Chapter 13 –

Aggregate Planning

Operations Management

by

R. Dan Reid & Nada R. Sanders

2nd Edition © Wiley 2005 PowerPoint Presentation by R.B. Clough - UNH

What is Aggregate Planning?

Aggregate planning is intermediate range (2 to 12 months) capacity planning useful in particular for organizations that experience seasonal or other fluctuation in demand.

The goal of aggregate planning is to effectively utilize the organization’s resources to satisfy expected demand.

The Role of the Aggregate Plan

The Concept of Aggregation

Aggregate planning is a “big picture” approach that does not focus on individual products or services. Instead, the focus is on groups of similar products of an entire product line.

Examples:   Total number of bikes produced Total number of customers served

Responses to Demand Fluctuations

  Demand-based options are intended to alter (smooth) the pattern of the demand.

Capacity-based options to alter capacity to better match the demand.

Demand-based Options

    Finished goods inventories:  To meet anticipate high demand Back orders & lost sales:  Delay delivery or allow demand to go unfilled when demand exceeds capacity Shift demand to off-peak times:  Proactive marketing: pricing, promotions Create new (complementary) demand

Capacity-based Options

    Overtime: Short-term option  Pay workers a premium to work longer hours Idle time: 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

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

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

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

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

Evaluating Alternative Plans

  Level strategy plan Chase strategy plan

Aggregate Planning Example

Period Demand 1 3000 2 6000 3 2000 4 1500 5 4000 6 5500 7 8500 Beginning Inventory Beginning Workforce Labor Standard (units/worker) Costs Regular Time Labor Cost Overtime/Subcontracting Inventory Holding Cost Backorders Hiring Layoff Cost Per Unit $9.60

$14.40

$5.00

$7.50

$500.00

$750.00

2500 18 250

Aggregate Planning Template

Aggregate Production Planning Cost Per Unit Total Units Total Cost Beginning Inventory Beginning Workforce Labor Standard (units/worker) Costs Regular Time Labor Cost Overtime/Subcontracting Inventory Holding Cost Backorders Hiring Layoff Total Costs Period Demand Cumulative Demand Net Cumulative Demand 1 2 3 4 5 6 7 8 Production/Inventory Planning Production Cumulative Production Inventory (Excess Units) Backorders (Units Short) Capacity Planning Workers Hired Workers Layed Off Workforce Available Regular Time Capacity (units) Overtime/Subcontracting (units) Total Production Capacity (units)

Level Strategy

Aggregate Production Planning Beginning Inventory Beginning Workforce Labor Standard (units/worker) 2500 18 250 Costs Regular Time Labor Cost Overtime/Subcontracting Inventory Holding Cost Backorders Hiring Layoff Cost Per Unit $9.60

$14.40

Total Units Total Cost 28000 $268,800 0 $0 $5.00

$7.50

$500.00

$750.00

Total Costs 25000 $125,000 0 0 $0 $0 2 $1,500 $395,300 Period Demand Cumulative Demand Net Cumulative Demand Production/Inventory Planning Production Cumulative Production Inventory (Excess Units) Backorders (Units Short) Capacity Planning Workers Hired Workers Layed Off Workforce Available Regular Time Capacity (units) Overtime/Subcontracting (units) Total Production Capacity (units) 1 3000 3000 500 4000 4000 3500 0 0 2 16 4000 0 4000 2 6000 9000 6500 3 2000 11000 8500 4 1500 12500 10000 5 4000 16500 14000 6 5500 22000 19500 7 8500 30500 28000 4000 8000 1500 0 4000 12000 3500 0 4000 16000 6000 0 4000 20000 6000 0 4000 24000 4500 0 4000 28000 0 0 0 0 16 4000 0 4000 0 0 16 4000 0 4000 0 0 16 4000 0 4000 0 0 16 4000 0 4000 0 0 16 4000 0 4000 0 0 16 4000 0 4000 8

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

Chase Strategy

Aggregate Production Planning Beginning Inventory Beginning Workforce Labor Standard (units/worker) 2500 18 250 Costs Regular Time Labor Cost Overtime/Subcontracting Inventory Holding Cost Backorders Hiring Layoff Cost Per Unit $9.60

$14.40

$5.00

$7.50

$500.00

$750.00

Total Costs Total Units Total Cost 28000 $268,800 0 $0 0 0 50 34 $0 $0 $25,000 $25,500 $319,300 Period Demand Cumulative Demand Net Cumulative Demand Production/Inventory Planning Production Cumulative Production Inventory (Excess Units) Backorders (Units Short) Capacity Planning Workers Hired Workers Layed Off Workforce Available Regular Time Capacity (units) Overtime/Subcontracting (units) Total Production Capacity (units) 1 3000 3000 500 500 500 0 0 0 16 2 500 0 500 2 6000 9000 6500 3 2000 11000 8500 4 1500 12500 10000 5 4000 16500 14000 6 5500 22000 19500 7 8500 30500 28000 6000 6500 0 0 22 0 24 6000 0 6000 2000 8500 0 0 1500 10000 0 0 4000 14000 0 0 5500 19500 0 0 8500 28000 0 0 0 16 8 2000 0 2000 0 2 6 1500 0 1500 10 0 16 4000 0 4000 6 0 22 5500 0 5500 12 0 34 8500 0 8500 8

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)

A Minimum Cost Plan (Hybrid Strategy)

Aggregate Production Planning Beginning Inventory Beginning Workforce Labor Standard (units/worker) Period Demand Cumulative Demand Net Cumulative Demand Production/Inventory Planning Production Cumulative Production Inventory (Excess Units) Backorders (Units Short) Capacity Planning Workers Hired Workers Layed Off Workforce Available Regular Time Capacity (units) Overtime/Subcontracting (units) Total Production Capacity (units) 2500 18 250 1 3000 3000 500 Costs Regular Time Labor Cost Overtime/Subcontracting Inventory Holding Cost Backorders Hiring Layoff Cost Per Unit $9.60

$14.40

$5.00

$7.50

$500.00

$750.00

Total Costs Total Units Total Cost 28000 $268,800 0 $0 2750 0 28 12 $13,750 $0 $14,000 $9,000 $305,550 8 2 6000 9000 6500 3 2000 11000 8500 4 1500 12500 10000 5 4000 16500 14000 6 5500 22000 19500 7 8500 30500 28000 3250 3250 2750 0 0 5 13 3250 0 3250 3250 6500 0 0 0 0 13 3250 0 3250 2000 8500 0 0 1500 10000 0 0 0 5 8 2000 0 2000 0 2 6 1500 0 1500 4000 14000 0 0 5500 19500 0 0 10 0 16 4000 0 4000 6 0 22 5500 0 5500 8500 28000 0 0 12 0 34 8500 0 8500

Aggregate Planning Bottom Line

   The Aggregate plan must balance several perspectives Costs are important but so are:  Customer service  Operational effectiveness  Workforce morale A successful AP considers each of these factors

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

Chapter 13 HW Assignment

Problems 1 – 5, 10 -12.