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

13-1

Operations Operations ManagementManagement

Aggregate PlanningAggregate PlanningChapter 13Chapter 13

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

13-2

AGGREGATE PLANNING STRATEGIES Capacity Options Demand Options Mixing Options to Develop a Plan

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13-3

METHODS FOR AGGREGATE PLANNING Graphical and Charting Methods Mathematical Approaches to Planning

AGGREGATE PLANNING IN SERVICES Restaurants Hospital Miscellaneous Services National Chains of Small Service Firms Airline Industry

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13-4

Anheuser-BuschAnheuser-Busch

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

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13-5

Aggregate Planning RequiresAggregate Planning Requires

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

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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

PlanningPlanning

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13-7

Planning Tasks and ResponsibilitiesPlanning Tasks and Responsibilities

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13-8

Planning HorizonsPlanning Horizons

Today 3 Months 1 year 5 years

Planning Horizon

Short-range plansJob assignmentsOrderingJob schedulingDispatching

Intermediate-range plansSales planningProduction planning and budgetingSetting employment, inventory, subcontracting levelsAnalyzing operating plans

Long-range plansR&DNew product plansCapital expensesFacility location, expansion

Responsible: Operations managers, supervisors, foremen

Responsible: Operations managers

Responsible: Top executives

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13-9

Relationships of the Aggregate PlanRelationships of the Aggregate Plan

AggregatePlan for

Production

DemandForecasts,

orders

MasterProduction

Schedule, and MRP systems

Detailed WorkSchedules

ExternalCapacity

Subcontractors

Inventory OnHand

Raw MaterialsAvailable

Work Force

Marketplaceand Demand

Research andTechnology

ProductDecisions

ProcessPlanning & Capacity

Decisions

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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!

What’s Needed for Aggregate What’s Needed for Aggregate PlanningPlanning

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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

Aggregate PlanningAggregate Planning

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Meet demand Use capacity efficiently Meet inventory policy Minimize cost

Labor Inventory Plant & equipment Subcontract

Aggregate Planning GoalsAggregate Planning Goals

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The ExtremesThe Extremes

Level Strategy

Chase Strategy

Production equals

demand

Production rate is constant

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Aggregate Planning StrategiesAggregate Planning StrategiesPure StrategiesPure Strategies

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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Aggregate Planning StrategiesAggregate Planning StrategiesPure StrategiesPure Strategies

Demand Options — change demand:

influencing demand backordering during high demand periods counterseasonal product mixing

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13-16

Aggregate Scheduling Options - Aggregate Scheduling Options - Advantages and DisadvantagesAdvantages and Disadvantages

Option Advantage Disadvantage SomeComments

Changinginventory levels

Changes inhuman resourcesare gradual, notabruptproductionchanges

Inventoryholding costs;Shortages mayresult in lostsales

Applies mainlyto production,not service,operations

Varyingworkforce sizeby hiring orlayoffs

Avoids use ofother alternatives

Hiring, layoff,and trainingcosts

Used where sizeof labor pool islarge

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Option Advantage Disadvantage SomeComments

Varyingproduction ratesthrough overtimeor idle time

Matches seasonalfluctuationswithouthiring/trainingcosts

Overtimepremiums, tiredworkers, may notmeet demand

Allowsflexibility withinthe aggregateplan

Subcontracting Permitsflexibility andsmoothing of thefirm's output

Loss of qualitycontrol; reducedprofits; loss offuture business

Applies mainlyin productionsettings

Advantages/Disadvantages - Advantages/Disadvantages - ContinuedContinued

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Advantages/Disadvantages - Advantages/Disadvantages - ContinuedContinued

Option Advantage Disadvantage SomeComments

Using part-timeworkers

Less costly andmore flexiblethan full-timeworkers

Highturnover/trainingcosts; qualitysuffers;schedulingdifficult

Good forunskilled jobs inareas with largetemporary laborpools

Influencingdemand

Tries to useexcess capacity.Discounts drawnew customers.

Uncertainty indemand. Hard tomatch demand tosupply exactly.

Createsmarketing ideas.Overbookingused in somebusinesses.

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Advantage/Disadvantage - Advantage/Disadvantage - ContinuedContinued

Option Advantage Disadvantage SomeComments

Back orderingduring high-demand periods

May avoidovertime. Keepscapacity constant

Customer mustbe willing towait, butgoodwill is lost.

Many companiesbackorder.

Counterseasonalproducts andservice mixing

Fully utilizesresources; allowsstable workforce.

May requireskills orequipmentoutside a firm'sareas ofexpertise.

Risky findingproducts orservices withopposite demandpatterns.

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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

Aggregate Planning StrategiesAggregate Planning Strategies

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Graphical & charting techniques Popular & easy-to-understand Trial & error approach

Mathematical approaches Transportation method Linear decision rule Management coefficients model Simulation

Aggregate Planning MethodsAggregate Planning Methods

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The Graphical Approach to The Graphical Approach to Aggregate PlanningAggregate Planning

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

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13-23

Forecast and Average Forecast Forecast and Average Forecast DemandDemand

0

10

20

30

40

50

60

70

Pro

duction r

ate

per

work

ing d

ay

Jan Feb Mar Apr May Jun

Forecast Demand

Level production using average monthly forecast demand

22 18 21 21 22 20

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13-24

Cumulative Demand Graph for Cumulative Demand Graph for Plan 1Plan 1

Jan Feb Mar Apr May Jun

Cumulative forecast requirements

Cumulative level production using average monthly

forecast requirements

Reduction of inventory

Excess inventoryCum

ulat

ive D

eman

d (U

nits

)7,000

6,000

5,000

4,000

3,000

2,000

1,000

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13-25

Comparison of Three Major Comparison of Three Major Aggregate Planning Methods Aggregate Planning Methods

Charting/graphical methods

Transportation method

Management coefficient model

Trial and error

Optimization

Heuristic

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

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

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

Techniques Approaches Aspects

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13-26

Controlling the Cost of Labor in Controlling the Cost of Labor in Service FirmsService Firms

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

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13-27

Hotel: Single Price LevelHotel: Single Price Level

$15 variable cost of room

$150 Price charged for room

Price

Sales

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

Demand Curve

Passed up profit contributions

Money left on the table

Potential customers exist who are willing to pay more than the $15 variable cost

Some customers who paid $150 for the room were actually willing to pay more

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13-28

Hotel: Two Price LevelsHotel: Two Price Levels

$15 variable cost of room

Demand

Sales

$100Price #1

$200Price #2

Total sales =

1st net price *30 + 2nd net price *30

= $8100

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