Session 18

Production & Operations
Management
Session-18
Program: FT MBA Core

Trim: III
Instructor: Dr. Abhinav Sharma
President Supply Chain Executive Marketing Executive
We keep running out of the Forecasting from marketing was We had a great month. We told
product. How can we sell the terrible. We sold 30% more than you mid-month the demand is
stuff if we don’t have it when a what they forecasted. How do rising.
customer wants it? you expect us to keep stuff in
stock.
Production & Operations Management, Dr. A.K. Sharma, SBM, NMIMS Mumbai 2
Plant Manager Supply Chain Executive Marketing Executive
There is no way we can react to Should we bump everything by Only if you are willing to keep
that demand quickly. Our 30% for next month? running 2-for-1 deal.
schedules are fixed.
Finance Executive
Oh! Now I understand why do we

have such big negative revenue
variance.
Aggregate Planning
• Aggregate planning translates annual and quarterly business plans into broad labor
and output plans for the intermediate-term (usually 3-18 months).
• It is a process that helps firms provide better customer service, lower inventory,
shorten customer lead times, stabilize production rates, and give top management
a handle on the business.
• Goal: Achieve a production plan that will effectively utilize the organization’s
resources to satisfy demand
This must occur at an aggregate level and also at the detailed individual product level. Aggregate
means at the level of major groups of products.
Overview of Major Operations and Supply Planning Activities
Overview of Major Operations and Supply Planning Activities
• Aggregate planning is also known as Sales and Operations planning.

• The new terminology is meant to capture the importance of cross-functional
work.
• Aggregation on the supply side is done by product families, and on the
demand side it is done by groups of customers
The Aggregate Plan
• Specifies the optimal combination of

 Production rate (units completed per unit of time)
 Workforce level (number of workers needed in a period)
 Inventory on hand (inventory carried from previous period)
• Product group or broad category (aggregation)

• Planning done over an intermediate-range planning period of 3 to 18 months
Production Planning Strategies
• Production planning strategies are the plans for meeting demand

• Trade offs involved include workers employed, work hours, inventory and
shortages
• A pure strategy uses just one of these approaches, a mixed strategy uses two
or more
1. Chase strategy
Match the production rate by hiring and laying off employees
Must have a pool of easily trained applicants to draw on
2. Stable workforce—variable work hours
Vary the number of hours worked through flexible work schedules or overtime
3. Level strategy
Demand changes are absorbed by fluctuating inventory levels, order backlogs, and
lost sales
• Chase Approach: Capacities are adjusted to match demand requirements

over the planning horizon
Advantages
• Investment in inventory is low
• Labor utilization in high
Disadvantages
• The cost of adjusting output rates and/or workforce levels
• Level Approach: Capacities are kept constant over the planning horizon
Advantages
Stable output rates and workforce
Disadvantages
Greater inventory costs
Increased overtime and idle time
Resource utilizations vary over time
Aggregate Planning Techniques
Cut-and-try charting and graphic methods/
Trial and Error Techniques
• Involves costing out various production planning
alternatives and selecting the one that is best
• Elaborate spreadsheets developed to facilitate the decision
process
Linear programming
• Use of mathematical analysis to determine an optimal plan
Simulation
• What-if analysis using simulated demand to evaluate

effectiveness of alternative plans
General procedure:
1. Determine demand for each period
2. Determine capacities for each period
3. Identify company or departmental policies that are pertinent
4. Determine unit costs
5. Develop alternative plans and costs
6. Select the plan that best satisfies objectives. Otherwise return to step 5.
Evaluate Alternative Plan
1. Produce to exact monthly production requirements by varying workforce size
2. Produce to meet expected average demand by maintaining a constant workforce
3. Produce to meet the minimum expected demand using a constant workforce and
subcontract to meet additional requirements
4. Produce to meet expected demand for all but the first two months using a
constant workforce and use overtime to meet additional output requirements
Plan 1: Exact Production; Vary Workforce
Plan 2: Constant Workforce; Vary Inventory and Stockout
Exhibit 19.4 Production & Operations Management, Dr. A.K. Sharma, SBM, NMIMS Mumbai 18
Plan 3: Constant Low Workforce; Subcontract
Plan 4: Constant Workforce; Overtime
Example: Comparison of Four Plans
Four Plans for Satisfying a Production Requirement over the Number of Production Days
Available
Aggregate Planning in Services
• Hospitals:
• Aggregate planning used to allocate funds, staff, and supplies to meet the
demands of patients for their medical services
• Airlines:
• Aggregate planning in this environment is complex due to the number of
factors involved
• Capacity decisions must take into account the percentage of seats to be
allocated to various fare classes in order to maximize profit or yield
• Restaurants:
• Aggregate planning in high-volume businesses is directed toward smoothing
the service rate, determining workforce size, and managing demand to match a
fixed capacity
• Can use inventory; however, it is perishable
Aggregate Planning in Services
• The resulting plan in services is a time-phased projection of service staff

requirements
• Aggregate planning in manufacturing and services is similar, but there are some
key differences related to:
1. Demand for service can be difficult to predict
2. Capacity availability can be difficult to predict
3. Labor flexibility can be an advantage in services
4. Services occur when they are rendered
Yield Management
An approach to maximizing revenue by using a strategy of variable pricing; prices

are set relative to capacity availability.
• During periods of low demand, price discounts are offered
• During periods of peak demand, higher prices are charged
• Users of yield management include

 Airlines, restaurants, hotels, restaurant

Session 18

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Production & Operations

Program: FT MBA Core

Oh! Now I understand why do we

• Aggregate planning is also known as Sales and Operations planning.

• Specifies the optimal combination of

• Product group or broad category (aggregation)

• Production planning strategies are the plans for meeting demand

• Chase Approach: Capacities are adjusted to match demand requirements

• Use of mathematical analysis to determine an optimal plan

• What-if analysis using simulated demand to evaluate

• The resulting plan in services is a time-phased projection of service staff

2. Capacity availability can be difficult to predict

3. Labor flexibility can be an advantage in services

4. Services occur when they are rendered

An approach to maximizing revenue by using a strategy of variable pricing; prices

• During periods of peak demand, higher prices are charged

• Users of yield management include

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