CHAPTER 16 Aggregate Sales and Operations Planning

Tata McGraw

Chapter 16
Aggregate Sales and Operations Planning

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OBJECTIVES
Sales and Operations Planning The Aggregate Operations Plan

Examples: Chase and Level strategies

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Process planning
Long range

Supply network planning Forecasting and demand management

Strategic capacity planning Sales and operations (aggregate) planning Sales plan
Aggregate operations plan

Medium range

Manufacturing Master scheduling

Material requirements planning

Logistics Vehicle capacity planning Vehicle loading Vehicle dispatching Warehouse receipt planning

Services

Order scheduling
Short range

Weekly workforce scheduling Daily workforce scheduling

1-4

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Sales and Operations Planning Activities

Long-range planning

Greater than one year planning horizon Usually performed in annual increments

Medium-range planning

Six to eighteen months Usually with weekly, monthly or quarterly increments

Short-range planning

One day to less than six months Usually with weekly or daily increments

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The Aggregate Operations Plan

Main purpose: Specify the optimal combination of production rate (units completed per unit of time) workforce level (number of workers) inventory on hand (inventory carried from previous period) Product group or broad category (Aggregation) This planning is done over an intermediate-range planning period of 3 to18 months

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Balancing Aggregate Demand and Aggregate Production Capacity

10000

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

10000 8000 8000 6000 4000 5500 4500 7000 6000

2000
0 Jan Feb Mar 9000 8000 6000 Apr May Jun

10000 8000

6000
4000 2000 0

4500

4000

4000

Jan

Feb

Mar

Apr

May

Jun

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Required Inputs to the Production Planning System

Competitors behavior External capacity

Raw material availability

Market demand Economic conditions

External to firm

Planning for production

Current physical capacity

Current workforce

Inventory levels

Activities required for production

Internal to firm

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Key Strategies for Meeting Demand

Chase

Level

Stable workforce

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Aggregate Planning Examples: Unit Demand and Cost Data

Suppose we have the following unit demand and cost information:

Demand/mo Jan 4500 Feb 5500 Mar 7000 Apr 10000 May 8000 Jun 6000

Materials Holding costs Marginal cost of stockout Hiring and training cost Layoff costs Labor hours required Straight time labor cost Beginning inventory Productive hours/worker/day Paid straight hrs/day

$5/unit $1/unit per mo. $1.25/unit per mo. $200/worker $250/worker .15 hrs/unit $8/hour 250 units 7.25 8

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

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

Demand/mo Jun
6000

Jan
4500

Feb
5500

Mar
7000

Apr
10000

May
8000

7.25x2 2

Productive hours/worker/day Paid straight hrs/day

7.25 8

22x8hrsx$8=$140 8
Days/mo Hrs/worker/mo Units/worker $/worker

7.25x0.15=48.33 & 84.33x22=1063.33

Apr 21 152.25 1015 1,344 May 22 159.5 1063.33 1,408 Jun 20 145 966.67 1,280

Jan 22 159.5 1063.33 $1,408

Feb 19 137.75 918.33 1,216

Mar 21 152.25 1015 1,344

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Chase Strategy (Hiring & Firing to meet demand)

Lets assume our current workforce is 7 workers.

Days/m o Hrs/wo rker/m o Units/wo rker $ /wo rker

Jan 22 1 5 9 .5 1 ,0 6 3 .3 3 $ 1 ,4 0 8

First, calculate net requirements for production, or 4500-250=4250 units

Dem and Beg. inv. Net req. Req. wo rkers Hired Fired W o rkfo rce Ending invento ry

Jan 4 ,5 0 0 250 4 ,2 5 0 3 .9 9 7 3 4 0

Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers
Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired.

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Below are the complete calculations for the remaining months in the six month planning horizon
Days/mo Hrs/worker/mo Units/worker $/worker Jan 22 159.5 1,063 $1,408 Feb 19 137.75 918 1,216 Mar 21 152.25 1,015 1,344 Apr 21 152.25 1,015 1,344 May 22 159.5 1,063 1,408 Jun 20 145 967 1,280

Demand Beg. inv. Net req. Req. workers Hired Fired Workforce Ending inventory

Jan 4,500 250 4,250 3.997 3 4 0

Feb 5,500 5,500 5.989 2 6 0

Mar 7,000 7,000 6.897 1 7 0

Apr 10,000 10,000 9.852 3 10 0

May 8,000 8,000 7.524 2 8 0

Jun 6,000 6,000 6.207 1 7 0

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Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
Demand Beg. inv. Net req. Req. workers Hired Fired W orkforce Ending inventory Jan 4,500 250 4,250 3.997 3 4 0 Feb 5,500 5,500 5.989 2 6 0 Mar 7,000 7,000 6.897 1 7 0 Apr 10,000 10,000 9.852 3 10 0 May 8,000 8,000 7.524 2 8 0 Jun 6,000 6,000 6.207 1 7 0

Material Labor Hiring cost Firing cost

Jan Feb Mar Apr May Jun $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 400.00 200.00 600.00 750.00 500.00 250.00

Costs 203,750.00 53,958.62 1,200.00 1,500.00

$260,408.62

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Level Workforce Strategy (Surplus and Shortage Allowed)

Lets take the same problem as before but this time use the Level Workforce strategy This time we will seek to use a workforce level of 6 workers

Demand Beg. inv. Net req. W orkers P roduction Ending inventory Surplus Shortage

Jan 4,500 250 4,250 6 6,380 2,130 2,130

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Below are the complete calculations for the remaining months in the six month planning horizon
Jan 4,500 250 4,250 6 6,380 2,130 2,130 Feb 5,500 2,130 3,370 6 5,510 2,140 2,140 Mar 7,000 2,140 4,860 6 6,090 1,230 1,230 Apr 10,000 1,230 8,770 6 6,090 -2,680 2,680 May 8,000 -2,680 10,680 6 6,380 -1,300 1,300 Jun 6,000 -1,300 7,300 6 5,800 -1,500 1,500

Demand Beg. inv. Net req. Workers Production Ending inventory Surplus Shortage

Note, if we recalculate this sheet with 7 workers we would have a surplus

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Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
Jan 4,500 250 4,250 6 6,380 2,130 2,130 Feb 5,500 2,130 3,370 6 5,510 2,140 2,140 Mar 7,000 10 4,860 6 6,090 1,230 1,230 Apr 10,000 -910 8,770 6 6,090 -2,680 2,680 Jan $8,448 31,900 2,130 Feb $7,296 27,550 2,140 Mar $8,064 30,450 1,230 Apr $8,064 30,450 3,350 May 8,000 -3,910 10,680 6 6,380 -1,300 1,300 May $8,448 31,900 1,625 Jun 6,000 -1,620 7,300 6 5,800 -1,500 1,500 Jun $7,680 29,000 1,875

Note, total costs under this strategy are less than Chase at $260.408.62
$48,000.00 181,250.00 5,500.00 6,850.00 $241,600.00

Labor Material Storage Stockout

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Question Bowl

Sales and Operations Planning activities are usually conducted during which planning time horizon? a. Long-range b. Intermediate-range c. Short-range d. Really short-range e. None of the above Answer: b. Intermediate-range (i.e., 6 to 18 months)

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Question Bowl

Which of the following are Production Planning Strategies can involve trade-offs among the workforce size, work hours, inventory, and backlogs? a. Chase strategy b. Stable workforce-variable work hours c. Level strategy d. All of the above e. None of the above

Answer: d. All of the above

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Question Bowl

Which of the following are considered relevant costs in the Aggregate Production Plan? a. Costs associated with changes in the production rate b. Inventory holding costs c. Backordering costs d. Basic production costs e. All of the above Answer: e. All of the above

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Question Bowl

Which of the following Aggregate Planning Techniques can be performed using simple spreadsheets? a. Cut-and-try b. Linear programming c. Transportation method d. All of the above e. None of the above
Answer: a. Cut-and-try (The other two involve more complex computational effort than simple spreadsheets.)

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End of Chapter 16