OPERATIONS MANAGEMENT

Chapter 13
Aggregate Planning

1
 Aggregate Planning

Determine the quantity and timing of production

for the intermediate future
Objective is to minimize cost over the planning
period by adjusting
Production rates
Labor levels
Inventory levels
Overtime work
Subcontracting rates
Other controllable variables
2
 Aggregate Planning

Required for aggregate planning

A logical overall unit for measuring sales and
output
A forecast of demand for an intermediate
planning period in these aggregate terms
A method for determining costs
A model that combines forecasts and costs so
that scheduling decisions can be made for the
planning period
3
 Aggregate Planning

Combines appropriate resources into general

terms
Part of a larger production planning system
Disaggregation breaks the plan down into
greater detail
Disaggregation results in a master production
schedule

4
 Aggregate Planning Strategies

1. Use inventories to absorb changes in demand

2. Accommodate changes by varying workforce
size
3. Use part-timers, overtime, or idle time to
absorb changes
4. Use subcontractors and maintain a stable
workforce
5. Change prices or other factors to influence
demand
5
 Capacity Options

Changing inventory levels

Increase inventory in low demand periods to meet
high demand in the future
Increases costs associated with storage, insurance,
handling, obsolescence, and capital investment 15%
to 40%
Shortages can mean lost sales due to long lead times
and poor customer service

6
 Capacity Options

Varying workforce size by hiring or layoffs

Match production rate to demand
Training and separation costs for hiring and laying
off workers
New workers may have lower productivity
Laying off workers may lower morale and
productivity

7
 Capacity Options

Varying production rate through overtime or idle

time
Allows constant workforce
May be difficult to meet large increases in demand
Overtime can be costly and may drive down
productivity
Absorbing idle time may be difficult

8
 Capacity Options

Subcontracting
Temporary measure during periods of peak demand
May be costly
Assuring quality and timely delivery may be difficult
Exposes your customers to a possible competitor
Using part-time workers

9
 Demand Options

Influencing demand
Use advertising or promotion to increase demand in
low periods
Attempt to shift demand to slow periods
May not be sufficient to balance demand
and capacity
Back ordering during high- demand periods
Counterseasonal product and service mixing

10
 Aggregate Planning Options
Option Advantages Disadvantages Comments

Changes in human Inventory holding cost

Applies mainly to
Changing inventory resources are gradual may increase.
production, not
levels or none; no abrupt Shortages may result
service, operations
production changes in lost sales

Hiring, layoff, and

Varying workforce size Avoids the costs of Used where size of
training costs may be
by hiring or layoffs other alternatives labor pool is large
significant

Varying production Matches seasonal Overtime premiums;

Allows flexibility within
rates through fluctuations without tired workers; may not
the aggregate plan
overtime or idle time hiring/ training costs meet demand

Permits flexibility and Loss of quality control;

Applies mainly in
Sub-contracting smoothing of the firms reduced profits; loss of
production settings
output future business
11
 Aggregate Planning Options

Option Advantages Disadvantages Comments

less costly and more High turnover/ training Good for unskilled jobs
Using part-time
flexible than full-time costs; quality suffers; in areas with large
workers
workers scheduling difficult temporary labor pools

Uncertainty in Creates marketing

Influencing demand Tries to use excess
demand. Hard to ideas. Overbooking
capacity. Discounts
match demand to used in some
draw new customers
supply exactly businesses

May avoid overtime. Customer must be

Many companies back
Back ordering Keeps capacity willing to wait, but
order
constant goodwill is lost

May require skills or Risky finding products

Counter-seasonal
Fully utilizes resources; equipment outside the or services with
product and service
allows stable workforce firms areas of opposite demand
mixing
expertise patterns

12
 Methods for Aggregate Planning

Chase strategy
Match output rates to demand forecast for each period
Vary workforce levels or vary production rate
Favored by many service organizations
Level strategy
Daily production is uniform
Use inventory or idle time as buffer
Stable production leads to better quality and productivity
A mixed strategy, might be the best solution
13
 Graphical Methods

1. Determine the demand for each period

2. Determine the capacity for regular time,
overtime, and subcontracting each period
3. Find labor costs, hiring and layoff costs, and
inventory holding costs
4. Consider company policy on workers and stock
levels
5. Develop alternative plans and examine their
total costs
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 Graphical Methods - Example

Production Demand Per Day

Month Expected Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Average Total expected demand

requirement =
Number of production days
6,200
= = 50 units per day
124
15
Production rate per working day Graphical Methods - Example

Forecast demand

Level production using

70 average monthly forecast
demand
60

50

40

30

0
Jan Feb Mar Apr May June = Month

22 18 21 21 22 20 = Number of
working days
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 Graphical Methods - Example

Cost Information
Inventory carrying cost $ 5 per unit per month

Subcontracting cost per unit $10 per unit

Average pay rate $ 5 per hour ($40 per day)

$ 7 per hour
Overtime pay rate (above 8 hours per day)

Labor-hours to produce a unit 1.6 hours per unit

Cost of increasing daily production rate (hiring $300 per unit

and training)

Cost of decreasing daily production rate $600 per unit

(layoffs)

17
 Graphical Methods - Example

Plan 1: Constant Workforce

Monthly
Production at Demand Inventory Ending
Month 50 Units per Day Forecast Change Inventory
Jan 1,100 900 +200 200
Feb 900 700 +200 400
Mar 1,050 800 +250 650
Apr 1,050 1,200 -150 500
May 1,100 1,500 -400 100
June 1,000 1,100 -100 0
1,850
Total cost: Inventory carrying + labor
Total cost: $9,250 + $49,600 = $58850

18
 Graphical Methods - Example

Plan 2: Subcontracting
Minimum requirement: 38 units per day
In-house production: 38 x 124 = 4,712 units
Subcontract units: 6,200 4,712 = 1,488 units

Total cost: 7.6 x 40 x 124 + 10 x 1,488 = $52,576

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 Graphical Methods - Example

Plan 3: Hiring and firing

Production = Expected demand
Basic Production Extra Cost of Extra Cost of
Daily Cost (demand x Increasing Decreasing
Forecast Prod 1.6 hrs/unit x Production (hiring Production (layoff
Month (units) Rate $5/hr) cost) cost) Total Cost
Jan 900 41 $ 7,200 $ 7,200
$1,200
Feb 700 39 5,600 6,800
(= 2 x $600)
$600
Mar 800 38 6,400 7,000
(= 1 x $600)
$5,700
Apr 1,200 57 9,600 15,300
(= 19 x $300)
$3,300
May 1,500 68 12,000 15,300
(= 11 x $300)
$7,800
June 1,100 55 8,800 16,600
(= 13 x $600)
$49,600 $9,000 $9,600 $68,200 20
 Comparison of Three Plans

Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0

Regular labor 49,600 37,696 49,600

Overtime labor 0 0 0

Hiring 0 0 9,000

Layoffs 0 0 9,600

Subcontracting 0 14,880 0

Total cost $58,850 $52,576 $68,200

21
 Linear Programming Model

Sales Period
Mar Apr May
Demand 800 1,000 750
Capacity:
Regular 700 700 700
Overtime 50 50 50
Subcontracting 150 150 130
Beginning inventory 100 tires
Costs
Regular time $40 per tire
Overtime $50 per tire
Subcontracting $70 per tire
Carrying $2 per tire per month
22
 Linear Programming Model

Decision Variables
It: Inventory level at the end of month t, t=0,1,2,3
Rt: Regular production in month t
Ot: Overtime production in month t
St: Number of units subcontracted in month t

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Linear Programming Model
min 40R 1 40R 2 40R 3 50O1 50O2
50O3 70 S1 70 S 2 70 S3 2 I1 2 I 2 2 I 3

subject to
I 0 100
I 0 R 1 O1 S1 I1 800
I1 R 2 O2 S 2 I 2 1000
I 2 R 3 O3 S3 I 3 800
R 1 700 R 2 700 R 3 700
O1 50 O 2 50 O 3 50
S1 150 S2 150 S3 130
All variables 0

24
 Yield Management

Allocating resources to customers at prices

that will maximize yield or revenue
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

25
 Yield Management Example

Room sales Demand

Curve
Potential customers exist who
100 are willing to pay more than the
$15 variable cost of the room

Passed-up Some customers who paid

contribution $150 were actually willing
Total 50 to pay more for the room
$ contribution
= (Price) x (50
rooms)
= ($150 - $15)
x (50) Money left
= $6,750 on the table

$15 $150 Price

Variable cost Price charged 26
of room for room
 Yield Management Example

Room sales Demand

Curve
Total $ contribution =
100 (1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =
$2,550 + $5,550 = $8,100

60

30

$15 $100 $200 Price

Variable cost Price 1 Price 2
of room for room for room 27