ISM 101

Operations Management
AG G REGATE P L A N NING L EC T U RE 1 1 & 1 2
Planning Horizon
Aggregate planning: Intermediate-range capacity planning, usually covering 2
to 12 months. The goal of aggregate planning is to achieve a production plan
that will effectively utilize the organization’s resources to satisfy expected
demand.

Long range

Intermediate
range
Short
range

Now 2 months 1 Year

Overview of Planning Levels
Organizations make capacity decisions on three levels:
Short-range plans (Detailed plans)
◦ Machine loading
◦ Job assignments
Intermediate plans (General levels)
◦ Employment
◦ Output, and inventories
Long-range plans
◦ Long term capacity
◦ Location / layout
Planning Sequence
Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts

Establishes operations
Business Plan
and capacity strategies

Establishes
Aggregate plan
operations capacity

Master schedule Establishes schedules

for specific products
 Overview of aggregate planning
1. Aggregate planning begins with a forecast of aggregate demand for the
intermediate range.
2. This is followed by a general plan to meet demand requirements by setting
output, employment, and finished-goods inventory or service capacities.
3. Managers must consider a number of plans, each of which must be examined
in light of feasibility and cost.
4. If a plan is reasonably good but has minor difficulties, it may be reworked.
5. Aggregate plans are updated periodically, often monthly, to take into account
updated forecast and other changes.
Aggregate Planning Inputs
Resources Costs
◦ Workforce/production rate ◦ Inventory carrying
◦ Facilities and equipment ◦ Back orders
Demand forecast ◦ Hiring/firing
◦ Overtime
Policies
◦ Inventory changes
◦ Subcontracting
◦ subcontracting
◦ Overtime
◦ Inventory levels
◦ Back orders
Aggregate Planning Outputs
1. Total cost of a plan
2. Projected levels of:
◦ Inventory
◦ Output
◦ Employment
◦ Subcontracting
◦ Backordering
Aggregate Planning Strategies
Proactive
◦ Involve demand options: Attempt to alter demand to match capacity
Reactive
◦ Involve capacity options: attempt to alter capacity to match demand
Mixed
◦ Some of each
Demand Options
1. Pricing

2. Promotion

3. Back orders

4. New demand
Pricing
Pricing differential are commonly used to shift demand from peak periods to off-peak periods, for
example:
◦ Some hotels offer lower rates for weekend stays
◦ Some airlines offer lower fares for night travel
◦ Movie theaters offer reduced rates for matinees
◦ Some restaurant offer early special menus to shift some of the heavier dinner demand to an
earlier time that traditionally has less traffic.
To the extent that pricing is effective, demand will be shifted so that it correspond more closely to
capacity.
An important factor to consider is the degree of price elasticity of demand; the more the elasticity,
the more effective pricing will be in influencing demand patterns.
Promotion
Advertising and any other forms of promotion, such as displays and direct marketing, can
sometimes be very effective in shifting demand so that it conforms more closely to capacity.
Timing of promotion and knowledge of response rates and response patterns will be needed to
achieve the desired result.
There is a risk that promotion can worsen the condition it was intended to improve, by bringing
in demand at the wrong time.
Back order
An organization can shift demand to other periods by allowing back orders. That is , orders are
taken in one period and deliveries promised for a later period.
The success of this approach depends on how willing the customers are to wait for delivery.
The cost associated with back orders can be difficult to pin down since it would include lost
sales, annoyed or disappointed customers, and perhaps additional paperwork.
New demand
Manufacturing firms that experience seasonal demand are sometimes able to
develop a demand for a complementary product that makes use of the same
production process. For example, the firms that produce water ski in the
summer, produce snow ski in the winter.
Capacity Options
1. Hire and layoff workers
2. Overtime/slack time
3. Part-time workers
4. Inventories
5. Subcontracting
Aggregate Planning Strategies
for meeting uneven demand
1. Maintain a level workforce
2. Maintain a steady output rate
3. Match demand period by period
4. Use a combination of decision variables
Basic Strategies
Level capacity strategy:
◦ Maintaining a steady rate of regular-time output while meeting variations in
demand by a combination of options such as: 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.
Chase Strategy
Chase Approach
Advantages
◦ Investment in inventory is low
◦ Labor utilization is high
Disadvantages
◦ The cost of adjusting output rates and/or workforce levels
Level Strategy
Level Approach
Advantages
◦ Stable output rates and workforce levels
Disadvantages
◦ Greater inventory costs
◦ Increased overtime and idle time
◦ Resource utilizations vary over time
Example
A General Motors Buick plant manufactures several Buick models.
◦ The plant can produce 25 cars per quarter for each worker.
◦ Workersreceive$15,000 per quarter.
◦ It costs $7,000 to hire and train a new worker and $10,000 to layoff a worker.
◦ GM has 480 workers on staff and 2000 cars in inventory from start.
◦ Any cars in inventory at the end of a quarter has a holding cost of $1,000.

Construct an aggregate plan for the next four quarters.

Use both chase and level strategies and compare their total costs.

Period 1 2 3 4
Demand (Cars) 10000 12000 9000 11000
Chase Strategy
Level Strategy
1. Because GM has 2000 cars in
inventory from start, we need to
produce 8000 cars in period 1.
2. The company needs to manufacture
8000+12000+9000+11000 = 40,000
cars in quarter 1-4 i.e. 10,000 cars
every quarter.
3. We need 10000/25 = 400 workers to
produce 10000 cars every quarter.
 A large distribution center must develop a staffing plan that minimizes the total cost
using part-time workers. Use chase and level strategy and compute the total cost.

Period 1 2 3 4 5 6
No. of workers 6 12 18 15 13 14

•Each period is 20 hours.

•From the beginning manager has 10 part time workers.
Example •The distribution center can hire new part time workers in any period, but no more
than 10.
•Overtime can not exceed 20 percent of the regular time (that is 4 hour) in any
period.
•The following costs can be assigned
◦ Regular time: 2000 dollars per period (period = 20 hour).
◦ Overtime : 150 percent of the regular time.
◦ Hires: 1000 dollar per person.
◦ Layoffs: 500 dollars per person.
Chase Strategy
Level Strategy
 Determine Determine demand for each period

Determine capacities (regular time, over time, and

Determine
subcontracting) for each period

A general Identify Identify policies that are pertinent

procedure for
Aggregate Determine units costs for regular time, overtime,
Planning Determine subcontracting, holding inventories, back orders, layoffs,
and other relevant costs

Develop Develop alternative plans and compute the costs for each

Select the best plan that satisfies objectives. Otherwise

Select
return to step 5.
Techniques for Aggregate Planning
Techniques for aggregate planning are classified into two categories:
1. Informal trial-and-error techniques (frequently used)
2. Mathematical techniques
Trial and error techniques
Trial and error approaches consist of developing simple tables or graphs that
enable planners to visually compare projected demand requirements with
existing capacity.
Different plans are conducted and evaluated in terms of their overall costs. The
one with the minimum cost will be chosen.
The disadvantage of such techniques is that they do not necessarily result in
the optimal aggregate plan.
Cost calculation
Type of cost How to calculate
Output
Regular Regular cost per unit × Quantity of regular output
Overtime Overtime cost per unit × Overtime quantity
Subcontract Subcontract cost per unit × subcontract quantity
Hire/layoff
Hire Cost per hire × number hired
Layoff Cost per layoff × number laid off
Inventory Carrying cost per unit × average inventory
Back order Back-order cost per unit × number of back order unit
Example 1
Planners for a company that makes several models of skateboards are about to prepare the aggregate plan that will
cover six periods. They now want to evaluate a plan that calls for a steady rate of regular output, mainly using inventory
to absorb the uneven demand but allowing some backlog. Overtime and subcontracting are not used because they
want a steady output. They intend to start with zero inventory on hand in the first period. Prepare an aggregate plan
and determine its cost using the following information. Assume a level of output rate of 300 unit per period with
regular time. Note that the planned ending inventory is zero. There are 15 workers, and each can produce 20 units per
period.
period 1 2 3 4 5 6 total
forecast 200 200 300 400 500 200 1800
Cost:
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
 Period 1 2 3 4 5 6 total
Forecast 200 200 300 400 500 200 1800
Output
Regular 300 300 300 300 300 300 1800
Overtime - - - - - -
Subcontract - - - - - -
Output-forecast 100 100 0 (100) (200) 100 0
Inventory
Beginning 0 100 200 200 100 0
Solution:
Ending
Average
100
50
200
150
200
200
100
150
0
50
0
0 600 example 1
Backlog 0 0 0 0 100 0 100
Cost
Output
Regular $600 600 600 600 600 600 $3600
Overtime - - - - - -
Subcontract - - - - - -
Hire/layoff - - - - - -
Inventory $50 150 200 150 50 0 $600
Back order 0 0 0 0 500 0 $500
Total $650 750 800 750 1150 600 $4700
Example 2
After reviewing the plan developed in the preceding example, planners have
decided to develop an alternative plan. They have learned that one is about to
retire from the company. Rather than replace that person, they would like to
stay with the smaller workforce and use overtime to make up for lost output.
The reduced regular time output is 280 units per period. The maximum amount
of overtime output per period is 40 units. Develop a plan and compare it to the
previous one.
 Period 1 2 3 4 5 6 total
Forecast 200 200 300 400 500 200 1800
Output
Regular 280 280 280 280 280 280 1680
Overtime 0 0 40 40 40 0 120
Subcontract - - - - - -
Output-forecast 80 80 20 (80) (180) 80 0
Inventory
Beginning 0 80 160 180 100 0
Solution: Ending
Average
80
40
160
120
180
170
100
140
0
50
0
0 520
example 2 Backlog
Cost
0 0 0 0 80 0 80

Output
Regular $560 560 560 560 560 560 $3360
Overtime 0 0 120 120 120 0 360
Subcontract - - - - - -
Hire/layoff - - - - - -
Inventory $40 120 170 140 50 0 $520
Back order 0 0 0 0 400 0 $400
Total $600 680 850 820 1130 560 $4640
 Linear programming models are methods for obtaining optimal
solutions to problems involving the allocation of scarce
resources in terms of cost minimization or profit maximization.

With aggregate planning, the goal is usually to minimize the sum

of costs related to regular labor time, overtime, subcontracting,
Transportation carrying inventory, and cost associated with changing the size of
table Linear programming the workforce. Constraints involve the capacities of the
workforce, inventories, and subcontracting.

The aggregate planning problem can be formulated as a

transportation problem (special case of linear programming).
 r = regular production cost per unit
t = overtime cost per unit
Aggregate s = subcontracting cost per unit
planning h = holding cost per unit
notation
b = backorder cost per unit per period
n = number of periods in planning horizon
Transportation
table
Transportation Model Solution methods
1. For finding basic feasible solution
a. Northwest corner rule
b. Lowest cost method
c. Vogel’s approximation method
2. For optimal solution - UV method/stepping stones method
 period
1 2 3
demand 550 700 750
Capacity
Example 3 Regular 500 500 500

Given the following Overtime 50 50 50

information set up subcontract 120 120 100

the problem in a Beginning inventory 100

transportation table Costs
and solve for the Regular time $60 per unit
minimum cost plan. Overtime 80 per unit
90 per unit
Subcontract
$1 per unit per month
Inventory carrying cost
$3 per unit per month
Back order cost
Solution –
Example 3
End of presentation