Operations management

Sales and Aggregate Planning

Krishna Murari
 Sales and Aggregate Planning

The first step in translating long range strategic

plans down to operational level is the
development of aggregate plan.
Aggregate planning is an intermediate or
medium range planning tool addressing the
requirements of product lines including labour.
Goal of aggregate plan is to match demand with
firm’s ability to supply the product at minimum
cost.
SALES AND OPERATIONS PLANNING
 Sales and Operations Planning in OM

Operations As a
Competitive Process Strategy Supply Chain
Weapon
Operations Strategy Process Analysis Strategy
Project Management Process Location
Performance Inventory
and Quality Management
Constraint Forecasting
Management Sales and
Process Layout Operations
Lean Systems Planning
Resource Planning
Scheduling
 Planning at Whirlpool
• Whirlpool begins production of room air conditioners in the fall and
holds them as inventory until they are shipped in the spring.

• Building inventory in the slack season allows the

company to even out production rates over much of the
year and still satisfy demand in the peak periods.
• However, when summers are hotter than usual,
demand increases dramatically and stockouts can
occur.
• If Whirlpool increases its output and the summer is hot,
it stands to increase its sales and market share. But if
the summer is cool, the company is stuck with
expensive inventories.
• Whirlpool prefers to make its production plans based on
the average year, taking into account industry forecasts
Time Dimensions of Planning

• Long range planning – time horizon 5

to 10 years for industries requires many
years to plan and construct (refineries), 2
to 5 years for others who can expand
capacity fast. Yearly review.
• Medium range planning – 6 to 18
months. Reviewed and updated quarterly.
Aggregate planning is part of this planning
• Short range planning – one day to six
month with weekly review.
 Aggregation Plan
• Organsiations estimate resource requirements
to satisfy the market demand. It is easy to plan
single product but for multiple product it
becomes difficult and requires common
measure for identifying the requirements by
making product group.
• The aggregate plan defines the best
combination of workforce level, inventory on
hand and production rate that matches the
company’s resources to market demand.
• Once aggregate plans are finalized, they are
disaggregated into small tasks.
• Master production schedules are made by
disaggregating the operations.
Aggregate Sales and Operations Planning
• Sales and operations planning
(S&OP): The process of planning future
aggregate resource levels so that supply is
in balance with demand.
• Staffing plan: A sales and operations
plan of a service firm, which centers on
staffing and other human resource–related
factors.
• Production plan: A sales and operations
plan of a manufacturing firm, which
centers on production rates and inventory
holdings.
Relationship between Sales and Operations Plans
and Other plans
• A financial assessment of an
organization’s near future (1 or 2 years
ahead) is called either a business plan (in
profit firms) or an annual plan (in
nonprofit services).
• Business plan: A projected statement of
income, costs, and profits.
• Annual plan or financial plan: A plan
for financial assessment used by a
nonprofit service organization.
Relationship between Sales and Operations Plans
and Other plans
 The Decision Context

• Information inputs to aggregate Sales

and Operations plans
–Business or Annual plan
–Operations Strategy
–Capacity Constraints
–Demand Forecast
Objectives of Aggregate Plan

Six objectives usually are considered during

development of a plan:
1. Minimize Costs/Maximize Profits
2. Maximize Customer Service
3. Minimize Inventory Investment
4. Minimize Changes in Production Rates
5. Minimize Changes in Workforce Levels
6. Maximize Utilization of Plant and
Equipment
Considerations for Aggregate planning Process

Aggregate planning provides primary link

between long range and short range
planning activities. It specifies monthly or
quarterly output requirements by major
product groups in labour hours or units of
production for up to 18 months.

It seeks to find out the combination of

monthly and quarterly work force and
inventory level to reduce the total
production related cost while meeting the
forecasted demand.
Considerations for Aggregate planning Process
Basic consideration for developing
aggregate plan are

 Concept of aggregation
 Goals of aggregate planning
 Forecast of aggregate demand
 Interrelationship among decisions
Concept of Aggregation
 Identifying meaningful measure of output
is first step in developing the aggregate
plan.
 It is easy to measure if a firm produces one
product but in case of multiple product it is
difficult to find common measure to define
complete product portfolio.
 Meaningful measure is found out by
identifying groups or families of individual
product. Product may be different but
follow similar process. Exp: various models
of TV made by a factory
Aggregate Planning Goals
 It should contain the information on the
required level of output, inventory level
and backlogs based on business plan.
 It should utilise the capacity of the
facilities efficiently and usage should be
inline with organisation’s strategy.
 The company’s objectives and policies
regarding its employees should be in line
with its aggregate plan. E.g. hire and fire
policy can not be adopted in case of skilled
jobs.
Forecasts of Aggregate Demand
Accurate forecasting helps aggregate
planning in delivering better results.

Inter relation ship among the decisions

All the activities in an organisation are
interrelated and dependent on each
other. Hence future consequences of
present decisions should be considered.
Managerial Inputs from Functional
Areas to Sales and Operations Plans
Basic Activities for Aggregate planning
a) Item forecasting - this provides an estimate
of specific products which on integrating
with aggregate plan become output
requirements.
b) Master production schedule (MPS) – it
generates the amounts and dates of specific
end products. It is fixed for short run (six to
eight weeks). It depends on product ,
market and resource plans.
c) Rough cut capacity planning - includes
verifying that’s sufficient production and
warehouse facilities, equipment and labour
are available. And key vendors are allocated
adequate capacity to provide materials
whenever required.
 A Sequential Production Planning Process

Long-term Demand
capacity planning forecasts

Aggregate
production planning
Necessary
Master modifications
production scheduling

Resource
requirements planning

Necessary Detailed planning and

modifications Scheduling (MRP)

Implementation
 Planning Strategies
• Chase strategy: A strategy that involves
hiring and laying off employees to match
the demand forecast.
• Level-utilization strategy: A strategy that
keeps the workforce constant, but varies its
utilization to match the demand forecast.
• Level-inventory strategy: A strategy that
relies on anticipation inventories,
backorders, and stockouts to keep both the
output rate and the workforce constant.
• Mixed strategy: A strategy that considers
and implements a fuller range of reactive
alternatives than any one “pure” strategy.
 Reactive Alternatives
• Reactive alternatives are actions that can be
taken to cope with demand requirements.
• Anticipation inventory is inventory that can
be used to absorb uneven rates of demand
or supply.
• Workforce adjustment: Hiring and laying off
to match demand.
• Workforce utilization: Use of overtime and
under time.
• Vacation schedules: Use of plant-wide
vacation period, vacation “blackout”
periods.
 Reactive Alternatives
• Subcontracting: Outsourcing to overcome
short-term capacity shortages.
• Backlogs, Backorders, and Stock outs:
– Backlog: An accumulation of customer
orders that have been promised for
delivery at some future date.
– Backorder: A customer order that cannot
be filled immediately but is filled as
soon as possible.
– Stockout: An order that is lost and
causes the customer to go elsewhere.
 Aggressive Alternatives

• Aggressive alternatives are actions that

attempt to modify demand and,
consequently, resource requirements.
• Complementary products: Services or
products that have similar resource
requirements but different demand cycles.
• Creative Pricing: Promotional campaigns
designed to increase sales with creative
pricing.
 Constraints and Costs
The planner usually considers several types of costs
when preparing sales and operations plans.
1. Regular-Time Costs: These costs include
regular-time wages plus contributions to
benefits, Social Security, retirement funds, and
pay for vacations and holidays.
2. Overtime Costs: Overtime wages typically are
150 percent of regular-time wages.
3. Hiring and Layoff Costs: Include the costs of
advertising jobs, interviews,training programs,
exit interviews, severance pay, and lost
productivity.
4. Inventory Holding Costs
5. Backorder and Stockout Costs
 Aggregate Planning Techniques
 Graphical method for Aggregate output
planning
Optimal Models for aggregate planning
*Linear programming –
simplex and transportation method
*Linear decision rules
*Heuristic model
Computer Search models
Computer Simulation in capacity evaluation
Decision tree analysis used in long term
capacity evaluation.
 Aggregate Planning Techniques
Graphical method for Aggregate output planning :
This is two dimensional model relating
cumulative demand to cumulative output
capacity. It is used to develop and evaluate
various alternative plans and identify the best
plan through trial and error.
The steps are :
i) Draw a graph by taking cumulative production
days for the planning period on x-axis and
cumulative output on y-axis.
ii) Plot cumulative demand forecast for the entire
planning time period.
 Aggregate Planning Techniques
Graphical method for Aggregate output planning :
iii) Select a planning strategy based on the
aggregate planning goals.
iv) Compute proposed output for each period in
the planning horizon. Plot on the same axis
used to plot the demand.
v) Compare the planned output with expected
demand and identify the excess inventory and
shortages.
vi) Calculate the cost involved in implementation.
vii) Modify the plan to meet aggregate planning
goals by following above steps from step iii to
vi.
 Aggregate Planning Techniques
Graphical method for Aggregate output planning :

Cumulative
output
Unit of output

Cumulative
Demand
Excess
demand

Inventory
Accumulation

Productive days in planning horizon

 Aggregate Planning Techniques
Linear Programming :
This is one of the optimal models used to
formulate aggregate plans.
The optimal plan for minimizing costs is
identified by linear programming procedure.
The number of units to be produced, the total
number of shifts for plan and amount of
inventory are specified.
It is used to allocate scare resources to
strategic alternatives when the costs are
linear functions of their quantities.
Optimal solutions are derived using simplex
and transportation methods.
 Aggregate Planning Techniques
Linear Decision Rules (LDRs):
These are set of equations for calculating the
optimal workforce, aggregate output rate and
inventory level. Non-linear relationships are
also considered.
The equations are tailored to fit each
organisation's specific requirements.
To derive proper LDRs for a particular
company, extensive mathematical analysis is
carried out.
In case of any change in the cost relationship,
whole exercise is to be repeated.
 Aggregate Planning Techniques
Heuristic Models
These are based on historical aggregate
planning data available with the organisation.

Computer Search Models

When organisation has large quantity of
information on different production variable,
computer search methods are used. A
computer program simulating conditions
under all possible combinations is used to
identify most cost effective combination
satisfying the production requirements.
Aggregate Planning For Service
Organisations

 Customer is a part of the production

process and individual customer response
and reaction cannot be estimated before
hand
Services can not be stored.
In general, labour hours are used to
aggregate all available factors in service
organsiations.
Aggregate Planning For Service
Organisations
Aspects of Aggregate Planning For services:
Unutilized service capacity at a particular
time is waste and can not be carried
forward.
Demand and capacity of a service
organisation are difficult to estimate
Labour flexibility is a useful factor in
service activities as employee can handle
many tasks.
Hallmark Strategy
• Hallmark spends considerable resources to
effectively produce and distribute more than 40,000
different products through 43,000 retail outlets in
the United States alone.
• Hallmark has never used layoffs to adjust production
rates. Employee flexibility is the key to this strategy.
• Hallmark follows a philosophy of retraining its
employees continually to make them more flexible.
• To keep workers busy, Hallmark shifts production
from its Kansas City plant to branch plants in
Topeka, Leavenworth, and Lawrence, Kansas, to
keep those plants fully utilized.
• It uses the Kansas City plant as its “swing facility.”
When demand is down, Kansas City employees may
take jobs in clerical positions, all at factory pay
rates. They might also be in classrooms learning new
skills.
 Example : Aggregate Planning
• Shiva Garments, Bangalore has export unit situated in
Doddanakundi Industrial Area, Bangalore It is
planning next year’s production. The estimated
demands are as follows :
Quarter I II III IV
Demand 10000 13,000 10,000 12,000
Units
The present production rate in single shift is 100
units. Company hires extra workers to run second
shift whenever needed and the rate of production in
such situation in second shift is 80 units. Each shift
has 25 workers. Extra hired workers are kept for a
quarter or multiple of the quarter. There is a provision
of overtime to the order of 50 percent of the regular
hours for the quarters when production is carried out
in single shift basis.
 Example : Aggregate Planning
• During OT, the rate of production is 25 percent more
than that in regular time. OT payment is 2 times the
regular pay of Rs. 200.
• The cost of change over from single shift to double
shift is Rs. 50,000 and from double shift to single shift
is Rs 30,000. The inventory holding cost is Rs 25 per
unit per month. Back order cost is Rs. 100 per unit per
month. An order once delayed can only be accepted in
next quarter or multiple of quarters. There is an initial
inventory of 2000 units and it is a safety stock and
required to be kept at all times.
• A quarter is of 3 months and every month has
average 25 days.
i) Compute the aggregate production plan at a
continuous rate of 13,000 units per quarter.
ii) Running single shift for the first half of the year and
double shift for the second half of the year.
(use OT to maximum wherever possible)
 Example : Aggregate Planning
Solution :
i) Aggregate plan I (constant rate of production 13000 per
quarter)
The regular- time production possible in single shift basis :
Given
a) rate of production – 100 units
b) No. of working days in a month – 25
Hence , no. of units / quarter = 100 x 25 x 3 = 7500
Which is less than 10000 as required in I quarter. So overtime
is required.
Quantity produced in overtime = OT time / quarter x production
ratio x rate of production/ day
= 50 % of 75 working days x 125% productivity x 100 units per
day
= 0.5 x 75 x 1.25 x 100 = 4687.5 = 4686
Total units produced in single shift basis in a quarter = 7500 +
4686 = 121 86
Which is less than the required rate of production 13,000 units.
Hence second shift is to be run.
Example : Aggregate Planning
Solution (contd..):
The production in second shift = 80 units/
day x 75 days per quarter = 6000 units
Since we are running second shift, no
overtime is permitted.
Thus the total production in double shift =
7500 + 6000
= 13,500 units / quarter
the relevant cost of production for
producing 13000 units per quarter are
Regular wages = 25 workers / shift x 2
shifts x Rs 200 per worker per day x 75
days per quarter
= Rs. 7,50,000
Example : Aggregate Planning
Solution :
i) Aggregate plan I (constant rate of production
13000/q)
Cost of change in shift = Rs. 50,000
Cost of inventory to be carried out is as computed
below :
Quarter I II III IV
Production 13,000 13,000 13,000 13,000
Demand 10,000 13,000 10,000 12,000
Beginning 2,000 5,000 5,000 8,000
inventory
End inventory 5,000 5,000 8,000 9,000

Average inventory 3,500 5,000 6,500 8,500

 Example : Aggregate Planning
Solution (contd..:
Cost of change in shift = Rs. 50,000
Cost of inventory to be carried out is as computed
below :
Quarter I II III IV
Production 13,000 13,000 13,000 13,000
Demand 10,000 13000 10000 12000
Beginning 2,000 5,000 5,000 8,000
inventory
End inventory 5,000 5,000 8,000 9,000
Average inventory 3,500 5,000 6,500 8,500

Cost of 3500 x 5000 x 6,500 x 8,500 x

Carrying 25x 25 x 3 25 x3 25 x 3
inventory 3 months
= 2,62,500 3,75,000 4,87,500 6,37,500
Example : Aggregate Planning
Solution (contd..):
The total relevant cost =
regular wages for 4 quarters+ O.T wages +
cost for change in shifts + inventory cost +
backlog cost
= (200 x 50 workers x 25 days x 3 months x
4 quarters) + 0 + 50,000 +
(2,62,500+ 3,75,000 + 4,87,500 +
6,37,500)
+ 0
= Rs. 30,00,000 +50,000+17,62,500
= Rs. 48,12,500
 Example : Aggregate Planning
Solution (contd..):
ii) Aggregate plan 2 : (single shift for quarters
I and II and double shift for quarters III
and IV). According to plan, the production
quantities are as follows
Quarter I II III IV
Regular 7500 7500 13500 13500
time
production
OT 4686 4686 - -
production
We place the demand figures next to production figures, we
get inventory or backlog
Example : Aggregate Planning
Solution (contd..):
Quarter I II III IV
Regular time 7500 7500 13500 13500
production
OT production 4686 4686 - -

Demand 10000 13,000 10,000 12,000

Beginning 2000 4186 3372 6872

inventory

Inventory at the 4186 3372 6872 8372

end

Average 3093 3779 5122 7622

inventory

If beginning inventory is less than safety stock 2000, production

requirements to be increased to take care of safety stock
Example : Aggregate Planning
Solution (contd..):
Relevant cost for aggregate plan 2 are
Regular time wages = 2 quarters single shifts + 2
quarters double shifts = 2 x ( 25 workers x Rs 200
per day x 25 days in a month x 3 month in a
quarter) + 2( 50 x 200 x 25 x 3 ) = 7,50,000 +
15,00,000
= Rs. 22,50,000

Overtime wages : these are for the first 2 quarters

Single shift wages for a quarter x (time) 50% OT

allowed x 2 (ratio of OT wages to regular wages x
2 ( no. of quarters)
= (25 x 200 x 25 x 3) x 0.5 x 2x 2 = Rs. 7,50,000.
 Example : Aggregate Planning
Solution (contd..):
Inventory carrying cost :
Rs 25 per month x 3 months in a quarter x
(average inventory 3093 +3779 +5122 +7622)
= Rs. 14,70,150
Change over cost :
single shift to double shift only once
= Rs. 50,000

Total relevant cost = Rs. 22,50,000 + 7,50,000+ 14,70,150+

50,000
= Rs 45,20,150

Thus the plan 2 is less costly . If these costs satisfactorily

cover all the relevant decision making factors the we choose
this plan.
Note that change over cost is not significant. Working double shift
through out the year causes more regular time wages.