Aggregate Sales and

Operations Planning
OBJECTIVES
• Sales and Operations Planning

• The Aggregate Operations Plan

• Examples: Chase and Level

strategies
 Process planning

Long Supply network Strategic capacity

range
planning planning

Forecasting and Sales and operations

demand management (aggregate) planning
Sales Aggregate
plan operations
plan
Medium Manufacturing Logistics Services
range

Master scheduling Vehicle capacity

planning
Material requirements
planning Vehicle loading Weekly
workforce
Order scheduling Vehicle dispatching scheduling

Short Warehouse Daily workforce

range receipt scheduling
planning
1-3
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
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
Balancing Aggregate Demand
and Aggregate Production Capacity

10000
Suppose
Supposethe thefigure
figureto
to
10000
8000
the
theright
rightrepresents
represents 8000 7000
6000
forecast
forecastdemand
demandin in 6000 5500
4500
units
units 4000

Now
Nowsuppose
supposethis
this 2000
lower
lowerfigure
figurerepresents
represents 0
the
theaggregate
aggregatecapacity
capacity Jan Feb Mar Apr May Jun
of
ofthe
thecompany
companyto to
meet 9000
meetdemand
demand 10000
8000
8000
What
Whatwewewant
wanttotodo
dois
is 6000
6000
4500 4000
balance
balanceout
outthe
the 4000
4000
production
productionrate,
rate,
workforce
workforcelevels,
levels,and
and
2000

inventory
inventorytotomake
make 0
these
thesefigures
figuresmatch
matchup
up
Jan Feb Mar Apr May Jun
 Required Inputs to the Production Planning System

Competitors’ Raw material Market

behavior availability demand
External
to firm
External Economic
capacity Planning
for conditions
production

Current Current Inventory Activities Internal

physical workforce levels required to firm
capacity for
production
Key Strategies for Meeting Demand

• Chase

• Level

• Stable workforce- Varying

work hours
Aggregate Planning Examples: Unit Demand and Cost Data
Suppose
Supposewewehave
havethethefollowing
followingunit
unit
demand
demandand
andcost
costinformation:
information:
Demand/mo Jan Feb Mar Apr May Jun
4500 5500 7000 10000 8000 6000

Materials $5/unit
Holding costs $1/unit per mo.
Marginal cost of stockout $1.25/unit per mo.
Hiring and training cost $200/worker
Layoff costs $250/worker
Labor hours required 0.15 hrs/unit
Straight time labor cost $8/hour
Beginning inventory 250 units
Productive hours/worker/day 7.25
Paid straight hrs/day 8
 Cut-and-Try Example: Determining
Straight Labor Costs and Output

Given
Giventhe
thedemand
demandand
andcost
costinformation
informationbelow,
below,what
what
are
arethe
theaggregate
aggregatehours/worker/month,
hours/worker/month,units/worker,
units/worker,and
and
dollars/worker?
dollars/worker?
Demand/mo Jan Feb Mar Apr May Jun
4500 5500 7000 10000 8000 6000
7.25x22

Productive hours/worker/day 7.25 7.25/0.15=48.33 &

Paid straight hrs/day 8 48.33x22=1063.33
22x8hrsx$8=$1408
Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1063.33 918.33 1015 1015 1063.33 966.67
$/worker $1,408 1,216 1,344 1,344 1,408 1,280
 Chase Strategy
(Hiring & Firing to meet demand)

Lets
Letsassume
assumeour
ourcurrent
currentworkforce
workforceis
is77
Jan workers.
workers.
Days/mo 22
Hrs/worker/mo 159.5 First, calculate net requirements for
Units/worker 1,063.33 production, or 4500-250=4250 units
$/worker $1,408

Then, calculate number of workers

Jan needed to produce the net
Demand 4,500 requirements, or
Beg. inv. 250 4250/1063.33=3.997 or 4 workers
Net req. 4,250
Req. workers 3.997 Finally, determine the number of
Hired workers to hire/fire. In this case we
Fired 3
only need 4 workers, we have 7, so
Workforce 4
Ending inventory 0
3 can be fired.
 Below
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1,063 918 1,015 1,015 1,063 967
$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb Mar Apr May Jun

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

Jan Feb Mar Apr May Jun Costs

Material $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00
Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62
Hiring cost 400.00 200.00 600.00 1,200.00
Firing cost 750.00 500.00 250.00 1,500.00

$260,408.62
 Level Workforce Strategy (Surplus and Shortage Allowed)

Lets
Letstake
takethe
thesame
sameproblem
problemasas
before
beforebut
butthis
thistime
timeuse
usethe
the
Level
LevelWorkforce
Workforcestrategy
strategy Jan
Demand 4,500
This
Thistime
timewe
wewill
willseek
seektotouse
use
aaworkforce
workforcelevel
levelof
of66workers
workers Beg. inv. 250
Net req. 4,250
Workers 6
Production 6,380
Ending inventory 2,130
Surplus 2,130
Shortage
 Below
Below are
arethe
thecomplete
completecalculations
calculationsfor
for the
theremaining
remaining
months
monthsininthe
thesix
sixmonth
month planning
planninghorizon
horizon

Jan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300
Net req. 4,250 3,370 4,860 8,770 10,680 7,300
Workers 6 6 6 6 6 6
Production 6,380 5,510 6,090 6,090 6,380 5,800
Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500
Surplus 2,130 2,140 1,230
Shortage 2,680 1,300 1,500

Note,
Note, ifif we
we recalculate
recalculate this
this sheet
sheet with
with 77 workers
workers
we
we would
would havehave aa surplus
surplus
Below
Below are
are the
the complete
complete calculations
calculations for
for the
the
remaining
remaining months
months inin the
the six
six month
month planning
planning
horizon
horizon with
with the
the other
other costs
costs included
included
Jan Feb Mar Apr May Jun
4,500 5,500 7,000 10,000 8,000 6,000 Note,
Note, total
total
250 2,130 10 -910 -3,910 -1,620 costs
4,250 3,370 4,860 8,770 10,680 7,300 costsunder
under
6 6 6 6 6 6 this
thisstrategy
strategy
6,380 5,510 6,090 6,090 6,380 5,800 are
areless
lessthan
than
2,130 2,140 1,230 -2,680 -1,300 -1,500
Chase
Chaseat at
2,130 2,140 1,230
2,680 1,300 1,500 $260.408.62
$260.408.62
Jan Feb Mar Apr May Jun
$8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.00 Labor
31,900 27,550 30,450 30,450 31,900 29,000 181,250.00 Material
2,130 2,140 1,230 5,500.00 Storage
3,350 1,625 1,875 6,850.00 Stockout

$241,600.00
• Plan production for a four-month period: February through May. For
February and March, you should produce to exact demand forecast. For
April and May, you should use overtime and inventory with a stable
workforce; stable means that the number of workers needed for March will
be held constant through May. However, government constraints put a
maximum of 5000 hours of overtime labor per month in April and May (zero
overtime in February and March). If demand exceeds supply, then
backorders occur. There are 100 workers on January 31. You are given the
following demand forecast: February 80000; March, 64000; April, 100000;
May, 40000. Productivity is four units per worker hour, eight hours per day,
20 days per month. Assume zero inventory on February 1. Costs are
hiring, $50 per new worker; layoff, $70 per worker laid off; inventory
holding, $10 per unit-month, straight-time labor, $10 per hour; overtime,
$15 per hour; backorder, $20 per unit. Find the total cost of this plan.