Aggregate Planning

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AGGREGATE PLANNINGChapter 11

MIS 373: Basic Operations Management

MIS 373: Basic Operations Management 2

LEARNING OBJECTIVES

• After this lecture, students will be able to 1. Explain what aggregate planning is and how it is useful.2. Identify the variables decision makers have to work with in aggregate

planning.3. Describe some of the graphical and quantitative techniques planners

use.4. Prepare aggregate plans and compute their costs.5. Discuss aggregate planning in services.

MOTIVATIONS

McDonald'sDo you need to know the demand for each burger to plan your labor force?


THE PLANNING SEQUENCE

Long-term planning

Intermediate-term planning

Short-term detailed planning


THE CONCEPT OF AGGREGATION

• Aggregate planning is essentially a “big-picture” approach to planning.

• avoid focusing on individual products or services• focus on a group of similar products or services

• For purposes of aggregate planning, it is often convenient to think of capacity in terms of labor hours or machine hours per period, or output rates (barrels per period, units per period), without worrying about how much of a particular item will actually be involved.


AGGREGATE PLANNING

• The main idea behind aggregate planning:

Aggregate planning translates business plans into rough labor schedules and production plans

• Issues to consider for aggregate planning• Production rate: “aggregate units” per worker per unit time• Workforce level: available workforce in terms of hours• Actual production: Production rate x Workforce level• Inventory: Units carried over from previous periods• Costs: production, changing workforce, inventory


AGGREGATE PLANNINGWhat does aggregate planning do?

Given an aggregate demand forecast , determine production levels, inventory levels, and workforce levels, in order to minimize total relevant costs over the planning horizon

Why do organizations need to do aggregate planning?It takes time to implement plans (e.g. hiring).It is not possible to predict with accuracy the timing and volume of

demand for individual items.Planning is connected to the budgeting process which is usually

done annually on an aggregate (e.g., departmental) level.It can help synchronize flow throughout the supply chain; it affects

costs, equipment utilization; employment levels; and customer satisfaction


MATCHING DEMAND AND SUPPLY

• Proactive• Alter demand to match supply (capacity)

• Among other approaches, we can alter demand by simply changing the price.

• Reactive• Alter supply (capacity) to match demand

• Through capacity planning and aggregate planning

• Mixed• Some of each


DEMAND OPTIONS• Pricing

• Used to shift demand from peak to off-peak periods• Price elasticity is important

• Promotion• Advertising and other forms of promotion• Issue: response rate and response patterns. Less control over timing of

demand (may worsen the problem by bringing demand at the wrong time).• Back orders (delaying order filling)

• Orders are taken in one period and deliveries promised for a later period• Possible loss of sales, increased record keeping, lowered customer service

level

• New demand• Offer different products/services during off-peak periods.

• Yield (Revenue) Management• Maximizing revenue by using a variable pricing strategy. Prices are set relative

to capacity availability.


SUPPLY OPTIONS• Hire and layoff workers

• May have upper or lower limit• Unions/internal policies may prohibit layoffs• Skill levels• Associated costs (e.g., recruiting, training, severance-pay, morale)

• Overtime• Overtime may result in lower productivity, poorer quality, more accidents, increased payroll

costs

• Part-time workers• Usually low-to-moderate job skills• Independent-contractors

• Inventories• Produce in one period and sell in another• Costs: holding and carrying cost, money tied up in inventory, insurance, obsolescence,

deterioration, spoilage, breakage etc.

• Subcontracting• Less control over output. Quality problems. • Higher costs


AGGREGATE PLANNING SUPPLY STRATEGIES

• Level capacity strategy: • Maintaining a steady rate of regular-time output;

variations in demand are met by using inventories or other options such as overtime, part-time workers, subcontracting, and backorders

• Chase demand strategy: • Matching capacity to demand; the planned output for a

period is set at the expected demand for that period.


LEVEL STRATEGY

• Capacities are kept constant over the planning horizon

• Advantages• Stable output rates and workforce

• Disadvantages• Greater inventory (or other) costs


CHASE STRATEGY

• 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


CHOOSING A STRATEGY

• Important factors:• Company policy

• Constraints on the available options• e.g., discourage layoffs, no subcontracting to protects secrets, union

policies regarding over time• Flexibility

• Chase flexibility may not be present for companies designed for high steady output (e.g., refineries, auto assembly)

• Cost• Alternatives are evaluated in term of cost (while matching

demand within the constraints).


EXAMPLE #1: CHASE DEMAND

• Beginning Inventory: 0 units• Beginning Workforce: 5 workers• Production Rate: 10 units/worker/period• Regular Production Costs: $10/unit• Inventory Costs: $5/unit/period• Hiring Cost: $200/worker• Firing Cost: $100/worker

Period 1 2 3 4 5Demand 40 30 20 50 60



0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production

End Inventory# Hired

# Fired

Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker

Beginning Inventory Time Periods

# Hired in the beginning of a period# Fired in the beginning of a period



0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200


# Fired


Recall the chase strategy: Capacities are adjusted to match demand requirements over the planning horizon



0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0

# Hired 0

# Fired 1




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0

# Hired 0 0

# Fired 1 1




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0

# Hired 0 0 0

# Fired 1 1 1




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0 0

# Hired 0 0 0 3

# Fired 1 1 1 0




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0 0 0

# Hired 0 0 0 3 1

# Fired 1 1 1 0 0




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0 0 0 0

# Hired 0 0 0 3 1 4

# Fired 1 1 1 0 0 3




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0 0 0 0

# Hired 0 0 0 3 1 4

# Fired 1 1 1 0 0 3


One defining characteristics of the chase strategy is that we don’t have end inventory. All we produced are/were sold. No holding cost



0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 30 20 50 60 200

End Inventory

0 0 0 0 0 0

# Hired 0 0 0 3 1 4

# Fired 1 1 1 0 0 3


TC=Production + Holding + Hiring + Firing = 200*10 + 0 + 4*200 + 3*100 = $3,100

EXERCISE PROBLEM• Perform aggregate planning using the chase strategy:


Period 1 2 3 4 5Demand 50 40 30 30 40

SOLUTION: CHASE STRATEGY10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190

Production


# Fired


Beginning Inventory


Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180


# Fired


Beginning Inventory

We only produce 40 units because there are 10 units beginning inventory that we can use.So, we can still meet the demand of 50 units.


Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0

# Hired 0

# Fired 1


Beginning Inventory

The beginning workforce is 5 workers. Since we only produce 40 units in this period and each worker can handle 10 units in a period, we only need 4 works here. We hence fire 1 at the beginning of this period.


Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0 0

# Hired 0 0

# Fired 1 0



Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0 0 0

# Hired 0 0 0

# Fired 1 0 1



Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0 0 0 0

# Hired 0 0 0 0

# Fired 1 0 1 0



Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0 0 0 0 0 0

# Hired 0 0 0 0 1 1

# Fired 1 0 1 0 0 2



Demand 50 40 30 30 40 190

Production 40 40 30 30 40 180

End Inventory

0 0 0 0 0 0

# Hired 0 0 0 0 1 1

# Fired 1 0 1 0 0 2


TC=Production + Holding + Hiring + Firing = 180*10 + 5*10 + 1*100 + 2*200


EXAMPLE #2: LEVEL CAPACITY

0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production


# Fired

Beginning Inventory: 0 unitsBeginning Workforce: 5 workersProduction Rate: 10 units/worker/periodRegular Production Costs: $10/unitInventory Holding Costs: $5/unit/periodHiring Cost: $200/workerFiring Cost: $100/worker



0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200


# Fired

Total demand=40+30+20+50+60=200Production per period=200/5=40


Recall the level strategy: Capacities are kept constant over the planning horizon. So,



0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0

# Hired 0

# Fired 1




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0

# Hired 0

# Fired 1


Fire 1 worker in this period because 4 workers are sufficient to produce 40 units in a period.



0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10

# Hired 0 0

# Fired 1 0




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30

# Hired 0 0 0

# Fired 1 0 0




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20

# Hired 0 0 0 0

# Fired 1 0 0 0




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0

# Hired 0 0 0 0 0

# Fired 1 0 0 0 0




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0 60

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1




0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0 60

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1


One defining characteristics of the level strategy is that we don’t need to adjust capacity (here, labor force), except for the initial period.



0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0 60

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1


TC=Production + Holding + Hiring + Firing

But, how to calculate the holding cost? Average inventory in a period


EXAMPLE #2: LEVEL CAPACITY0 1 2 3 4 5 Total

Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0 60

Average Inventory

0 5 20 25 10 60

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1

We can estimate the holding cost by considering the average inventory in each period.

Regular Production Costs: $10/unit

Inventory Holding Costs: $5/unit/period

Hiring Cost: $200/worker

Firing Cost: $100/worker

=(0+10)/2=(10+30)/2



Demand 40 30 20 50 60 200

Production 40 40 40 40 40 200

End Inventory

0 10 30 20 0 60

Average Inventory

0 5 20 25 10 60

# Hired 0 0 0 0 0 0

# Fired 1 0 0 0 0 1

TC= 200*10 + 60*5 + 0*200 + 1*100 = $2,400TC=Production + Holding + Hiring + Firing





=(0+10)/2=(10+30)/2

EXERCISE PROBLEM• Perform aggregate planning using the level strategy:


Period 1 2 3 4 5Demand 50 40 30 30 40

Two additional assumptions: 1. Unmet demands in a period can be held and fulfilled in a future period.2. There is no cost associated with unmet demands.

SOLUTION: CHASE STRATEGY


Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190ProductionEnd Inventory

Avg. Inventory# Hired# Fired



Beginning Inventory

Total demand=190Total demand=190 – 10 = 180Production per period=180/5=36

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190Production 36 36 36 36 36 180End Inventory

Avg. Inventory# Hired# Fired



Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190Production 36 36 36 36 36 180End Inventory -4Avg. Inventory 3# Hired 0# Fired 1

By assumption #1, unmet demands in a period can be held and fulfilled in a future period. So, we keep track on the unmet demands, and try to fulfill them in a future period.



Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190Production 36 36 36 36 36 180End Inventory -4Avg. Inventory 3# Hired 0# Fired 1

Avg. inventory = [10 + (-4)]/2 = 3



Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190Production 36 36 36 36 36 180End Inventory -4 -8Avg. Inventory 3 -6# Hired 0 0# Fired 1 0

-8 = (-4) + (-4)Unmet demand from period #1 and from period #2



Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190Production 36 36 36 36 36 180End Inventory -4 -8 -2Avg. Inventory 3 -6 -5# Hired 0 0 0# Fired 1 0 0



Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190Production 36 36 36 36 36 180End Inventory -4 -8 -2 4Avg. Inventory 3 -6 -5 1# Hired 0 0 0 0# Fired 1 0 0 0

SOLUTION: CHASE STRATEGYBeginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190Production 36 36 36 36 36 180End Inventory -4 -8 -2 4 0Avg. Inventory 3 -6 -5 1 2# Hired 0 0 0 0 0 0# Fired 1 0 0 0 0 1




Beginning Inventory

10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190Production 36 36 36 36 36 180End Inventory -4 -8 -2 4 0Avg. Inventory 3 -6 -5 1 2# Hired 0 0 0 0 0 0# Fired 1 0 0 0 0 1

By assumption #2, there is no cost associated with unmet demand (i.e., negative inventory has no costs).

TC=Production + Holding + Hiring + Firing = 180*10 + 10*(3+1+2) + 0 + 1*200 = $2,030



10 1 2 3 4 5 Total

Demand 50 40 30 30 40 190Production 36 36 36 36 36 180End InventoryAvg. Inventory# Hired# Fired

Tim suggested another way to solve this problem. Pushing unmet demands to its next period



10 1 2 3 4 5 Total

Demand 50 40 44 30 30 40 190Production 36 36 36 36 36 180End Inventory 0Avg. Inventory 5# Hired 0# Fired 1

Tim suggested another way to solve this problem. Pushing unmet demands to its next period Instead of -4 end inventory, here we have 0. See that the demand for period #2 increase

from 40 to 44.



10 1 2 3 4 5 Total

Demand 50 40 44 30 38 30 40 190Production 36 36 36 36 36 180End Inventory 0 0Avg. Inventory 5 0# Hired 0 0# Fired 1 0



10 1 2 3 4 5 Total

Demand 50 40 44 30 38 30 32 40 190Production 36 36 36 36 36 180End Inventory 0 0 0Avg. Inventory 5 0 0# Hired 0 0 0# Fired 1 0 0



10 1 2 3 4 5 Total

Demand 50 40 44 30 38 30 32 40 190Production 36 36 36 36 36 180End Inventory 0 0 0 4Avg. Inventory 5 0 0 2# Hired 0 0 0 0# Fired 1 0 0 0



10 1 2 3 4 5 Total

Demand 50 40 44 30 38 30 32 40 190Production 36 36 36 36 36 180End Inventory 0 0 0 4 0 4Avg. Inventory 5 0 0 2 2 9# Hired 0 0 0 0 0 0# Fired 1 0 0 0 0 1



10 1 2 3 4 5 Total

Demand 50 40 44 30 38 30 32 40 190Production 36 36 36 36 36 180End Inventory 0 0 0 4 0 4Avg. Inventory 5 0 0 2 2 9# Hired 0 0 0 0 0 0# Fired 1 0 0 0 0 1

TC=Production + Holding + Hiring + Firing = 180*10 + 10*9 + 0 + 1*200 = $2,090

While the TC number is different, this approach seems more intuitive than the previous approach, especially on the parts about inventory.


AGGREGATE PLANNING IN SERVICES

• The aggregate planning process is different for services in the following ways:

• Most services cannot be inventoried• Demand for services is difficult to predict• Capacity is also difficult to predict• Service capacity must be provided at the appropriate place and time• Labor is usually the most constraining resource for services


AGGREGATE PLANNING IN SERVICES

• Hospitals:• allocate funds, staff, and supplies to meet the demands of patients for

their medical services

• Restaurants:• smoothing the service rate, determining workforce size, and

managing demand to match a fixed capacity• Perishable inventory

• Airlines:• complex due to the large number of factors involved (planes, flight &

group personnel, multiple routes, airports etc.)• Capacity decisions must also take into account the percentage of

seats to be allocated to various fare classes in order to maximize profit or yield (Revenue Management)


KEY POINTS

• An aggregate plan is an intermediate-range plan for a collection of similar products or services that sets the stage for shorter-range plans.

• Two aggregate planning supply strategies are 1) chase demand strategy and 2) level capacity strategy.

Aggregate Planning

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