This document provides an outline and overview of aggregate planning concepts. It discusses key topics such as: - The objective of aggregate planning is to meet forecasted demand while minimizing costs over the planning period. - Aggregate planning strategies include changing inventory levels, varying workforce size, using overtime/idle time, and subcontracting. - Graphical and mathematical methods can be used to develop aggregate plans and mixing different options may provide the best solution. - An example of a roofing supplier's aggregate plan is presented to demonstrate graphical planning methods.

1. 10/16/2010
Aggregate Planning Outline
13 Global Company Profile: Frito-Lay
The Planning Process
Planning Horizons
PowerPoint presentation to accompany The Nature of Aggregate Planning
Heizer and Render
Operations Management, 10e Aggregate Planning Strategies
Principles of Operations Management, 8e
PowerPoint slides by Jeff Heyl
Capacity Options
Demand Options
Mixing Options to Develop a Plan
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Outline – Continued Outline – Continued
Aggregate Planning in Services
Methods for Aggregate Planning
Restaurants
Graphical Methods
Hospitals
Mathematical Approaches
National Chains of Small Service
Comparison of Aggregate Planning Firms
Methods
Miscellaneous Services
Airline Industry
Yield Management
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Learning Objectives Learning Objectives
When you complete this chapter you When you complete this chapter you
should be able to: should be able to:
1. Define aggregate planning 4. Solve an aggregate plan via the
transportation method of linear
2. Identify optional strategies for
programming
developing an aggregate plan
5. Understand and solve a yield
3. Prepare a graphical aggregate plan
management problem
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Frito-
Frito-Lay Frito-
Frito-Lay
More than three dozen brands, 15 Demand profile based on historical
brands sell more than $100 million sales, forecasts, innovations,
annually, 7 sell over $1 billion promotion, local demand data
Planning processes covers 3 to 18 Match total demand to capacity,
months expansion plans, and costs
Unique processes and specially Quarterly aggregate plan goes to 38
designed equipment plants in 18 regions
High fixed costs require high volumes Each plant develops 4-week plan for
and high utilization product lines and production runs
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Aggregate Planning The Planning Process
Determine the quantity and timing of
production for the intermediate future
The objective of aggregate planning
is to meet forecasted demand while Objective is to minimize cost over the
minimizing cost over the planning
g p g planning period by adjusting
period Production rates
Labor levels
Inventory levels
Overtime work
Subcontracting rates
Other controllable variables
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Aggregate Planning Planning Horizons
Long-range plans
Required for aggregate planning (over one year)
Research and Development
New product plans
Capital investments
Facility location/expansion
A logical overall unit for measuring sales
Top
and output executives Intermediate-range plans
(3 to 18 months)
A forecast of demand for an intermediate Sales planning
Production planning and budgeting
planning period in these aggregate terms Operations
managers
Setting employment, inventory,
subcontracting levels
Analyzing operating plans
A method for determining costs Short-range plans
(up to 3 months)
A model that combines forecasts and Job assignments
Ordering
Operations
costs so that scheduling decisions can managers, Job scheduling
Dispatching
supervisors,
be made for the planning period foremen Overtime
Part-time help
Responsibility Planning tasks and horizon Figure 13.1
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3. 10/16/2010
Aggregate Planning Aggregate
Planning
Quarter 1
Jan Feb Mar
150,000 120,000 110,000
Quarter 2
Apr May Jun
100,000 130,000 150,000
Quarter 3
Jul Aug Sep
180,000 150,000 140,000
Figure 13.2
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Aggregate Planning Aggregate Planning
Strategies
Combines appropriate resources 1. Use inventories to absorb changes in
into general terms demand
2. Accommodate changes by varying
Part of a larger production planning workforce size
system
t
3. Use part-timers, overtime, or idle time to
Disaggregation breaks the plan absorb changes
down into greater detail 4. Use subcontractors and maintain a
stable workforce
Disaggregation results in a master
production schedule 5. Change prices or other factors to
influence demand
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Capacity Options Capacity Options
Changing inventory levels
Varying workforce size by hiring
Increase inventory in low demand or layoffs
periods to meet high demand in
the future Match production rate to demand
Increases costs associated with Training d
T i i and separation costs for
ti t f
storage, insurance, handling, hiring and laying off workers
obsolescence, and capital New workers may have lower
investment productivity
Shortages may mean lost sales Laying off workers may lower
due to long lead times and poor morale and productivity
customer service
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Capacity Options Capacity Options
Varying production rate through Subcontracting
overtime or idle time Temporary measure during
Allows constant workforce periods of peak demand
May be diffi lt t
M b difficult to meet large
tl May be costly
increases in demand Assuring quality and timely
Overtime can be costly and may delivery may be difficult
drive down productivity Exposes your customers to a
Absorbing idle time may be possible competitor
difficult
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Capacity Options Demand Options
Influencing demand
Using part-time workers
Use advertising or promotion
Useful for filling unskilled or low to increase demand in low
skilled positions, especially in periods
services
Attempt to shift
demand to slow
periods
May not be
sufficient to
balance demand
and capacity
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Demand Options Demand Options
Back ordering during high- Counterseasonal product and
demand periods service mixing
Requires customers to wait for an Develop a product mix of
order without loss of goodwill or counterseasonal items
the order May lead to products or services
Most effective when there are few outside the company’s areas of
if any substitutes for the product expertise
or service
Often results in lost sales
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Aggregate Planning Options Aggregate Planning Options
Option Advantages Disadvantages Some Comments Option Advantages Disadvantages Some Comments
Changing Changes in Inventory Applies mainly to Varying Matches Overtime Allows flexibility
inventory human holding cost production, not production seasonal premiums; tired within the
levels resources are may increase. service, rates fluctuations workers; may aggregate plan.
gradual or Shortages may operations. through without hiring/ not meet
none; no abrupt result in lost overtime or training costs.
g demand.
production sales. idle time
changes.
Sub- Permits Loss of quality Applies mainly in
Varying Avoids the costs Hiring, layoff, Used where size contracting flexibility and control; production
workforce of other and training of labor pool is smoothing of reduced profits; settings.
size by alternatives. costs may be large. the firm’s loss of future
hiring or significant. output. business.
layoffs
Table 13.1 Table 13.1
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Aggregate Planning Options Aggregate Planning Options
Option Advantages Disadvantages Some Comments Option Advantages Disadvantages Some Comments
Using part- Is less costly High turnover/ Good for Back May avoid Customer must Many companies
time and more training costs; unskilled jobs in ordering overtime. be willing to back order.
workers flexible than quality suffers; areas with large during Keeps capacity wait, but
full-time scheduling temporary labor high- constant. goodwill is lost.
workers. difficult. pools. demand
periods
Influencing Tries to use Uncertainty in Creates
demand excess demand. Hard marketing Counter- Fully utilizes May require Risky finding
capacity. to match ideas. seasonal resources; skills or products or
Discounts draw demand to Overbooking product allows stable equipment services with
new customers. supply exactly. used in some and service workforce. outside the opposite
businesses. mixing firm’s areas of demand
expertise. patterns.
Table 13.1 Table 13.1
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Methods for Aggregate Mixing Options to
Planning Develop a Plan
A mixed strategy may be the best Chase strategy
way to achieve minimum costs Match output rates to demand
forecast for eac pe od
o ecast o each period
There are many possible mixed
Th ibl i d
strategies Vary workforce levels or vary
production rate
Finding the optimal plan is not Favored by many service
always possible organizations
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Mixing Options to
Develop a Plan Graphical Methods
Level strategy Popular techniques
Daily production is uniform
Easy to understand and use
Use inventory or idle time as buffer
Trial-and-error approaches that do
Stable production leads to better not guarantee an optimal solution
quality and productivity
Require only limited computations
Some combination of capacity
options, a mixed strategy, might be
the best solution
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Graphical Methods Roofing Supplier Example 1
Production Demand Per Day
1. Determine the demand for each period Month Expected Demand Days (computed)
Jan 900 22 41
2. Determine the capacity for regular time, Feb 700 18 39
overtime, and subcontracting each period Mar 800 21 38
3.
3 Find labor costs, hiring and layoff costs
costs costs, Apr
p 1,200
, 21 57
May 1,500 22 68
and inventory holding costs
June 1,100 20 55
4. Consider company policy on workers and 6,200 124
stock levels Table 13.2
Average Total expected demand
5. Develop alternative plans and examine requirement = Number of production days
their total costs 6,200
= = 50 units per day
124
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Roofing Supplier Example 1 Roofing Supplier Example 2
Forecast demand
Cost Information
Production rate per working day
70 – Inventory carrying cost $ 5 per unit per month
Level production using average
monthly forecast demand Subcontracting cost per unit $20 per unit
60 –
Average pay rate $10 per hour ($80 per day)
50 – $17 per hour
p
Overtime pay rate
e
(above 8 hours per day)
40 – 1.6 hours per unit
Labor-hours to produce a 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
Table 13.3
22 18 21 21 22 20 = Number of
Figure 13.3 working days
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Roofing Supplier Example 2 Roofing Supplier Example 2
Production Monthly Production Monthly
Cost Information
Production at 50 Units Demand Inventory Ending Costs Production
Cost Information at 50 Units Calculations
Demand Inventory Ending
Month Days cost per Day
Inventory carrying $ 5 Change
Forecast per unit per month
Inventory Month Days cost per Day
Inventory carrying
Inventory carrying $9,250 (= 1,850Change
Forecast per unit per month $5
$5 Inventory
units carried x
Subcontracting cost per unit 1,100
Jan 22 900 per +200
$20 unit 200 Subcontracting cost per unit 1,100
Jan 22 per unit) +200
900 per unit
$20 200
Feb 18 900 700 per +200 ($80 per400
$10 hour day) Feb 18
Regular-time labor 900 700 per +200 ($80 per400
99,200 (= 10 workers x $80 per
$10 hour day)
Average pay rate Average pay rate
Mar 21 1,050 800 +250 650 Mar 21 1,050 day x 124 days)
800 +250 650
$17 per hour
p $17 per hour
p
Overtime pay rate Overtime pay rate
Apr 21 1,050 1,200 (above-150
8 hours per 500
day) Other costs 21
Apr (overtime, 1,050 1,200 (above-150
8 hours per 500
day)
Labor-hours to produce a unit
May 22 1,100 1,500 hours per unit
1.6 -400 100 hiring, layoffs,
Labor-hours to produce a unit
May 22 1,100 1,500 hours per unit
1.6 -400 100
subcontracting) 0
Cost of increasing daily production rate1,100
June 20 1,000 $300 per-100
unit 0 Cost of increasing daily production rate1,100
June 20 1,000 $300 per-100
unit 0
(hiring and training) Total cost training)
(hiring and $108,450
1,850 1,850
Cost of decreasing daily production rate $600 per unit Cost of decreasing daily production rate $600 per unit
(layoffs) (layoffs)
Total units of inventory carried over from one Total units of inventory carried over from one
Table 13.3 month to the next = 1,850 units Table 13.3 month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers Workforce required to produce 50 units per day = 10 workers
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Roofing Supplier Example 2 Roofing Supplier Example 3
7,000 –
Production Demand Per Day
Month Expected Demand Days (computed)
6,000 – Reduction
Jan 900 22 41
emand units
of inventory
5,000 – 6,200 units Feb 700 18 39
Cumulative level
production using Mar 800 21 38
4,000 – average monthly
forecast Apr
p 1,200
, 21 57
Cumulative de
requirements May 1,500 22 68
3,000 –
June 1,100 20 55
2,000 – 6,200 124
Cumulative forecast
requirements Table 13.2
1,000 –
Excess inventory
–
Jan Feb Mar Apr May June Minimum requirement = 38 units per day
Figure 13.4
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Roofing Supplier Example 3 Roofing Supplier Example 3
Forecast demand
Cost Information
Production rate per working day
70 – Inventory carrying cost $ 5 per unit per month
Level production Subcontracting cost per unit $20 per unit
60 – using lowest
Average pay rate $10 per hour ($80 per day)
monthly forecast
50 – demand $17 per hour
p
Overtime pay rate
e
(above 8 hours per day)
40 – 1.6 hours per unit
Labor-hours to produce a 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
Table 13.3
22 18 21 21 22 20 = Number of
working days
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Roofing Supplier Example 3 Roofing Supplier Example 3
Cost Information Cost Information
Inventory carry cost $ 5 per unit per month Inventory carry cost $ 5 per unit per month
In-house production
Subcontracting cost per unit = 38 units per day
$10 per unit In-house production
Subcontracting cost per unit = 38 units per day
$10 per unit
Average pay rate x $ 5 perdays per day)
124 hour ($40 Average pay rate x $ 5 perdays per day)
124 hour ($40
Overtime pay rate
= 4,712 units
,$ 7 per hour
p
Overtime pay rate
= 4,712 units
,$ 7 per hour
p
(above 8 hours per day) (above 8 hours per day)
Subcontract units
Labor-hours to produce a unit = 6,200 - 4,712
1.6 hours per unit Costs Subcontract units
Labor-hours to produce a unit = Calculations unit
6,200 - 4,712
1.6 hours per
Cost of increasing daily production rate 1,488per unit
= $300 units Cost of increasing daily production rate (= $300 per unit x $80 per
Regular-time labor $75,392 = 1,488 units
7.6 workers
(hiring and training) (hiring and training) day x 124 days)
Cost of decreasing daily production rate $600 per unit Cost of decreasing daily production rate (= $600 per unitx $20 per
Subcontracting 29,760 1,488 units
(layoffs) (layoffs)
unit)
Table 13.3 Table 13.3
Total cost $105,152
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Roofing Supplier Example 4 Roofing Supplier Example 4
Production Demand Per Day
Production rate per working day
Month Expected Demand Days (computed) Forecast demand and
monthly production
Jan 900 22 41 70 –
Feb 700 18 39
60 –
Mar 800 21 38
Apr
p 1,200
, 21 57 50 –
e
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 22 18 21 21 22 20 = Number of
working days
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Roofing Supplier Example 4 Roofing Supplier Example 4
Basic
Cost Information Cost Information Production
Cost Extra Cost of Extra Cost of
Inventory carrying cost $ 5 per unit per month Inventory carrying cost (demand x
Daily Increasing 5 perDecreasing month
$ unit per
Forecast Prod 1.6 hrs/unit x Production Production
Subcontracting cost per unit $20 per unit Subcontracting cost per unit
Month (units) Rate $10/hr)
$10 per unitcost) Total Cost
(hiring cost) (layoff
Average pay rate $10 per hour ($80 per day) Average pay rate
Jan 900 41 $ 14,400 — $ 5 per hour ($40 per14,400
— $ day)
$17 per hour
p $1,200
$ 7 per hour
p
Overtime pay rate Overtime 700 rate39
Feb pay 11,200
11 200 — 12,400
12 400
(above 8 hours per day) (above28 hours per day)
(= x $600)
(
$600
Labor-hours to produce a unit 1.6 hours per unit Labor- 800
Labor-hours to produce a 12,800
Mar 38 unit — 1.6 hours x $600)
(= 1 per unit 13,400
Cost of increasing daily production rate $300 per unit Cost of increasing daily production rate
Apr 1,200 57 19,200
$5,700$300 per unit
— 24,900
(hiring and training) (hiring and training) (= 19 x $300)
$3,300
Cost of decreasing daily production rate $600 per unit Cost of decreasing daily production (= 11 x $300) per unit
May 1,500 68 24,000 rate $600 — 24,300
(layoffs) (layoffs)
$7,800
June 1,100 55 17,600 — 25,400
(= 13 x $600)
Table 13.3 Table 13.3
$99,200 $9,000 $9,600 $117,800
Table 13.4
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Comparison of Three Plans Mathematical Approaches
Useful for generating strategies
Cost Plan 1 Plan 2 Plan 3
Transportation Method of Linear
Inventory carrying $ 9,250 $ 0 $ 0 Programming
Regular labor 99,200 75,392 99,200 Produces an optimal plan
Overtime labor 0 0 0
Management Coefficients Model
Hiring 0 0 9,000
Model built around manager’s
Layoffs 0 0 9,600
experience and performance
Subcontracting 0 29,760 0
Other Models
Total cost $108,450 $105,152 $117,800
Linear Decision Rule
Plan 2 is the lowest cost option Simulation
Table 13.5
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Transportation Method Transportation Example
Sales Period
Mar Apr May Important points
Demand 800 1,000 750 1. Carrying costs are $2/tire/month. If
Capacity: goods are made in one period and held
Regular 700 700 700
over to the next, holding costs are
Overtime 50 50 50
incurred
Subcontracting 150 150 130
Beginning inventory 100 tires 2. Supply must equal demand, so a dummy
Costs
column called “unused capacity” is
Regular time $40 per tire added
Overtime $50 per tire 3. Because back ordering is not viable in
Subcontracting $70 per tire this example, cells that might be used to
Carrying $2 per tire per month satisfy earlier demand are not available
Table 13.6
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Transportation Example Transportation
Important points Example
4. Quantities in each column designate
the levels of inventory needed to meet
demand requirements
5. In general, production should be
allocated to the lowest cost cell
available without exceeding unused
capacity in the row or demand in the
column
Table 13.7
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Management Coefficients Other Models
Model
Linear Decision Rule
Builds a model based on manager’s Minimizes costs using quadratic cost curves
experience and performance Operates over a particular time period
A regression model is constructed
i d li t t d Simulation
to define the relationships between
decision variables Uses a search procedure to try different
combinations of variables
Objective is to remove Develops feasible but not necessarily optimal
inconsistencies in decision making solutions
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Summary of Aggregate Summary of Aggregate
Planning Methods Planning Methods
Solution Solution
Techniques Approaches Important Aspects Techniques Approaches Important Aspects
Graphical Trial and Simple to understand and Management Heuristic Simple, easy to implement;
methods error easy to use. Many coefficients tries to mimic manager’s
solutions; one chosen model decision process; uses
may not be optimal. regression.
Transportation Optimization LP software available; Simulation Change Complex; may be difficult
method of linear permits sensitivity parameters to build and for managers
programming analysis and new to understand.
constraints; linear
functions may not be
realistic.
Table 13.8 Table 13.8
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Aggregate Planning in
Services Five Service Scenarios
Controlling the cost of labor is critical Restaurants
1. Accurate scheduling of labor-hours Smoothing the production
to assure quick response to customer p
process
demand
d d
Determining the optimal
2. An on-call labor resource to cover workforce size
unexpected demand
3. Flexibility of individual worker skills
Hospitals
4. Flexibility in rate of output or hours of Responding to patient demand
work
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Five Service Scenarios Law Firm Example
Labor-Hours Required Capacity Constraints
National Chains of Small Service (2) (3) (4) (5) (6)
Firms (1)
Category of Best
Forecasts
Likely Worst
Maximum
Demand in
Number of
Qualified
Legal Business (hours) (hours) (hours) People Personnel
Planning done at national level Trial work 1,800
1 800 1,500
1 500 1,200
1 200 3.6
36 4
and at local level Legal research 4,500 4,000 3,500 9.0 32
Corporate law 8,000 7,000 6,500 16.0 15
Miscellaneous Services Real estate law 1,700 1,500 1,300 3.4 6
Criminal law 3,500 3,000 2,500 7.0 12
Plan human resource Total hours 19,500 17,000 15,000
Lawyers needed 39 34 30
requirements
Manage demand
Table 13.9
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Yield Management
Five Service Scenarios
Allocating resources to customers at
Airline industry prices that will maximize yield or
revenue
Extremely complex planning
problem 1. Service or product can be sold in
advance of consumption
Involves number of flights,
number of passengers, air and 2. Demand fluctuates
ground personnel, allocation of 3. Capacity is relatively fixed
seats to fare classes
4. Demand can be segmented
Resources spread through the
entire system 5. Variable costs are low and fixed costs
are high
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Yield Management Example Yield Management Example
Room sales Demand Room sales Demand
Curve Curve
Total $ contribution =
Potential customers exist who (1st price) x 30 rooms + (2nd price) x 30 rooms =
100 are willing to pay more than the 100
($100 - $15) x 30 + ($200 - $15) x 30 =
$15 variable cost of the room, $2,550 + $5,550 = $8,100
but not $150
Passed-upp Some customers who paid 60
contribution $150 were actually willing
Total 50 to pay more for the room
$ contribution
= (Price) x (50
rooms) 30
= ($150 - $15)
x (50) Money left
= $6,750 on the table
$15 $150 Price $15 $100 $200 Price
Variable cost Price charged Variable cost Price 1 Price 2
of room for room Figure 13.5 of room for room for room Figure 13.6
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Yield Management Matrix Making Yield Management
Price
Work
Tend to be fixed Tend to be variable
Quadrant 1: Quadrant 2: 1. Multiple pricing structures must
dictable
Ten to be
Movies Hotels be feasible and appear logical to
Stadiums/arenas Airlines
nd
the customer
pred
Duration of use
e
Convention centers
C ti t Rental
R t l cars
Hotel meeting space Cruise lines
2. Forecasts of the use and
Quadrant 3: Quadrant 4: duration of use
Tend to be
Uncertain
Restaurants Continuing care
Golf courses
Internet service
hospitals 3. Changes in demand
providers
Figure 13.7
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