Operations

Management
Aggregate Planning
Chapter 13
1

Outline
The Planning Process
Sales and Operations Planning
(S&OP)
The Nature of Aggregate Planning
Aggregate Planning Strategies
Capacity Options
Demand Options
2

Mixing Options to Develop a Plan

Outline Continued
Methods for Aggregate Planning
Graphical Methods
Mathematical Approaches
Comparison of Aggregate
Planning Methods
Aggregate Planning in Services
Restaurants, Hospitals, National
Chains of Small Service Firms,
Airline Industry
Miscellaneous Services
3

Revenue (Yield) Management

Learning Objectives
When you complete this chapter you should be able to:

1. Define sales and operations planning

and aggregate planning
2. Identify optional strategies for
developing an aggregate plan
3. Prepare a graphical aggregate plan
4. Solve an aggregate plan via the
transportation method and linear
programming
5. Understand and solve a revenue
(yield) management problem
4

Planning Horizons

Figure 13.1

Sales and Operations Planning

(S&OP)
Coordination of demand forecasts with

functional areas and the supply chain

Typically done by cross-functional teams
Determine which plans are feasible
Limitations must be reflected
Provides warning when resources do not
match expectations
Output is an aggregate plan

Sales and Operations Planning

(S&OP)
Decisions must be tied to strategic planning

and integrated with all areas of the firm over

all planning horizons
S&OP is aimed at
1. The coordination and integration of the
internal and external resources necessary
for a successful aggregate plan
2. Communication of the plan to those
charged with its execution

Sales and Operations

Planning
Requires

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 relevant costs
A model that combines forecasts and costs
so that scheduling decisions can be made
for the planning period

Aggregate Planning
(or Aggregate Scheduling)
Aggregate Planning is a high level approach

to planning. It translates annual and

quarterly business plans into intermediate
term production plans.
Objective:

- To meet forecasted demand while minimizing cost

over the planning period
Provides the quantity and timing of

production for intermediate future

Usually 3 to 18 months into future

Combines (aggregates) production

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ADM 3301 ~ Rim Jaber

Aggregate Planning
QUARTER 1
Jan.

Feb.

March

150,000

120,000

110,000

QUARTER 2
April

May

June

100,000

130,000

150,000

QUARTER 3
July

Aug.

Sept.

180,000

150,000

140,000

Aggregate Planning
In manufacturing organizations

aggregate planning means determining

the size of the work-force, the rate of
production and inventory level that are
needed to implement a production plan.
In service organizations aggregate
planning means scheduling staff to
meet customers' service needs.
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ADM 3301 ~ Rim Jaber

S&OP
and the
Aggregate
Plan

Figure 13.2

Steps in Planning Process

Forecasting the demand for the planning period:
Total demand for each product is aggregated.
Determination of the aggregate production plan:
Production and work-force levels, as well as

production capacity requirements are determined.

Determination of the Master Production
Schedule (MPS):
Production levels by product type by time period
over the planning horizon are calculated.

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ADM 3301 ~ Rim Jaber

Steps in Planning Process

Material Requirements Planning (MRP):
The master production schedule is exploded"

14

to obtain requirements for sub-assemblies,

components and raw materials for each time
period.
Determination of the detailed job shop
schedule:
Detailed production schedules for components,
sub-assemblies and final products and order
quantities for raw materials are determined to
meet the specification of production quantities
from the MRP system.
ADM 3301 ~ Rim Jaber

Aggregate Planning Goals

Meet demand
Meet inventory policy
Use capacity efficiently
Minimize cost
Labor
Inventory
Plant & equipment
Subcontract
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Relevant Costs
Hiring/firing costs:
Hiring costs - recruitment, screening, training
Lower initial productivity

Firing costs - severance, employee benefits,

redeployment of remaining work-force

Ill will, loss of morale.

Overtime/idle time costs:

Overtime costs - overtime premiums
Health costs
Idle time costs - opportunity cost.

Part time/temporary labour costs:

Lower rates and benefits, but possibly lower
productivity.

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Relevant Costs

Subcontracting costs:
Usually more costly than in-house manufacture.
Cooperative arrangement costs:
Usually lower cost.
Inventory carrying costs:
Storage, financial opportunity cost, insurance,

obsolescence;
Breakage, spoilage, deterioration.
Back order or stockout costs:
Loss of goodwill (for back orders), loss of sales
(for stockouts).
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Aggregate Planning Strategies

1. Should inventories be used to absorb
changes in demand?
2. Should changes be accommodated by
varying the size of the workforce?
3. Should part-timers, overtime, or idle time be
used to absorb changes?
4. Should subcontractors be used and
maintain a stable workforce?
5. Should prices or other factors be changed to
influence demand?

AGGREGATE SCHEDULING OPTIONS

(Aggregate Planning Pure Strategies)

Capacity

Demand

Inventory
Hire or layof
Overtime or idle

19

time
Subcontract
Part-time
workers

Promotion &

price
Back ordering
Counterseasonal
product mixing

ADM 3301 ~ Rim Jaber

Capacity Options
1. 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
Shortages may mean lost sales due to
long lead times and poor customer service

Capacity Options
2. 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

Capacity Options
3. Varying production rates 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

Capacity Options
4. 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

5. Using part-time workers

Useful for filling unskilled or low skilled

positions, especially in services

Demand Options
1. 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

Demand Options
2. Back ordering during high-demand

periods
Requires customers to wait for an order
without loss of goodwill or the order
Most effective when there are few if
any substitutes for the product or
service
Often results in lost sales

Demand Options
3. Counterseasonal product and

service mixing
Develop a product mix of
counterseasonal items
May lead to products or services
outside the companys areas of
expertise

Aggregate Planning Options

TABLE 13.1 Aggregate Planning Options
OPTION

ADVANTAGES

DISADVANTAGE
S

COMMENTS

Changing
inventory
levels

Changes in
human resources
are gradual or
none; no abrupt
production
changes.

Inventory holding
cost may increase.
Shortages may
result in lost sales.

Applies mainly to
production, not
service,
operations.

Varying
workforce
size by
hiring or
layoffs

Avoids the costs

of other
alternatives.

Hiring, layoff, and

training costs may
be significant.

Used where size

of labor pool is
large.

Aggregate Planning Options

TABLE 13.1 Aggregate Planning Options
OPTION

ADVANTAGES

DISADVANTAGE
S

COMMENTS

Varying
production
rates
through
overtime or
idle time

Matches seasonal Overtime premiums;

fluctuations
tired workers; may
without hiring/
not meet demand.
training costs.

Allows flexibility
within the
aggregate plan.

Subcontracting

Permits flexibility
and smoothing of
the firms output.

Applies mainly in
production
settings.

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

Aggregate Planning Options

TABLE 13.1 Aggregate Planning Options
DISADVANTAGE
S

OPTION

ADVANTAGES

COMMENTS

Using parttime
workers

Is less costly and

more flexible than
full-time workers.

High turnover/
training costs;
quality suffers;
scheduling difficult.

Good for
unskilled jobs in
areas with large
temporary labor
pools.

Influencing
demand

Tries to use
excess capacity.
Discounts draw
new customers.

Uncertainty in
demand. Hard to
match demand to
supply exactly.

Creates
marketing ideas.
Overbooking
used in some
businesses.

Aggregate Planning Options

TABLE 13.1 Aggregate Planning Options
OPTION

ADVANTAGES

DISADVANTAGE
S

COMMENTS

Back
May avoid
ordering
overtime. Keeps
during high- capacity constant.
demand
periods

Customer must be
willing to wait, but
goodwill is lost.

Many companies
back order.

CounterFully utilizes
seasonal
resources; allows
product and stable workforce.
service
mixing

May require skills or

equipment outside
the firms areas of
expertise.

Risky finding
products or
services with
opposite demand
patterns.

Determining the Aggregate Plan

Step # 1: Collect relevant data:
Forecasts, inventory levels, desired final

inventory levels, current and future resource

availability, production times and costs.
Step # 2: Analyze per unit costs for each

of the pure strategies:

Determine the preference thresholds by

estimating the cost of each option on a

homogeneous unit of measure.
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Determining the Aggregate Plan

Step # 3: Develop and evaluate alternative

plans:

Development of plans corresponding to dominant

strategies and evaluation of total cost (graphical

method, optimization, simulation, etc...).

Step # 4: Integrate non quantifiable

variables and constraints:

Organizational culture, policies, external

environment, etc...

Step # 5: Choose the aggregate plan:

The best plan is chosen and implemented.
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Step # 3:Graphical Method

Popular techniques
Easy to understand and use
Trial-and-error approaches that do not
guarantee an optimal solution
Require only limited computations

33

Step # 3: Graphical method

A chase strategy involves changing the production rates

or work-force levels to match the demand forecast for

each period. Inventory is not used to absorb demand
fluctuations. Favored by many service organizations.
A level strategy involves the maintaining of a constant daily

production rate and work-force level for the duration of the

plan. Inventory is built up during periods of less than average
demand; alternatively, delivery lead times may be allowed to
grow during periods of high demand. Stable production leads
to better quality and productivity
A mixed strategy involves periodic fluctuations in both
inventory levels and in work-force and production rates.
ADM 3301 ~ Rim Jaber

Step # 3: Graphical method

Chase
Strategy

Level
Strategy

Production equals
demand forecast

Daily production
rate is constant
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ADM 3301 ~ Rim Jaber

Step # 3: Graphical Method

Some combination of capacity options, a

mixed strategy, might be the best solution

A mixed strategy may be the best way to

achieve minimum costs

There are many possible mixed strategies

Finding the optimal plan is not always

possible

36

Step # 3: Mathematical Methods

Transportation Method/Linear Programming

Produces an optimal plan

Management Coefficients Model

Model built around managers experience and

performance

Other Models

37

Linear Decision Rule

Simulation

Step # 3: Mathematical Methods

Management Coefficients
Model
Builds a model based on managers
experience and performance
A regression model is constructed to
define the relationships between
decision variables
Objective is to remove inconsistencies
in decision making
38

Step # 3: Mathematical Methods

Linear Decision Rule

Minimizes costs using quadratic cost curve

Operates over a particular time period

Simulation
Uses a search procedure to try
diferent combinations of variables
Develops feasible but not
necessarily optimal solutions
39

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