PRODUCTION

&
OPERATIONS MANAGEMENT
SESSION 13-14
 BUSINESS PLANNING EXERCISE
• Business plan is strategic in nature and addresses the following questions:
• Should we meet the projected demand entirely or a portion of the projected demand?
• What are the implications of this decision on the overall competitive scenario and the
firm’s standing in the market?
• How is this likely to affect the operating system and planning in other functional areas of
the business such as marketing and finance?
• What resources should we commit to meet the chosen demand during the planning
horizon?
• Aggregate production planning seeks to translate business plans to operational
decisions
 AGGREGATE PLANNING
• Aggregate planning
• Intermediate-range capacity planning that typically covers a time horizon of 2 to 18
months
• Especially useful for organizations that experience seasonal, or other variations in
demand
• Goal:
• Achieve a production plan that will effectively utilize the organization’s resources to satisfy demand
• Product lines not saleable units (SKUs)
• Television sets
• Hatchbacks, Sedans, SUVs
• Women’s sportswear, Infant garments, Men’s formal shirts, Casual trousers
• Level of Aggregation will depend on the planning process & the planning
horizon
THE PLANNING SEQUENCE
PLANNING HIERARCHIES IN OPERATIONS
Business Plan

Marketing Plan Financial Plan

Operations Plan
(rough cut capacity)
Level 1

Level 2
Master Operations Schedule

Materials Capacity
Requirement Requirement
Plan Plan

Detailed Scheduling

Level 3 Shop Floor Control

 PLANNING HIERARCHIES IN OPERATIONS
Key Term Definition

Sales and operations A plan of future aggregate resource levels so that supply is in balance with demand. It states a
plan (S&OP) company’s or department’s production rates, workforce levels, and inventory holdings that are
consistent with demand forecasts and capacity constraints. The S&OP is a time-phased plan,
meaning that it is projected for several time periods (such as months or quarters) into the future.

Aggregate plan Another term for the sales and operations plan.

Production plan A sales and operations plan for a manufacturing firm that centers on production rates and
inventory holdings.

Staffing plan A sales and operations plan for a service firm, which centers on staffing and on other human
resource–related factors.

Resource plan An intermediate step in the planning process that lies between S&O P and scheduling. It
determines requirements for materials
and other resources on a more detailed level than the S&OP. It is covered in the next chapter.

Schedule A detailed plan that allocates resources over shorter time horizons to accomplish specific tasks.
 AGGREGATE PLANNING: DECISION VARIABLES
• The decisions involve
• Amount of resources (productive capacity and labour hours) to be committed
• Rate at which goods and services needs to be produced during a period
• Inventory to be carried forward from one period to the next
• An example from Garment Manufacturing
• Produce at the rate of 9000 metres of cloth everyday during the months of January to
March
• Increase it to 11,000 metres during April to August
• Change the production rate to 10,000 metres during September to December
• Carry 10% of monthly production as inventory during the first 9 months of production.
• Work on a one-shift basis throughout the year with 20% over time during July to October
AGGREGATE PLANNING: UNITS FOR CAPACITY
Sl. No Product/Service Aggregate Unit of capacity

1 Phenyl Acetic Acid Metric tonnes

2 Data Entry Systems Numbers
3 Mini computer Value (ex-factory) in Rs.
4 Printed Circuit Board Square Meters
5 Alloy Iron Castings Metric tonnes
6 Cement Metric tonnes
7 Multi-specialty Clinic Patient-Bed Days
8 Bank No. of Accounts
9 Insurance Firm No. of Policies
AGGREGATE PLANNING: FRAMEWORK
Alternatives for
Forecasting Modifying demand

Arriving at effective
Targeted Demand Period-by-period
to be fulfilled Demand to be met

Arriving at
Actual period-by-period
Period-by-Period
Supply Schedules
Supply Schedules

Alternatives for
Modifying supply
 AGGREGATE PLANNING
• Sales and Operations Planning
• Intermediate-range planning decisions to balance supply and demand, integrating
financial and operations planning
• Prepared with inputs from sales, finance, and operations
 AGGREGATE PLANNING
• Why do organizations need to do aggregate planning?
• Planning
• It takes time to implement plans
• Strategic
• Aggregation is important because it is not possible to predict with accuracy the
timing and volume of demand for individual items
• It is connected to the budgeting process
• It can help synchronize flow throughout the supply chain; it affects costs, equipment
utilization; employment levels; and customer satisfaction
• To handle
• Demand fluctuations
• Capacity fluctuations
• Difficulty level in altering operation rates
• Operating systems are complex and varying the rate of operation requires prior planning and co-
ordination with other trading partners
• Achieve benefits of multi-period planning
 AGGREGATE PLANNING
• Dealing with Variation
• Most organizations use rolling 3, 6, 9 and 12 month forecasts
• Forecasts are updated periodically, rather than relying on a once-a-year forecast
• This allows planners to take into account any changes in either expected demand or
expected supply and to develop revised plans
• Strategies to counter variation:
• Maintain a certain amount of excess capacity to handle increases in demand
• Maintain a degree of flexibility in dealing with changes
• Hiring temporary workers
• Using overtime
• Wait as long as possible before committing to a certain level of supply capacity
• Schedule products or services with known demands first
• Wait to schedule other products until their demands become less uncertain
 AGGREGATE PLANNING
• Demand and Supply
• Aggregate planners are concerned with the
• Demand quantity
• If demand exceeds capacity, attempt to achieve balance by altering capacity,
demand, or both
• Timing of demand
• Even if demand and capacity are approximately equal, planners still often have to
deal with uneven demand within the planning period
•Resources
AGGREGATE PLANNING: INPUTS
• Workforce/production rates
• Facilities and equipment
•Demand forecast
•Policies
• Workforce changes
• Subcontracting
• Overtime
• Inventory levels/changes
• Back orders
•Costs
• Inventory carrying
• Back orders
• Hiring/firing
• Overtime
• Inventory changes
• subcontracting
 AGGREGATE PLANNING: OUTPUTS
• Total cost of a plan
• Projected levels of
• Inventory
• Output
• Employment
• Subcontracting
• Backordering
 AGGREGATE PLANNING: STRATEGIES
• Proactive
• Alter demand to match capacity
• Reactive
• Alter capacity to match demand
• Mixed
• Some of each
 AGGREGATE PLANNING: DEMAND OPTIONS
• Reservation of Capacity
• Hospital Appointment system
• Pricing
• Used to shift demand from peak to off-peak periods
• Price elasticity is important
• Special Tariffs
• Differential Discount Structures
• Senior Citizen Discount
• Limited period special offers
• Promotion
• Advertising and other forms of promotion
• Back orders
• Orders are taken in one period and deliveries promised for a later period
• New demand
 AGGREGATE PLANNING: SUPPLY OPTIONS
• Inventory Based Alternatives
• Stock out, Backordering/Backlogging
• Carrying Inventory
• Capacity Adjustment Alternatives
• Hiring/Lay-off of workers
• Varying shifts
• Varying Working Hours (Overtime, Undertime / slack time)
• Part-time workers
• Capacity Augmentation Alternatives
• Sub-contracting/Outsourcing
• De-bottlenecking
• Addition of new capacity
 AGGREGATE PLANNING: SUPPLY OPTIONS
Cost Definition
Regular time Regular-time wages paid to employees plus contributions to benefits, such as health insurance,
dental care, social security, retirement funds, and pay for vacations, holidays, and certain other
types of absences.
Overtime Wages paid for work beyond the normal workweek, typically 150 percent of regular-time wages
(sometimes up to 200 percent for Sundays and holidays), exclusive of fringe benefits. Overtime can
help avoid the extra cost of fringe benefits that come with hiring another full-time employee.
Hiring and layoff Costs of advertising jobs, interviews, training programs for new employees, scrap caused by the
inexperience of new employees, loss of productivity, and initial paperwork. Layoff costs include
the costs of exit interviews, severance pay, retaining and retraining remaining workers and
managers, and lost productivity.
Inventory holding Costs that vary with the level of inventory investment: the costs of capital tied up in inventory,
variable storage and warehousing costs, pilferage and obsolescence costs, insurance costs, and
taxes.
Backorder and stockout Additional costs to expedite past-due orders, the costs of lost sales, and the potential cost of losing
a customer to a competitor (sometimes called loss of goodwill).
 AGGREGATE PLANNING
Description of the alternative
Alternatives for Reservation of capacity
managing demand Influencing Demand
Inventory based alternatives
(a) Build Inventory
(b) Backlog/Backorder/Shortage
Capacity Adjustment Alternatives
(a) Over Time/Under Time
Alternatives for
(b) Vary no. of shifts
managing supply
(c) Hire/Lay-off workers
Capacity augmentation alternatives
(a) Sub-contract/Outsource
(b) De-bottleneck
(c) Add new capacity
Costs
• Planning and Scheduling costs
• Marketing oriented costs
• Inventory holding costs
• Shortage/Loss of Goodwill
• OT premium, Lost productivity
• Shift change costs
• Training/Hiring costs, Morale issues
• Transaction costs for sub-contract
• Annualised de-bottlenecking cost
• Annualised cost of new capacity
 AGGREGATE PLANNING STRATEGIES
1. Maintain a level workforce
2. Maintain a steady output rate
3. Match demand period by period
4. Use a combination of decision variables
 AGGREGATE PLANNING PURE STRATEGIES
• Level capacity strategy:
• Maintaining a steady rate of regular-time output while meeting variations in demand by
a combination of options:
• inventories, overtime, part-time workers, subcontracting, and back orders
• Chase demand strategy:
• Matching capacity to demand; the planned output for a period is set at the expected
demand for that period.
 LEVEL STRATEGY
• Capacities are kept constant over the planning horizon
• Emphasis is not to disturb the existing production rate at all

• Advantages
• Stable output rates and workforce
• Disadvantages
• Greater inventory costs
• Increased overtime and idle time
• Resource utilizations vary over time
 LEVEL STRATEGY
Demand

Units Production

Time
 CHASE STRATEGY
• Capacities are adjusted to match demand requirements over the planning
horizon
• No effort is made to carry inventory from one period to another
• The supply – demand mismatch is addressed during each period by employing
capacity related alternatives
• Advantages
• Investment in inventory is low
• Labor utilization in high
• Disadvantages
• The cost of adjusting output rates and/or workforce levels
 CHASE STRATEGY
Demand

Production
Units

Time
AGGREGATE PLANNING PURE STRATEGIES
AOP Strategy AOP alternatives applicable
Inventory based alternatives
(a) Build Inventory
Level Strategy
(b) Backlog/Backorder/Shortage
Capacity adjustment alternatives
(a) Over Time/Under Time
(b) Vary no. of shifts
Chase Strategy (c) Hire/Lay-off workers
Capacity augmentation
alternatives
(a) Sub-contract/Outsource
(b) De-bottleneck
Key features
Inventory as the critical link
between the periods; Made-
to-stock environments;
Products with low risks of
obsolescence
No inventory carried from one
period to another; Made-to-
order and project
environments; Several service
systems
 TECHNIQUES FOR AGGREGATE PLANNING
• General procedure:
1.Determine demand for each period
2.Determine capacities for each period
3.Identify company or departmental policies that are pertinent
4.Determine unit costs
5.Develop alternative plans and costs
6.Select the plan that best satisfies objectives. Else return to step 5.
 TRIAL-AND-ERROR TECHNIQUES
• Trial-and-error approaches consist of developing simple table or graphs that
enable planners to visually compare projected demand requirements with
existing capacity
• Alternatives are compared based on their total costs
• Disadvantage of such an approach is that it does not necessarily result in an
optimal aggregate plan
AGGREGATE PLANNING
 AGGREGATE PLANNING
• Planners for a company that makes several models of skateboards are about to
prepare an aggregate plan that will cover six periods.
• They want to evaluate a plan that calls for a steady rate of regular-time output,
mainly using inventory to absorb the uneven demand but allowing some
backlog. Overtime and subcontracting are not used because they want steady
output. They intend to start with zero inventory on hand in the first period.
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Costs
Output
Regular time = $2 per skateboard
Overtime = $3 per skateboard
Subcontract = $6 per skateboard
Inventory = $1 per skateboard per period on average inventory
Back orders = $5 per skateboard per period
 AGGREGATE PLANNING
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Output
Regular time 300 300 300 300 300 300 1,800
Overtime --- --- --- --- --- ---
Subcontract --- --- --- --- --- ---
Inventory
Output - Forecast 100 100 0 (100) (200) 100 0
Inventory
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0 600
Backlog 0 0 0 0 100 0 100
 AGGREGATE PLANNING
Period 1 2 3 4 5 6 Total
Costs
Output
Regular time $600 $600 $600 $600 $600 $600 $3,600
Overtime --- --- --- --- --- ---
Subcontract --- --- --- --- --- ---
Hire/Layoff --- --- --- --- --- ---
Inventory $50 $150 $200 $150 $50 $0 $600
Backlog $0 $0 $0 $0 $500 $0 $500
Total $650 $750 $800 $750 $1,150 $600 $4,700
 AGGREGATE PLANNING
• Manager T.C Downs of Plum Engines, a producer of lawn mowers and leaf
blowers, must develop an aggregate plan given the forecast for engine
demands shown in table. The department has a normal capacity of 130 engines
per month. Normal output has a cost of $60 per engine. The beginning
inventory is zero engines. Overtime has a cost of $90 per engine.
• Develop a chase plan that matches the forecast and compute the total cost of
your plan.
• Compare the cost to a level plan that uses inventory to absorb fluctuations.
Inventory carrying cost is $2 per engine per month. Backlog cost is $90 per
engine per month.
Month 1 2 3 4 5 6 7 8

Forecast 120 135 140 120 125 125 140 135

 AGGREGATE PLANNING
Month 1 2 3 4 5 6 7 8 Total
Forecast 120 135 140 120 125 125 140 135 1040

Production Chase 120 135 140 120 125 125 140 135
Normal 120 130 130 120 125 125 130 130 1010
OT 0 5 10 0 0 0 10 5 30
Cost Normal 7200 7800 7800 7200 7500 7500 7800 7800 60600
OT 0 450 900 0 0 0 900 450 2700
Total 63300

Production Level 130 130 130 130 130 130 130 130 1040
Cl stock 10 5 0 5 10 15 5 0
Backlog 5
Avg Inv 5 7.5 2.5 2.5 7.5 12.5 10 2.5
Cost Prod 7800 7800 7800 7800 7800 7800 7800 7800 62400
Inv 10 15 5 5 15 25 20 5 100
Backlog 450 450
Total 62950
 AGGREGATE PLANNING
• Wormwood, Ltd. Produces a variety of furniture products. The planning
committee wants to prepare an aggregate plan for the next six months using
the following information:
Month Cost per Unit

1 2 3 4 5 6 Regular time $50

Overtime 75
Demand 160 150 160 180 170 140 Subcontract 80
Capacity Inventory, per period 4

Regular 150 150 150 150 160 160

Overtime 10 10 0 10 10 10

• Subcontracting can handle a maximum of 10 units per month. Beginning

inventory is zero. Develop a plan that minimizes total cost. No back orders are
allowed.
 MASTER OPERATIONS SCHEDULING
Order
Aggregate
Inflow Operations Forecasting
Planning
Market

Master
Capacity Plan Operations Materials Plan
Scheduling

Labour & Actual

Vendors
Resources Operations
Resource Material
availability Inflow
 MASTER OPERATIONS SCHEDULING
• The heart of production planning and control
• It determines the quantity needed to meet demand from all sources
• It interfaces with
• Marketing
• Capacity planning
• Production planning
• Distribution planning
• Provides senior management with the ability to determine whether the
business plan and its strategic objectives will be achieved
 MASTER OPERATIONS SCHEDULING
• Time Fences
Period
1 2 3 4 5 6 7 8 9

“frozen” “slushy” “liquid”

(firm or somewhat (open)
fixed) firm
MASTER OPERATIONS SCHEDULING

Inputs Outputs
Beginning inventory
Projected inventory

Master
Forecast Scheduling Master production schedule

Customer orders Uncommitted inventory

 MASTER SCHEDULING PROCESS
• The master production schedule (MPS) is one of the primary outputs of the
master scheduling process
• Once a tentative MPS has been developed, it must be validated
• Rough cut capacity planning (RCCP) is a tool used in the validation process
• Approximate balancing of capacity and demand to test the feasibility of a master
schedule
• Involves checking the capacities of production and warehouse facilities, labor, and
vendors to ensure no gross deficiencies exist that will render the MPS unworkable
MPS – FORECASTS AND CUSTOMER ORDERS
MPS – PROJECTED ON HAND
 MPS – PROJECTED ON HAND
Inventory
from
Previous Inventory (70) Projected
Week Week Requirements before MPS MPS Inventory
1 64 33 31 31

2 31 30 1 1

3 1 30 -29 + 70 = 41

4 41 30 11 11

5 11 40 -29 + 70 = 41

6 41 40 1 1

7 1 40 -39 + 70 = 31

8 31 40 -9 + 70 = 61
ADDING MPS AND PROJECTED ON HAND TO THE MPS
AVAILABLE-TO-PROMISE
MASTER OPERATIONS SCHEDULING
Capacity Planned using AOP 18,000
Silver 20
Capacity Required/unit Gold 40
Platinum 70

Planning Horizon
Type of service Demand status
Month 1 Month 2 Month 3
Forecast 100 120 140
Silver
Firm Order 120 90 30

Gold Forecast 200 240 180

Firm Order 180 200 60
Forecast 80 100 90
Platinum
Firm Order 50 110 20

MOS Quantity Shaded area represents MOS Qty.

Capacity required (for MOS
Quantity) 16,000 19,700 16,300
 AGGREGATE PLANNING IN SERVICES
• The resulting plan in services is a time-phased projection of service staff requirements
• Aggregate planning in manufacturing and services is similar, but there are some key
differences related to:
1. Demand for service can be difficult to predict
2. Capacity availability can be difficult to predict
3. Labor flexibility can be an advantage in services
4. Services occur when they are rendered
• Hospitals:
• Aggregate planning used to allocate funds, staff, and supplies to meet the demands of patients for their
medical services
• Airlines:
• Capacity decisions must take into account the percentage of seats to be allocated to various fare classes in
order to maximize profit or yield
• Restaurants:
• Aggregate planning in high-volume businesses is directed toward smoothing the service rate, determining
workforce size, and managing demand to match a fixed capacity
• Can use inventory; however, it is perishable