Outline

• What is aggregate planning?

Aggregate Planning • How do we match production to demand?

Chapter 13 • Operations Options

MGNT 3430
• Graphical methods (3 examples)

Aggregate Planning The Planning Process

Long-range plans
(over one year)
Research & Development
Determine the quantity and timing of New product plans
Capital investment
production for the immediate future Facility location/expansion

Top
; Objective is to minimize cost over the executives Intermediate-range plans
(3 to 18 months)
planning period by adjusting Sales planning
Production planning and budgeting
Setting employment, inventory,
; Production rates Operations
managers subcontracting levels
Analyzing cooperating plans
; Labor levels Short-range plans
; Inventory levels (up to 3 months)
Job assignments
Operations Ordering
; Overtime work managers, Job scheduling
Dispatching
supervisors,
Overtime
; Subcontracting foremen
Part-time help

; Other controllable variables Responsibility Planning tasks and horizon Figure 13.1
 Aggregate Planning Aggregate Planning

Marketplace
and
demand
Product
decisions
Research
and
technology
; Combines appropriate resources
Process
into general terms
planning and
Demand
forecasts,
orders
capacity
decisions
; Part of a larger production planning
Aggregate
Workforce
Raw
materials
available
system
plan for

; Disaggregation breaks the plan

production Inventory
on
hand
External

Master
production
capacity
(subcontractors) down into greater detail
schedule and

; Disaggregation results in a master

MRP
systems

Detailed
production schedule
work
schedules Figure 13.2

Aggregate Planning Aggregate Planning Options

(IBM microcomputer units) (Capacity)
Option Advantages Disadvantages Some Comments
Quarter 1
Changing Changes in Inventory holding Applies mainly to
Jan Feb Mar inventory human cost may production, not
150,000 120,000 110,000 levels resources are increase. service,
gradual or none; Shortages may operations
no abrupt result in lost
Quarter 2 production sales.
Apr May Jun changes

100,000 130,000 150,000 Varying Avoids the costs Hiring, layoff, and Used where size
workforce of other training costs of labor pool is
size by alternatives may be large
Quarter 3 hiring or significant
layoffs
Jul Aug Sep
Family plan includes: 180,000 150,000 140,000
Laptops, desktops, servers, etc. Table 13.1
 Aggregate Planning Options Aggregate Planning Options
(Capacity) (Demand) Table 13.1

Option Advantages Disadvantages Some Comments

Option Advantages Disadvantages Some Comments Influencing Tries to use Uncertainty in Creates marketing
Varying Matches seasonal Overtime Allows flexibility demand excess capacity. demand. Hard to ideas.
production fluctuations premiums; tired within the Discounts draw match demand to Overbooking
rates without hiring/ workers; may not aggregate plan new customers. supply exactly. used in some
through training costs meet demand businesses.
overtime or Back May avoid Customer must be Allows flexibility
idle time ordering overtime. Keeps willing to wait, within the
Using part- Is less costly and High turnover/ Good for unskilled during high- capacity but goodwill is aggregate plan
time workers more flexible training costs; jobs in areas with demand constant. lost.
than full-time quality suffers; large temporary periods
workers scheduling labor pools
difficult Counter- Fully utilizes May require skills Risky finding
Sub- Permits flexibility Loss of quality Applies mainly in seasonal resources; or equipment products or
contracting and smoothing control; reduced production product and allows stable outside the firm’s services with
of the firm’s profits; loss of settings service workforce areas of opposite demand
output future business Table 13.1 mixing expertise patterns

Graphical and Charting

Operations Options
Methods
; Level strategy ; Popular techniques
; Daily production is uniform
; Use inventory or idle time as buffer ; Easy to understand and use
; Stable production leads to better quality and productivity
; Trial-and-error approaches that do
; Chase strategy not guarantee an optimal solution
; Match output rate to demand forecast
; Vary production rate or workforce level ; Require only limited computations
; Often used in services

; Mixed strategy
; Some combination of capacity options might be the best
 Graphical and Charting Planning Example 1:
Methods Level Strategy
Demand Per Day
Month Expected Demand Production Days (computed)
1. Determine the demand for each period Jan 900 22 41
Feb 700 18 39
2. Determine the capacity for regular time, Mar 800 21 38
overtime, and subcontracting each period Apr 1,200 21 57
May 1,500 22 68
3. Find labor costs, hiring and layoff costs, June 1,100 20 55
and inventory holding costs
4. Consider company policy on workers and Table 13.2

stock levels
5. Develop alternative plans and examine
their total costs

Planning Example 1 Planning Example 1

Forecast demand
Cost Information
Production rate per working day

Inventory carrying cost $ 5 per unit per month

70 –
Level production using average
monthly forecast demand Subcontracting cost per unit $10 per unit
60 –
Average pay rate $ 5 per hour ($40 per day)
50 – $ 7 per hour
Overtime pay rate
(above 8 hours per day)
40 – Labor-hours to produce a unit 1.6 hours per unit
30 – Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
0 – (layoffs)
Jan Feb Mar Apr May June = Month
Ð Ð Ð Ð Ð Ð Table 13.3
22 18 21 21 22 20 = Number of
Figure 13.3 working days
 Planning Example 1 Planning Example 1
Monthly 7,000 –
Cost Information
Production at Demand Inventory Ending
Inventory 6,000 –
Month carry50 cost
Units per Day Forecast $ 5Change
per unit per month
Inventory Reduction
of inventory
Subcontracting
Jan cost per unit 900 $10 per unit
5,000 – Cumulative level
Average
Feb pay rate 700 $ 5 per hour ($40 per day) production using

Cumulative units
4,000 – average monthly
Mar pay rate
Overtime 800 $ 7 per hour forecast
(above 8 hours per day) requirements
Apr
Labor-hours to produce a unit 1,200 1.6 hours per unit 3,000 –
May
Cost 1,500
of increasing daily production rate $300 per unit
2,000 – Cumulative forecast
(hiring
June and training) 1,100 requirements
Cost of decreasing daily production rate $600 per unit
1,000 –
(layoffs) Excess inventory
Total units of inventory carried over from one
Table 13.3 month to the next = –
Jan Feb Mar Apr May June
Workforce required to produce 50 units per day =
Figure 13.4

Planning Example 2:
Planning Example 2
Sub-contracting
Demand Per Day Forecast demand

Production rate per working day

Month Expected Demand Production Days (computed)
Jan 900 22 41 70 –
Feb 700 18 39 Level production
60 – using lowest
Mar 800 21 38 monthly forecast
Apr 1,200 21 57 50 – demand
May 1,500 22 68
40 –
June 1,100 20 55
6,200 124 30 –
Table 13.2

0 –
Jan Feb Mar Apr May June = Month
Minimum requirement = 38 units per day Ð Ð Ð Ð Ð Ð
22 18 21 21 22 20 = Number of
working days
 Planning Example 2 Planning Example 2
Cost Information Cost Information
Inventory carrying cost $ 5 per unit per month Inventory carry cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
In-house production =
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day) Average pay rate $ 5 per hour ($40 per day)

Overtime pay rate $ 7 per hour Overtime pay rate $ 7 per hour
(above 8 hours per day) (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit Subcontract
Labor-hours to produce a unit units = 1.6 hours per unit
Cost of increasing daily production rate $300 per unit Cost of increasing daily production rate $300 per unit
(hiring and training) (hiring and training)
Cost of decreasing daily production rate $600 per unit Cost of decreasing daily production rate $600 per unit
(layoffs) (layoffs)

Table 13.3 Table 13.3

Planning Example 3:
Planning Example 3
Chase Strategy
Demand Per Day

Production rate per working day

Month Expected Demand Production Days (computed) Forecast demand and
monthly production
Jan 900 22 41 70 –
Feb 700 18 39
60 –
Mar 800 21 38
Apr 1,200 21 57 50 –
May 1,500 22 68
40 –
June 1,100 20 55
6,200 124 30 –
Table 13.2

0 –
Jan Feb Mar Apr May June = Month
Production = Expected Demand Ð Ð Ð Ð Ð Ð
22 18 21 21 22 20 = Number of
working days
 Planning Example 3 Planning Example 3
Basic
Cost Information Cost Information Production Extra Cost of Extra Cost of
Inventory carrying cost $ 5 per unit per month Inventory carryingDaily
cost Cost (demand Increasing
$ 5 per Decreasing
unit per month
Forecast Prod x 1.6 hrs/unit Production Production
Subcontracting cost per unit $10 per unit Subcontracting
Month (units) cost per
Rate unitx $5/hr) $10 per(layoff
(hiring cost) unit cost) Total Cost

$ 5 per hour ($40 per day) Jan 900 $ 5 per hour ($40 per day)
Average pay rate Average pay rate
$ 7 per hour Feb 700 $ 7 per hour
Overtime pay rate Overtime pay rate
(above 8 hours per day) (above 8 hours per day)
Mar 800
Labor-hours to produce a unit 1.6 hours per unit Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit Cost
Apr of increasing
1,200 daily production rate $300 per unit
(hiring and training) (hiring and training)
Cost of decreasing daily production rate May of decreasing
Cost 1,500 daily production rate
$600 per unit $600 per unit
(layoffs) (layoffs)
June 1,100
Table 13.3 Table 13.3

Comparison of Three Plans Homework: Chapter 13

Cost Plan 1 Plan 2 Plan 3
• Discussion Questions:
• 2, 4, 6, 8
Inventory carrying $ 9,250 $ 0 $ 0
Regular labor 49,600 37,696 49,600
• Problems
Overtime labor 0 0 0 • 13.1, 13.2, 13.3, 13.4
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 14,880 0
Total cost $58,850 $52,576 $68,200

Plan 2 is the lowest cost option Table 13.5