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Chapter 13 – Aggregate Planning

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1 Chapter 13 – Aggregate Planning
Operations Management by R. Dan Reid & Nada R. Sanders 4th Edition © Wiley 2010 © Wiley 2010

2 Learning Objectives Explain business planning
Explain sales and operations planning Identify different aggregate planning strategies & options for changing demand and/or capacity in aggregate plans Develop aggregate plans, calculate associated costs, and evaluate the plan in terms of operations, marketing, finance, and human resources Describe differences between aggregate plans for service and manufacturing companies © Wiley 2010

3 The Role of Aggregate Planning
Integral to part of the business planning process Supports the strategic plan Also known as the production plan Identifies resources required for operations for the next 6-18 months Details the aggregate production rate and size of work force required © Wiley 2010

4 The Role of the Aggregate Plan
© Wiley 2010

5 Types of Aggregate Plans
Level Aggregate Plans Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products like appliances Disadvantage- builds inventory and/or uses back orders Chase Aggregate Plans Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage- constantly changing short term capacity © Wiley 2010

6 Level Plan Example Level production rate= 28,000 units/7 periods= 4000 units Level workforce= (4000 units x .64 std.)/160 = 16 people © Wiley 2010

7 Chase Plan Example Chase hires and fires staff to exactly meet each periods demand Period 1 = (500 units x .64 std.)/160 = 2 people, need to fire 16 people © Wiley 2010

8 Types of Aggregate Plans con’t
Hybrid Aggregate Plans Uses a combination of options Options should be limited to facilitate execution May use a level workforce with overtime & temps May allow inventory buildup and some backordering May use short term sourcing © Wiley 2010

9 Aggregate Planning Options
Demand-based options Reactive: uses finished goods inventories and backorders for fluctuations Proactive: shifts the demand patterns to minimize fluctuations e.g. early bird dinner prices at a restaurant Capacity-based options Changes output capacity to meet demand Uses overtime, under time, subcontracting, hiring, firing, and part-timers – cost and operational implications © Wiley 2010

10 Evaluating the Current Situation
Important to evaluate current situation in terms of: Point of Departure Current % of normal capacity Options are different depending on present situation Magnitude of change Larger changes need more dramatic measures Duration of change Is the length of time a brief seasonal change? Is a permanent change in capacity needed? © Wiley 2010

11 Developing the Aggregate Plan
Step 1- Choose strategy: level, chase, or Hybrid Step 2- Determine the aggregate production rate Step 3- Calculate the size of the workforce Step 4- Test the plan as follows: Calculate Inventory, expected hiring/firing, overtime needs Calculate total cost of plan Step 5- Evaluate performance: cost, service, human resources, and operations © Wiley 2010

12 Aggregate Plans for Companies with Tangible Products
Plan A: Level aggregate plan using inventories and back orders Plan B: Chase aggregate plan using hiring and firing © Wiley 2010

13 Problem Data for Plans A & B
Data for Sophisticated Skates © Wiley 2010

14 Plan A - Level Using Inventory & Backorders
First calculate the level production rate (14400/8=1800) © Wiley 2010

15 Plan A Evaluation Fill rate is 83.9% Fill rate is likely to low
Inventory levels seem to be okay Human resources fires two employees © Wiley 2010

16 Plan B – Chase Aggregate Plan Using Hiring and Firing
Using the same problem data as previous example, develop a chase aggregate plan using hires and fires but no overtime production. © Wiley 2010

17 Plan B Evaluation Plan B costs slightly less than the level plan.
Hiring demands ranges from two in November to thirty-four in February Utilization is highest, 70.6%, in December and even lower in the other months Space and equipment are underutilized in every other month of the plan © Wiley 2010

18 Aggregate Plans for Service Companies with Non-Tangible Products
Options remain the same – level, chase, and hybrid plans Overtime and under time can be used Staff can be hired and fired Inventory cannot be used to level the service plan All demand must be satisfied or lose business to a competing service provider © Wiley 2010

19 Problem Data for Plans C, D, and E
© Wiley 2010

20 Plan C – Level Aggregate Plan with No Back Orders or Tangible Product
Staff of 69 people creates excessive UT (averages 30% UT) Cost per service call is $46.15 ($708,000 Divided by calls) © Wiley 2010

21 Plan D – Hybrid Aggregate Plan Using Initial Workforce and OT as Needed
Costs reduced by $77K and under time to an average of 20% Cost per service call reduced to $41.13 (-$5.02) © Wiley 2010

22 Plan E – Chase Aggregate Plan for Nontangible Products Using Hiring and Firing
Total cost reduced by $114K over Plan F, utilization improved to 100%, and cost per service call now $33.72 (-$7.41) Workforce fluctuates from people- morale problems Solution?? Compare smaller permanent workforce, more OT?? © Wiley 2010

23 Aggregate Planning Bottom Line
The Aggregate plan must balance several perspectives Costs are important but so are: Customer service Operational effectiveness Workforce morale A successful AP considers each of these factors © Wiley 2010

24 Aggregate Planning within OM: How it all fits together
Aggregate planning determines the resources available to operations to support the overall business plan. It is critical that accurate demand forecasts be available (Ch 8) so that a reasonable production plan can be developed. A company needs to determine the aggregate production rate output required to determine the appropriate size of the workforce. After these determinations have been made, the company can calculate its inventory levels, back-order levels, capacity requirements, and customer service levels. If the plan requires seven-day-a-week operations, appropriate staff schedules need to be developed (Ch 15). The aggregate plan specifies the number of employees needed. This allows company to determine how much equipment and workspace is needed, as well as to provide the input needed for developing a workplace layout (Ch 9) within the operations area. Aggregate planning provides the resources needed by operations to achieve the company’s strategic objective. © Wiley 2010

25 Aggregate Planning Across the Organization
Aggregate planning, MPS, and rough-cut capacity affection functional areas throughout the organization Accounting is affected because aggregate plan details the resources needed by operations Marketing as the aggregate plan supports the marketing plan Information systems maintains the databases that support demand forecasts and other such information © Wiley 2010

26 Chapter 13 Highlights Planning begins with the development of the strategic business plan that provides company direction & objectives for the next two to ten years. Sales and operations planning integrates plans from the other functional areas and regularly evaluates company performance. The level aggregate plan maintains the same size workforce and produces the same output each period. Inventories and backorders absorb fluctuations in demand. Chase aggregate plans change the capacity each period to match demand. © Wiley 2010

27 Chapter 13 Highlights con’t
Demand patterns can be smoothed through pricing incentives, reduced prices for out-of-season purchases, or nonprime service times. The difference in aggregate planning for companies that do not provide a tangible product is that the option to use inventories is not available © Wiley 2010

28 Chapter 13 Homework Hints
All problems are based on The BackPack Company. Problem 13.1: level strategy allowing backorders. Calculate the production rate and workforce level. Develop the plan, calculate the costs, and evaluate the strategy. Problem : chase strategy. 3) Calculate the production rate and workforce levels. 4) Develop the plan, calculate the costs, and evaluate the strategy. Problem 13.5: chase strategy with overtime. Calculate the production rate and workforce levels. Develop the plan, calculate the costs, and evaluate the strategy.

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