Aggregate Planning

Operations Management Aggregate Planning Chapter 13 Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-1

♦ AGG RE GATE P LANNI NG S TR ATE GI ES Cap acit y Option s ♦ Dem and Opt ions ♦ Mixing O ptions to Dev elop a Plan ♦

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13-2

♦ ME THO DS FOR A GGR EG ATE PLAN NI NG Gra phic al a nd Cha rt ing M eth od s ♦ Mat hem at ic al Ap pro ac hes to Pl anning ♦

♦ AGG RE GA TE P LANN ING I N S ERV ICE S Re st aur an ts ♦ Ho sp ital ♦ Miscellan eou s Se rv ice s ♦ Na tion al Cha ins of S ma ll Se rv ice F irms ♦ Airli ne I nd ust ry ♦

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13-3

An heuser- Bu sch ♦ Anheuser-Busch produces nearly 40% of the beer consumed in the U.S. ♦ Matches fluctuating demand by brand to specific plant, labor, and inventory capacity ♦ High facility utilization requires meticulous cleaning between batches ♦ effective maintenance ♦ efficient employees ♦ efficient facility scheduling ♦

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-4

Ag gregate Pl anning Re quir es ♦ Logical overall unit for measuring sales and outputs ♦ Forecast of demand for intermediate planning period in these aggregate units ♦ Method for determining costs ♦ Model that combines forecasts and costs so that planning decisions can be made Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

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Pl anning ♦ Setting goals & objectives ♦

Example: Meet demand within the limits of available resources at the least cost

♦ Determining steps to achieve goals ♦

Example: Hire more workers

♦ Setting start & completion dates ♦

Example: Begin hiring in Jan.; finish, Mar.

♦ Assigning responsibility Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-6

Pl anning Tasks and Re sponsib ilitie s

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13-7

Pl an ning Hori zon s Re sponsib l

Short- ran ge p la ns e: Job a ssign ments Ope ratio ns Order in g man ag ers In te rmed ia te -range p la ns Job s che dul in g Sale s p la nn in g Dispatc hi ng Prod ucti on p la nnin g an d bu dge tin g Re spo nsib le Sett in g e mpl oy ment , in vento ry, : O pe rat ions sub con tr actin g le vels man age rs , Ana ly zin g o per ati ng p la ns superv isors , foremen

Tod ay

1 ye ar

3 Mon th s

Plan ning Hor iz on Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-8

Re sponsib le: Top executives

Lo ng- ran ge p la ns R&D New p rodu ct pl ans Capi ta l e xpens es Fa cil ity l oc at io n, ex pan sio n

5 ye ar s

Rela tio nships of the Agg re gate Plan Marketplace and Demand

Demand Forecasts, orders

Product Decisions Process Planning & Capacity Decisions

Research and Technology

Work Force

Agg re gat e Pla n fo r Pro du ctio n

External Capacity Subcontractors

Master Production Schedule, and MRP systems

Detailed Work Schedules Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

Raw Materials Available

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Inventory On Hand

Wha t’s Nee de d f or Aggr eg ate Pla nnin g A mathematically based aggregate planning model requires considerable: ♦ time

♦

♦ problem definition ♦ model development ♦ model verification ♦ model application

expertise

♦ people who understand the problem ♦ people who understand both the modeling process, and the

♦

specific model

money

♦ money to pay for all of the above ♦ often requires funding for several people for several months!

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13-10

Ag gregate Pl anning ♦ Provides the quantity and timing of production for intermediate future ♦

Usually 3 to 18 months into future

♦ Combines (‘aggregates’) production ♦

Often expressed in common units ♦

Example: Hours, dollars, equivalents (e.g., FTE students)

♦ Involves capacity and demand variables Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-11

Ag gre gate Pl anning G oals ♦ Meet demand ♦ Use capacity efficiently ♦ Meet inventory policy ♦ Minimize cost ♦

Labor ♦ Inventory ♦ Plant & equipment ♦ Subcontract

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-12

The Ex tre me s

Le vel St ra teg y

Cha se St rat eg y

Production rate is constant

Production equals demand

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-13

Ag gregate Pl anning St rategie s Pu re St ra tegies ♦ Capacity Options — change capacity: ♦ ♦ ♦ ♦ ♦

changing inventory levels varying work force size by hiring or layoffs varying production capacity through overtime or idle time subcontracting using part-time workers

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13-14

Ag gregate Pl anning St rategie s Pu re St ra tegies ♦ Demand Options — change demand: ♦ ♦ ♦

influencing demand backordering during high demand periods counterseasonal product mixing

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13-15

Ag gregate Sc heduli ng Optio ns - Ad vantages and Dis advantages Option

Advantage

Changing inventory levels

Changes in human resources are gradual, not abrupt production changes

Varying workforce size by hiring or layoffs

Avoids use of Hiring, layoff, other alternatives and training costs

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Disadvantage Inventory holding costs; Shortages may result in lost sales

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Some Comments Applies mainly to production, not service, operations

Used where size of labor pool is large

Ad vanta ges/Di sadvantages Co ntinued Option

Advantage

Disadvantage Some Comments

Varying production rates through overtime or idle time

Matches seasonal fluctuations without hiring/training costs Permits flexibility and smoothing of the firm's output

Overtime premiums, tired workers, may not meet demand

Allows flexibility within the aggregate plan

Loss of quality control; reduced profits; loss of future business

Applies mainly in production settings

Subcontracting

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13-17

Ad vanta ges/Di sadvantages Co ntinued Option

Advantage

Disadvantage

Some Comments

Using part-time workers

Less costly and more flexible than full-time workers

Good for unskilled jobs in areas with large temporary labor pools

Influencing demand

Tries to use excess capacity. Discounts draw new customers.

High turnover/training costs; quality suffers; scheduling difficult Uncertainty in demand. Hard to match demand to supply exactly.

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13-18

Creates marketing ideas. Overbooking used in some businesses.

Ad vantage/Di sadvantage Co ntinued Option

Advantage

Back ordering during highdemand periods

May avoid Customer must overtime. Keeps be willing to capacity constant wait, but goodwill is lost.

Many companies backorder.

Counterseasonal Fully utilizes May require products and resources; allows skills or service mixing stable workforce. equipment outside a firm's areas of expertise.

Risky finding products or services with opposite demand patterns.

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

Disadvantage

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Some Comments

Ag gregate Pl anning Str ategies ♦ Mixed strategy ♦ Combines 2 or more aggregate scheduling options

♦ Level scheduling strategy ♦

Produce same amount every day ♦ Keep work force level constant ♦ Vary non-work force capacity or demand options ♦ Often results in lowest production costs

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-20

Ag gregate Pla nning Me thods ♦ Graphical & charting techniques ♦

Popular & easy-to-understand ♦ Trial & error approach

♦ Mathematical approaches ♦

Transportation method ♦ Linear decision rule ♦ Management coefficients model ♦ Simulation

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-21

The Graphical Ap proach to Ag gregate Pl anning ♦ Forecast the demand for each period ♦ Determine the capacity for regular time, overtime, and subcontracting, for each period ♦ Determine the labor costs, hiring and firing costs, and inventory holding costs ♦ Consider company policies which may apply to the workers or to stock levels ♦ Develop alternative plans, and examine their total costs Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-22

Production rate per working day

Forecast and Av erage Forecast De ma nd 70 60 50

Forecast Demand

Level production using average monthly forecast demand

40 30 20 10 0 Jan

Feb

Mar

Apr

May

22 20

18

21

21

22

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13-23

Jun

Cu mu lativ e De ma nd Graph for Pl an 1 Cumulative Demand (Units)

7,000 6,000 5,000 4,000 3,000

Cumulative forecast requirements

2,000 1,000

Reduction of inventory

Cumulative level production using average monthly forecast requirements

Excess inventory

Jan Feb Mar Apr May Jun Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

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Co mp arison o f Thre e Major Ag gregate Pl anning Me thods Tech niq ue s As pec ts Charting/graphical

Ap pr oa che s Trial and error

Simple to understand, easy to use. Many solutions; one chosen may not be optimal

Optimization

LP software available;permits sensitivity analysis and constraints. Linear function may not be realistic

methods Transportation method

Management coefficient model

Simple, easy to implement; tries to mimic manager’s decision process; uses regression

Heuristic

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-25

Co ntroll ing the Cost of Labor in Se rvic e F irms Seek: Close control of labor hours to ensure quick response to customer demand ♦ On-call labor resource that can be added or deleted to meet unexpected demand ♦ Flexibility of individual worker skills to permit reallocation of available labor ♦ Flexibility of individual worker in rate of output or hours of work to meet demand ♦

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

13-26

Ho tel: Si ngle Pr ice Level Sales

Demand Curve

$sales = Net price * 50 rooms =150*50 =$7500

Potential customers exist who are willing to pay more than the $15 variable cost Passed up Some customers who profit paid $150 for the room contributions were actually willing to pay more Money left on the table $15 variable cost of room

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$150 Price charged for room 13-27

Price

Ho te l: Two Pr ice Levels Sales

Net prices are: Price #1 => $85 Price #2 => $175

Demand Total sales = 1st net price *30 + 2nd net price *30 = $8100

$15 variable cost of room Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e

$100 Price #1 13-28

$200 Price #2