1. Aggregate Planning
Topic 2
Prof. Upendra Kachru

2. Planning Hierarchy Level Customer Business Activity Strategic
Corporate/Senior OM Executives
Competitive Strategy
Product Innovation
Supply Chain Structuring
Capital Budget Process
Functional
Regional/Plant Level
Marketing Strategy
Plant Utilization Strategy
Capacity Budgeting
Aggregate Planning
Organizational Control
Operational
Operations Level
CRM
Procurement
Logistics
MPS and MRP
Managing Workforce
Prof. Upendra Kachru

3. Planning Hierarchy Types of Decision Short term Current Plans
Long term
Planning
Medium term
Time horizon in years
Current Plans
Aggregate Plans
Strategies & Facilities
Prof. Upendra Kachru

4. WHAT IS AGRREGATE PLANNING?
The aggregate plan links strategic goals and objectives of the organization with the plans for individual products , services and their various components.
Prof. Upendra Kachru

5. Nature of Aggregate Planning
It determines the course the organization takes in the medium term, with the following in mind:
Market Inputs (demand forecasts and/or actual orders);
Capability Specifications and Performance Metrics; and
Resource Availability
Aggregate Planning has to firstly link strategic goals and objectives with the plans for individual products by transforming its understanding of the market into a set of capability specifications. i.e. what business processes must do to meet the needs and expectations of customers.
Prof. Upendra Kachru

6. The business processes that are involved are as follows:
Prof. Upendra Kachru

7. Objectives of Aggregate Planning Maximize Minimize profits
customer service
utilization of plant and equipment
Minimize
inventory investment
changes in production rates
changes in workforce levels
Prof. Upendra Kachru

8. The Aggregate Planning Process
Distribution and marketing
Customers needs
Demand forecasts
Competition behavior
Operations
Current machine capacities
Plans for future capacities
Workforce capacities
Current staffing level
Accounting and Finance
Cost data
Financial condition of firm
Aggregate plan
Materials
Supplier capabilities
Storage capability
Materials availability
Human Resources
Labor-market conditions
Training capacity
Engineering
New Products
Product design changes
Machine standards
Prof. Upendra Kachru

9. Aggregate Planning System - Inputs
Competitors’ behavior
Raw material availability
Market
demand
External to firm
External capacity
Economic conditions
Planning for production
Current
physical
capacity
Activities required for production
Current workforce
Inventory levels
Internal to firm
Prof. Upendra Kachru 11 11 9

10. Business Environment Market Orientation Time Focused Environment
Product Flexibility Focused Environment
Prof. Upendra Kachru

11. Market Orientation
Make-To-Stock (MTS): Produce to buildup inventory and then use that inventory later to meet demand. This makes the aggregate plan critical to the business.
Make-To-Order (MTO): Service organizations and job shops provide such Products.
Assemble-to-Order (ATO), Engineer-to-Order (ETO): Aggregate planning has to use actual or projected orders to plan production activities.
Prof. Upendra Kachru

12. Time Focused Environment
Right inventory stocking decisions
Efficient, timely feedback
Excellence in collecting and analyzing data
Sufficient resources
Sufficient resources at the right location
Prof. Upendra Kachru

13. Product Flexibility Focused Environment
Sufficient Goods at convenient place
Good Forecast
Short change over times
Reduction in manufacturing lead time
Prof. Upendra Kachru

14. Aggregate Demand and Aggregate Capacity
10000
Suppose the figure to the right represents forecast demand in units
10000
8000
8000
7000
6000
5500
6000
4500
4000
Now suppose this lower figure represents the aggregate capacity of the company to meet demand
2000
Jan
Feb
Mar
Apr
May
Jun
10000
9000
8000
8000
What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up
6000
6000
4500
4000
4000
4000
2000
Jan
Feb
Mar
Apr
May
Jun 14
Prof. Upendra Kachru 9 9 14

15. Chase
Strategy
A Chase Strategy is a strategy aimed at adjusting capacity in anticipation of demand.
You are "chasing demand" by regulating capacity to the demand doing it as dynamically and quickly as you can.
Prof. Upendra Kachru

16. Chase Strategy Using part-time employees
Varying production rates through overtime or idle time
Maximizing efficiency through training, work scheduling, cross-training, use of technology, etc.
Increasing involvement of consumer in delivery of service
Keeping Bottleneck Resources Busy
Sharing capacity with other divisions/firms
Outsourcing
Chase Strategy
Prof. Upendra Kachru

17. Level Strategy
Level Strategy is a strategy where you maintain a constant capacity over a period of time, irrespective of fluctuations in demand.
This strategy is used when skill level, the training required, or the cost of hiring people and terminating them is high.
Prof. Upendra Kachru

18. Level Strategy Changing Product Mix Increasing Machine Product Rate
Improving Quality
Increasing Product Yield
Increasing Motivation
Increasing Employee Involvement
Changing Inventory Levels
Planning for future expansion
Prof. Upendra Kachru

19. Mixed Strategy Mixed Strategy
In a “mixed” strategy, the organization combines strategies, in view of its specific and unique requirements.
Mixed Strategy
Prof. Upendra Kachru

20. Impact of Different Options
ADVANTAGES
DISADVANTAGES
COMMENTS
Changing inventory level
Changes in human resources are gradual or none; no abrupt production changes.
Inventory holding costs. Shortages, resulting in lost sales, may occur if demand increases.
This applies mainly to production, not service, settings.
Varying work-force size by hiring or layoffs
Avoids the costs of other alternatives
Hiring, layoff, and training costs may be significant
Used where many unskilled people seek extra income.
Varying production rates through over time or idle time
Matches seasonal fluctuations without Hiring / training costs
Overtime premiums; tired workers; may Not meet demand.
Allows flexibility within the Aggregate plan.
Subcontracting
Permits flexibility and smoothing of the firm's output.
Loss of quality control; reduced profits; loss of future business.
Applies mainly in production settings.
Prof. Upendra Kachru

21. Using part-time workers
OPTION
ADVANTAGES
DISADVANTAGES
COMMENTS
Using part-time workers
Is less costly and more flexible than full-time workers.
High turnover / training costs; quality suffers; scheduling difficult.
Good for unskilled jobs in areas with large temporary labor pools.
Influencing demand.
Tries to use excess capacity. Discounts draw new customers.
Uncertainty in demand. Hard to exactly match demand to supply.
Creates marketing ideas. Overbooking used in some businesses.
Back-ordering.
May avoid overtime. Keeps capacity constant.
Customer must be willing to wait, but goodwill is lost.
Many companies backlog.
Counter seasonal product and service mixing.
Fully utilizes resources; allows stable work force.
May require skills or equipment outside firm's areas of expertise.
Risky finding products or services with opposite demand patterns.
Prof. Upendra Kachru

22. Methods for Aggregate Planning
Graphical and charting procedure.
Linear programming.
Mathematical modeling using Linear Decision Rules
Management Coefficient Models
Production Switching Heuristics
Simulation
Methods for Aggregate Planning
Prof. Upendra Kachru

23. Graphical & Charting Method
This is a trial-and-error method, assisted by spreadsheets. In general, the graphical and charting method follows five steps:
Determine the demand in each period.
Determine what the capacity is for regular time, overtime, and subcontracting each period.
Find the labor costs, hiring and layoff costs, and inventory holding costs.
Consider company policy that may apply to the workers or to stock levels.
Develop alternative plans and examine their total costs.
Graphical &
Charting
Method
Prof. Upendra Kachru

24. Graphical & Charting Method
The method requires the planner to specify a planning horizon and secure aggregate demand forecasts
Second, the decision variable such as size of workforce, output rate, overtime or idle time, inventory level, sub-contracting, etc., have to be explicitly identified.
Third, all models require the relevant costs, including costs of wages, hiring/layoff, overtime, inventory, etc., to be specified
Graphical &
Charting Method
Prof. Upendra Kachru

25. Chase and Level Strategy Costs
Suppose we have the following unit demand and cost information:
Demand/mo Jan Feb Mar Apr May Jun
Production Cost Rs. 350/unit
Lost Sales Rs. 1000/unit per mo.
Inventory Carrying Cost Rs. 10/unit per mo.
Subcontracting Costs Rs. 600/unit
Layoff costs Rs. 7000/worker
Hiring Cost Rs. 3500/worker
Beginning Workforce Level 20 workers
Capacity per Worker 50 units/mo.
Beginning inventory units
Closing Inventory units 25
Prof. Upendra Kachru 11 25 11

26. Chase Strategy 50x(20+4+6)=1500 700x10 1000x350=Rs. 350000
Given is the demand information below:
Demand Jan Feb Mar Apr May Jun
Production/mo
Inventory
Hire/Fire
50x(20+4+6)=1500
700x10
1000x350=Rs
Cumulative cost information is given in ‘000 below:
Jan Feb Mar Apr May Jun
Production
Inventory
Hire/Fire
Total
7000x2= 14000
Prof. Upendra Kachru

27. Level Strategy
Given is the demand information below:
=1200
Demand Jan Feb Mar Apr May Jun
Production/mo
Inventory
Hire/Fire
1100x10
Cumulative cost information is given in ‘000 below:
Jan Feb Mar Apr May Jun
Production
Inventory
Hire/Fire
Total
Chase Strategy costs Rs.3,297,000
Prof. Upendra Kachru

28. Problem: Ramson & Co.
Ramson & Company, a Delhi company, manufactures designer furniture for offices. Mr. Ram has developed monthly forecasts for executive chairs and presented the period January – June in the table below.
Month
Expected demand
Production days
Demand per day
January
1000 22 45
Feb
800 18 44
March
1200 21 57
April
May
1500 68
June
1100 20 55
Prof. Upendra Kachru

29. Cost Information for Manufacture of Executive Chairs
Inventory carrying cost
Rs. 10 unit/month
Subcontracting cost
(marginal cost per unit above in-house manufacturing cost)
Rs. 100/unit
Average pay rate
Rs. 20/hour (Rs. 160/day)
Overtime pay rate
Rs. 40/hour (above 8 hours)
Labor-hours to produce a unit
6 hours/unit
Cost of increasing production rate (hiring)
Cost of decreasing production rate (layoffs)
Rs. 150/unit
Prof. Upendra Kachru

30. Forecast vs. Demand
6800/124 =
Prof. Upendra Kachru

31. Plan 1: Level Strategy - Production is equal to Average Demand
Month
Production at 55 units/day
Demand forecast
Ending inventory
January
1,210
1000
210
February
990
800
400
March
1,155
1200
355
April
1,200
310
May
1,500 20
June
1,100
Total
6,820
6800
1,315
COSTS
CALCULATIONS
Inventory carrying
Rs. 13,150 = 1,315 units carried x Rs. 10 / unit
Regular time labor
Rs. 833,280 = 42 workers x Rs. 160 / day x 124 days
Other costs
Total cost
Rs. 846,430
Prof. Upendra Kachru

32. To produce 44 units/day in-house, 33 workers are needed.
Plan 2: Mixed Strategy- Constant Workforce at lowest demand level and meet additional demand through Outsourcing
To produce 44 units/day in-house, 33 workers are needed.
All other demand is met by subcontracting, which is thus required in every month. No inventory costs are incurred.
In-house production = 44 units/day x 124 production days = 5,456 units
Subcontract units = 6, ,456 = 1,344 units
COSTS
CALCULATIONS
Regular-time labor
Rs. 654,720 = 33 workers x Rs. 160 per day x 124 days
Subcontracting
Rs. 134,400 = 1,344 units x Rs. 100 per unit
Total cost
Rs. 789,120
Prof. Upendra Kachru

33. Plan 3: Chase Strategy – Hire and layoff workers to meet the exact demand each month.
44 x 6 x Rs.20 x 18 = Rs. 95,040
Month
Forecast (units)
Prod Rate
Production Cost)
Hiring cost
Layoff cost
Total Cost
Jan
1000 45
Rs. 118,800
Feb
800 44
Rs. 95,040
Rs. 2,700
Rs. 97,740
Mar
1200 57
Rs. 143,640
Rs. 170,940
Apr
1,200
Rs. 27,300
May
1,500 68
Rs. 179,520
Rs. 24,200
Rs. 203,720
June
1,100 55
Rs. 139,200
Rs. 3,900
Rs. 143,100
6800
Rs. 819,840
Rs. 51,500
Rs. 6,600
Rs. 877,940
Rs. 100 x 13 x 21= Rs. 27,300
Rs. 150 x 13 x 20 = Rs. 3,900
Prof. Upendra Kachru

34. Comparison of Different Plans Cost Plan 1 Plan 2 Plan 3
Inventory carrying
Rs. 13,150
Regular labor
Rs. 833,280
Rs. 654,720
Rs. 819,840
Overtime labor
Hiring
Rs. 51,500
Layoffs
Rs. 6,600
Subcontracting
Rs. 134,400
Total cost
Rs. 846,430
Rs. 789,120
Rs. 877,940
Plan 2 is the lowest cost option
Prof. Upendra Kachru

35. Hierarchical Production Planning (HPP)
In large companies with several divisions or plants, HPP is used so decide which product groups to produce where.
Planning is then carried out at the appropriate organizational level.
HPP is the starting point for decisions about production quantities, inventory levels, and workforce levels for each plant.
This planning process can continue plans for individual products being developed by departmental managers.
Prof. Upendra Kachru

36. Aggregate Planning For Services
The typical service operation is Make-To-Order rather than Make-To-Stock.
The aggregate planning process, therefore, is different for services in the following ways:
Most services can not 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 service.
Prof. Upendra Kachru

37. Proactive Strategies Fixed Service Schedules/Variable Hours Strategy
Appointment for Service Times
Customer Involvement
Planning with order Backlogs
Differential Pricing
Develop Complementary Products or Services to address imbalance
Coordination with other Organizations
Proactive Strategies
Prof. Upendra Kachru

38. Scheduling Customer Demand
Backlogs:
For example, your tailor shop will not tell you exactly when service will commence. You give your measurements (service request) to a tailor (order taker), who adds it to the waiting line of orders already in the system and he gives you a date for trying out the outfit.
Prof. Upendra Kachru

39. Reservations:
In many industries like in the hospitality and travel trades, reservations have become a norm. Reservations systems, although quite similar to appointment systems, are used when the customer actually occupies or use facilities associated with the service.
Prof. Upendra Kachru

40. Cont.
Appointments:
An appointment system assign specific times for service to customers. The advantages of this method are:
Timely customer service
High utilization of servers
Hospitals are examples of service providers that use appointment systems
Prof. Upendra Kachru

41. Aggregate Planning For Services
Where this is not the case, service organizations also use aggregate planning, some in exactly the same way with a manufacturing firm.
Aggregate planning in the case of a high-volume-product output business is very similar to manufacturing.
In such high-volume tangible services, traditional aggregate planning methods may be applied.
Aggregate Planning For Services
Prof. Upendra Kachru

42. In a restaurant, for example, inventory is perishable.
In addition, in fast-food restaurants, peak and slack periods may be measured in hours.
The ’product’ may be inventoried for only as long as 10 minutes.
This brings in complexity in aggregate planning.
Prof. Upendra Kachru

43. Aggregate Planning for Services
Yield Management
Aggregate Planning for Services
Most service organizations have limited capacity. Their product is perishable e.g. airlines, and hotels, etc.
In yield management, pricing relates to addressing specific capacity problems.
The objective is to sell as much of the service at full price as possible, but to offer discounts if necessary to avoid the service to elapse.
Prof. Upendra Kachru

44. From an operational perspective, yield management is most effective when
Demand can be segmented by customer.
Fixed costs are high and variable costs are low.
Inventory is perishable.
Product can be sold in advance.
Demand is highly variable.
Yield Management
Prof. Upendra Kachru

45. Yield Management Formula
In yield management, service providers seek to minimize the cost of overbooking.
The probability of ‘no-shows’ is given by the formula:
P(n < x)  Cu/ ( Cu + Co)
Where:
n = number of no-shows
x = number of rooms or seats overbooked
Cu = cost of under-booking; i.e., lost sale
Co = cost of overbooking; i.e., replacement cost
P = probability
Prof. Upendra Kachru

46. Problem – Great Eastern Hotel
The Great Eastern Hotel at Jaipur had on the basis of historical data calculated the probability of ‘no-shows’ in a particular season.
The cost of under booking was estimated at Rs. 1750; and the cost of overbooking at Rs
The statistical data is shown below:
No-Shows Probability P(N < X)
Prof. Upendra Kachru

47. Solution Expected number of no shows = 1.75
0*(.15) + 1*(.25) + 2*(.30) + 3*(.30) = 1.75
Solution
[2(.15) + 1(.25)]*Rs = Rs
1750 / ( ) = 0.593
Expected number of no shows = 1.75
Optimal probability of no-shows = 0.593
As you expect 1.75 ‘no shows’ and rooms have to be integer numbers, you overbook 2 rooms. The cost of overbooking the rooms is as follows:
Cost of Refusing Rooms = Rs
Lost revenue from no-shows = Rs
Total cost of overbooking by 2 rooms = Rs
Expected savings = Rs a night
Therefore, it is worth overbooking 2 rooms to maximize profits and capacity utilization.
(.30)* Rs = Rs. 525
[(Rs. 1750* 1.75) - Rs ] = Rs
Prof. Upendra Kachru

48. Graphical Problem & Solution
The hotel sells its first 30 rooms at Rs and the next 30 rooms at Rs
The variable cost per room is Rs
By selling rooms at differential prices, the hotel expects to improve its operations.
Does it do so?
Prof. Upendra Kachru

49. Solution
The result is that it sells an additional 30 per cent of its rooms and improves profitability to Rs. 96,000 per day.
Prof. Upendra Kachru

50. Desegregating the Aggregate Plan
In the real world, a manufacturing system with only a fair degree of complexity might process components through seven or eight manufacturing stages.
The process would probably be integrated with parts purchased from outside vendors.
The final-assembly plan would combine numerous internally manufactured components, purchased components, and subassemblies into end products for the customers.
Desegregating the Aggregate Plan
Prof. Upendra Kachru

51. Desegregating the Aggregate Plan
The operations manager would like to know:
How should aggregate output be subdivided among each of the products that are to be produced?
What mix of these products should comprise the aggregate inventories?
This process of translating aggregate plans into plans for individual products is called desegregation.
Prof. Upendra Kachru

52. Rough-cut Capacity Plan
The upper portion of shows that the aggregate production plan anticipates making 1,200, 800, and liter bottles of soda over the 3-month planning horizon. The production schedule shown in the bottom half of the figure above provides a week-by-week schedule.
Prof. Upendra Kachru

53. Rough-cut Capacity Plan
The rough-cut capacity plan is necessary to generate the necessary detail, for planners to transform them into the Master Production Schedule (MPS).
Planners use this to determine the firm’s resource needs over the planning horizon.
In our next session, we will discuss MPS and MRP.
Rough-cut Capacity Plan
Prof. Upendra Kachru

54. Read at Home Forecast control What is Inventory management?
This is given as an Appendix to the Chapter on Supply Chain Management in your text book.
Read at Home
Prof. Upendra Kachru

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