Aggregate

Planning

© 2008 Prentice Hall, Inc. 1

 Outline

 The Planning Process

 The Nature of Aggregate Planning
 Aggregate Planning Strategies
 Capacity Options
 Demand Options
 Mixing Options to Develop a Plan

© 2008 Prentice Hall, Inc. 2

 Aggregate Planning

Quarter 1
JanFebMar
150,000120,000110,000

Quarter 2
AprMayJun
100,000130,000150,000

Quarter 3
JulAugSep
180,000150,000140,000

© 2008 Prentice Hall, Inc. 3

 Aggregate Planning Strategies

1. Use inventories to absorb changes in

demand
2. Accommodate changes by varying
workforce size
3. Use part-timers, overtime, or idle time
to absorb changes
4. Use subcontractors and maintain a stable
workforce
5. Change prices or other factors to
influence demand
© 2008 Prentice Hall, Inc. 4
 Capacity Options

 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 15% to 40%
 Shortages can mean lost sales due
to long lead times and poor
customer service
© 2008 Prentice Hall, Inc. 5
 Capacity Options

 Varying workforce size by hiring

or layoffs
 Match production rate to demand
 Training and separation costs for
hiring and laying offworkers
 New workers may have lower
productivity
 Laying offworkers may lower
morale and productivity

© 2008 Prentice Hall, Inc. 6

 Capacity Options

 Varying production rate 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

© 2008 Prentice Hall, Inc. 7

 Capacity Options

 Subcontracting
 Temporary measure during
periods ofpeak demand
 May be costly
 Assuring quality and timely
delivery may be difficult
 Exposes your customers to a
possible competitor

© 2008 Prentice Hall, Inc. 8

 Capacity Options

 Using part-time workers

 Useful for filling unskilled or low
skilled positions, especially in
services

© 2008 Prentice Hall, Inc. 9

 Demand Options

 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
© 2008 Prentice Hall, Inc. 10
 Demand Options

 Back ordering during high-

demand periods
 Requires customers to wait for an
order without loss ofgoodwill or
the order
 Most effective when there are few
ifany substitutes for the product
or service
 Often results in lost sales

© 2008 Prentice Hall, Inc. 11

 Demand Options

 Counterseasonal product and

service mixing
 Develop a product mix of
counterseasonal items
 May lead to products or services
outside the company’s areas of
expertise

© 2008 Prentice Hall, Inc. 12

 Aggregate Planning Options

Option Advantages Disadvantages Some Comments

Using part- Is less costly and High turnover/ Good for
time more flexible training costs; unskilled jobs in
workers than full-time quality suffers; areas with large
workers. scheduling temporary labor
difficult. pools.

Influencing Tries to use Uncertainty in Creates

demand excess demand. Hard marketing
capacity. to match ideas.
Discounts draw demand to Overbooking
new customers. supply exactly. used in some
businesses.

© 2008 Prentice Hall, Inc. 13

 Aggregate Planning Options

Option Advantages Disadvantages Some Comments

Back May avoid Customer must Many companies
ordering overtime. be willing to back order.
during high- Keeps capacity wait, but
demand constant. goodwill is lost.
periods

Counter- Fully utilizes May require Risky finding

seasonal resources; skills or products or
product allows stable equipment services with
and service workforce. outside the opposite
mixing firm’s areas of demand
expertise. patterns.

© 2008 Prentice Hall, Inc. 14

 Roofing Supplier Example 1
Production Demand Per Day
Month Expected Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Average Total expected demand

=
requirement Number of production days
6,200
= = 50 units per day
124
© 2008 Prentice Hall, Inc. 15
 Roofing Supplier Example 1
Forecast demand
Production rate per working day

70 –
Level production using average
60 – monthly forecast demand

50 –

40 –

30 –

0 –
JanFebMarAprMayJune=Month

221821212220=Number of
working days

© 2008 Prentice Hall, Inc. 16

 Roofing Supplier Example 2
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs) P
l an 1 –
co ns ta
nt w o r
k fo r c e

© 2008 Prentice Hall, Inc. 17

 Roofing Supplier Example 2
Monthly
Cost Information
Production at Demand Inventory Ending
Month carry
Inventory 50 Units
cost per Day Forecast $ 5 Change
per unit perInventory
month
Jan 1,100cost per unit
Subcontracting 900 $10 per unit
+200 200
Feb pay
Average 900rate 700 $+200 400per day)
5 per hour ($40
Mar 1,050 800 $+250
7 per hour 650
Overtime pay rate
(above 8 hours per day)
Apr 1,050 1,200 -150 500
Labor-hours to produce a unit 1.6 hours per unit
May 1,100 1,500 -400 100
Cost of increasing daily production rate $300 per unit
June 1,000
(hiring and training)
1,100 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs) P l an 1
Total units ofinventory carried over from– cone
o ns tan
month
Table to
the next= 1,850 units
13.3 t
w o r k fo
rc e
W orkforce required to produce 50 units per day= 10 workers

© 2008 Prentice Hall, Inc. 18

 Roofing Supplier Example 2
Monthly
Costs
Cost Information
Production at Demand Calculations
Inventory Ending
Month carry
Inventory
Inventory 50 Units
cost per Day$9,250
carrying Forecast
(= $ 5 Change
perunits
1,850 unit perInventory
month
carried x $5
Jan 1,100cost per unit 900
Subcontracting per unit)
$10
+200per unit 200
Regular-time
Feb pay
Average 900 labor
rate 49,600
700 (= $
105 workers
per hour x($40
+200 $40 perday)
400per
Mar 1,050 800 day+250
x 124 days)
$ 7 per hour 650
Overtime pay rate
Other (above 8 hours per day)
Apr costs (overtime,
1,050 1,200 -150 500
hiring, layoffs,
Labor-hours to produce a unit 1.6 hours per unit
May 1,100
subcontracting) 0 1,500 -400 100
Cost of increasing daily production rate $300 per unit
June
Total cost
(hiring
1,000
and training)
1,100
$58,850 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs)
Total units ofinventory carried over from one
month
Table to the next= 1,850 units
13.3
W orkforce required to produce 50 units per day= 10 workers

© 2008 Prentice Hall, Inc. 19

 Roofing Supplier Example 2
7,000 –

6,000 –
Reduction
Cumulative demand units

5,000 – of inventory
Cumulative level 6,200 units
4,000 – production using
average monthly
forecast
3,000 – requirements

2,000 –
Cumulative forecast
1,000 – requirements

Excess inventory
–

JanFebMarAprMayJune

© 2008 Prentice Hall, Inc. 20

 Roofing Supplier Example 3
Production Demand Per Day
Month Expected Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

P l an 2
– s ub co
ntract
in g

Minimum requirement = 38 units per day

© 2008 Prentice Hall, Inc. 21

 Roofing Supplier Example 3
Forecast demand
Production rate per working day

70 –

60 – Level production
using lowest
50 – monthly forecast
demand
40 –

30 –

0 –
JanFebMarAprMayJune=Month

221821212220=Number of
working days

© 2008 Prentice Hall, Inc. 22

 Roofing Supplier Example 3
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

© 2008 Prentice Hall, Inc. 23

 Roofing Supplier Example 3
Cost Information
Inventory carry cost $ 5 per unit per month
In-house production=38 units per day
$10 per unit
Subcontracting cost per unit
x 124
Average days
pay rate $ 5 per hour ($40 per day)
=4,712 units
Overtime pay rate
$ 7 per hour
(above 8 hours per day)
Subcontract
Labor-hours units=6,200
to produce a unit 1.6 - 4,712
hours per unit
=1,488 daily
Cost of increasing unitsproduction rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

© 2008 Prentice Hall, Inc. 24

 Roofing Supplier Example 3
Cost Information
Inventory carry cost $ 5 per unit per month
In-house production=38 units per day
$10 per unit
Subcontracting cost per unit
x 124
Average days
pay rate $ 5 per hour ($40 per day)
=4,712 units
Overtime pay rate
$ 7 per hour
(above 8 hours per day)
Costs Subcontract
Labor-hours units=6,200
to produce a unit 1.6 - 4,712
Calculations
hours per unit
Cost =1,488
Regular-time labor
of increasing units
daily $37,696
production rate (= $300
7.6 workers
per unitx $40 per
(hiring and training) day x 124 days)
Cost of decreasing daily production
Subcontracting 14,880rate (= $600
1,488per unitx $10 per
units
(layoffs)
unit)
Table 13.3
Total cost $52,576

© 2008 Prentice Hall, Inc. 25

 Roofing Supplier Example 4
Production Demand Per Day
Month Expected Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

P l an 3
– hiring
a n d fi r
in g
Production = Expected Demand

© 2008 Prentice Hall, Inc. 26

 Roofing Supplier Example 4
Production rate per working day

Forecast demand and

70 – monthly production

60 –

50 –

40 –

30 –

0 –
JanFebMarAprMayJune=Month

221821212220=Number of
working days

© 2008 Prentice Hall, Inc. 27

 Roofing Supplier Example 4
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

© 2008 Prentice Hall, Inc. 28

 Roofing Supplier Example 4
Cost Information Basic
Production Extra Cost of Extra Cost of
Inventory carrying cost
Daily Cost (demand $
Increasing 5 per unit per
Decreasing month
Forecast Prod x 1.6 hrs/unit Production Production
Subcontracting
Month (units) cost
Rate per unit
x $5/hr) $10
(hiring cost) per unitcost)
(layoff Total Cost
Average
Jan pay rate 41
900 $ 7,200 — $ 5 per hour
— ($40 per day)
$ 7,200

Feb 700pay rate

39 5,600 — $ 7 per hour
$1,200
6,800
Overtime (= 2 x $600)
(above 8 hours per day)
$600
Mar 800
Labor-hours 38
to produce6,400
a unit — 1.6 hours
(= 1 xper unit 7,000
$600)
Cost
Apr of1,200
increasing57daily9,600
production rate
$5,700$300 per unit
— 15,300
(hiring and training) (= 19 x $300)
$3,300
Cost
May of1,500
decreasing68daily production (=
12,000 rate $600 per unit
11 x $300)
— 15,300
(layoffs)
$7,800
June 1,100 55 8,800 — 16,600
(= 13 x $600)
Table 13.3
$49,600 $9,000 $9,600 $68,200

© 2008 Prentice Hall, Inc. 29

 Comparison of Three Plans

Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0

Regular labor 49,600 37,696 49,600
Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 14,880 0
Total cost $58,850 $52,576 $68,200

Plan 2 is the lowest cost option

© 2008 Prentice Hall, Inc. 30
 Aggregate Planning in Services

Controlling the cost of labor is critical

1. Accurate scheduling of labor-hours to
assure quick response to customer
demand
2. An on-call labor resource to cover
unexpected demand
3. Flexibility of individual worker skills
4. Flexibility in rate of output or hours
of work
© 2008 Prentice Hall, Inc. 31
 Service Scenarios

 National Chains of Small Service

Firms
 Planning done at national level
and at local level

© 2008 Prentice Hall, Inc. 32

 Service Scenarios

 Airline industry
 Extremely complex planning
problem
 Involves number offlights,
number ofpassengers, air and
ground personnel, allocation of
seats to fare classes
 Resources spread through the
entire system
© 2008 Prentice Hall, Inc. 33
 Yield Management
Allocating resources to customers at
prices that will maximize yield or
revenue
1. Service or product can be sold in
advance ofconsumption
2. Demand fluctuates
3. Capacity is relatively fixed
4. Demand can be segmented
5. Variable costs are low and fixed costs
are high
© 2008 Prentice Hall, Inc. 34
 Necessary conditions to be
met are…
 That there is a fixed amount of resources available for
sale.
 That the resources sold are perishable (there is a time
limit to selling the resources, after which they cease to
be of value).
 That different customers are willing to pay a different
price for using the same amount of resources.

© 2008 Prentice Hall, Inc. 35

 Yield Management Matrix
Price
Tend to be fixedTend to be variable

Quadrant 1:Quadrant 2:
Unpredictable Predictable
Duration ofuse

MoviesHotels
Stadiums/arenasAirlines
Convention centersRental cars
Hotel meeting spaceCruise lines

Quadrant 3:Quadrant 4:

RestaurantsHospitals
Internet service
providers

© 2008 Prentice Hall, Inc. 36