1. Operations Management Aggregate Planning Chapter 13

2. Figure 13.1

3. Using our “Seasonally Adjusted Trend Sales Forecast as a starting point, IDES Management has decided upon the following sales forecast for 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

4. Aggregate Planning Goals
Meet demand
(Sales Forecast)
Use capacity efficiently
Meet inventory policy
Minimize cost
Labor
Inventory
Plant & equipment
Subcontract
At this point, we are making the decisions as to “how” we will meet the aggregate schedules, and “when” each major task with be performed.

5. Aggregate Planning Strategies Pure Strategies
Demand Options — change demand:
influencing demand (e.g. change price)
backordering during high demand periods
counterseasonal product mixing

6. 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
This slide and the next list various scheduling strategies. The four slides following provide a framework for discussing the advantages and disadvantages of the pure strategies.

7. Aggregate Scheduling Options - Advantages and Disadvantages
Some
Comments
Changing
inventory levels
Changes in
human resources
are gradual, not
abrupt
production
changes
Inventory
holding costs;
Shortages may
result in lost
sales
Applies mainly
to production,
not service
operations
Varying
workforce size
by hiring or
layoffs
Avoids use of
other alternatives
Hiring, layoff,
and training
costs
Used where size
of labor pool is
large

8. Advantages/Disadvantages - continued
Option
Advantage
Disadvantage
Some
Comments
Varying
production rates
through overtime
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

9. Advantages/Disadvantages - continued
Option
Advantage
Disadvantage
Some
Comments
Using part-time
workers
Less costly and
more flexible
than full-time
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
match demand to
supply exactly.
Creates
marketing ideas.
Overbooking
used in some
businesses.

10. Advantage/Disadvantage - continued
Option
Advantage
Disadvantage
Some
Comments
Back ordering
during high-
demand periods
May avoid
overtime. Keeps
capacity constant
Customer must
be willing to
wait, but
goodwill is lost.
Many companies
backlog.
Counterseasonal
products and
service mixing
Fully utilizes
resources; allows
stable workforce.
May require
skills or
equipment
outside a firm's
areas of
expertise.
Risky finding
products or
services with
opposite demand
patterns.

11. The Extremes Level Strategy Chase Strategy
Production equals sales forecast
Production rate is constant

12. Aggregate Planning Strategies
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
Students might be asked to suggest what problem level-scheduling enables one to avoid. Why would level-scheduling result in the lowest production costs?

13. 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

14. 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

15. 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).

16. 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 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

17. 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

18. 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
379,200
+ 4,800
81,600 3
360,000
+24,000
105,600 4
489,600
-105,600
Total
1,536,000
264,000

19. 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) 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

20. Option 2 – Present Workforce (150) using O/T & subcontracting
Qtr
Sales
Forecast
In-house Production
Inv
Change
End
Units
Req’d
O/T
Out
Source 1
307,200
360,000
+52,800
52,800 2
379,200
-19,200
33,600 3 4
489,600
-33,600
96,000
72,000
24,000
Total
1,536,000
1,440,000

21. 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

22. Option 3 – Vary Production (Workforce) to match Sales Forecast
Qtr
Sales
Forecast
Beginning
Capacity
Change
Needed
Cost of 1
307,200
360,000
-52,800
$105,600 2
379,200
+72,000
216,000 3
-19,200
38,400 4
489,600
+129,600
388,800
Total
1,536,000
$748,800

23. Option 3 Continued Calculation 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

24. 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

25. 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

26. The IDES Sales Forecast for 2003 Revised
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

27. 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 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