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Chapter 16

Aggregate Sales and Operations Planning

Operations Planning Overview

The Hierarchical Planning Process

Aggregate Production Planning

Examples: Chase and Level strategies

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Operations Planning Overview Long-range planning

– Greater than one year planning horizon– Usually with yearly increments

Intermediate-range planning– Six to eighteen months – Usually with monthly or quarterly increments

Short-range planning– One day to less than six months– Usually with weekly increments

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Master Production Scheduling

Material Requirements Planning

Order SchedulingWeekly Workforce &Customer Scheduling

Daily Workforce &Customer Scheduling

Process Planning

Strategic Capacity Planning

Sales and Operations (Aggregate) Planning

Long-range

Intermediate-range

Short-range

Manufacturing Services

Sales Plan Aggregate Operations Plan

Forecasting and Demand

Mgmt.

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Hierarchical Production Planning

Annual demand byitem and by region

Monthly demandfor 15 months by

product type

Monthly demandfor 5 months by

item

Forecasts needed

Allocatesproduction

among plants

Determinesseasonal plan by

product type

Determines monthlyitem production

schedules

Decision ProcessDecision Level

Corporate

Plant manager

Shopsuperintendent

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Aggregate Planning

Goal: Specify the optimal combination of– – –

Product group or broad category - family (Aggregation)

Intermediate-range planning period: 6-18 months

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Balancing Aggregate Demandand Aggregate Production Capacity

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

45005500

7000

10000

8000

6000

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

4500 4000

90008000

4000

6000

Suppose the figure to the right represents forecast demand in units.

Now suppose this lower figure represents the aggregate capacity of the company to meet demand.

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up.

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13-13

– – – –

Aggregate Scheduling Goals

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Required Inputs to the Production Planning System

Planning for

production

External capacity

Competitors’behavior

Raw material availability

Market demand

Economic conditions

Currentphysical capacity

Current workforce

Inventory levels

Activities required for production

External to firm

Internal to firm

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Key Strategies for Meeting Demand

Chase - Match production to customer order rate by hiring and laying off employees

Level - Stable workforce with constant output, inventory and backlogs absorb fluctuations in demand

Some combination of the two - Stable workforce, variable hours - vary output through overtime or flexible schedules

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Costs Relevant to Aggregate Planning

Direct and indirect labor costs and overtime Costs associated with changing the

production rate - hiring, training, layoffs, temps

Inventory holding costs - costs of capital, storage, insurance, taxes, spoilage, obsolescence

Backordering costs - expediting, loss of goodwill, lost sales due to stocking out

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Aggregate Planning Examples: Unit Demand and Cost Data

Materials $5/unitHolding costs $1/unit per mo. based on ending inv.Marginal cost of backorder $1.25/unit per mo.Hiring and training cost $200/workerLayoff costs $250/workerLabor hours required .15 hrs/unitStraight time labor cost $8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8

Suppose we have the following unit demand and cost information:

Demand/mo Jan Feb Mar Apr May Jun

4500 7500 10500 11000 8000 5000

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Cut-and-Try Example: Determining Straight Labor Costs and Output

Demand/mo Jan Feb Mar Apr May Jun

4500 7500 10500 11000 8000 5000

Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker?

Jan Feb Mar Apr May JunDays/mo 20 20 20 20 20 20Productive Hrs/worker/mo 145 145 145 145 145 145Units/worker/month 966.7 966.7 966.7 966.7 966.7 966.7$/worker $1,280 $1,280 $1,280 $1,280 $1,280 $1,280

Productive hours/worker/day 7.25Paid straight hrs/day 8

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JanDays/mo 20Productive Hrs/worker/mo 145Units/worker/month 966.7$/worker $1,280

JanDemand 4500Beg. inv. 250Net req. 4250Req. workers 5Beg. Workers 7Hired 0Fired 2Workforce 5Production 4834Ending inventory 584

Chase Strategy(Hiring & Firing to meet demand/ No Shortage)

Lets assume our current workforce is 7 workers.

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Below are the complete calculations for the remaining months in the six month planning horizon.

Jan Feb Mar Apr May JunDays/Month 20 20 20 20 20 20Productive Hrs./Worker/Month 145 145 145 145 145 145Units/Worker/Month 966.7 966.7 966.7 966.7 966.7 966.7$/Worker $1,280 $1,280 $1,280 $1,280 $1,280 $1,280

Jan Feb Mar Apr May JunDemand 4,500 7,500 10,500 11,000 8,000 5,000Beg. inv. 250 584 818 952 586 320Net req. 4,250 6,916 9,682 10,048 7,414 4,680Req. workers 5 8 11 11 8 5Beg. Workers 7 5 8 11 11 8Hired 0 3 3 0 0 0Fired 2 0 0 0 3 3Workforce 5 8 11 11 8 5Production 4834 7734 10634 10634 7734 4834Ending inventory 584 818 952 586 320 154

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Below are the complete calculations for January with the other costs included.

JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 5Beg. Workers 7Hired 0Fired 2Workforce 5Production 4834Ending inventory 584Costs:Material $24,170Labor $6,400Hiring cost $0Firing cost $500Holding Cost $584

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Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included.

Hiring Cost $200Firing Cost $250Material Cost/unit $5Holding Cost $1

Jan Feb Mar Apr May JunDemand 4,500 7,500 10,500 11,000 8,000 5,000Beg. inv. 250 584 818 952 586 320Net req. 4,250 6,916 9,682 10,048 7,414 4,680Req. workers 5 8 11 11 8 5Beg. Workers 7 5 8 11 11 8Hired 0 3 3 0 0 0Fired 2 0 0 0 3 3Workforce 5 8 11 11 8 5Production 4834 7734 10634 10634 7734 4834Ending inventory 584 818 952 586 320 154Costs:Material $24,170 $38,670 $53,170 $53,170 $38,670 $24,170 $232,020Labor $6,400 $10,240 $14,080 $14,080 $10,240 $6,400 $61,440Hiring cost $0 $600 $600 $0 $0 $0 $1,200Firing cost $500 $0 $0 $0 $750 $750 $2,000Holding Cost $584 $818 $952 $586 $320 $154 $3,414

$300,074

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Level Workforce Strategy (Surplus and Shortage Allowed - minimize ending inventory)

Lets take the same problem as before but this time use the Level Workforce strategy.

What workforce level will minimize ending inventory?

Total demand =

Beginning inventory:

Total production required =

Minimum production required per month =

Workers required =

Actual monthly production =

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Below are the complete calculations for the six months in the planning horizon.

Jan Feb Mar Apr May Jun TotalDemand 4,500 7,500 10,500 11,000 8,000 5,000 46,500Beg. inv. 250 3,484 3,718 952 -2,314 -2,580Net req. 4,250 4,016 6,782 10,048 10,314 7,580Req. workers 8 8 8 8 8 8Beg. Workers 7 8 8 8 8 8Hired 1 0 0 0 0 0Fired 0 0 0 0 0 0Workforce 8 8 8 8 8 8Production 7734 7734 7734 7734 7734 7734Ending inventory 3,484 3,718 952 (2,314) (2,580) 154Costs:Material $38,670 $38,670 $38,670 $38,670 $38,670 $38,670 $232,020Labor $10,240 $10,240 $10,240 $10,240 $10,240 $10,240 $61,440Hiring cost $200 $0 $0 $0 $0 $0 $200Firing cost $0 $0 $0 $0 $0 $0 $0Holding Cost $3,484 $3,718 $952 $0 $0 $154 $8,308Backorder Cost $0 $0 $0 $2,893 $3,225 $0 $6,118

$308,086

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Level Strategy to Minimize Ending Inventory withNo Backorders By End of June

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Jan Feb Mar Apr May Jun

Cum

ulat

ive

Dem

and/

Pro

duct

ion

Cumulative Demand Cumulative Production

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Master Scheduling Process - Determine amounts and dates of each end itemto be produced

Masterscheduling

Beginning inventory

Forecast

Customer orders

Inputs Outputs

Projected inventory

Master production schedule

Uncommitted inventory

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Master Scheduling Drives:

Rough cut capacity planning verifies equipment and labor availability

Material requirements planning (MRP) - breaks end product requirements into a materials plan for component parts