Module VI (O&SCM)

Dr. Dheeraj Chandra

(Postdoc. IIT Kanpur, Ph.D. IIT Roorkee, M. Tech. IIT
Delhi)
Assistant Professor
Operations Management & Decision Sciences
IIM Kashipur, India
Managing Operations and Supply
Chains

― Aggregate Planning
Readings

• The Mayo Clinic in Rochester, Minnesota serves regional, national, and

international patients. The clinic’s goal is to provide the majority of
patients with access to the health services they require within one
week. This requires careful attention to the management of resources.
• To allocate clinical resources efficiently and effectively, the Mayo
Clinic starts with annual forecasts of outpatient visits per year per
clinic by week.
• Managers use these forecasts to determine patient appointment
demand, staff capacity, schedules, and budgets. The most expensive
resources in outpatient clinics are typically physicians.
Continue…

• Individual physician’s calendars define times when they are

available to see patients for scheduled visits. Before setting
expectations for individual physician’s calendars, managers
estimate the aggregate number of physician hours required in a
particular week.
• To enable advance bookings of patients, and to give patients
time to make travel plans, the design of a physician’s calendars
begins 12 weeks in advance.
• At regular intervals, physicians release their calendars so
appointment schedulers can book future patient appointments.
Continue…

• The Mayo Clinic example illustrates the challenges that

managers face in dealing with limited and valuable resources.
• Every industry–service and manufacturing–must carefully
manage these resources, particularly in the face of changing
and uncertain demand.

Resource management deals with planning, execution, and

control of all the resources that are used to produce goods or
provide services in the supply chain.
 Role of Aggregate Planning in a Supply Chain
― Readings

Imagine a world in which manufacturing, transportation, warehousing, and even information

capacity are all limitless and free. Imagine lead times of zero, allowing goods to be produced
and delivered instantaneously. In this world, there would be no need to plan in anticipation of
demand, because whenever a customer demands a product, the demand would be instantly
satisfied. In this world, aggregate planning plays no role.
In the real world, however, capacity has a cost, and lead times are often long. Therefore,
companies must make decisions regarding capacity levels, production levels, outsourcing, and
promotions well before demand is known. A company must anticipate demand and determine,
in advance of that demand, how to meet it. Should a company invest in a plant with large
capacity that is able to produce enough to satisfy demand even in the busiest months? Or should
a company build a smaller plant but incur the costs of holding inventory built during slow
periods in anticipation of demand in later months?
• These are few questions that aggregate planning helps companies answer.
Resource Management Planning Framework for Goods and Services

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• Aggregate planning is a process by which a company determines ideal
levels of capacity, production, subcontracting, inventory, stockouts, and
even pricing over a planning horizon of one or two years, usually in
monthly or quarterly time bucket.
• Aggregate planning, as the name suggests, solves problems involving
aggregate decisions rather than stock-keeping unit (SKU)-level decisions.
• Therefore, they normally focus on product families or total capacity
requirements rather than individual products or specific capacity
allocations.
• It further helps to define budget allocations and associated resource
requirements.
Example
Sony corporation may have an aggregate plan that calls for
200 TVs in January, 300 in February, and 400 in March.
However, the company may produce three different
models of TVs. Although all TVs probably contain some
of the same parts and involve some similar or identical
operations for assembly, there would be some difference in
the materials, parts, and operations that each type requires.

Hence these 200, 300, and 400 TVs must be translated into
specific numbers of TVs of each model prior to actually
purchasing the appropriate materials and parts, scheduling
operations, and planning inventory requirements.
Aggregate plan Jan Feb Mar
200 300 400

Disaggregate Jan Feb Mar

plan (or master Model A 100 100 100
production
schedule) Model B 75 150 200
Model C 25 50 100
Total 200 300 400
 Two Levels of Disaggregation for Many Service Organizations

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• Resource management for most service-providing organizations
generally does not require as many intermediate levels of planning as
it does for manufacturing.
• Service firms frequently take their aggregate plans and disaggregate
them down to the execution level as detailed frontline staff and
resource schedules, job sequences, and service-encounter execution.
Physician capacity, calendars and schedules, for example, at the
Mayo Clinic use a two-level resource planning process
• Some services, however, use the three levels of planning similar to manufacturing.
• For example, many service facilities, such as fast-food restaurants, need to be close to
the customer, requiring them to be scattered within a geographical area.
• In these cases, the firm creates aggregate plans at the corporate level and then
disaggregates them by region or district (geographically).
• This is similar to Level 2 intermediate planning in manufacturing, Regional and district
offices further disaggregate these plans and budgets given the intermediate-level
budgets and resource constraints.
• Level 3 resource planning and execution occurs at the store level, where local
forecasts, food and other supply orders, staff work shifts and schedules, and service
encounters are created.
 Application

• Hospitals: Hospitals use aggregate planning to allocate funds, staff, and

supplies to meet the demands of patients for their medical services. For
example, plans for bed capacity, medications. surgical supplies, and
personnel needs are based on patient load forecasts.
• Airlines: Airline might use passenger forecasts to develop monthly
aggregate plans based on the number of passenger miles each month.
This aggregate plan would also specify the resource requirements in
terms of total airline capacity, flight crews, and so on. Disaggregation
would then create detailed, point-to-point flight schedules, crew work
assignments, food purchase plans, aircraft maintenance schedules, and
other resource requirements.
 Continue..

• Other services: Financial, hospitality, transportation, and

recreation services provide a high-volume, intangible
output. Aggregate planning for these and similar services
involves managing demand and planning for human
resource requirements, The main goals are to
accommodate peak demand and to find ways to
effectively use labor resources during periods of low
demand.
Question??

Supposing the role of an operations manager at Taj

Hotel Mumbai, would it be feasible for me to formulate
the aggregate planning for any of their services?
• Restaurants: Aggregate planning in the case of a high-
volume product output business such as a restaurant is
directed toward smoothing the service rate, determining
the size of the workforce, and managing demand to match
fixed kitchen and eating capacity. The general approach
usually involves adjusting the number of staff according to
the time of the day and the day of the week.
Aggregate planner’s main objective

The main objective is to identify the following operational parameters over the
specified time horizon:
• Production Rate: the number of units to be completed per unit time (such as per
week or per month)
• Workforce: the number of workers/units of capacity needed for production
• Overtime: the amount of overtime production planned
• Machine Capacity Level: the number of units of machine capacity needed for
production
• Subcontracting: the subcontracted capacity required over the planning horizon
• Backlog: demand not satisfied in the period in which it arises but carried over to
future periods
• Inventory on Hand: the planned inventory carried over the various periods in
the planning horizon
Aggregate planning and the supply chain

Managers have a variety of options in developing aggregate

plans in the face of fluctuating demand and supply.
Demand options
1. Pricing
2. Promotions
3. New demand
4. Backorders
Supply options

1. Hiring and lay off workers

2. Overtime/slack time

3. Part-time workers

4. Inventories

5. Subcontracting
 Aggregate planning strategies
1. Chase strategy – using capacity as the lever: With this strategy, the production
rate is synchronized with the demand rate by varying machine capacity or hiring
and laying off employees as the demand rate varies. In practice, achieving this
synchronization can be very problematic because of the difficulty of varying
capacity and workforce on short notice.

This strategy can be expensive to implement if the cost of varying machine or labor
capacity over time is high. It can also have a significant negative impact on the
morale of the workforce.

The chase strategy results in low levels of inventory in the supply chain and high
levels of change in capacity and workforce. It should be used when the cost of
carrying inventory is very high and costs to change levels of machine and labor
capacity are low.
2. Level strategy – using inventory as the lever: With this strategy, a stable
machine capacity and workforce are maintained with a constant output
rate. Shortages and surpluses result in inventory levels fluctuating over
time.
In this case, production is not synchronized with demand. Either
inventories are built up in anticipation of future demand or backlogs are
carried over from high- to low-demand periods. Employees benefit from
stable working conditions.

A drawback associated with this strategy is that large inventories may

accumulate, and customer orders may be delayed. This strategy keeps
capacity and costs of changing capacity relatively low. It should be used
when inventory carrying, and backlog costs are relatively low.
3. Minimum cost strategy–A minimum cost strategy seeks to determine
production levels for each time period that minimizes the total cost.

Although it seems obvious to simply produce the anticipated level of sales with chase demand
strategy, it may be sometimes advantageous to produce more than needed in earlier time
periods when production costs may be lower and store the excess production as inventory for
use in later time periods thereby letting lower production costs offset the costs of holding the
inventory.

Optimization techniques can identify the minimum cost strategy.

Figure 2. Comparison
between chase and level
strategy with varying
demand pattern.
Choosing a Strategy
Chase Approach
• Capacities (workforce levels, output
rates, etc.) are adjusted to match demand
requirements over the planning horizon.
• A chase strategy works best when
inventory carrying costs are high and
costs of changing capacity are low.
• Advantage – investment in inventory is
low; labor utilization is high.
• Disadvantage – the cost of adjustments
are high.
Level Approach
• Capacities (workforce levels, output rates,
etc.) are kept constant over the planning
horizon.
• A level strategy works best when inventory
carrying costs and backlog costs are
relatively low.
• Advantage – stable output rates and
workforce levels.
• Disadvantage – greater inventory costs;
increased overtime and idle time; resource
utilizations that vary over time.
Numerical example
Forecasting serves an as input for demand.
An aggregate production plan specifies the production level for each time-period
within the horizon, such as week or month.

We will assume that we are planning for time periods. Let,

= Production in time-period
= Demand in period , and
= Inventory at the end of period
The following equation reveals the relationship between inventory,
production and demand at each time-period

Ending inventory in period + Production in period – Demand in period =

Ending inventory in period

That is,
1. F&J enterprise needs to determine an aggregate plan for the next three
months. Demand forecasts are:
Month 1 = 250
Month 2 = 350
Month 3 = 150
The production cost per unit varies because of contractual agreements with
suppliers. It is $10 in month 1, $13 in month 2, and $11.50 in month 3. Each
unit held in inventory at the end of a month costs $0.80. Because of the
company’s commitment to customer service, no shortages are allowed.
Initial inventory at the beginning of month 1 is 0 units.

a) Find a level production strategy that avoids any shortages.

b) Evaluate a chase demand production strategy.
a) Using the inventory, production, and demand relation equation:

Month 1:
Month 2:
Month 3:

Objective function
Minimize (Z) = Total production costs + Total inventory costs
= + 13+ 11.5 + 0.80(+ + )
Simulation to find the optimum level:

Let, to avoid shortages, maximum demand is produced that is 350 units.

Month 1:

Month 2:

Month 3:

Total cost = 10*350 + 13*350 + 11.5*350 + 0.80*(100+100+100) = $12,475

However, 300 units to produce each month gives better results.

Month 1:

Month 2:

Month 3:
b) For a chase demand strategy, ;

Month 1:

Month 2:

Month 3:

Total cost = $8,775

c) The same problem is now to be solved using cost minimization
approach.

Month 1:
Month 2:
Month 3:

Objective function
Minimize (Z) = Total production costs + Total inventory costs
= + 13+ 11.5 + 0.80(+ + )
Cost minimization approach answer in Excel solver. Minimum cost is $8005
Homework

Rapallo Corporation manufactures industrial vacuum cleaners

with forecasted sales for the next five weeks as follows: Week
1 = 2000, Week 2 = 2500, Week 3 = 3000, Week 4 = 3000, and
Week 5 = 3500. Beginning inventory equals 13,000 units and
the firm wants to maintain this level at the end of Week 5.
• What weekly production rate is necessary?
• What is ending inventory level over time sing your answer in part a?
• Suppose management wants to reduce its inventory level to 3000 units by the
end of Week 5 because the CFO is upset about the cost to carry so much
inventory. How does the production plan and rate change?
Solution:
a. What weekly production rate is necessary?
(2,000+2,500+3,000+3,000+3,500)/5 = 2,800 units/week
b. What is the ending inventory level over time using your answer in part
a?

Week
1 2 3 4 5
Beginning 13,000 13,800 14,100 13,900 13,700
Inventory
+ Production 2,800 2,800 2,800 2,800 2,800

- Demand 2,000 2,500 3,000 3,000 3,500

= Ending 13,800 14,100 13,900 13,700 13,000
Inventory
c. Since ending week 5 inventory must be reduced from 13,000
to 3,000 units, we need to reduce the production rate by
(10,000/5 = 2,000 units/week. The revised production rate is
800 units/ week, and the ending week 5 inventory is 3,000
units. This production plan works down existing inventory, but
factory layoffs are severe. Not such a practical plan and the
operations manager must tell the financial officer.
Master Scheduling or Master Production Schedule (MPS)
For the production plan to be translated into meaningful terms for
production, it is necessary to disaggregate the aggregate plan.
This means breaking down the aggregate plan into specific product
requirements in order to determine labor requirements, materials, and
inventory requirements.

Aggregate planning

Disaggregate
planning

Master schedule
MPS Process

A master schedule indicates the quantity and timing (that is delivery

times) for a product, or a group of products, but it does not show planned
production.
For instance, a master schedule may call for delivery of 50 cases of
cranberry-apple juice to be delivered on May 1. But this may not require any
production; there may be 200 cases in inventory. Or it may require some
production: If there were 40 cases in inventory, and additional 10 cases
would be needed to achieve the specified delivery amount. Or it may
involve production of 50 or more cases: In some instances, it is more
economical to produce large amounts rather than small amounts, with the
excess temporarily placed in inventory until needed.
Thus, the production lot size might be 70 cases, so if additional cases were
needed (e.g., 50 cases), a run of 70 cases would be made.