Manufacturing Management

K S Sangwan
BITS Pilani
Pilani Campus
 BITS Pilani
Pilani Campus

Aggregate planning
(Sales and operations planning)
Aggregate planning

What does aggregate planning do?

How to respond the demand fluctuation?
How do organization define an aggregate plan?

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Aggregate planning
Sales and Operations Planning (S&OP) is an aggregate
planning process that determines the resource capacity a
firm will need to meet its demand over an intermediate
time horizon—6 to 12 months in the future.

The term ‘aggregate’ is used because the plans are

developed for product lines or product families, rather
than individual products.
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 Objective of aggregate
Planning
The objectives of aggregate planning are—
 To establish a company-wide game plan for allocating
resources
 To develop an economic strategy for meeting demand.
 To minimize cost over the planning period by adjusting
 Production rates
 Labor levels
 Inventory levels
 Overtime work
 Subcontracting rates
 Other controllable variables

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Aggregate Planning Inputs

 Resources/ capacity  Costs/financial

constraints constraints
– Workforce
– Inventory carrying
– Facilities
– Back orders
 Demand forecast
– Hiring/firing
 Policy statements
– Subcontracting
– Overtime
– Overtime – Inventory changes
– Inventory levels – subcontracting
– Back orders

Note: An economic strategy for meeting demand can be

attained by either adjusting capacity or managing demand.

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Sales and operations
planning

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Sales and operations
planning Capturing market
share, achieving target
Avoid lay-offs, limiting level of quality and
inventory level, profit
maintaining specified
customer service level

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Monthly S&OP planning
process

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 Strategies for adjusting
capacity
Aggregate planning becomes more of a challenge when demand
fluctuates over the planning horizon.
For example, seasonal demand patterns can be met by:
1. Producing at a constant rate and using inventory to absorb
fluctuations in demand (level production)
2. Hiring and firing workers to match demand (chase demand)
3. Maintaining resources for high-demand levels (Peak demand)
4. Increasing or decreasing working hours (overtime and undertime)
5. Subcontracting work to other firms
6. Using part-time workers
7. Providing the service or product at a later time period (backordering)
When one of these alternatives is selected, a company is said to have a
pure strategy for meeting demand.
When two or more are selected, a company has a mixed strategy.
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 Level production
The level production strategy means producing at a
constant rate and using inventory as needed to meet
demand.
• During periods of low demand,
overproduction is stored as
inventory, to be depleted in periods
of high demand.
• The cost of this strategy is the cost
of holding inventory, including the
cost of obsolete or perishable items
that may have to be discarded.

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 Chase demand
The chase demand strategy means changing workforce levels
so that production matches demand.
Absorbs variations in demand by hiring and firing workers.
This approach would not work for industries in which worker
skills are scarce or competition for labor is intense, but it can
be quite cost-effective during periods of high unemployment
or for industries with low-skilled workers.

A variation of chase demand is

chase supply. For some industries,
the production planning task
revolves around the supply of raw
materials, not the demand pattern.

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 Peak demand
Maintaining resources for peak demand levels ensures high
levels of customer service but can be very costly in terms of
the investment in extra workers and machines that remain
idle during low-demand periods.
This strategy is used when superior customer service is
important or when customers are willing to pay extra for the
availability of critical staff or equipment.
Professional services trying to generate more demand may
keep staff levels high, defense contractors may be paid to
keep extra capacity “available,” and full-service hospitals may
invest in specialized equipment that is rarely used but is
critical for the care of a small number of patients.

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 Overtime and undertime

Overtime and undertime are common strategies when demand

fluctuations are not extreme.
Overtime
• A competent staff is maintained, hiring and firing costs are
avoided, and demand is met temporarily without investing in
permanent resources.
• Disadvantages include—
 The premium paid for overtime work,
 A tired and potentially less efficient workforce, and
 The possibility that overtime alone may be insufficient to
meet peak demand periods.

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Overtime and undertime

Undertime can be achieved by working fewer hours during the

day or fewer days per week.
In addition, vacation time can be scheduled during months of slow
demand.
For example—
• Furniture manufacturers typically shut down the entire month of
July, while shipbuilding goes dormant in December.
• During the recent recession, 35% of U.S. employers surveyed
used unpaid furloughs in lieu of more layoffs to adjust to
decreased demand.
• Europe routinely uses shorter workweeks and mandatory
vacations in economic downturns.

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Subcontracting

Subcontracting or outsourcing is a feasible alternative if a supplier

can reliably meet quality and time requirements.
This is a common solution for component parts when demand
exceeds expectations for the final product.
The subcontracting decision requires maintaining strong ties with
possible subcontractors and first-hand knowledge of their work.
Disadvantages of subcontracting include—
• Reduced profits,
• Loss of control over production,
• Long lead times, and
• The potential that the subcontractor may become a future
competitor.

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 Part-time workers
Using part-time workers is feasible for unskilled jobs or in areas
with large temporary labor pools (such as students,
homemakers, or retirees).
Part-time workers are less costly than full-time workers—they
receive no health-care or retirement benefits—and are more
flexible—their hours usually vary considerably.
Part-time workers have been the mainstay of retail, fast-food,
and other services for some time and are becoming more
accepted in manufacturing and government jobs.
Japanese manufacturers traditionally use a large percentage of
part-time or temporary workers.

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 Backlogs, backordering, and
lost sales
Companies that offer customized products and services accept
customer orders and fill them at a later date.
Backlog: accumulated customer orders to be completed at a later
date.
 It grows during periods of high demand and is depleted during
periods of low demand.
 The planned backlog is an important part of the aggregate plan.
Backordering: ordering an item that is temporarily out-of-stock.
 For make-to-stock companies, customers who request an item
that is temporarily out-of-stock may have the option of
backordering the item.
Lost sales: forfeited sales for out-of-stock items.
Note: Backorders are added to the next period’s requirements; lost
sales are not.
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 Strategies for managing
demand
Strategies for managing demand include—
• Shifting demand into other time periods with incentives, sales
promotions, and advertising campaigns
 Examples: Winter coat specials in July and bathing-suit sales in January are
attempts to shift demand into different time periods.
• Offering products or services with countercyclical demand patterns
 This approach involves examining the idleness of resources and creating a
demand for those resources.
 McDonald’s offers breakfast to keep its kitchens busy during the prelunch hours,
and heating firms also sell air conditioners.
• Partnering with suppliers to reduce information distortion along the
supply chain
 To control the Bullwhip effect, manufacturers, their suppliers, and customers
form partnerships in which demand information is shared and orders are placed
in a more continuous fashion.
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Quantitative techniques for
aggregate planning
One aggregate planning strategy is not always preferable
to another.
The most effective strategy depends on—
 The demand distribution,
 Competitive position, and
 Cost structure of a firm or product line.
The different quantitative techniques are—
 Pure and mixed strategies,
 Linear programming,
 Transportation method, and
 Some other quantitative techniques.

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Pure strategies
Solving aggregate planning problems involves—
 Formulating strategies for meeting demand,
 Constructing production plans from those strategies,
 Determining the cost and feasibility of each plan, and
 Selecting the lowest cost plan from among the feasible alternatives.

The effectiveness of the aggregate planning process is directly

related to management’s understanding of the cost variables
involved and the reasonableness of the scenarios tested.

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 Aggregate planning using
pure strategies Example
The Good and Rich Candy Company makes a variety of candies in three
factories worldwide. Its line of chocolate candies exhibits a highly seasonal
demand pattern, with peaks during the winter months (for the holiday
season and Valentine’s Day) and valleys during the summer months (when
chocolate tends to melt and customers are watching their weight). Given
the following costs and quarterly sales forecasts, determine whether (a)
level production, or (b) chase demand would more economically meet the
demand for chocolate candies:
QUARTER SALES FORECAST (LB)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

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 Aggregate planning using
pure strategies Example
Solution Hiring cost = $100 per worker
Firing cost = $500 per worker
Inventory carrying cost = $0.50 pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers

Level production

(50,000 + 120,000 + 150,000 + 80,000)

4

= 100,000 pounds

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Aggregate planning using
pure strategies Example

Level Production Strategy

SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 0
400,000 140,000

Cost = 140,000 pounds x 0.50 per pound = $70,000

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 Aggregate planning using
pure strategies Example
Chase Demand Strategy
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000 80,000 80 0 20
Summer 50,000 50,000 50 0 30
Fall 120,000 120,000 120 70 0
Winter 150,000 150,000 150 30 0
100 50

Cost = (100 workers hired x $100) + (50 workers fired x $500)

= $10,000 + 25,000 = $35,000
Comparing the cost of level production with chase demand, we find that
chase demand is the best strategy for the Good and Rich line of
candies.
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Mixed strategies
Varying two or more capacity factors to determine a feasible
production plan.
Mixed strategies can incorporate management policies, such
as “no more than x% of the workforce can be laid off in one
quarter” or “inventory levels cannot exceed x dollars.”

For example, many industries that experience a slowdown

during part of the year may simply shut down manufacturing
during the low-demand season and schedule employee
vacations during that time.

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Linear programming Example
Minimize Z = $100 (H1 + H2 + H3 + H4)
+ $500 (F1 + F2 + F3 + F4)
+ $0.50 (I1 + I2 + I3 + I4)
Subject to
P1 - I1 = 80,000
(1)
Demand I1 + P2 - I2 = 50,000
(2)
where
constraints I2 + P3 - I3 = 120,000 Ht = # hired for period t
(3) Ft = # fired for period t
I3 + P4 - I4 = 150,000 It = inventory at end
(4) of period t
Production 1000 W1 = P1 Pt = units produced
in period t
(5) Wt = workforce size
constraints 1000 W2 = P2 for period t
(6)
1000 W3 = P3 BITS Pilani, Pilani Campus
 The transportation method
For cases in which the decision to change the size of the
workforce has already been made or is prohibited, the
transportation method of linear programming can be used to
develop an aggregate production plan.
The transportation method gathers all the cost information into
one matrix and plans production based on the lowest-cost
alternatives.

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The transportation method

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 The transportation method
Burruss Manufacturing Company uses overtime, inventory, and
subcontracting to absorb fluctuations in demand. An aggregate production
plan is devised annually and updated quarterly. Cost data, expected
demand, and available capacities in units for the next four quarters are
given here. Demand must be satisfied in the period it occurs; that is, no
backordering is allowed. Design a production plan that will satisfy demand
at minimum cost. Quarter Expected Regular Overtime Subcontract
demand capacity capacity capacity
1 900 1000 100 500
2 1500 1200 150 500
3 1600 1300 200 500
4 3000 1300 200 500

Regular production cost per unit =$20; Overtime production cost per unit =$25
Subcontracting cost per unit =$28; Inventory holding cost per unit per period= $ 3
Beginning inventory 300 units
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The transportation method

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The transportation method

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 Other quantitative techniques
• Linear decision rule
 It is an optimizing technique originally developed for aggregate planning in a
paint factory.
 It solves a set of four quadratic equations that describe the major capacity-
related costs in the factory:
 payroll costs,
 hiring and firing,
 overtime and undertime, and
 inventory costs.
 The results yield the optimal workforce level and production rate.
• Search decision rule
 It is a pattern search technique for aggregate planning.
 Tries to find the minimum cost combination of various workforce levels and
production rates.
• Management coefficients model
 A regression techniques for aggregate planning
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The hierarchical nature of
planning

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 Collaborative planning
Collaborative planning is part of the supply chain process of
collaborative planning, forecasting, and replenishment
(CPFR)
CPFR involves selecting the products to be jointly managed,
creating a single forecast of customer demand, and
synchronizing production across the supply chain.
Consensus among partners is reached first on the sales
forecast, then on the production plan.
One example of an event that requires collaboration among
trading partners is quoting available to- promise dates for
customers.

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 Available-to-promise (ATP)

In the current business environment of outsourcing and build-to-

order products, companies must be able to provide the customer
with accurate promise dates.
As customer orders come in consuming the forecast, the remaining
quantities are available-to-promise to future customers.
Available-to-promise is the difference between customer orders
(CO) and planned production.
ATP may also involve drilling down beyond the end item level to
check the availability of critical components.
ATP in period 1 = (On-hand quantity + MPS in period 1) – (CO until the next period of planned production)

ATP in period n = (MPS in period n) – (CO until the next period of planned production)

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 Available-to-promise (ATP)
Example
East Coast Bicycle Company has recently begun to accept customer orders over the
Internet. The company uses both an aggregate production plan for families and a
master production schedule for individual products. Now East Coast wants to add
available-to-promise functionality to the planning process. Using the information given
below, determine how many girls 26" bikes are available-to-promise in April, May,
and June.

?
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Available-to-promise (ATP)
Example
Solution

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Rules-Based ATP

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Thank You

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