Aggregate-Planning-Heizer.ppt...........

Aggregate-Planning-Heizer.ppt

1. © 2008 Prentice Hall, Inc. 13 – 1
AggregateAggregate
PlanningPlanning
Operations ManagementOperations Management
Batangas State UniversityBatangas State University
Lipa CityLipa City

2. © 2008 Prentice Hall, Inc. 13 – 2
OutlineOutline
Global Company Profile: Global Company Profile:
Anheuser-BuschAnheuser-Busch
The Planning ProcessThe Planning Process
The Nature of Aggregate PlanningThe Nature of Aggregate Planning
Aggregate Planning StrategiesAggregate Planning Strategies
Capacity OptionsCapacity Options
Demand OptionsDemand Options
Mixing Options to Develop a PlanMixing Options to Develop a Plan

3. © 2008 Prentice Hall, Inc. 13 – 3
Outline – ContinuedOutline – Continued
Methods for Aggregate PlanningMethods for Aggregate Planning
Graphical MethodsGraphical Methods
Mathematical ApproachesMathematical Approaches
Comparison of Aggregate Planning Comparison of Aggregate Planning
MethodsMethods

4. © 2008 Prentice Hall, Inc. 13 – 4
Outline – ContinuedOutline – Continued
Aggregate Planning in ServicesAggregate Planning in Services
RestaurantsRestaurants
HospitalsHospitals
National Chains of Small Service National Chains of Small Service
FirmsFirms
Miscellaneous ServicesMiscellaneous Services
Airline IndustryAirline Industry
Yield ManagementYield Management

5. © 2008 Prentice Hall, Inc. 13 – 5
Learning ObjectivesLearning Objectives
When you complete this chapter you When you complete this chapter you
should be able to:should be able to:
1.1.Define aggregate planningDefine aggregate planning
2.2.Identify optional strategies for Identify optional strategies for
developing an aggregate plandeveloping an aggregate plan
3.3.Prepare a graphical aggregate planPrepare a graphical aggregate plan

6. © 2008 Prentice Hall, Inc. 13 – 6
Learning ObjectivesLearning Objectives
When you complete this chapter you When you complete this chapter you
should be able to:should be able to:
4.4.Solve an aggregate plan via the Solve an aggregate plan via the
transportation method of linear transportation method of linear
programmingprogramming
5.5.Understand and solve a yield Understand and solve a yield
management problemmanagement problem

7. © 2008 Prentice Hall, Inc. 13 – 7
Anheuser-BuschAnheuser-Busch
Anheuser-Busch produces nearly 40% Anheuser-Busch produces nearly 40%
of the beer consumed in the U.S.of the beer consumed in the U.S.
Matches fluctuating demand by brand Matches fluctuating demand by brand
to plant, labor, and inventory capacity to plant, labor, and inventory capacity
to achieve high facility utilizationto achieve high facility utilization
High facility utilization requiresHigh facility utilization requires
Meticulous cleaning between batchesMeticulous cleaning between batches
Effective maintenanceEffective maintenance
Efficient employee and facility schedulingEfficient employee and facility scheduling

8. © 2008 Prentice Hall, Inc. 13 – 8
Anheuser-BuschAnheuser-Busch
Product-focused facility with high fixed Product-focused facility with high fixed
costscosts
High utilization requires effective High utilization requires effective
aggregate planning of the four basic aggregate planning of the four basic
stages of productionstages of production
Selection and delivery of raw materialsSelection and delivery of raw materials
Brewing process from milling to agingBrewing process from milling to aging
PackagingPackaging
DistributionDistribution

9. © 2008 Prentice Hall, Inc. 13 – 9
Aggregate PlanningAggregate Planning
Objective is to minimize cost over the Objective is to minimize cost over the
planning period by adjustingplanning period by adjusting
Production ratesProduction rates
Labor levelsLabor levels
Inventory levelsInventory levels
Overtime workOvertime work
Subcontracting ratesSubcontracting rates
Other controllable variablesOther controllable variables
Determine the quantity and timing of Determine the quantity and timing of
production for the immediate futureproduction for the immediate future

10. © 2008 Prentice Hall, Inc. 13 – 10
Aggregate PlanningAggregate Planning
Demand Forecast: Demand Forecast: Predict customer demand Predict customer demand
over the planning period.over the planning period.
Available Capacity: Available Capacity: Machines, Labor, FacilitiesMachines, Labor, Facilities
Inventory Levels: Inventory Levels: Stock on Hand and Safety Stock on Hand and Safety
StockStock
Workforce: Workforce: Hiring, layoffs, overtimeHiring, layoffs, overtime
Costs: Costs: Production, labor, inventory holding, Production, labor, inventory holding,
backorders, etc.backorders, etc.
Key ComponentsKey Components

11. © 2008 Prentice Hall, Inc. 13 – 11
Aggregate PlanningAggregate Planning
Level Strategy : Level Strategy : Maintain a steady production Maintain a steady production
rate regardless of demand changesrate regardless of demand changes
Chase Strategy: Chase Strategy: Adjust production rate and Adjust production rate and
workforce to match demand fluctuationsworkforce to match demand fluctuations
Hybrid Strategy:Hybrid Strategy: Mix both level and chase Mix both level and chase
strategies to balance cost and flexibility.strategies to balance cost and flexibility.
Strategies:Strategies:

12. © 2008 Prentice Hall, Inc. 13 – 12
Aggregate PlanningAggregate Planning
Forecast Demand: Forecast Demand: Estimate demand for the Estimate demand for the
planning period (usually 3-18 months) using planning period (usually 3-18 months) using
historical data, trends, seasonality, and market historical data, trends, seasonality, and market
analysisanalysis
Determine Available Capacity: Determine Available Capacity: Assess the Assess the
current production capabilities – labor, current production capabilities – labor,
equipment, and facility capacity.equipment, and facility capacity.
Step-by-Step Process:Step-by-Step Process:

13. © 2008 Prentice Hall, Inc. 13 – 13
Aggregate PlanningAggregate Planning
Identify Planning Options: Identify Planning Options: Decide how to Decide how to
respond to demand, such as:respond to demand, such as:
•Adjusting workforce (hiring/firing, overtime)Adjusting workforce (hiring/firing, overtime)
•Changing production rateChanging production rate
•Using inventory Using inventory
•SubcontractingSubcontracting
Step-by-Step Process:Step-by-Step Process:

14. © 2008 Prentice Hall, Inc. 13 – 14
Aggregate PlanningAggregate Planning
Develop Alternative Plans: Develop Alternative Plans: Create different Create different
scenarios using level, chase, or hybrid strategies:scenarios using level, chase, or hybrid strategies:
Evaluate Costs: Evaluate Costs: For each scenario calculate: For each scenario calculate:
•Labor Costs (regular time, overtime, hiring/firing)Labor Costs (regular time, overtime, hiring/firing)
•Inventory Costs (holding, storage)Inventory Costs (holding, storage)
•Subcontracting CostsSubcontracting Costs
Select the best plan: Select the best plan: Choose the plan with the Choose the plan with the
lowest total cost that still meets demand and lowest total cost that still meets demand and
operational goals.operational goals.
Monitor & Adjust: Monitor & Adjust: Regularly review actual Regularly review actual
performance vs. the plan and adjust as needed.performance vs. the plan and adjust as needed.
Step-by-Step Process:Step-by-Step Process:

15. © 2008 Prentice Hall, Inc. 13 – 15
Aggregate PlanningAggregate Planning
A logical overall unit for measuring sales A logical overall unit for measuring sales
and outputand output
A forecast of demand for an intermediate A forecast of demand for an intermediate
planning period in these aggregate termsplanning period in these aggregate terms
A method for determining costsA method for determining costs
A model that combines forecasts and A model that combines forecasts and
costs so that scheduling decisions can costs so that scheduling decisions can
be made for the planning periodbe made for the planning period
Required for aggregate planningRequired for aggregate planning

16. © 2008 Prentice Hall, Inc. 13 – 16
The Planning ProcessThe Planning Process
Figure 13.1Figure 13.1
Long-range plans
(over one year)
Research and Development
New product plans
Capital investments
Facility location/expansion
Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Setting employment, inventory,
subcontracting levels
Analyzing operating plans
Short-range plans
(up to 3 months)
Job assignments
Ordering
Job scheduling
Dispatching
Overtime
Part-time help
Top
executives
Operations
managers
Operations
managers,
supervisors,
foremen
ResponsibilityResponsibility Planning tasks and horizonPlanning tasks and horizon

17. © 2008 Prentice Hall, Inc. 13 – 17
Aggregate PlanningAggregate Planning
Quarter 1Quarter 1
JanJan FebFeb MarMar
150,000150,000120,000120,000110,000110,000
Quarter 2Quarter 2
AprApr MayMay JunJun
100,000100,000130,000130,000150,000150,000
Quarter 3Quarter 3
JulJul AugAug SepSep
180,000180,000150,000150,000140,000140,000

18. © 2008 Prentice Hall, Inc. 13 – 18
Aggregate Aggregate
PlanningPlanning
Figure 13.2Figure 13.2

19. © 2008 Prentice Hall, Inc. 13 – 19
Aggregate PlanningAggregate Planning
Combines appropriate resources Combines appropriate resources
into general termsinto general terms
Part of a larger production planning Part of a larger production planning
systemsystem
Disaggregation breaks the plan Disaggregation breaks the plan
down into greater detaildown into greater detail
Disaggregation results in a master Disaggregation results in a master
production scheduleproduction schedule

20. © 2008 Prentice Hall, Inc. 13 – 20
Aggregate Planning Aggregate Planning
StrategiesStrategies
1.1.Use inventories to absorb changes in Use inventories to absorb changes in
demanddemand
2.2.Accommodate changes by varying Accommodate changes by varying
workforce sizeworkforce size
3.3.Use part-timers, overtime, or idle time to Use part-timers, overtime, or idle time to
absorb changesabsorb changes
4.4.Use subcontractors and maintain a stable Use subcontractors and maintain a stable
workforceworkforce
5.5.Change prices or other factors to Change prices or other factors to
influence demandinfluence demand

21. © 2008 Prentice Hall, Inc. 13 – 21
Aggregate Planning Aggregate Planning
StrategiesStrategies
Examples of Matching Capacity with Examples of Matching Capacity with
DemandDemand
Scenario What Aggregate Planning Might Do
Demand is higher than
capacity
Hire workers, add overtime, use
inventory, or subcontract
Capacity is higher than
demand
Cut backs on hours, delay production,
build inventory
Demand fluctuates
seasonally
Level production and build inventory
during low-demand times

22. © 2008 Prentice Hall, Inc. 13 – 22
Capacity OptionsCapacity Options
Changing inventory levelsChanging inventory levels
Increase inventory in low demand Increase inventory in low demand
periods to meet high demand in periods to meet high demand in
the futurethe future
Increases costs associated with Increases costs associated with
storage, insurance, handling, storage, insurance, handling,
obsolescence, and capital obsolescence, and capital
investment 15% to 40%investment 15% to 40%
Shortages can mean lost sales due Shortages can mean lost sales due
to long lead times and poor to long lead times and poor
customer servicecustomer service

23. © 2008 Prentice Hall, Inc. 13 – 23
Capacity OptionsCapacity Options
Varying workforce size by hiring Varying workforce size by hiring
or layoffsor layoffs
Match production rate to demandMatch production rate to demand
Training and separation costs for Training and separation costs for
hiring and laying off workers hiring and laying off workers
New workers may have lower New workers may have lower
productivityproductivity
Laying off workers may lower Laying off workers may lower
morale and productivitymorale and productivity

24. © 2008 Prentice Hall, Inc. 13 – 24
Capacity OptionsCapacity Options
Varying production rate through Varying production rate through
overtime or idle timeovertime or idle time
Allows constant workforceAllows constant workforce
May be difficult to meet large May be difficult to meet large
increases in demandincreases in demand
Overtime can be costly and may Overtime can be costly and may
drive down productivitydrive down productivity
Absorbing idle time may be Absorbing idle time may be
difficultdifficult

25. © 2008 Prentice Hall, Inc. 13 – 25
Capacity OptionsCapacity Options
SubcontractingSubcontracting
Temporary measure during Temporary measure during
periods of peak demandperiods of peak demand
May be costlyMay be costly
Assuring quality and timely Assuring quality and timely
delivery may be difficultdelivery may be difficult
Exposes your customers to a Exposes your customers to a
possible competitorpossible competitor

26. © 2008 Prentice Hall, Inc. 13 – 26
Capacity OptionsCapacity Options
Using part-time workersUsing part-time workers
Useful for filling unskilled or low Useful for filling unskilled or low
skilled positions, especially in skilled positions, especially in
servicesservices

27. © 2008 Prentice Hall, Inc. 13 – 27
Demand OptionsDemand Options
Influencing demandInfluencing demand
Use advertising or promotion to Use advertising or promotion to
increase demand in low periodsincrease demand in low periods
Attempt to shift Attempt to shift
demand to slow demand to slow
periodsperiods
May not be May not be
sufficient to sufficient to
balance demand balance demand
and capacityand capacity

28. © 2008 Prentice Hall, Inc. 13 – 28
Demand OptionsDemand Options
Back ordering during high- Back ordering during high-
demand periodsdemand periods
Requires customers to wait for an Requires customers to wait for an
order without loss of goodwill or order without loss of goodwill or
the orderthe order
Most effective when there are few Most effective when there are few
if any substitutes for the product if any substitutes for the product
or serviceor service
Often results in lost salesOften results in lost sales

29. © 2008 Prentice Hall, Inc. 13 – 29
Demand OptionsDemand Options
Counterseasonal product and Counterseasonal product and
service mixingservice mixing
Develop a product mix of Develop a product mix of
counterseasonal itemscounterseasonal items
May lead to products or services May lead to products or services
outside the company’s areas of outside the company’s areas of
expertiseexpertise

30. © 2008 Prentice Hall, Inc. 13 – 30
Aggregate Planning OptionsAggregate Planning Options
Table 13.1Table 13.1
OptionOption AdvantagesAdvantages DisadvantagesDisadvantages Some CommentsSome Comments
Changing Changing
inventory inventory
levelslevels
Changes in Changes in
human human
resources are resources are
gradual or gradual or
none; no abrupt none; no abrupt
production production
changes.changes.
Inventory Inventory
holding cost holding cost
may increase. may increase.
Shortages may Shortages may
result in lost result in lost
sales.sales.
Applies mainly to Applies mainly to
production, not production, not
service, service,
operations.operations.
Varying Varying
workforce workforce
size by size by
hiring or hiring or
layoffslayoffs
Avoids the costs Avoids the costs
of other of other
alternatives.alternatives.
Hiring, layoff, Hiring, layoff,
and training and training
costs may be costs may be
significant.significant.
Used where size Used where size
of labor pool is of labor pool is
large.large.

31. © 2008 Prentice Hall, Inc. 13 – 31
Aggregate Planning OptionsAggregate Planning Options
Table 13.1Table 13.1
OptionOption AdvantagesAdvantages DisadvantagesDisadvantages Some CommentsSome Comments
Varying Varying
production production
rates rates
through through
overtime or overtime or
idle timeidle time
Matches Matches
seasonal seasonal
fluctuations fluctuations
without hiring/ without hiring/
training costs.training costs.
Overtime Overtime
premiums; tired premiums; tired
workers; may workers; may
not meet not meet
demand.demand.
Allows flexibility Allows flexibility
within the within the
aggregate plan.aggregate plan.
Sub-Sub-
contractingcontracting
Permits Permits
flexibility and flexibility and
smoothing of smoothing of
the firm’s the firm’s
output.output.
Loss of quality Loss of quality
control; control;
reduced profits; reduced profits;
loss of future loss of future
business.business.
Applies mainly in Applies mainly in
production production
settings.settings.

32. © 2008 Prentice Hall, Inc. 13 – 32
Aggregate Planning OptionsAggregate Planning Options
Table 13.1Table 13.1
OptionOption AdvantagesAdvantages DisadvantagesDisadvantages Some CommentsSome Comments
Using part-Using part-
time time
workersworkers
Is less costly Is less costly
and more and more
flexible than flexible than
full-time full-time
workers.workers.
High turnover/ High turnover/
training costs; training costs;
quality suffers; quality suffers;
scheduling scheduling
difficult.difficult.
Good for Good for
unskilled jobs in unskilled jobs in
areas with large areas with large
temporary labor temporary labor
pools.pools.
Influencing Influencing
demanddemand
Tries to use Tries to use
excess excess
capacity. capacity.
Discounts draw Discounts draw
new customers.new customers.
Uncertainty in Uncertainty in
demand. Hard demand. Hard
to match to match
demand to demand to
supply exactly.supply exactly.
Creates Creates
marketing marketing
ideas. ideas.
Overbooking Overbooking
used in some used in some
businesses.businesses.

33. © 2008 Prentice Hall, Inc. 13 – 33
Aggregate Planning OptionsAggregate Planning Options
Table 13.1Table 13.1
OptionOption AdvantagesAdvantages DisadvantagesDisadvantages Some CommentsSome Comments
Back Back
ordering ordering
during during
high-high-
demand demand
periodsperiods
May avoid May avoid
overtime. overtime.
Keeps capacity Keeps capacity
constant.constant.
Customer must Customer must
be willing to be willing to
wait, but wait, but
goodwill is lost.goodwill is lost.
Many companies Many companies
back order.back order.
Counter-Counter-
seasonal seasonal
product product
and service and service
mixingmixing
Fully utilizes Fully utilizes
resources; resources;
allows stable allows stable
workforce.workforce.
May require May require
skills or skills or
equipment equipment
outside the outside the
firm’s areas of firm’s areas of
expertise.expertise.
Risky finding Risky finding
products or products or
services with services with
opposite opposite
demand demand
patterns.patterns.

34. © 2008 Prentice Hall, Inc. 13 – 34
Methods for Aggregate Methods for Aggregate
PlanningPlanning
A mixed strategy may be the best A mixed strategy may be the best
way to achieve minimum costsway to achieve minimum costs
There are many possible mixed There are many possible mixed
strategiesstrategies
Finding the optimal plan is not Finding the optimal plan is not
always possiblealways possible

35. © 2008 Prentice Hall, Inc. 13 – 35
Mixing Options to Mixing Options to
Develop a PlanDevelop a Plan
Chase strategyChase strategy
Match output rates to demand Match output rates to demand
forecast for each periodforecast for each period
Vary workforce levels or vary Vary workforce levels or vary
production rateproduction rate
Favored by many service Favored by many service
organizationsorganizations

36. © 2008 Prentice Hall, Inc. 13 – 36
Mixing Options to Mixing Options to
Develop a PlanDevelop a Plan
Level strategyLevel strategy
Daily production is uniformDaily production is uniform
Use inventory or idle time as bufferUse inventory or idle time as buffer
Stable production leads to better Stable production leads to better
quality and productivityquality and productivity
Some combination of capacity Some combination of capacity
options, a mixed strategy, might be options, a mixed strategy, might be
the best solutionthe best solution

37. © 2008 Prentice Hall, Inc. 13 – 37
Graphical MethodsGraphical Methods
Popular techniquesPopular techniques
Easy to understand and useEasy to understand and use
Trial-and-error approaches that do Trial-and-error approaches that do
not guarantee an optimal solutionnot guarantee an optimal solution
Require only limited computationsRequire only limited computations

38. © 2008 Prentice Hall, Inc. 13 – 38
Graphical MethodsGraphical Methods
1.1.Determine the demand for each periodDetermine the demand for each period
2.2.Determine the capacity for regular time, Determine the capacity for regular time,
overtime, and subcontracting each periodovertime, and subcontracting each period
3.3.Find labor costs, hiring and layoff costs, Find labor costs, hiring and layoff costs,
and inventory holding costsand inventory holding costs
4.4.Consider company policy on workers and Consider company policy on workers and
stock levelsstock levels
5.5.Develop alternative plans and examine Develop alternative plans and examine
their total coststheir total costs

39. © 2008 Prentice Hall, Inc. 13 – 39
Roofing Supplier Example 1Roofing Supplier Example 1
Table 13.2Table 13.2
MonthMonth Expected DemandExpected Demand
Production Production
DaysDays
Demand Per Day Demand Per Day
(computed)(computed)
JanJan 900900 2222 4141
FebFeb 700700 1818 3939
MarMar 800800 2121 3838
AprApr 1,2001,200 2121 5757
MayMay 1,5001,500 2222 6868
JuneJune 1,1001,100 2020 5555
6,2006,200 124124
= = 50= = 50 units per day units per day
6,2006,200
124124
Average Average
requirementrequirement
==
Total expected demandTotal expected demand
Number of production daysNumber of production days

40. © 2008 Prentice Hall, Inc. 13 – 40
Roofing Supplier Example 1Roofing Supplier Example 1
Figure 13.3Figure 13.3
70 70 –
60 60 –
50 50 –
40 40 –
30 30 –
0 0 –
JanJan FebFeb MarMar AprApr MayMay JuneJune ==MonthMonth
     
2222 1818 2121 2121 2222 2020 ==Number ofNumber of
working daysworking days
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Level production using average Level production using average
monthly forecast demandmonthly forecast demand
Forecast demandForecast demand

41. © 2008 Prentice Hall, Inc. 13 – 41
Roofing Supplier Example 2Roofing Supplier Example 2
Table 13.3Table 13.3
Cost InformationCost Information
Inventory carrying costInventory carrying cost $ 5$ 5 per unit per month per unit per month
Subcontracting cost per unitSubcontracting cost per unit $20$20 per unit per unit
Average pay rateAverage pay rate
$ 10$ 10 per hour per hour ($80($80 per per
dayday))
Overtime pay rateOvertime pay rate
$ 7$ 7 per hour per hour
((above above 88 hours per day hours per day))
Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit
Cost of increasing daily production rate Cost of increasing daily production rate
(hiring and training)(hiring and training)
$300$300 per unit per unit
Cost of decreasing daily production rate Cost of decreasing daily production rate
(layoffs)(layoffs)
$600$600 per unit per unit
Plan 1 – constant workforce
Plan 1 – constant workforce

42. © 2008 Prentice Hall, Inc. 13 – 42
Roofing Supplier Example 2Roofing Supplier Example 2
Table 13.3Table 13.3
Cost InformationCost Information
Inventory carry costInventory carry cost $ 5$ 5 per unit per month per unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per day per day))
Overtime pay rateOvertime pay rate
$ 7$ 7 per hour per hour
((above above 88 hours per day hours per day))
Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit
Cost of increasing daily production rate Cost of increasing daily production rate
(hiring and training)(hiring and training)
$300$300 per unit per unit
Cost of decreasing daily production rate Cost of decreasing daily production rate
(layoffs)(layoffs)
$600$600 per unit per unit
Plan 1 – constant workforce
Plan 1 – constant workforce
Month
Production at
50 Units per Day
Demand
Forecast
Monthly
Inventory
Change
Ending
Inventory
Jan 1,100 900 +200 200
Feb 900 700 +200 400
Mar 1,050 800 +250 650
Apr 1,050 1,200 -150 500
May 1,100 1,500 -400 100
June 1,000 1,100 -100 0
1,850
Total units of inventory carried over from one
month to the next= 1,850 units
Workforce required to produce 50 units per day= 10 workers

43. © 2008 Prentice Hall, Inc. 13 – 43
Roofing Supplier Example 2Roofing Supplier Example 2
Table 13.3Table 13.3
Cost InformationCost Information
Inventory carry costInventory carry cost $ 5$ 5 per unit per month per unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per day per day))
Overtime pay rateOvertime pay rate
$ 7$ 7 per hour per hour
((above above 88 hours per day hours per day))
Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit
Cost of increasing daily production rate Cost of increasing daily production rate
(hiring and training)(hiring and training)
$300$300 per unit per unit
Cost of decreasing daily production rate Cost of decreasing daily production rate
(layoffs)(layoffs)
$600$600 per unit per unit
Month
Production at
50 Units per Day
Demand
Forecast
Monthly
Inventory
Change
Ending
Inventory
Jan 1,100 900 +200 200
Feb 900 700 +200 400
Mar 1,050 800 +250 650
Apr 1,050 1,200 -150 500
May 1,100 1,500 -400 100
June 1,000 1,100 -100 0
1,850
Total units of inventory carried over from one
month to the next= 1,850 units
Workforce required to produce 50 units per day= 10 workers
Costs Calculations
Inventory carrying $9,250(= 1,850 units carried x $5
per unit)
Regular-time labor 99,200(= 10 workers x $80 per
day x 124 days)
Other costs (overtime,
hiring, layoffs,
subcontracting) 0
Total cost $108,450

44. © 2008 Prentice Hall, Inc. 13 – 44
Roofing Supplier Example 2Roofing Supplier Example 2
Figure 13.4Figure 13.4
C
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7,000 7,000 –
6,000 6,000 –
5,000 5,000 –
4,000 4,000 –
3,000 3,000 –
2,000 –
1,000 –
–
JanJanFebFeb MarMarAprAprMayMayJuneJune
Cumulative forecast Cumulative forecast
requirementsrequirements
Cumulative level Cumulative level
production using production using
average monthly average monthly
forecast forecast
requirementsrequirements
Reduction Reduction
of inventoryof inventory
Excess inventoryExcess inventory
6,200 units6,200 units

45. © 2008 Prentice Hall, Inc. 13 – 45
Roofing Supplier Example 3Roofing Supplier Example 3
Table 13.2Table 13.2
MonthMonth Expected DemandExpected Demand
Production Production
DaysDays
Demand Per Day Demand Per Day
(computed)(computed)
JanJan 900900 2222 4141
FebFeb 700700 1818 3939
MarMar 800800 2121 3838
AprApr 1,2001,200 2121 5757
MayMay 1,5001,500 2222 6868
JuneJune 1,1001,100 2020 5555
6,2006,200 124124
Minimum requirementMinimum requirement = 38 = 38 units per day units per day
Plan 2 – subcontracting
Plan 2 – subcontracting

46. © 2008 Prentice Hall, Inc. 13 – 46
Roofing Supplier Example 3Roofing Supplier Example 3
70 70 –
60 60 –
50 50 –
40 40 –
30 30 –
0 0 –
JanJan FebFeb MarMar AprApr MayMay JuneJune ==MonthMonth
     
2222 1818 2121 2121 2222 2020 ==Number ofNumber of
working daysworking days
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Level production Level production
using lowest using lowest
monthly forecast monthly forecast
demanddemand
Forecast demandForecast demand

47. © 2008 Prentice Hall, Inc. 13 – 47
Roofing Supplier Example 3Roofing Supplier Example 3
Table 13.3Table 13.3
Cost InformationCost Information
Inventory carrying costInventory carrying cost $ 5$ 5 per unit per month per unit per month
Subcontracting cost per unitSubcontracting cost per unit $20$20 per unit per unit
Average pay rateAverage pay rate
$ 10$ 10 per hour per hour ($80($80 per per
dayday))
Overtime pay rateOvertime pay rate
$ 7$ 7 per hour per hour
((above above 88 hours per day hours per day))
Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit
Cost of increasing daily production rate Cost of increasing daily production rate
(hiring and training)(hiring and training)
$300$300 per unit per unit
Cost of decreasing daily production rate Cost of decreasing daily production rate
(layoffs)(layoffs)
$600$600 per unit per unit

48. © 2008 Prentice Hall, Inc. 13 – 48
Roofing Supplier Example 3Roofing Supplier Example 3
Table 13.3Table 13.3
Cost InformationCost Information
Inventory carry costInventory carry cost $ 5$ 5 per unit per month per unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per day per day))
Overtime pay rateOvertime pay rate
$ 7$ 7 per hour per hour
((above above 88 hours per day hours per day))
Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit
Cost of increasing daily production rate Cost of increasing daily production rate
(hiring and training)(hiring and training)
$300$300 per unit per unit
Cost of decreasing daily production rate Cost of decreasing daily production rate
(layoffs)(layoffs)
$600$600 per unit per unit
In-house production=38 units per day
x 124 days
=4,712 units
Subcontract units=6,200 - 4,712
=1,488 units

49. © 2008 Prentice Hall, Inc. 13 – 49
Table 13.3Table 13.3
Cost InformationCost Information
Inventory carry costInventory carry cost $ 5$ 5 per unit per month per unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per day per day))
Overtime pay rateOvertime pay rate
$ 7$ 7 per hour per hour
((above above 88 hours per day hours per day))
Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit
Cost of increasing daily production rate Cost of increasing daily production rate
(hiring and training)(hiring and training)
$300$300 per unit per unit
Cost of decreasing daily production rate Cost of decreasing daily production rate
(layoffs)(layoffs)
$600$600 per unit per unit
Roofing Supplier Example 3Roofing Supplier Example 3
In-house production=38 units per day
x 124 days
=4,712 units
Subcontract units=6,200 - 4,712
=1,488 units
Costs Calculations
Regular-time labor $75,392(= 7.6 workers x $80 per
day x 124 days)
Subcontracting 29,760(= 1,488 units x $20 per
unit)
Total cost $105,152

50. © 2008 Prentice Hall, Inc. 13 – 50
Roofing Supplier Example 4Roofing Supplier Example 4
Table 13.2Table 13.2
MonthMonth Expected DemandExpected Demand
Production Production
DaysDays
Demand Per Day Demand Per Day
(computed)(computed)
JanJan 900900 2222 4141
FebFeb 700700 1818 3939
MarMar 800800 2121 3838
AprApr 1,2001,200 2121 5757
MayMay 1,5001,500 2222 6868
JuneJune 1,1001,100 2020 5555
6,2006,200 124124
Production = Expected DemandProduction = Expected Demand
Plan 3 – hiring and firing
Plan 3 – hiring and firing

51. © 2008 Prentice Hall, Inc. 13 – 51
Roofing Supplier Example 4Roofing Supplier Example 4
70 70 –
60 60 –
50 50 –
40 40 –
30 30 –
0 0 –
JanJan FebFeb MarMar AprApr MayMay JuneJune ==MonthMonth
     
2222 1818 2121 2121 2222 2020 ==Number ofNumber of
working daysworking days
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Forecast demand and Forecast demand and
monthly productionmonthly production

52. © 2008 Prentice Hall, Inc. 13 – 52
Roofing Supplier Example 4Roofing Supplier Example 4
Table 13.3Table 13.3
Cost InformationCost Information
Inventory carrying costInventory carrying cost $ 5$ 5 per unit per month per unit per month
Subcontracting cost per unitSubcontracting cost per unit $20$20 per unit per unit
Average pay rateAverage pay rate
$ 10$ 10 per hour per hour ($80($80 per per
dayday))
Overtime pay rateOvertime pay rate
$ 7$ 7 per hour per hour
((above above 88 hours per day hours per day))
Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit
Cost of increasing daily production rate Cost of increasing daily production rate
(hiring and training)(hiring and training)
$300$300 per unit per unit
Cost of decreasing daily production rate Cost of decreasing daily production rate
(layoffs)(layoffs)
$600$600 per unit per unit

53. © 2008 Prentice Hall, Inc. 13 – 53
Roofing Supplier Example 4Roofing Supplier Example 4
Table 13.3Table 13.3
Cost InformationCost Information
Inventory carrying costInventory carrying cost $ 5$ 5 per unit per month per unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unit per unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per day per day))
Overtime pay rateOvertime pay rate
$ 7$ 7 per hour per hour
((above above 88 hours per day hours per day))
Labor-hours to produce a unitLabor-hours to produce a unit 1.61.6 hours per unit hours per unit
Cost of increasing daily production rate Cost of increasing daily production rate
(hiring and training)(hiring and training)
$300$300 per unit per unit
Cost of decreasing daily production rate Cost of decreasing daily production rate
(layoffs)(layoffs)
$600$600 per unit per unit
Month
Forecast
(units)
Daily
Prod
Rate
Basic
Production
Cost
(demand x
1.6 hrs/unit x
$10/hr)
Extra Cost of
Increasing
Production
(hiring cost)
Extra Cost of
Decreasing
Production
(layoff cost)Total Cost
Jan 900 41 $ 14,400 — — $ 14,400
Feb 700 39 11,200 —
$1,200
(= 2 x $600)
12,400
Mar 800 38 12,800 —
$600
(= 1 x $600)
13,400
Apr 1,200 57 19,200
$5,700
(= 19 x $300)
— 24,900
May 1,500 68 24,000
$3,300
(= 11 x $300)
— 27,300
June 1,100 55 17,600 —
$7,800
(= 13 x $600)
25,400
$99,200 $9,000 $9,600 $117,800
Table 13.4Table 13.4

54. © 2008 Prentice Hall, Inc. 13 – 54
Comparison of Three PlansComparison of Three Plans
Table 13.5Table 13.5
CostCost Plan 1Plan 1 Plan 2Plan 2 Plan 3Plan 3
Inventory carryingInventory carrying $ 9,250$ 9,250 $ 0$ 0$ 0$ 0
Regular laborRegular labor 99,20099,200 75,39275,392 99,20099,200
Overtime laborOvertime labor 00 00 00
HiringHiring 00 00 9,0009,000
LayoffsLayoffs 00 00 9,6009,600
SubcontractingSubcontracting 00 29,76029,760 00
Total costTotal cost $108,450$108,450 $105,152$105,152 $117,800$117,800
Plan 2 is the lowest cost optionPlan 2 is the lowest cost option

55. © 2008 Prentice Hall, Inc. 13 – 55
SummarySummary
•Aggregate planning provides companies with a
necessary weapon to help capture market shares in
the Global Economy.
•The aggregate plan provides both manufacturing
and service firms the ability to respond to changing
customer demands while still producing at low-cost
and high-quality levels.
•Aggregate schedules set levels of inventory,
production, subcontracting, and employment over an
intermediate time, usually 3 to 18 months.
•The aggregate plan is important responsibility of an
operations manager and a key to efficient use of
existing capital investment.

56. © 2008 Prentice Hall, Inc. 13 – 56
AssignmentAssignment
1.The roofing manufacturer described in the previous
example wishes to consider yet a fourth planning
strategy (plan 4). This one maintains a constant
workforce of eight people and uses overtime
whenever necessary to meet demand. Use the
information on the previous example. Again,
assume beginning and ending inventories are equal
to zero.

57. © 2008 Prentice Hall, Inc. 13 – 57
AssignmentAssignment
2. The president of Hill Enterprises, Terri Hill, projects
the firm’s aggregate demand requirements over the
next 8 months as follows:
January1400 May 2200
February1600 June 2200
March 1800 July 1800
April 1800 August 1400
The operations manager is considering a new plan,
which begins in January with 200 units on hand.
Stockout cost of lost sales is $100 per unit. Inventory
holding cost is $20 per unit per month. Ignore any idle-
time costs. The plan is called Plan A.

58. © 2008 Prentice Hall, Inc. 13 – 58
AssignmentAssignment
Cont.
Plan A: Vary the workforce level to execute a “chase”
strategy by producing the quantity demanded in the
prior month. The December demand and rate of
production are both 1,600 units per month. The cost of
hiring additional workers is $5,000 per 100 units. The
cost of laying off workers is $7,500 per 100 units.
Evaluate this plan.

59. © 2008 Prentice Hall, Inc. 13 – 59
Mathematical ApproachesMathematical Approaches
Useful for generating strategiesUseful for generating strategies
Transportation Method of Linear Transportation Method of Linear
ProgrammingProgramming
Produces an optimal planProduces an optimal plan
Management Coefficients ModelManagement Coefficients Model
Model built around manager’s Model built around manager’s
experience and performanceexperience and performance
Other ModelsOther Models
Linear Decision RuleLinear Decision Rule
SimulationSimulation

60. © 2008 Prentice Hall, Inc. 13 – 60
Transportation MethodTransportation Method
Table 13.6Table 13.6
CostsCosts
Regular timeRegular time $40$40per tireper tire
OvertimeOvertime $50$50per tireper tire
SubcontractingSubcontracting $70$70per tireper tire
CarryingCarrying $ 2$ 2per tire per monthper tire per month
Sales PeriodSales Period
MarMar AprApr MayMay
DemandDemand 800800 1,0001,000 750750
Capacity:Capacity:
RegularRegular 700700 700700 700700
OvertimeOvertime 5050 5050 5050
SubcontractingSubcontracting 150150 150150 130130
Beginning inventoryBeginning inventory 100100 tirestires

61. © 2008 Prentice Hall, Inc. 13 – 61
Transportation ExampleTransportation Example
Important pointsImportant points
1.1.Carrying costs are Carrying costs are $2$2/tire/month. If /tire/month. If
goods are made in one period and held goods are made in one period and held
over to the next, holding costs are over to the next, holding costs are
incurredincurred
2.2.Supply must equal demand, so a Supply must equal demand, so a
dummy column called “unused dummy column called “unused
capacity” is addedcapacity” is added
3.3.Because back ordering is not viable in Because back ordering is not viable in
this example, cells that might be used to this example, cells that might be used to
satisfy earlier demand are not availablesatisfy earlier demand are not available

62. © 2008 Prentice Hall, Inc. 13 – 62
Transportation ExampleTransportation Example
Important pointsImportant points
4.4.Quantities in each column designate the Quantities in each column designate the
levels of inventory needed to meet levels of inventory needed to meet
demand requirementsdemand requirements
5.5.In general, production should be In general, production should be
allocated to the lowest cost cell allocated to the lowest cost cell
available without exceeding unused available without exceeding unused
capacity in the row or demand in the capacity in the row or demand in the
columncolumn

63. © 2008 Prentice Hall, Inc. 13 – 63
Transportation Transportation
ExampleExample
Table 13.7Table 13.7

64. © 2008 Prentice Hall, Inc. 13 – 64
Management Coefficients Management Coefficients
ModelModel
Builds a model based on manager’s Builds a model based on manager’s
experience and performanceexperience and performance
A regression model is constructed A regression model is constructed
to define the relationships between to define the relationships between
decision variablesdecision variables
Objective is to remove Objective is to remove
inconsistencies in decision makinginconsistencies in decision making

65. © 2008 Prentice Hall, Inc. 13 – 65
Other ModelsOther Models
Linear Decision RuleLinear Decision Rule
Minimizes costs using quadratic cost curvesMinimizes costs using quadratic cost curves
Operates over a particular time periodOperates over a particular time period
SimulationSimulation
Uses a search procedure to try different Uses a search procedure to try different
combinations of variablescombinations of variables
Develops feasible but not necessarily optimal Develops feasible but not necessarily optimal
solutionssolutions

66. © 2008 Prentice Hall, Inc. 13 – 66
Summary of Aggregate Summary of Aggregate
Planning MethodsPlanning Methods
TechniquesTechniques
Solution Solution
ApproachesApproaches Important AspectsImportant Aspects
GraphicalGraphical
methodsmethods
Trial and Trial and
errorerror
Simple to understand and Simple to understand and
easy to use. Many easy to use. Many
solutions; one chosen solutions; one chosen
may not be optimal.may not be optimal.
Transportation Transportation
method of linear method of linear
programmingprogramming
OptimizationOptimizationLP software available; LP software available;
permits sensitivity permits sensitivity
analysis and new analysis and new
constraints; linear constraints; linear
functions may not be functions may not be
realistic.realistic.
Table 13.8Table 13.8

67. © 2008 Prentice Hall, Inc. 13 – 67
Summary of Aggregate Summary of Aggregate
Planning MethodsPlanning Methods
TechniquesTechniques
Solution Solution
ApproachesApproaches Important AspectsImportant Aspects
Management Management
coefficients coefficients
modelmodel
HeuristicHeuristic Simple, easy to implement; Simple, easy to implement;
tries to mimic manager’s tries to mimic manager’s
decision process; uses decision process; uses
regression.regression.
SimulationSimulation Change Change
parametersparameters
Complex; may be difficult Complex; may be difficult
to build and for managers to build and for managers
to understand.to understand.
Table 13.8Table 13.8

68. © 2008 Prentice Hall, Inc. 13 – 68
Aggregate Planning in Aggregate Planning in
ServicesServices
Controlling the cost of labor is criticalControlling the cost of labor is critical
1.1.Accurate scheduling of labor-hours to Accurate scheduling of labor-hours to
assure quick response to customer assure quick response to customer
demanddemand
2.2.An on-call labor resource to cover An on-call labor resource to cover
unexpected demandunexpected demand
3.3.Flexibility of individual worker skillsFlexibility of individual worker skills
4.4.Flexibility in rate of output or hours of Flexibility in rate of output or hours of
workwork

69. © 2008 Prentice Hall, Inc. 13 – 69
Five Service ScenariosFive Service Scenarios
RestaurantsRestaurants
Smoothing the production Smoothing the production
processprocess
Determining the optimal Determining the optimal
workforce sizeworkforce size
HospitalsHospitals
Responding to patient demandResponding to patient demand

70. © 2008 Prentice Hall, Inc. 13 – 70
Five Service ScenariosFive Service Scenarios
National Chains of Small Service National Chains of Small Service
FirmsFirms
Planning done at national level Planning done at national level
and at local leveland at local level
Miscellaneous ServicesMiscellaneous Services
Plan human resource Plan human resource
requirementsrequirements
Manage demandManage demand

71. © 2008 Prentice Hall, Inc. 13 – 71
Law Firm ExampleLaw Firm Example
Table 13.9Table 13.9
Labor-Hours RequiredLabor-Hours Required Capacity Constraints Capacity Constraints
(2)(2) (3)(3) (4)(4) (5)(5) (6)(6)
(1)(1) ForecastsForecasts MaximumMaximum Number ofNumber of
Category ofCategory of Best Best LikelyLikely WorstWorst Demand inDemand in QualifiedQualified
Legal BusinessLegal Business (hours)(hours) (hours)(hours) (hours)(hours) PeoplePeople PersonnelPersonnel
Trial workTrial work 1,8001,800 1,5001,500 1,2001,200 3.63.6 44
Legal researchLegal research 4,5004,500 4,0004,000 3,5003,500 9.09.0 3232
Corporate lawCorporate law 8,0008,000 7,0007,000 6,5006,500 16.016.0 1515
Real estate lawReal estate law 1,7001,700 1,5001,500 1,3001,300 3.43.4 66
Criminal lawCriminal law 3,5003,500 3,0003,000 2,5002,500 7.07.0 1212
Total hoursTotal hours 19,50019,500 17,00017,000 15,00015,000
Lawyers neededLawyers needed 3939 3434 3030

72. © 2008 Prentice Hall, Inc. 13 – 72
Five Service ScenariosFive Service Scenarios
Airline industryAirline industry
Extremely complex planning Extremely complex planning
problemproblem
Involves number of flights, Involves number of flights,
number of passengers, air and number of passengers, air and
ground personnel, allocation of ground personnel, allocation of
seats to fare classesseats to fare classes
Resources spread through the Resources spread through the
entire systementire system

73. © 2008 Prentice Hall, Inc. 13 – 73
Yield ManagementYield Management
Allocating resources to customers at Allocating resources to customers at
prices that will maximize yield or prices that will maximize yield or
revenuerevenue
1.1.Service or product can be sold in Service or product can be sold in
advance of consumptionadvance of consumption
2.2.Demand fluctuatesDemand fluctuates
3.3.Capacity is relatively fixedCapacity is relatively fixed
4.4.Demand can be segmentedDemand can be segmented
5.5.Variable costs are low and fixed costs Variable costs are low and fixed costs
are highare high

74. © 2008 Prentice Hall, Inc. 13 – 74
Demand Demand
CurveCurve
Yield Management ExampleYield Management Example
Figure 13.5Figure 13.5
Passed-up
contribution
Money left
on the table
Potential customers exist who Potential customers exist who
are willing to pay more than the are willing to pay more than the
$15$15 variable cost of the room variable cost of the room
Some customers who paid Some customers who paid
$150$150 were actually willing were actually willing
to pay more for the roomto pay more for the roomTotalTotal
$ $ contributioncontribution
==((PricePrice)) x x
(50(50
roomsrooms))
==($150 - $15)($150 - $15)
x x (50)(50)
==$6,750$6,750
PricePrice
Room salesRoom sales
100100
5050
$150$150
Price charged Price charged
for room for room
$15$15
Variable costVariable cost
of roomof room

75. © 2008 Prentice Hall, Inc. 13 – 75
Total $ contribution =Total $ contribution =
(1(1st pricest price) x 30 ) x 30 roomsrooms + (2 + (2ndnd price) x 30 rooms = price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =($100 - $15) x 30 + ($200 - $15) x 30 =
$2,550 + $5,550 = $8,100$2,550 + $5,550 = $8,100
Demand Demand
CurveCurve
Yield Management ExampleYield Management Example
Figure 13.6Figure 13.6
PricePrice
Room salesRoom sales
100100
6060
3030
$100$100
Price 1Price 1
for roomfor room
$200$200
Price 2Price 2
for roomfor room
$15$15
Variable costVariable cost
of roomof room

76. © 2008 Prentice Hall, Inc. 13 – 76
Yield Management MatrixYield Management Matrix
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Price
Tend to be fixed Tend to be variable
Quadrant 1: Quadrant 2:
Movies Hotels
Stadiums/arenas Airlines
Convention centers Rental cars
Hotel meeting space Cruise lines
Quadrant 3: Quadrant 4:
Restaurants Continuing care
Golf courses hospitals
Internet service
providers
Figure 13.7Figure 13.7

77. © 2008 Prentice Hall, Inc. 13 – 77
Making Yield Management Making Yield Management
WorkWork
1.1.Multiple pricing structures must Multiple pricing structures must
be feasible and appear logical to be feasible and appear logical to
the customerthe customer
2.2.Forecasts of the use and duration Forecasts of the use and duration
of useof use
3.3.Changes in demandChanges in demand