synchronize flow throughout the supply chain; it affects costs, equipment utilization; employment levels; and customer satisfaction MIS 373: Basic Operations Management

Matching Demand and Supply
Proactive Alter demand to match supply (capacity) Among other approaches, we can alter demand by simply changing the price. Reactive Alter supply (capacity) to match demand Through capacity planning and aggregate planning Mixed Some of each MIS 373: Basic Operations Management

Demand Options Pricing Promotion Back orders (delaying order filling)
Used to shift demand from peak to off-peak periods Price elasticity is important Promotion Advertising and other forms of promotion Issue: response rate and response patterns. Less control over timing of demand (may worsen the problem by bringing demand at the wrong time). Back orders (delaying order filling) Orders are taken in one period and deliveries promised for a later period Possible loss of sales, increased record keeping, lowered customer service level New demand Offer different products/services during off-peak periods. Yield (Revenue) Management Maximizing revenue by using a variable pricing strategy. Prices are set relative to capacity availability. MIS 373: Basic Operations Management

Supply Options Hire and layoff workers Overtime Part-time workers
May have upper or lower limit Unions/internal policies may prohibit layoffs Skill levels Associated costs (e.g., recruiting, training, severance-pay, morale) Overtime Overtime may result in lower productivity, poorer quality, more accidents, increased payroll costs Part-time workers Usually low-to-moderate job skills Independent-contractors Inventories Produce in one period and sell in another Costs: holding and carrying cost, money tied up in inventory, insurance, obsolescence, deterioration, spoilage, breakage etc. Subcontracting Less control over output. Quality problems. Higher costs MIS 373: Basic Operations Management

Aggregate Planning Supply Strategies
Level capacity strategy: Maintaining a steady rate of regular-time output; variations in demand are met by using inventories or other options such as overtime, part-time workers, subcontracting, and backorders Chase demand strategy: Matching capacity to demand; the planned output for a period is set at the expected demand for that period. MIS 373: Basic Operations Management

Level strategy Capacities are kept constant over the planning horizon
Advantages Stable output rates and workforce Disadvantages Greater inventory (or other) costs MIS 373: Basic Operations Management

Chase strategy Capacities are adjusted to match demand requirements over the planning horizon Advantages Investment in inventory is low Labor utilization in high Disadvantages The cost of adjusting output rates and/or workforce levels MIS 373: Basic Operations Management

Choosing a Strategy Important factors: Company policy Flexibility Cost
Constraints on the available options e.g., discourage layoffs, no subcontracting to protects secrets, union policies regarding over time Flexibility Chase flexibility may not be present for companies designed for high steady output (e.g., refineries, auto assembly) Cost Alternatives are evaluated in term of cost (while matching demand within the constraints). MIS 373: Basic Operations Management

Example #1: Chase demand
Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker Period 1 2 3 4 5 Demand 40 30 20 50 60 MIS 373: Basic Operations Management

Beginning Inventory Time Periods 1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory # Hired # Fired # Hired in the beginning of a period Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker # Fired in the beginning of a period MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory # Hired # Fired Recall the chase strategy: Capacities are adjusted to match demand requirements over the planning horizon Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker One defining characteristics of the chase strategy is that we don’t have end inventory. All we produced are/were sold. No holding cost MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker TC=Production + Holding + Hiring + Firing = 200* * *100 = $3,100 MIS 373: Basic Operations Management

Exercise Problem Perform aggregate planning using the chase strategy:
Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Period 1 2 3 4 5 Demand 50 40 30

Solution: chase strategy
Beginning Inventory 10 1 2 3 4 5 Total Demand 50 40 30 190 Production End Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

Beginning Inventory 10 1 2 3 4 5 Total Demand 50 40 30 190 Production 180 End Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker We only produce 40 units because there are 10 units beginning inventory that we can use. So, we can still meet the demand of 50 units.

Beginning Inventory 10 1 2 3 4 5 Total Demand 50 40 30 190 Production 180 End Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker The beginning workforce is 5 workers. Since we only produce 40 units in this period and each worker can handle 10 units in a period, we only need 4 works here.  We hence fire 1 at the beginning of this period.

10 1 2 3 4 5 Total Demand 50 40 30 190 Production 180 End Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

10 1 2 3 4 5 Total Demand 50 40 30 190 Production 180 End Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker TC=Production + Holding + Hiring + Firing = 180* * * *200

Example #2: Level Capacity
1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory # Hired # Fired Recall the level strategy: Capacities are kept constant over the planning horizon. So, Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker Total demand= =200 Production per period=200/5=40 MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory # Hired # Fired Fire 1 worker in this period because 4 workers are sufficient to produce 40 units in a period. Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory 10 # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory 10 # Hired # Fired One defining characteristics of the level strategy is that we don’t need to adjust capacity (here, labor force), except for the initial period. Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory 10 # Hired # Fired TC=Production + Holding + Hiring + Firing But, how to calculate the holding cost?  Average inventory in a period Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory 10 Average Inventory 25 # Hired # Fired Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker =(0+10)/2 =(10+30)/2 We can estimate the holding cost by considering the average inventory in each period. MIS 373: Basic Operations Management

1 2 3 4 5 Total Demand 40 30 20 50 60 200 Production End Inventory 10 Average Inventory 25 # Hired # Fired Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker =(0+10)/2 =(10+30)/2 TC=Production + Holding + Hiring + Firing TC= 200* * * *100 = $2,400 MIS 373: Basic Operations Management

Exercise Problem Perform aggregate planning using the level strategy:
Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Period 1 2 3 4 5 Demand 50 40 30 Two additional assumptions: Unmet demands in a period can be held and fulfilled in a future period. There is no cost associated with unmet demands.

Beginning Inventory 10 1 2 3 4 5 Total Demand 50 40 30 190 Production End Inventory Avg. Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

Beginning Inventory 10 1 2 3 4 5 Total Demand 50 40 30 190 Production 36 180 End Inventory Avg. Inventory # Hired # Fired Total demand=190 Total demand=190 – 10 = 180 Production per period=180/5=36 Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

Beginning Inventory 10 1 2 3 4 5 Total Demand 50 40 30 190 Production 36 180 End Inventory -4 Avg. Inventory # Hired # Fired By assumption #1, unmet demands in a period can be held and fulfilled in a future period. So, we keep track on the unmet demands, and try to fulfill them in a future period. Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

Beginning Inventory 10 1 2 3 4 5 Total Demand 50 40 30 190 Production 36 180 End Inventory -4 Avg. Inventory # Hired # Fired Avg. inventory = [10 + (-4)]/2 = 3 Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

Beginning Inventory 10 1 2 3 4 5 Total Demand 50 40 30 190 Production 36 180 End Inventory -4 -8 Avg. Inventory -6 # Hired # Fired -8 = (-4) + (-4) Unmet demand from period #1 and from period #2 Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

Beginning Inventory 10 1 2 3 4 5 Total Demand 50 40 30 190 Production 36 180 End Inventory -4 -8 -2 Avg. Inventory -6 -5 # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

Beginning Inventory 10 1 2 3 4 5 Total Demand 50 40 30 190 Production 36 180 End Inventory -4 -8 -2 Avg. Inventory -6 -5 # Hired # Fired By assumption #2, there is no cost associated with unmet demand (i.e., negative inventory has no costs). Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker TC=Production + Holding Hiring + Firing = 180* *(3+1+2) *200 = $2,030

10 1 2 3 4 5 Total Demand 50 40 30 190 Production 36 180 End Inventory Avg. Inventory # Hired # Fired Tim suggested another way to solve this problem.  Pushing unmet demands to its next period Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

10 1 2 3 4 5 Total Demand 50 40 44 30 40 190 Production 36 180 End Inventory Avg. Inventory # Hired # Fired Tim suggested another way to solve this problem. Pushing unmet demands to its next period Instead of -4 end inventory, here we have 0. See that the demand for period #2 increase from 40 to 44. Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

10 1 2 3 4 5 Total Demand 50 40 44 30 38 30 40 190 Production 36 180 End Inventory Avg. Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

10 1 2 3 4 5 Total Demand 50 40 44 30 38 30 32 40 190 Production 36 180 End Inventory Avg. Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

10 1 2 3 4 5 Total Demand 50 40 44 30 38 30 32 40 190 Production 36 180 End Inventory Avg. Inventory 9 # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

10 1 2 3 4 5 Total Demand 50 40 44 30 38 30 32 40 190 Production 36 180 End Inventory Avg. Inventory 9 # Hired # Fired TC=Production + Holding + Hiring + Firing = 180* * *200 = $2,090 While the TC number is different, this approach seems more intuitive than the previous approach, especially on the parts about inventory. Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

Aggregate Planning in Services
The aggregate planning process is different for services in the following ways: Most services cannot 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 MIS 373: Basic Operations Management

Aggregate Planning in Services
Hospitals: allocate funds, staff, and supplies to meet the demands of patients for their medical services Restaurants: smoothing the service rate, determining workforce size, and managing demand to match a fixed capacity Perishable inventory Airlines: complex due to the large number of factors involved (planes, flight & group personnel, multiple routes, airports etc.) Capacity decisions must also take into account the percentage of seats to be allocated to various fare classes in order to maximize profit or yield (Revenue Management) MIS 373: Basic Operations Management

Key Points An aggregate plan is an intermediate-range plan for a collection of similar products or services that sets the stage for shorter-range plans. Two aggregate planning supply strategies are 1) chase demand strategy and 2) level capacity strategy. MIS 373: Basic Operations Management

Aggregate Planning Chapter 11 MIS 373: Basic Operations Management.

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Aggregate Planning Chapter 11 MIS 373: Basic Operations Management.

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