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 Medium (intermediate) range operations planning  To meet the demand at a reasonable cost (to balance demand and supply)  To effectively

allocate firm’s resources Process Planning (“optimize”) Long-range
Strategic Capacity Planning
Intermediate-range Manufacturing

Chapter 14. Aggregate Sales & Operations Planning

Aggregate Sales & Ops. Plan.

Master Production Scheduling Material Requirements Planning Short-range Order Scheduling Services Weekly Workforce & Customer Scheduling Daily Workforce & Customer Scheduling

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 The most critical input to (any) planning process. hence the term Aggregate (Aggregation)  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)  This planning is done over an intermediate-range planning period of 3 to 18 months. the most common planning horizon is 12 months  The plan needs to be updated at least quarterly or monthly  Demand forecast is the key input.The Aggregate Operations Plan  Product group or broad category. 2 .

Potentially Conflicting Objectives in Aggregate Planning       Minimize Costs or Maximize Profits Maximize customer service Minimize inventory Minimize changes in production rate Minimize changes in the staffing levels Maximize plant utilization 3 .

stable workforce working at a constant rate. Vary output by over/under time. flexible schedules  Level . use inventory/shortages/backordering to meet the demand  Mix strategy – two or more of the above in a more complex approach  Outsourcing (subcontracting) can also be used to manage demand fluctuations 4 .Key Strategies for meeting demand  Chase – match the production rate to the order rate by hiring/firing as the order rate varies  Stable workforce – variable work hours.

Relevant Costs Generally the following are the most common relevant costs:  Production costs  Costs associated with changing production rates  Inventory holding costs  Backordering costs 5 .

00 $20. Costs Materials Inventory holding cost Marginal cost of stockout Marginal cost of subcont.00 $6.0 $4.Basics – an example Beginning Inventory Demand Forecast No of Working Days/Mo.50 $5.00 $1.00 $200.00 5. Hiring and training cost Layoff cost Labor hours required / unit Straight-line cost Overtime cost January February 400 450 1800 1500 22 19 March 375 1100 21 April 275 900 21 May 225 1100 22 June 275 1600 20 $100.00 $ per unit $ per unit per month $ per unit per month $ per unit ($120 less $100 material cost) $ per worker $ per worker $ per unit $ per hour $ per hour Excel time… 6 .00 $250.

subcontracting limitations must be acknowledged.  Various production.  Consider the following mini-case study: 7 . overtime.Developing an Aggregate Plan  Aggregate plans are done at an overview level and are not intended to incorporate all aspects of daily operational details.  Simple balance equation: Supply = Demand  It-1 + Pt = Dt + It   This says that total product available in period t is either sold or put into ending inventory.  More realistic balance equation could include backorders and subcontracting (if applicable).  The period-to-period sales. inventory-production relationships must balance.

 Demand per month. 913. supply = demand. 725. Hence. 800.  The backorder cost is $5 per unit per month and the inventory cost is $1 per unit per month (use ending inventories for costing). 775.A “simple” aggregate plan  Given the demand and relevant costs develop the lowest cost production plan. 675. but can we do it at minimum cost!  8 . 850  The variable production cost is estimated to be $10/unit.  The maximum production capacity is 1000 units per month.  The production change cost (increase or decrease from month to month) is $2 per unit.  12 month total production must equal to the 12 month total demand.  At the end of period 12 (December) there should not be any inventory or backorders. 788. January through December:  988. 713.  There is no subcontracting option. 913.  This cost captures (estimates) the hiring and layoff costs. 538. 1075.