Operations Management

Aggregate PlanningChapter 13

Figure 13.1

Using our “Seasonally Adjusted Trend Sales Forecast as a starting point, IDES Management has decided upon the following sales forecast for 2003.Our goal is to compare the cost of “Aggregate Plan Options” that will deal with this sales forecast.

Unit Sales Forecast

For 2003

Quarter 1 307,200

Quarter 2 379,200

Quarter 3 360,000

Quarter 4 489,600

Total 1,536,000

Meet demand

(Sales Forecast) Use capacity efficiently Meet inventory policy Minimize cost

– Labor

– Inventory

– Plant & equipment

– Subcontract

Aggregate Planning Goals

Aggregate Planning Strategies Pure Strategies

Demand Options — change demand:

influencing demand (e.g. change price) backordering during high demand periods counterseasonal product mixing

Aggregate Planning Strategies Pure Strategies

Capacity Options — change capacity: changing inventory levels varying work force size by hiring or layoffs varying production capacity through

overtime or idle time subcontracting (aka “outsourcing”) using part-time workers

Aggregate Scheduling Options - Advantages and Disadvantages

Option Advantage Disadvantage SomeComments

Changinginventory levels

Changes inhuman resourcesare gradual, notabruptproductionchanges

Inventoryholding costs;Shortages mayresult in lostsales

Applies mainlyto production,not serviceoperations

Varyingworkforce sizeby hiring orlayoffs

Avoids use ofother alternatives

Hiring, layoff,and trainingcosts

Used where sizeof labor pool islarge

Option Advantage Disadvantage SomeComments

Varyingproduction ratesthrough overtimeor idle time

Matches seasonalfluctuationswithouthiring/trainingcosts

Overtimepremiums, tiredworkers, may notmeet demand

Allowsflexibility withinthe aggregateplan

Subcontracting Permitsflexibility andsmoothing of thefirm's output

Loss of qualitycontrol; reducedprofits; loss offuture business

Applies mainlyin productionsettings

Advantages/Disadvantages - continued

Advantages/Disadvantages - continued

Option Advantage Disadvantage SomeComments

Using part-timeworkers

Less costly andmore flexiblethan full-timeworkers

Highturnover/trainingcosts; qualitysuffers;schedulingdifficult

Good forunskilled jobs inareas with largetemporary laborpools

Influencingdemand

Tries to useexcess capacity.Discounts drawnew customers.

Uncertainty indemand. Hard tomatch demand tosupply exactly.

Createsmarketing ideas.Overbookingused in somebusinesses.

Advantage/Disadvantage - continued

Option Advantage Disadvantage SomeComments

Back orderingduring high-demand periods

May avoidovertime. Keepscapacity constant

Customer mustbe willing towait, butgoodwill is lost.

Many companiesbacklog.

Counterseasonalproducts andservice mixing

Fully utilizesresources; allowsstable workforce.

May requireskills orequipmentoutside a firm'sareas ofexpertise.

Risky findingproducts orservices withopposite demandpatterns.

The Extremes

Level Strategy

Chase Strategy

Production equals sales

forecast

Production rate is constant

Level scheduling strategy– Produce same amount every day– Keep work force level constant – Vary non-work force capacity or demand options– Often results in lowest production costs

Chase scheduling strategy– Vary the amount of production to match (chase) the sales forecast– This requires changing the workforce (hiring & firing)

Mixed strategy– Combines 2 or more aggregate scheduling options

Aggregate Planning Strategies

The Trial & Error Approach to Aggregate Planning

Forecast the demand for each period Determine the capacity for regular time,

overtime, and subcontracting, for each period

Determine the labor costs, hiring and firing costs, and inventory holding costs

Consider company policies which may apply to the workers, overtime, outsourcing, or to inventory levels

Develop alternative plans, and examine their total costs

The IDES Sales Forecast for 2003

Unit Sales Forecast

For 2003

Quarter 1 307,200

Quarter 2 379,200

Quarter 3 360,000

Quarter 4 489,600

Total 1,536,000

IDES Manufacturing Example IDES Manufacturing wants to compare the

annual (year 2003) costs associated with scheduling using the following three (3) options:

Option 1 – Maintain a constant work force during the entire year (Level).

Option 2 – Maintain the present work force of 150 and use overtime and sub-contracting as needed (Mixed)

Option 3 – Hire/layoff workers as needed to produce the required output (Chase).

IDES Cost Information Inventory Carrying Cost

(per quarter) $ 0.50/unit Subcontracting cost $ 7/unit Pay rate – regular time $20/hr Pay rate – overtime $30/hr Labor standard per unit 0.2 hrs Cost to increase production $ 3/unit Cost to decrease production $ 2/unit IDES has 0 units in inventory Each Quarter has 60 working days At end of 2002, IDES has 150 prod. workers IDES Policy – Maximum of 72,000 units/qtr produced

using overtime

Option 1 – Constant Workforce without overtime or subcontracting

First, determine the number of workers required to produce the units forecast for 2003.

Ave. Prod/day = 1,536,000 = 6,400/day

240 days Then determine how many workers are

needed. Workers needed = 6,400/day = 160

5 units/hr X 8 hrs

Option 1 Continued:Calculate Inventory Carrying Costs

Qtr Production

@ 6400/day

Sales Forecast

Inventory Change

Ending Inventory

1 384,000 307,200 +76,800 76,800

2 384,000 379,200 + 4,800 81,600

3 384,000 360,000 +24,000 105,600

4 384,000 489,600 -105,600 0

Total 1,536,000 1,536,000 264,000

Option 1 Continued:Calculation of Annual Costs

Inventory carrying cost:

264,000 units X $0.50/unit = $ 132,000 Cost to increase capacity:

(384,000-360,000) units X $5/unit = $ 120,000 Regular time labor cost:

1,536,000 units X $4/unit = $6,144,000 Total Annual Cost for Option 1 = $6,396,000

Option 2 – Present Workforce (150) using O/T & subcontracting

Qtr Sales

Forecast

In-house Production

Inv

Change

End

Inv

Units

Req’d

O/T Out

Source

1 307,200 360,000 +52,800 52,800 0 0 0

2 379,200 360,000 -19,200 33,600 0 0 0

3 360,000 360,000 0 33,600 0 0 0

4 489,600 360,000 -33,600 0 96,000 72,000 24,000

Total

1,536,000 1,440,000 0 72,000 24,000

Option 2 Continued:Calculation of Annual Costs

Inventory Carrying Costs 120,000 units X $.50/unit = $ 60,000

Regular time labor (150 workers)$4/unit X 1,440,000 units = $5,760,000

Overtime labor$6/unit X 72,000 units = $ 432,000

Out-sourcing$7/unit X 24,000 units = $ 168,000

Total Annual Costs for Option 2 = $6,420,000

Option 3 – Vary Production (Workforce) to match Sales Forecast

Qtr

Sales

Forecast

Beginning

Capacity

Capacity

Change

Needed

Cost of

Capacity

Change

1 307,200 360,000 -52,800 $105,600

2 379,200 307,200 +72,000 216,000

3 360,000 379,200 -19,200 38,400

4 489,600 360,000 +129,600 388,800

Total 1,536,000 $748,800

Option 3 ContinuedCalculation of Annual Costs

Regular time labor costs

1,536,000 units X $4/unit = $6,144,000 Capacity Change Costs = $ 748,800 Total Annual Cost - Option 3 = $6,892,800

Annual Cost Comparison of the Aggregate Scheduling Strategies

Option Annual Cost

1. Level – No use of O/T or Outsourcing

$6,396,000

2. Mixed – Present work force w/ O/T & Outsourcing

$6,420,000

3. Chase – Vary Production (workforce)

$6,892,800

Homework Problem – Due at the beginning of class Tuesday March 11

Use the Revised IDES Cost information shown on the following two slides to evaluate the following scheduling options:

Level Strategy Chase Strategy Maintain Present work force and use

overtime production and sub-contracting as needed

The IDES Sales Forecast for 2003Revised

Unit Sales Forecast

For 2003

Quarter 1 388,000

Quarter 2 440,000

Quarter 3 400,000

Quarter 4 500,000

Total 1,728,000

IDES Cost Information - Revised Inventory Carrying Cost

(per quarter) $ 0.75/unit Subcontracting cost $ 7.50/unit Pay rate – regular time $20/hr Pay rate – overtime $30/hr Labor standard per unit 0.2 hrs Cost to increase production $ 1.50/unit Cost to decrease production $ 1/unit IDES has 0 units in inventory Each Quarter has 60 working days At end of 2000, IDES has 140 prod. workers IDES Policy – Maximum of 78,000 units/qtr produced

using overtime