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Operations ManagementOperations ManagementChapter 13 – Aggregate Planning

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Determining most cost effective way to match supply and demand.

Aggregate Planning

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Aggregate Planning

Minimize cost by adjusting Production rates Labor levels Inventory levels Overtime work Subcontracting rates

Determine quantity and timing of production for immediate future

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Aggregate Planning Strategies

Capacity Options1. Inventories absorb changes in demand2. Varying workforce size3. Use part-timers, overtime or idle time4. Use subcontractors and maintain a stable

workforce5. Change prices or other factors to

influence demand

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Demand Options

Influencing demand6. Use advertising/ promotion

7. Shift demand to slow periods

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Capacity Options

Changing inventory levels Increase inventory in low demand

periods Increases costs with storage,

insurance, handling, obsolescence and capital investment

Shortages can mean lost sales

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Capacity Options

Varying workforce size by hiring or layoffsTraining and separation costsNew workers’ learning curvesLaying off affects morale and

productivity

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Capacity Options

Varying production rate through overtime or idle timeConstant workforceDifficult to meet large increasesOvertime costs and productivity

levelsWhat to do with idle time?

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Capacity Options

SubcontractingTemporary measureCostlyAssuring quality and timely

delivery difficultExposes customers to a possible

competitor

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Capacity Options

Using part-time workersFor unskilled or low skilled

positions, especially in services

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Demand Options

Back ordering during high- demand periodsCustomers wait for an order

without loss of goodwill or orderEffective when few substitutes for

product or serviceResults in lost sales

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Demand Options

Counterseasonal mixingMay lead to products/ services

outside company’s expertise

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Mixing Options to Develop a Plan

Chase strategyMatch output rates to demand

forecast for each periodVary workforce levels or vary

production rateFavored by service organizations

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Mixing Options to Develop a Plan

Level strategyUniform daily production Inventory/ idle time as bufferStable production leads to better

quality and productivity

Mixed strategy Combination of capacity options

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Graphical Method

1. Determine demand per period

2. Determine regular time, overtime, subcontracting capacity per period

3. Find labor, hiring and layoff, inventory holding costs

4. Consider company policy on workers and stock levels

5. Develop plans and examine total costs

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Roofing Supplier Example

Table 13.2

Month Expected DemandProduction

DaysDemand Per Day

(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

= = 50 units per day6,200

124

Average requirement =

Total expected demand

Number of production days

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Roofing Supplier Example

Figure 13.3

70 –

60 –

50 –

40 –

30 –

0 –Jan Feb Mar Apr May June = Month

22 18 21 21 22 20 = Number ofworking days

Pro

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per

wo

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g d

ay

Level production using average monthly forecast demand

Forecast demand

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Sample Problem

Brooke Cashion, operations manager at Kansas Furniture, has received the following demand: July (1000), Aug (1200), Sept (1400), Oct (1800), Nov (1800), Dec (1600)

Assuming stockout costs for lost sales of $100, inventory carrying costs of $25/unit/mo and zero ending inventory.

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Sample ProblemPlan A: Produce at a steady rate (equal

to minimum requirements) of 1,000 units/mo and subcontract additional units at a $60/unit premium cost.

Plan B: Vary the workforce, which performs at a current production level of 1,300 units/mo. The cost of hiring is $3,000 per 100 units while layoffs cost $6,000 per 100 units cut back.

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Sample Problem

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Sample Problem

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Transportation Method

Table 13.6

CostsRegular time $40 per tireOvertime $50 per tireSubcontracting $70 per tireCarrying $ 2 per tire per month

Sales PeriodMar Apr May

Demand 800 1,000 750Capacity: Regular 700 700 700 Overtime 50 50 50 Subcontracting 150 150 130Beginning inventory 100 tires

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Sample Problem

Set the following problem up in transportation model format and solve for the minimum cost plan.

PeriodFeb Mar Apr

Demand 55 70 75CapacityRegular 50 50 50Overtime 5 5 5Subcontract 12 12 10Beginning Inventory 10CostsRegular time $60 per unitOvertime $80 per unitSubcontract $90 per unitInventory carrying $1 per unit per monthBack order $3 per unit per month

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Practice Problems