Operations Management

Aggregate Planning
 Aggregate Planning
• Aggregate planning is medium term
planning
• Does not bother about individual products
or services
• Tries to balance overall demand with
overall capacity
• Involves top management
 Aggregate Planning
Goals of aggregate planning

• Decide on overall level of output

• Decide on inventories
• Decide on capacity utilization
• Decide on workforce levels
 Aggregate Planning

 Part of a larger production planning

system
 Disaggregation breaks the plan
down into greater detail (shorter
time periods and exact production
quantities)
 Disaggregated plan is called a
Master Production Schedule
 Aggregate Planning Strategies
(to manage uneven demand)
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
6. Use counter seasonal products
 Capacity Options
 Changing inventory levels
 Increase inventory in low demand
periods to meet high demand in
the future
 Increases inventory holding costs
(storage, insurance, handling,
obsolescence, capital investment
etc.).
 Shortages can mean lost sales
 Capacity Options
 Varying workforce size by hiring
or layoffs
 Match production rate to demand
(Chase strategy)
 Training and separation costs for
hiring and laying off workers
 New workers may have lower
productivity
 Laying off workers may lower
morale and productivity
 Capacity Options
 Varying production rate through
overtime or idle time
 Allows workforce to remain
unchanged (Constant Workforce
Strategy)
 May be difficult to meet large
increases in demand
 Overtime can be costly and may
drive down productivity
 Absorbing idle time may be
difficult
 Capacity Options
 Subcontracting
 Temporary measure during
periods of peak demand
 Can help in having a Constant
Workforce Strategy
 May be costly
 Assuring quality and timely
delivery may be difficult
 May create a possible competitor
 Capacity Options
 Using part-time workers
 Often used for filling unskilled or
low skilled positions, especially in
services
 Demand Options
 Influencing demand
 Use advertising or promotion to
increase demand in low periods
 Increase prices to
reduce demand
in high periods
 May not be
sufficient to
balance demand
and capacity
 Demand Options
 Back ordering during high-
demand periods (level production
strategy)
 Requires customers to wait for an
order
 Most effective when there are few
or no substitutes for the product or
service
 May result in lost sales
 Demand Options
 Counter seasonal product and
service mixing
 Develop a product mix of counter
seasonal items
 May lead to products or services
outside the company’s areas of
expertise
 Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Changing Changes in Inventory holding Applies mainly to
inventory human cost may production, not
levels resources are increase. service,
gradual or none; Shortages may operations.
no abrupt result in lost
production sales.
changes.
Varying Avoids inventory Hiring, layoff, and Used where size
workforce holding and training costs of labor pool is
size by shortage costs may be large.
hiring or significant.
layoffs
 Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Varying Matches seasonal Overtime Allows flexibility in
production fluctuations premiums; tired Aggregate plan
rates without hiring/ workers; may not
through training costs. meet demand.
overtime or
idle time
Sub- Permits flexibility Loss of quality Applies mainly in
contracting and smoothing of control; reduced production
the firm’s output. profits; loss of settings but can
future business. be applied in
service settings
also
 Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Using part- Is less costly and High turnover/ Good for unskilled
time more flexible than training costs; jobs in areas with
workers full-time workers. quality suffers; large temporary
scheduling labor pools.
difficult.
Influencing Tries to use Uncertainty in Creates marketing
demand excess capacity. demand. Hard to ideas.
Discounts draw match demand to Overbooking
new customers. supply exactly. used in some
businesses.
 Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Back May avoid Customer may not Useful in
ordering overtime. Keeps be willing to wait. monopolistic
during high- capacity Goodwill is lost. situations.
demand constant.
periods

Counter- Fully utilizes May require skills Difficult to find

seasonal resources; or equipment products or
product and allows stable outside the firm’s services with
service workforce. areas of opposite demand
mixing expertise. patterns.
 Methods for Aggregate
Planning
 A mixed strategy may be the best
way to achieve minimum costs
 There are many possible mixed
strategies
 Finding the optimal plan is not
always possible
 Mixing Options to
Develop a Plan
 Chase strategy
 Match output rates to demand
forecast for each period
 Vary workforce levels or vary
production rate
 Favored by many service
organizations
 Mixing Options to
Develop a Plan
 Level production strategy
 Daily production is uniform
 Use inventory or idle time or sub-
contracting to manage uneven
demand
 Stable production leads to better
quality and productivity
 Mixing Options to
Develop a Plan
Level workforce strategy
No. of workers is constant
Daily production may not be uniform
Use inventory or over time or sub-
contracting (or a combination of these) to
manage uneven demand
 Linear Programming Technique

The Linear Programming model for aggregate

planning tries to minimize the total of all
associated costs.
Variable costs excluding labour
Regular time labour costs
Overtime labour costs
Inventory holding costs
Shortage costs
Hiring and training costs
Layoff costs
Aggregate planning using transportation method

PERIOD 1 PERIOD 2 PERIOD 3 CAPACITY

REGULAR TIME

OVER TIME

SUB
CONTRACTING
REGULAR TIME

OVERTIME

SUB
CONTRACTING
REGULAR TIME

OVER TIME

SUB
CONTRACTING

DEMAND
 PERIOD 1 PERIOD 2 PERIOD 3 CAPACITY
REGULAR TIME

OVER TIME

SUB
CONTRACTING
REGULAR TIME

OVERTIME

SUB
CONTRACTING
REGULAR TIME

OVER TIME

SUB
CONTRACTING

DEMAND
 Transportation Method
Sales Period
Mar Apr May
Demand 800 1,000 750
Capacity:
Regular 700 700 700
Overtime 50 50 50
Subcontracting 150 150 130
Beginning inventory 100 tires
Costs
Regular time $40 per tire
Overtime $50 per tire
Subcontracting $70 per tire
Carrying $ 2 per tire per month
 Transportation Example
Important points
1. Carrying costs are $2/tire/month. If
goods are made in one period and held
over to the next, holding costs are
incurred
2. 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 Example
Important points
4. 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
 Informal techniques

 Popular techniques
 Easy to understand and use
 Trial-and-error approaches that do
not guarantee an optimal solution
 Require only limited computations
 Informal techniques
1. Determine the demand for each period
2. Determine the capacity for regular time,
overtime, and subcontracting each period
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 1
Demand Per Day
Month Expected Demand Production Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
 Roofing Supplier Example 1
Cost Information
Inventory carrying cost $ 5 per unit per month

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

$ 7 per hour
Overtime pay rate
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
 Roofing supplier example
Solution
Average Total expected demand
requirement =
Number of production days

6,200
= = 50 units per day
124
 Roofing Supplier Example 1
Forecast demand
Production rate per working day

70 – Level production using average

monthly forecast demand
60 –

50 –
s t r a t egy
40 – r od u c tion
– L e v el p rce)
la n 1 o r k f o
30 –
P
c o n st an t w
(with

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
 Roofing Supplier Example 1
Monthly
Cost Information
Production at Demand Inventory Ending
Inventory
Month carry50 cost
Units per Day Forecast $ 5Change
per unit per month
Inventory
Subcontracting
Jan cost per unit
1,100 900 $10 +200
per unit 200
Average
Feb pay rate 900 700 $ 5 per
+200hour ($40 per400
day)

Mar pay rate 1,050 800 $ 7 per

+250hour 650
Overtime
(above 8 hours per day)
Apr 1,050 1,200 -150 500
Labor-hours to produce a unit 1.6 hours per unit
May 1,100 1,500 -400 100
Cost of increasing daily production rate $300 per unit
June and training)
(hiring 1,000 1,100 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
Total units of inventory carried over from one t workforce
(layoffs)
monthnto the ns
conext ta n
= 1,850 units
Table 13.3 1 –
Pla
Workforce required to produce 50 units per day = 10 workers
 Roofing Supplier Example 1
Monthly
Cost
CostsInformation
Production at Demand Calculations
Inventory Ending
Inventory
Month carry
Inventory 50 cost
carrying
Units per Day $9,250 $ 5Change
perunits
(= 1,850
Forecast unit per month
carried x $5
Inventory
Subcontracting
Jan cost per unit
1,100 900 per unit)
$10 per unit
+200 200
Regular-time
Average
Feb pay ratelabor900 49,600
700 (= 10
$ 5 workers
per x $40per
hour ($40
+200 per
400 day
day)
x 124
$ 7 days)
per hour
Mar pay rate 1,050
Overtime 800 +250 650
Other costs (overtime, (above 8 hours per day)
Apr layoffs, 1,050
hiring, 1,200 -150 500
Labor-hours to produce a unit 1.6 hours per unit
May
subcontracting) 1,100 1,500
0 -400 100
Cost of increasing daily production rate $300 per unit
Junecost
Total
(hiring 1,000
and training) 1,100
$58,850 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs)
Total units of inventory carried over from one
Table 13.3 month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
Roofing Supplier Example 1
7,000 –

6,000 – Reduction
of inventory
Cumulative demand units

5,000 – Cumulative level 6,200 units

production using
average monthly
4,000 – forecast
requirements
3,000 –

2,000 – Cumulative forecast

requirements
1,000 – Excess inventory

–
Jan Feb Mar Apr May June
 Roofing Supplier Example 2
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)

Labor-hours to produce a unit 1.6 hours per unit

Determine the total cost of the plan if the
minimum daily demand in any period is
made in-house always and the rest is sub
contracted.
 Roofing Supplier Example 2
Demand Per Day
Month Expected Demand Production Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
n t r a cting
it h su bco
odu ct ion w
– Le vel p r
Plan 2

Minimum requirement = 38 units per day

 Roofing Supplier Example 2
Forecast demand
Production rate per working day

70 –
Level production
60 – using lowest
monthly forecast
demand
50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
 Roofing Supplier Example 2
Cost Information
Inventory carry cost $ 5 per unit per month
In-house production = 38$10units
Subcontracting cost per unit per unitper day
Average pay rate x $124
5 perdays
hour ($40 per day)

Overtime pay rate

= 4,712
$ 7 perunits
hour
(above 8 hours per day)
Subcontract
Labor-hours to produce a unit units = 6,200 - 4,712
1.6 hours per unit
Cost of increasing daily production rate = 1,488 units
$300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
 Roofing Supplier Example 2
Cost Information
Inventory carry cost $ 5 per unit per month
In-house production = 38$10units
Subcontracting cost per unit per unitper day
Average pay rate x $124
5 perdays
hour ($40 per day)

Overtime pay rate

= 4,712
$ 7 perunits
hour
(above 8 hours per day)
Costs Subcontract
Labor-hours to produce a unit units = Calculations
6,200 - 4,712
1.6 hours per unit
Regular-time
Cost labor
of increasing daily production rate = (=4712
$37,696 1,488 xunits
$300 per1.6 x $ 5)
unit
(hiring and training)
Subcontracting
Cost 14,880
of decreasing daily production rate (= $600
1,488per
units
unit x $10 per
(layoffs) unit)
Table 13.3
Total cost $52,576
 Roofing Supplier Example 3
Demand Per Day
Month Expected Demand Production Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
n d f ir ing)
y ( h ir ing a
s e s t r ateg
n 3 – Cha
Pla
Production = Expected Demand
 Roofing Supplier Example 3
Production rate per working day

Forecast demand and

monthly production
70 – (same curve)

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
 Roofing Supplier Example 3
Cost Information
Inventory carrying cost $ 5 per unit per month

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

Labor-hours to produce a unit 1.6 hours per unit

Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
 Roofing Supplier Example 3
Production rate per working day

Forecast demand and

monthly production
70 – (same curve)

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
 Roofing Supplier Example 3
Basic
Cost Information Production Extra Cost of Extra Cost of
Inventory carrying Daily
cost Cost (demand Increasing
$ 5 per Decreasing
unit per month
Forecast Prod x 1.6 hrs/unit Production Production
Subcontracting
Month (units) cost per
Rate unitx $5/hr) $10 per(layoff
(hiring cost) unit cost) Total Cost
Jan 900 41 $ 7,200 — — ($40 per $day)
$ 5 per hour 7,200
Average pay rate
$1,200
Feb 700 39 5,600 — $ 7 per(=hour
2 x $600)
6,800
Overtime pay rate
(above 8$600
hours per day)
Mar 800 38 6,400 — 7,000
Labor-hours to produce a unit (= 1per
1.6 hours x $600)
unit
$5,700
Apr of increasing
Cost 1,200 57
daily 9,600 rate
production —
$300 per unit 15,300
(= 19 x $300)
(hiring and training) $3,300
May 1,500 68 12,000 — 15,300
Cost of decreasing daily production rate(= 11 x $300)
$600 per unit
(layoffs)
June 1,100 55 8,800 —
$7,800
16,600
(= 13 x $600)
Table 13.3
$49,600 $9,000 $9,600 $68,200
 Aggregate Planning in Services

Controlling the cost of labor is critical

1. Accurate scheduling of labor-hours to
assure quick response to customer
demand
2. An on-call labor resource to cover
unexpected demand
3. Flexibility of individual worker skills
4. Flexibility in rate of output or hours of
work
 Cyclical Scheduling Example
1. Determine the staffing requirements
2. Identify two consecutive days with the
lowest total requirements and assign these
as days off
3. Make a new set of requirements subtracting
the days worked by the first employee
4. Apply step 2 to the new row
5. Repeat steps 3 and 4 until all requirements
have been met
 Cyclical Scheduling Example
M T W T F S S
Employee 1 5 5 6 5 4 3 3
 Cyclical Scheduling Example
M T W T F S S
Employee 1 5 5 6 5 4 3 3
Employee 2 4 4 5 4 3 3 3
 Cyclical Scheduling Example
M T W T F S S
Employee 1 5 5 6 5 4 3 3
Employee 2 4 4 5 4 3 3 3
Employee 3 3 3 4 3 2 3 3
 Cyclical Scheduling Example
M T W T F S S
Employee 1 5 5 6 5 4 3 3
Employee 2 4 4 5 4 3 3 3
Employee 3 3 3 4 3 2 3 3
Employee 4 2 2 3 2 2 3 2
 Cyclical Scheduling Example
M T W T F S S
Employee 1 5 5 6 5 4 3 3
Employee 2 4 4 5 4 3 3 3
Employee 3 3 3 4 3 2 3 3
Employee 4 2 2 3 2 2 3 2
Employee 5 1 1 2 2 2 2 1
 Cyclical Scheduling Example
M T W T F S S
Employee 1 5 5 6 5 4 3 3
Employee 2 4 4 5 4 3 3 3
Employee 3 3 3 4 3 2 3 3
Employee 4 2 2 3 2 2 3 2
Employee 5 1 1 2 2 2 2 1
Employee 6 1 1 1 1 1 1 0
 Cyclical Scheduling Example
M T W T F S S
Employee 1 5 5 6 5 4 3 3
Employee 2 4 4 5 4 3 3 3
Employee 3 3 3 4 3 2 3 3
Employee 4 2 2 3 2 2 3 2
Employee 5 1 1 2 2 2 2 1
Employee 6 1 1 1 1 1 1 0
Employee 7 1