Operations

Management
Aggregate Planning
Chapter 13

13-1
 13-2

Outline
 GLOBAL COMPANY PROFILE: ANHEUSER-BUSCH
 THE PLANNING PROCESS
 THE NATURE OF AGGREGATE PLANNING
 AGGREGATE PLANNING STRATEGIES
 Capacity Options
 Demand Options
 Mixing Options to Develop a Plan
 13-3

Outline - Continued
 METHODS FOR AGGREGATE PLANNING
 Graphical and Charting Methods
 Mathematical Approaches to Planning
 Comparison of Aggregate Planning Methods

 AGGREGATE PLANNING IN SERVICES

 Restaurants
 Hospital
 Miscellaneous Services
 National Chains of Small Service Firms
 Airline Industry

 YIELD MANAGEMENT
 13-4

Learning Objectives
When you complete this chapter, you should be able to :
 Identify or Define:
 Aggregate planning
 Tactical scheduling
 Graphic technique for aggregate planning
 Mathematical techniques for aggregate planning

 Describe or Explain:
 How to do aggregate planning
 How service firms develop aggregate plans
 13-5

Anheuser-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

Transparency Masters to accompany Heizer/Render –

© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458 Principles of Operations Management, 5e, and Operations
Management, 7e
 13-6

Aggregate 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

Transparency Masters to accompany Heizer/Render –

© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458 Principles of Operations Management, 5e, and Operations
Management, 7e
 13-7

Planning
 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

Transparency Masters to accompany Heizer/Render –

© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458 Principles of Operations Management, 5e, and Operations
Management, 7e
 13-8

Planning Tasks and Responsibilities

Transparency Masters to accompany Heizer/Render –

© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458 Principles of Operations Management, 5e, and Operations
Management, 7e
 Planning Horizons 13-9

Responsible:
Short-range plans Operations
Job assignments managers
Ordering
Intermediate-range plans
Job scheduling Responsible: Top
Sales planning
Dispatching executives
Production planning and
Responsible: budgeting Long-range plans
Operations Setting employment, inventory, R&D
managers, subcontracting levels New product plans
supervisors, Analyzing operating plans Capital expenses
foremen
Facility location, expansion

Today 3 Months 1 year 5 years

Planning Horizon
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accompany Heizer/Render –
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458 Principles of Operations
Management, 5e, and
Relationships of the Aggregate Plan
13-10

Marketplace Product Research and

and Demand Decisions Technology

Demand Process
Forecasts, Planning & Capacity
orders Decisions Work Force
Raw Materials
Aggregate Available
Inventory On
Plan for Hand
Production External
Capacity
Master Subcontractors
Production
Schedule, and MRP systems

Detailed Work
Schedules
 What’s Needed for Aggregate 13-11

Planning

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!
 13-12

Aggregate Planning
 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

 13-13

Aggregate Planning Goals

 Meet demand
 Use capacity efficiently
 Meet inventory policy
 Minimize cost
 Labor
 Inventory
 Plant & equipment
 Subcontract
 13-14

Aggregate Planning Strategies

Pure 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
 13-15

Aggregate Planning Strategies

Pure Strategies
 Demand Options — change demand:
 influencing demand
 backordering during high demand periods
 counterseasonal product mixing
Aggregate Scheduling Options -
Advantages and Disadvantages
Option Advantage Disadvantage Some
Comments
Changing Changes in Inventory Applies mainly
inventory levels human resources holding costs; to production,
are gradual, not Shortages may not service,
abrupt result in lost operations
production sales
changes

Varying Avoids use of Hiring, layoff, Used where size

workforce size other alternatives and training of labor pool is
by hiring or costs large
layoffs

13-16
Advantages/Disadvantages -
Continued

Option Advantage Disadvantage Some

Comments
Varying Matches seasonal Overtime Allows
production rates fluctuations premiums, tired flexibility within
through overtime without workers, may not the aggregate
or idle time hiring/training meet demand plan
costs
Subcontracting Permits Loss of quality Applies mainly
flexibility and control; reduced in production
smoothing of the profits; loss of settings
firm's output future business

13-17
Advantages/Disadvantages -
Continued
Option Advantage Disadvantage Some
Comments
Using part-time Less costly and High Good for
workers more flexible turnover/training unskilled jobs in
than full-time costs; quality areas with large
workers suffers; temporary labor
scheduling pools
difficult
Influencing Tries to use Uncertainty in Creates
demand excess capacity. demand. Hard to marketing ideas.
Discounts draw match demand to Overbooking
new customers. supply exactly. used in some
businesses.

13-18
Advantage/Disadvantage -
Continued
Option Advantage Disadvantage Some
Comments
Back ordering May avoid Customer must Many companies
during high- overtime. Keeps be willing to backorder.
demand periods capacity constant wait, but
goodwill is lost.
Counterseasonal Fully utilizes May require Risky finding
products and resources; allows skills or products or
service mixing stable workforce. equipment services with
outside a firm's opposite demand
areas of patterns.
expertise.

13-19
 13-20

The Extremes

Level Chase
Strategy Strategy

Production rate is Production

constant equals
demand
 13-21

Aggregate Planning
Strategies
 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
 13-22

Aggregate Planning
Methods
 Graphical & charting techniques
 Popular & easy-to-understand
 Trial & error approach
 Mathematical approaches
 Transportation method
 Linear decision rule
 Management coefficients model
 Simulation
The Graphical Approach to
13-23

Aggregate 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
 13-24

Forecast and Average Forecast

Demand
70
Forecast
Level production using
60 Demand
Production rate per working day

average monthly
50 forecast demand

40

30

20

10

0
Jan Feb Mar A pr May Jun

22 18 21 21 22 20
Cumulative Demand Graph for 13-25

Plan 1
7,000
6,000 Reduction of
Cumulative level
Cumulative Demand

inventory
5,000 production using
average monthly
4,000 forecast
requirements
3,000 Cumulative forecast
(Units)

requirements
2,000
Excess inventory
1,000
Jan Feb Mar Apr May Jun
Comparison of Three Major
Aggregate Planning
13-26

Methods
Techniques Approaches Aspects
Charting/graphical Trial and error Simple to understand, easy to
methods
use. Many solutions; one chosen
may not be optimal
Transportation method Optimization LP software available;permits
sensitivity analysis and
constraints. Linear function may
not be realistic
Management Simple, easy to implement; tries to
coefficient model Heuristic mimic manager’s decision
process; uses regression
Controlling the Cost of Labor in 13-27

Service 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
 13-28

Making Yield Management

Work
 Multiple pricing structures must be feasible and
appear logical

 Forecast the use and duration of use.

 Manage the changes in demand.

 13
-
Hotel: Single Price Level 29
Sales
Demand Curve

Potential customers exist who are willing to

pay more than the $15 variable cost
Passed up
$sales = Net price *
Some customers who
profit
50 rooms contributions
paid $150 for the room
=150*50 were actually willing to
=$7500 pay more
Money left on
the table
$15 variable cost of $150 Price charged Price
room for room
 13
-
Hotel: Two Price Levels 30
Sales Net prices are:
Price #1 => $85
Demand
Price #2 => $175
Total sales =
1st net price *30 +
2nd net price *30
= $8100

$15 variable $100 $200

cost of room Price #1 Price #2
 13
-
31

Yield Management Matrix

Fixed Variable
D Predictable use Quadrant 1 Quadrant 2
u
r Movies, stadiums, arenas, Hotels, Airlines,
a
t convention centers, hotel Rental cars,Cruise
I meeting space lines
o
n
o
f Unpredictable use Quadrant 3 Quadrant 4
u Restaurants,Golf courses, Continuing care
s
e Internet service providers hospitals