Operations Management

smooth operations, organizations i c a .

In order to maintain he back order
commitments are fulfilled in the
order er strategy
which current
customers are Willing
to wait for deliver
tiure. Back-order strategy
that t effectively smoc
assumes
may sometimes result in stoe Clively Sth
roduction. But this strategy out costs
ill the product is delivered and switch to a competitos s product.
when o
when
The subcontracting strategy allows eve production and sourcec the additional outpu
.
customers
subcontractors. Finally, adjusting plant
required from capacity by varying
the short term and long term is another
capacity over both
demand fluctuations. Meeting the demand by varyingpure the work force
tome equipn
subcontracting may lead to hiring and lay-off costs. Furth absorb
of idle time and periods of over-utilization of work fore.y also h d
in Europe have started ad to
consequences, many organizations Ar the
are recruited On the basis of number o nualizedSe
In this concept, workers
work in a year. Refer Exhibit
9.I urs
for further details on annuali
urs.
they hoursto
Exhibit 9.1
Annualized Hours
In aggregate planning, seasonal demand is managed by varying the .
varying workforce usage, building inventory//backlogging and subconorkforce size,
hiring and layoff costs are incurred in varying the
workforce, while
utilization-based planning leads to periods of idle time and periods of workforce
vertime.
In order to meet fluctuations in demand effectively, a new concent m
"annualized hours (AH)" is being used in Europe. Under the ann:OWn as
basis of number of hours to a hours
system, workers are recruited on the
year, for instance, 1500 hours a year. These hours are distributed throuphtthe year
on the basis of the demand requirements at a particular time. The use
concept has helped overcome the problem of having idle or overworked emniu
and has reduced the costs of hiring/layoff and training of employees. Workersaare
paid overtime only when they have worked more than their annual contractec
hours. Using annualized hours, many organizations have achieved reduction in unit
cost, inventory and low labor turnover, and improvement in quality of products and
services. This system has also improved employee morale and made it easier for
employers to recruit new employees.

One of the problems faced by organizations in annualized system is scheduling the

work throughout the year.

Adapted from R Hung, "Scheduling a workforce under annualized hours,"

InternationalJournal ofProduction Research, 07/20/99, Vol. 37 Issue 1l. p2419.

AGGREGATE PLANNING TECHNIQUES

There are many aggregate output planning models that help planners fomulate
aggregate output plan. The graphical, optimal, and heuristic models are some ol
aggregate planning models that are discussed in the following section.

Graphical Method for Aggregate Output Planning

The graphical planning procedure is a two-dimensional model relating cuml
developn
demand to cumulative capacity. It is techniques
of the us alternatives
various output
one The
and evaluating alternative plans or a combination of these through trial

method evaluates various alternatives plans and identifies the best Pra
and error. The steps are as follows:
146
 Aggregate Planning and Capacity Planning

A graph is drawn by taking cumulative productive days for the planning time
1 on the Y or
period on the X or horizontal axis, and cumulative units of output
time
vertical axis. The cumulative demand forecast for the entire planning
is plotted on the graph.
period
selected.
Based on aggregate planning goals, a planning strategyis
the
Proposed output for each period in the planning horizon is computed and
plotted on the same axis used to plot the demand.
and periods of excess
i) The planned output is compared with expected demand
inventory and shortages are identified.
calculated.
iv) The costs involved in the implementation of the plan are

is modified in a way to meet aggregate planning goals by repeating

v) The plan
the steps 2 to 4 until a satisfactory plan is established.
and
9.3 shows a graph that illustrates the above steps for level production
Figure to understand, and
demand forecast. The graphical method described above is simple
effort.
requires only minimal computational
and Forecasted Demand for
Figure 9.3: Aggregate Output Plan
Level Production

Cumulative
demand

Cumulat1ve output
Excess demand

Inventory
accumulation

horizon
Productive days in planning

Optimal Models for Aggregate Planning

Linear programming
models used to formulate
model is one of the optimal
The linear programming costs is identified by the linear
for minimizing
aggregate plans. The optimal plan to be produced, the total number of
The number of units
programming procedure. time horizon, and the amount
in the planning
shifts for which the plan should operate the identified
carried in each time period, are specified by
of inventory that has to be alternatives
is used to allocate scarce resources to strategic
plan. Linear programming functions of their quantities.
resources are linear
when the costs of various

147
Operations Management

The linear programming model is useful when the cost and

linear,and demand can be forecasted exactly. Optimal solutionsariable relationships are

the simplex and transportation methods described in Chapter 4 can be
Linear decision rules (LDRs)
o
derived sing
Lincar Decision Rules (LDRs) are a set of equations for cal
work force, aggregate output rate and inventory level calculating the
for each
time per optimal
planning horizon. Similar to ear programming,this ethod
riod in a
guarantees
solution and eliminates trial-and-error computations. It also overe
es an o
of linear programming by taking into account non-linear c o s t s the ptimal
model determines the actual costs incurred due to the changes in the i mitation ips.
production rate, and workforce size, and fits them in the form of nolentory le

These equations simplified to obtain two linear equations: for nlinear uations
are
vel
roduction rate, and
workforce size, using calculus to minimize the total cost. These two
used to determine the required workforce size and production rate (for equations can be
a
function of the demand forecast, the current workforce, and inventory. month):as a
drawbacks of LDRs is that they must be tailored to fit each orsOne of t
requirements. Further, to derive proper LDRs for a particular comno anization's specific
mathematical analysis has to be carried out. Finally, any chanoeextensive
relationships like increase in wages will require redoing the whole process to lerive
cost
new LDRs.

Heuristic models
Heuristic models are based on historical aggregate planning data availahle
organizations. The management coefficient model is a heuristic model whieh with
ih
regression methodto identify
capacity requirements based
on the
decisions. The management coefficient model is used to generate
managemethe
ast
a set ofe
equations
that represents historical patterns a of company'saggregate planning
Accumulated data on the firm's workforce, production and inventory decisions ns
re
analyzed using regression techniques. The objective is to find the regression ations
that best fit the historical data. Finally, the equations so generated are used to
make
future planning decisions, in a manner similar to LDRs. Heuristic models are
easy to
construct if the relevant historical data is available. But heuristic models should he
applied after careful consideration, as past pattern may not always be an accurate
indicator of future trends.

Computer Search Models

Computer search methods are used when an organization has large quantity of
information on different production variables. A computer program simulates
conditions under all the possible combinations of these variables and identifies the
most cost-effective combination, which satisfies the production requirements
evaluates al possible combinations. based on specified search conditions and rules, in
order to identify the optimum
aggregate plan.
Computer simulation in capacity evaluation
Computer simulation is used to evaluate the performance of a specific plan, based o
real-world variables and situations. Simulation provides what-if analysis of dilrerc
Situations, using different variables with alternative values attached to them, to Juu
the of the system under different conditions. Complex situations
performance
analyzed with the help of simulation models. For example, ny
service ce
Using
organization, the number of customers served is a key measure of produciviyl a
simulation, different layouts and schedules can be tested to see which wo thod is
organization to maximize its capacity utilization. Formulation of simulation
quite complicated, and the costs associated with it are high.
148