heizer om10 ch13-aggregate planning

10/16/2010

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1313 Aggregate PlanningAggregate Planning

13 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall

PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer and Render Heizer and Render Operations Management, 10e Operations Management, 10e Principles of Operations Management, 8ePrinciples of Operations Management, 8e

PowerPoint slides by Jeff Heyl

OutlineOutlineGlobal Company Profile: Frito-LayThe Planning Process

Planning HorizonsThe Nature of Aggregate Planning


The Nature of Aggregate PlanningAggregate Planning Strategies

Capacity OptionsDemand OptionsMixing Options to Develop a Plan

Outline Outline –– ContinuedContinued

Methods for Aggregate PlanningGraphical MethodsMathematical Approaches


Mathematical ApproachesComparison of Aggregate Planning Methods

Outline Outline –– ContinuedContinued

Aggregate Planning in ServicesRestaurantsHospitals


National Chains of Small Service FirmsMiscellaneous ServicesAirline Industry

Yield Management

Learning ObjectivesLearning ObjectivesWhen you complete this chapter you When you complete this chapter you should be able to:should be able to:

1. Define aggregate planning


2. Identify optional strategies for developing an aggregate plan

3. Prepare a graphical aggregate plan

Learning ObjectivesLearning ObjectivesWhen you complete this chapter you When you complete this chapter you should be able to:should be able to:

4. Solve an aggregate plan via the transportation method of linear


transportation method of linear programming

5. Understand and solve a yield management problem

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FritoFrito--LayLayMore than three dozen brands, 15 brands sell more than $100 million annually, 7 sell over $1 billionPlanning processes covers 3 to 18


monthsUnique processes and specially designed equipmentHigh fixed costs require high volumes and high utilization

FritoFrito--LayLayDemand profile based on historical sales, forecasts, innovations, promotion, local demand dataMatch total demand to capacity,


expansion plans, and costsQuarterly aggregate plan goes to 38 plants in 18 regionsEach plant develops 4-week plan for product lines and production runs

Aggregate PlanningAggregate Planning

The objective of aggregate planning The objective of aggregate planning is to meet forecasted demand while is to meet forecasted demand while minimizing cost over the planning minimizing cost over the planning


g p gg p gperiodperiod

The Planning ProcessThe Planning Process

Objective is to minimize cost over the planning period by adjusting

Determine the quantity and timing of production for the intermediate future


Production ratesLabor levelsInventory levelsOvertime workSubcontracting ratesOther controllable variables


A logical overall unit for measuring sales and outputA forecast of demand for an intermediate

Required for aggregate planning


A forecast of demand for an intermediate planning period in these aggregate termsA method for determining costsA model that combines forecasts and costs so that scheduling decisions can be made for the planning period

Planning HorizonsPlanning HorizonsLong-range plans (over one year)Research and DevelopmentNew product plansCapital investmentsFacility location/expansion

Intermediate-range plans (3 to 18 months)Sales planning

Top executives


Figure 13.1

Sales planningProduction planning and budgetingSetting employment, inventory,

subcontracting levelsAnalyzing operating plans

Short-range plans (up to 3 months)Job assignmentsOrderingJob schedulingDispatchingOvertimePart-time help

Operations managers

Operations managers, supervisors, foremen

Responsibility Planning tasks and horizon

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Quarter 1Jan Feb Mar

150,000 120,000 110,000

Quarter 2


Quarter 2Apr May Jun

100,000 130,000 150,000

Quarter 3Jul Aug Sep

180,000 150,000 140,000

Aggregate Aggregate PlanningPlanning


Figure 13.2


Combines appropriate resources into general termsPart of a larger production planning

t


systemDisaggregation breaks the plan down into greater detailDisaggregation results in a master production schedule

Aggregate Planning Aggregate Planning StrategiesStrategies

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

Capacity OptionsCapacity OptionsChanging 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 investmentShortages may mean lost sales due to long lead times and poor customer service

Capacity OptionsCapacity OptionsVarying workforce size by hiring or layoffs

Match production rate to demandT i i d ti t f


Training and separation costs for hiring and laying off workers New workers may have lower productivityLaying off workers may lower morale and productivity

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Capacity OptionsCapacity OptionsVarying production rate through overtime or idle time

Allows constant workforceM b diffi lt t t l


May be difficult to meet large increases in demandOvertime can be costly and may drive down productivityAbsorbing idle time may be difficult

Capacity OptionsCapacity OptionsSubcontracting

Temporary measure during periods of peak demandMay be costly


May be costlyAssuring quality and timely delivery may be difficultExposes your customers to a possible competitor

Capacity OptionsCapacity OptionsUsing part-time workers

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


Demand OptionsDemand OptionsInfluencing demand

Use advertising or promotion to increase demand in low periods


Attempt to shift demand to slow periodsMay not be sufficient to balance demand and capacity

Demand OptionsDemand OptionsBack ordering during high-demand periods

Requires customers to wait for an order without loss of goodwill or


order without loss of goodwill or the orderMost effective when there are few if any substitutes for the product or serviceOften results in lost sales

Demand OptionsDemand OptionsCounterseasonal product and service mixing

Develop a product mix of counterseasonal items


counterseasonal itemsMay lead to products or services outside the company’s areas of expertise

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Aggregate Planning OptionsAggregate Planning OptionsOption Advantages Disadvantages Some Comments

Changing inventory levels

Changes in human resources are gradual or none; no abrupt

Inventory holding cost may increase. Shortages may result in lost

Applies mainly to production, not service, operations.

13 - 25© 2011 Pearson Education, Inc. publishing as Prentice HallTable 13.1

production changes.

sales.

Varying workforce size by hiring or layoffs

Avoids the costs of other alternatives.

Hiring, layoff, and training costs may be significant.

Used where size of labor pool is large.


Varying production rates through overtime or

Matches seasonal fluctuations without hiring/ training costs.

Overtime premiums; tired workers; may not meet demand.

Allows flexibility within the aggregate plan.


idle timeg

Sub-contracting

Permits flexibility and smoothing of the firm’s output.

Loss of quality control; reduced profits; loss of future business.

Applies mainly in production settings.


Using part-time workers

Is less costly and more flexible than full-time workers.

High turnover/ training costs; quality suffers; scheduling difficult.

Good for unskilled jobs in areas with large temporary labor pools.


Influencing demand

Tries to use excess capacity. Discounts draw new customers.

Uncertainty in demand. Hard to match demand to supply exactly.

Creates marketing ideas. Overbooking used in some businesses.


Back ordering during high-demand

May avoid overtime. Keeps capacity constant.

Customer must be willing to wait, but goodwill is lost.

Many companies back order.


periods

Counter-seasonal product and service mixing

Fully utilizes resources; allows stable workforce.

May require skills or equipment outside the firm’s areas of expertise.

Risky finding products or services with opposite demand patterns.

Methods for Aggregate Methods for Aggregate PlanningPlanning

A mixed strategy may be the best way to achieve minimum costsTh ibl i d


There are many possible mixed strategiesFinding the optimal plan is not always possible

Mixing Options to Mixing Options to Develop a PlanDevelop a Plan

Chase strategyMatch output rates to demand forecast for each period


o ecast o eac pe odVary workforce levels or vary production rateFavored by many service organizations

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Mixing Options to Mixing Options to Develop a PlanDevelop a Plan

Level strategyDaily production is uniformUse inventory or idle time as buffer


Use inventory or idle time as bufferStable production leads to better quality and productivity

Some combination of capacity options, a mixed strategy, might be the best solution

Graphical MethodsGraphical Methods

Popular techniquesEasy to understand and use


Trial-and-error approaches that do not guarantee an optimal solutionRequire only limited computations

Graphical MethodsGraphical Methods1. Determine the demand for each period2. Determine the capacity for regular time,

overtime, and subcontracting each period3 Find labor costs hiring and layoff costs


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

4. Consider company policy on workers and stock levels

5. Develop alternative plans and examine their total costs

Roofing Supplier Example 1Roofing Supplier Example 1

Month Expected DemandProduction

DaysDemand Per Day

(computed)Jan 900 22 41Feb 700 18 39Mar 800 21 38Apr 1,200 21 57


Table 13.2

p ,May 1,500 22 68June 1,100 20 55

6,200 124

= = 50 units per day6,200124

Average requirement =

Total expected demandNumber of production days


70 –

60 –

50 –e pe

r wor

king

day

Level production using average monthly forecast demand

Forecast demand


Figure 13.3

40 –

30 –

0 –Jan Feb Mar Apr May June = Month22 18 21 21 22 20 = Number of

working days

Prod

uctio

n ra

te

Roofing Supplier Example 2Roofing Supplier Example 2Cost InformationInventory carrying cost $ 5 per unit per monthSubcontracting cost per unit $20 per unit

Average pay rate $10 per hour ($80 per day)

Overtime pay rate $17 per hour


Table 13.3

Overtime pay rate p(above 8 hours per day)

Labor-hours to produce a unit 1.6 hours per unit

Cost of increasing daily production rate (hiring and training)

$300 per unit

Cost of decreasing daily production rate (layoffs)

$600 per unit

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MonthProduction

Days

Production at 50 Units

per DayDemand Forecast

Monthly Inventory Change

Ending Inventory

Jan 22 1,100 900 +200 200Feb 18 900 700 +200 400Mar 21 1,050 800 +250 650


Table 13.3




$300 per unit


$600 per unit

Apr 21 1,050 1,200 -150 500May 22 1,100 1,500 -400 100June 20 1,000 1,100 -100 0

1,850

Total units of inventory carried over from onemonth to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers




MonthProduction

Days

Production at 50 Units

per DayDemand Forecast

Monthly Inventory Change

Ending Inventory

Jan 22 1,100 900 +200 200Feb 18 900 700 +200 400Mar 21 1,050 800 +250 650

Costs CalculationsInventory carrying $9,250 (= 1,850 units carried x $5

per unit)Regular-time labor 99,200 (= 10 workers x $80 per

day x 124 days)


Table 13.3




$300 per unit


$600 per unit

Apr 21 1,050 1,200 -150 500May 22 1,100 1,500 -400 100June 20 1,000 1,100 -100 0

1,850

Total units of inventory carried over from onemonth to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

Other costs (overtime, hiring, layoffs, subcontracting) 0

Total cost $108,450


eman

d un

its

7,000 –

6,000 –

5,000 –

4,000 –

Cumulative level production using average monthly

forecast

Reduction of inventory

6,200 units


Figure 13.4

Cum

ulat

ive

de

3,000 –

2,000 –

1,000 –

–Jan Feb Mar Apr May June

Cumulative forecast requirements

forecast requirements

Excess inventory



DaysDemand Per Day



Table 13.2

p ,May 1,500 22 68June 1,100 20 55

6,200 124

Minimum requirement = 38 units per day


70 –

60 –

50 –e pe

r wor

king

day

Level production using lowest

monthly forecast demand

Forecast demand


40 –

30 –


working days

Prod

uctio

n ra

te





Table 13.3




$300 per unit


$600 per unit

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Roofing Supplier Example 3Roofing Supplier Example 3Cost InformationInventory carry cost $ 5 per unit per monthSubcontracting cost per unit $10 per unit

Average pay rate $ 5 per hour ($40 per day)

Overtime pay rate $ 7 per hour

In-house production = 38 units per day x 124 days

= 4,712 units


Table 13.3




$300 per unit


$600 per unit

,

Subcontract units = 6,200 - 4,712= 1,488 units

Cost InformationInventory carry cost $ 5 per unit per monthSubcontracting cost per unit $10 per unit

Average pay rate $ 5 per hour ($40 per day)

Overtime pay rate $ 7 per hour


In-house production = 38 units per day x 124 days

= 4,712 units


Table 13.3




$300 per unit


$600 per unit

,

Subcontract units = 6,200 - 4,712= 1,488 units

Costs CalculationsRegular-time labor $75,392 (= 7.6 workers x $80 per

day x 124 days)Subcontracting 29,760 (= 1,488 units x $20 per

unit)

Total cost $105,152



DaysDemand Per Day



Table 13.2

p ,May 1,500 22 68June 1,100 20 55

6,200 124

Production = Expected Demand


70 –

60 –

50 –e pe

r wor

king

day Forecast demand and

monthly production


40 –

30 –


working days

Prod

uctio

n ra

te





Table 13.3




$300 per unit


$600 per unit

Roofing Supplier Example 4Roofing Supplier Example 4Cost InformationCost InformationInventory carrying costInventory carrying cost $ 5 per unit per month$ 5 per unit per monthSubcontracting cost per unitSubcontracting cost per unit $10 per unit$10 per unit

Average pay rateAverage pay rate $ 5 per hour ($40 per day)$ 5 per hour ($40 per day)

Overtime pay rateOvertime pay rate $ 7 per hour $ 7 per hour

MonthMonthForecast Forecast

(units)(units)

Daily Daily Prod Prod RateRate

Basic Basic Production Production

Cost Cost (demand x (demand x

1.6 hrs/unit x 1.6 hrs/unit x $10/hr)$10/hr)

Extra Cost of Extra Cost of Increasing Increasing Production Production (hiring cost)(hiring cost)

Extra Cost of Extra Cost of Decreasing Decreasing Production Production (layoff cost)(layoff cost) Total CostTotal Cost

JanJan 900900 4141 $ 14,400$ 14,400 —— —— $ 14,400$ 14,400

FebFeb 700700 3939 11 20011 200 —— $1,200 $1,200 ( 2 $600)( 2 $600) 12 40012 400


Table 13.3Table 13.3

Overtime pay rateOvertime pay rate pp(above 8 hours per day)(above 8 hours per day)

LaborLabor--hours to produce a unithours to produce a unit 1.6 hours per unit1.6 hours per unit

Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

$300 per unit$300 per unit

Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)

$600 per unit$600 per unit

FebFeb 700700 3939 11,20011,200 (= 2 x $600)(= 2 x $600) 12,40012,400

MarMar 800800 3838 12,80012,800 —— $600 $600 (= 1 x $600)(= 1 x $600) 13,40013,400

AprApr 1,2001,200 5757 19,20019,200 $5,700 $5,700 (= 19 x $300)(= 19 x $300) —— 24,90024,900

MayMay 1,5001,500 6868 24,00024,000 $3,300 $3,300 (= 11 x $300)(= 11 x $300) —— 24,30024,300

JuneJune 1,1001,100 5555 17,60017,600 —— $7,800 $7,800 (= 13 x $600)(= 13 x $600) 25,40025,400

$99,200$99,200 $9,000$9,000 $9,600$9,600 $117,800$117,800

Table 13.4Table 13.4

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Comparison of Three PlansComparison of Three Plans

Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0

Regular labor 99,200 75,392 99,200


Table 13.5

Overtime labor 0 0 0Hiring 0 0 9,000Layoffs 0 0 9,600Subcontracting 0 29,760 0Total cost $108,450 $105,152 $117,800

Plan 2 is the lowest cost option

Mathematical ApproachesMathematical ApproachesUseful for generating strategies

Transportation Method of Linear Programming

Produces an optimal plan


Management Coefficients ModelModel built around manager’s experience and performance

Other ModelsLinear Decision RuleSimulation

Transportation MethodTransportation MethodSales Period

Mar Apr MayDemand 800 1,000 750Capacity:

Regular 700 700 700Overtime 50 50 50


Table 13.6

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

Subcontracting 150 150 130Beginning inventory 100 tires

Transportation ExampleTransportation ExampleImportant points1. Carrying costs are $2/tire/month. If

goods are made in one period and held over to the next, holding costs are incurred


incurred2. Supply must equal demand, so a dummy

column called “unused capacity” is added

3. Because back ordering is not viable in this example, cells that might be used to satisfy earlier demand are not available

Transportation ExampleTransportation ExampleImportant points4. Quantities in each column designate

the levels of inventory needed to meet demand requirements


5. In general, production should be allocated to the lowest cost cell available without exceeding unused capacity in the row or demand in the column

Transportation Transportation ExampleExample


Table 13.7

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Management Coefficients Management Coefficients ModelModel

Builds a model based on manager’s experience and performanceA i d l i t t d


A regression model is constructed to define the relationships between decision variablesObjective is to remove inconsistencies in decision making

Other ModelsOther Models

Linear Decision Rule

Minimizes costs using quadratic cost curvesOperates over a particular time period


Simulation

Uses a search procedure to try different combinations of variablesDevelops feasible but not necessarily optimal solutions

Summary of Aggregate Summary of Aggregate Planning MethodsPlanning Methods

TechniquesSolution

Approaches Important AspectsGraphical

methodsTrial and

errorSimple to understand and

easy to use. Many solutions; one chosen


solutions; one chosen may not be optimal.

Transportation method of linear programming

Optimization LP software available; permits sensitivity analysis and new constraints; linear functions may not be realistic.

Table 13.8

Summary of Aggregate Summary of Aggregate Planning MethodsPlanning Methods

TechniquesSolution

Approaches Important AspectsManagement

coefficients model

Heuristic Simple, easy to implement; tries to mimic manager’s decision process; uses


model decision process; uses regression.

Simulation Change parameters

Complex; may be difficult to build and for managers to understand.

Table 13.8

Aggregate Planning in Aggregate Planning in ServicesServices

Controlling the cost of labor is critical1. Accurate scheduling of labor-hours

to assure quick response to customer d d


demand2. An on-call labor resource to cover

unexpected demand3. Flexibility of individual worker skills4. Flexibility in rate of output or hours of

work

Five Service ScenariosFive Service Scenarios

RestaurantsSmoothing the production process


pDetermining the optimal workforce size

HospitalsResponding to patient demand

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Five Service ScenariosFive Service ScenariosNational Chains of Small Service Firms

Planning done at national level


and at local levelMiscellaneous Services

Plan human resource requirementsManage demand

Law Firm ExampleLaw Firm ExampleLabor-Hours Required Capacity Constraints

(2) (3) (4) (5) (6)(1) Forecasts Maximum Number of

Category of Best Likely Worst Demand in QualifiedLegal Business (hours) (hours) (hours) People PersonnelTrial work 1 800 1 500 1 200 3 6 4


Table 13.9

Trial work 1,800 1,500 1,200 3.6 4Legal research 4,500 4,000 3,500 9.0 32Corporate law 8,000 7,000 6,500 16.0 15Real estate law 1,700 1,500 1,300 3.4 6Criminal law 3,500 3,000 2,500 7.0 12Total hours 19,500 17,000 15,000Lawyers needed 39 34 30

Five Service ScenariosFive Service ScenariosAirline industry

Extremely complex planning problem


Involves number of flights, number of passengers, air and ground personnel, allocation of seats to fare classesResources spread through the entire system

Yield ManagementYield ManagementAllocating resources to customers at prices that will maximize yield or revenue

1. Service or product can be sold in advance of consumption


advance of consumption2. Demand fluctuates3. Capacity is relatively fixed4. Demand can be segmented5. Variable costs are low and fixed costs

are high

Demand Curve

Yield Management ExampleYield Management Example

Passed-up

Potential customers exist who are willing to pay more than the $15 variable cost of the room, but not $150

Some customers who paid

Room sales

100

13 - 65© 2011 Pearson Education, Inc. publishing as Prentice HallFigure 13.5

pcontribution

Money left on the table

Some customers who paid $150 were actually willing to pay more for the roomTotal

$ contribution= (Price) x (50

rooms)= ($150 - $15)

x (50)= $6,750

Price

50

$150Price charged

for room

$15Variable cost

of room

Total $ contribution =(1st price) x 30 rooms + (2nd price) x 30 rooms =

($100 - $15) x 30 + ($200 - $15) x 30 =$2,550 + $5,550 = $8,100

Demand Curve

Yield Management ExampleYield Management ExampleRoom sales

100

60

13 - 66© 2011 Pearson Education, Inc. publishing as Prentice HallFigure 13.6

Price

60

30

$100Price 1

for room

$200Price 2

for room

$15Variable cost

of room

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Yield Management MatrixYield Management Matrixe nd

to b

edi

ctab

le

PriceTend to be fixed Tend to be variable

Quadrant 1: Quadrant 2:

Movies HotelsStadiums/arenas Airlines

C ti t R t l


Dur

atio

n of

use

Tend

to b

eTe

nU

ncer

tain

pred Convention centers Rental cars

Hotel meeting space Cruise lines

Quadrant 3: Quadrant 4:

Restaurants Continuing careGolf courses hospitals

Internet serviceproviders

Figure 13.7

Making Yield Management Making Yield Management WorkWork

1. Multiple pricing structures must be feasible and appear logical to the customer


the customer2. Forecasts of the use and

duration of use3. Changes in demand


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heizer om10 ch13-aggregate planning

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