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1 AGGREGATE PLANNING Chapter 11 MIS 373: Basic Operations Management

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LEARNING OBJECTIVES After this lecture, students will be able to 1.Explain what aggregate planning is and how it is useful. 2.Identify the variables decision makers have to work with in aggregate planning. 3.Describe some of the graphical and quantitative techniques planners use. 4.Prepare aggregate plans and compute their costs. 5.Discuss aggregate planning in services. MIS 373: Basic Operations Management2

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MOTIVATIONS McDonald's Do you need to know the demand for each burger to plan your labor force?

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THE PLANNING SEQUENCE MIS 373: Basic Operations Management Long-term planning Intermediate-term planning Short-term detailed planning 4

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THE CONCEPT OF AGGREGATION Aggregate planning is essentially a “big-picture” approach to planning. avoid focusing on individual products or services focus on a group of similar products or services For purposes of aggregate planning, it is often convenient to think of capacity in terms of labor hours or machine hours per period, or output rates (barrels per period, units per period), without worrying about how much of a particular item will actually be involved. MIS 373: Basic Operations Management5

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AGGREGATE PLANNING The main idea behind aggregate planning: Aggregate planning translates business plans into rough labor schedules and production plans Issues to consider for aggregate planning Production rate: “aggregate units” per worker per unit time Workforce level: available workforce in terms of hours Actual production: Production rate x Workforce level Inventory: Units carried over from previous periods Costs: production, changing workforce, inventory MIS 373: Basic Operations Management6

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AGGREGATE PLANNING What does aggregate planning do? Given an aggregate demand forecast, determine production levels, inventory levels, and workforce levels, in order to minimize total relevant costs over the planning horizon Why do organizations need to do aggregate planning? It takes time to implement plans (e.g. hiring). It is not possible to predict with accuracy the timing and volume of demand for individual items. Planning is connected to the budgeting process which is usually done annually on an aggregate (e.g., departmental) level. It can help synchronize flow throughout the supply chain; it affects costs, equipment utilization; employment levels; and customer satisfaction MIS 373: Basic Operations Management7

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MATCHING DEMAND AND SUPPLY Proactive Alter demand to match supply (capacity) Among other approaches, we can alter demand by simply changing the price. Reactive Alter supply (capacity) to match demand Through capacity planning and aggregate planning Mixed Some of each MIS 373: Basic Operations Management8

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DEMAND OPTIONS Pricing Used to shift demand from peak to off-peak periods Price elasticity is important Promotion Advertising and other forms of promotion Issue: response rate and response patterns. Less control over timing of demand (may worsen the problem by bringing demand at the wrong time). Back orders (delaying order filling) Orders are taken in one period and deliveries promised for a later period Possible loss of sales, increased record keeping, lowered customer service level New demand Offer different products/services during off-peak periods. Yield (Revenue) Management Maximizing revenue by using a variable pricing strategy. Prices are set relative to capacity availability. MIS 373: Basic Operations Management9

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SUPPLY OPTIONS Hire and layoff workers May have upper or lower limit Unions/internal policies may prohibit layoffs Skill levels Associated costs (e.g., recruiting, training, severance-pay, morale) Overtime Overtime may result in lower productivity, poorer quality, more accidents, increased payroll costs Part-time workers Usually low-to-moderate job skills Independent-contractors Inventories Produce in one period and sell in another Costs: holding and carrying cost, money tied up in inventory, insurance, obsolescence, deterioration, spoilage, breakage etc. Subcontracting Less control over output. Quality problems. Higher costs MIS 373: Basic Operations Management10

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AGGREGATE PLANNING SUPPLY STRATEGIES Level capacity strategy: Maintaining a steady rate of regular-time output; variations in demand are met by using inventories or other options such as overtime, part-time workers, subcontracting, and backorders Chase demand strategy: Matching capacity to demand; the planned output for a period is set at the expected demand for that period. MIS 373: Basic Operations Management11

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LEVEL STRATEGY Capacities are kept constant over the planning horizon Advantages Stable output rates and workforce Disadvantages Greater inventory (or other) costs MIS 373: Basic Operations Management12

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CHASE STRATEGY Capacities are adjusted to match demand requirements over the planning horizon Advantages Investment in inventory is low Labor utilization in high Disadvantages The cost of adjusting output rates and/or workforce levels MIS 373: Basic Operations Management13

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CHOOSING A STRATEGY Important factors: Company policy Constraints on the available options e.g., discourage layoffs, no subcontracting to protects secrets, union policies regarding over time Flexibility Chase flexibility may not be present for companies designed for high steady output (e.g., refineries, auto assembly) Cost Alternatives are evaluated in term of cost (while matching demand within the constraints). MIS 373: Basic Operations Management14

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EXAMPLE #1: CHASE DEMAND Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker MIS 373: Basic Operations Management Period12345 Demand

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EXAMPLE #1: CHASE DEMAND MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 16 Beginning Inventory Time Periods # Hired in the beginning of a period # Fired in the beginning of a period

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EXAMPLE #1: CHASE DEMAND MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 17 Recall the chase strategy: Capacities are adjusted to match demand requirements over the planning horizon

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EXAMPLE #1: CHASE DEMAND MIS 373: Basic Operations Management Total Demand Production End Inventory 0 # Hired 0 # Fired 1 Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 18

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EXAMPLE #1: CHASE DEMAND MIS 373: Basic Operations Management Total Demand Production End Inventory 00 # Hired 00 # Fired 11 Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 19

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EXAMPLE #1: CHASE DEMAND MIS 373: Basic Operations Management Total Demand Production End Inventory 000 # Hired 000 # Fired 111 Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 20

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EXAMPLE #1: CHASE DEMAND MIS 373: Basic Operations Management Total Demand Production End Inventory 0000 # Hired 0003 # Fired 1110 Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 21

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EXAMPLE #1: CHASE DEMAND MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 22

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EXAMPLE #1: CHASE DEMAND MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 23

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EXAMPLE #1: CHASE DEMAND MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 24 One defining characteristics of the chase strategy is that we don’t have end inventory. All we produced are/were sold. No holding cost

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EXAMPLE #1: CHASE DEMAND MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker TC=Production + Holding + Hiring + Firing = 200* * *100 = $3,100 25

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EXERCISE PROBLEM Perform aggregate planning using the chase strategy: Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Period12345 Demand

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SOLUTION: CHASE STRATEGY Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Beginning Inventory

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SOLUTION: CHASE STRATEGY Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Beginning Inventory We only produce 40 units because there are 10 units beginning inventory that we can use. So, we can still meet the demand of 50 units.

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SOLUTION: CHASE STRATEGY Total Demand Production End Inventory 0 # Hired 0 # Fired 1 Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Beginning Inventory The beginning workforce is 5 workers. Since we only produce 40 units in this period and each worker can handle 10 units in a period, we only need 4 works here. We hence fire 1 at the beginning of this period.

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SOLUTION: CHASE STRATEGY Total Demand Production End Inventory 00 # Hired 00 # Fired 10 Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

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SOLUTION: CHASE STRATEGY Total Demand Production End Inventory 000 # Hired 000 # Fired 101 Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

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SOLUTION: CHASE STRATEGY Total Demand Production End Inventory 0000 # Hired 0000 # Fired 1010 Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

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SOLUTION: CHASE STRATEGY Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

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SOLUTION: CHASE STRATEGY Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker TC=Production + Holding + Hiring + Firing = 180*10 + 5*10 + 1* *200

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 35

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Total demand= =200 Production per period=200/5=40 Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 36 Recall the level strategy: Capacities are kept constant over the planning horizon. So,

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory 0 # Hired 0 # Fired 1 Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 37

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory 0 # Hired 0 # Fired 1 Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 38 Fire 1 worker in this period because 4 workers are sufficient to produce 40 units in a period.

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory 010 # Hired 00 # Fired 10 Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 39

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired 000 # Fired 100 Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 40

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired 0000 # Fired 1000 Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 41

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 42

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 43

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 44 One defining characteristics of the level strategy is that we don’t need to adjust capacity (here, labor force), except for the initial period.

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory # Hired # Fired Beginning Inventory: 0 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 45 TC=Production + Holding + Hiring + Firing But, how to calculate the holding cost? Average inventory in a period

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory Average Inventory # Hired # Fired We can estimate the holding cost by considering the average inventory in each period. Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 46 =( )/2 =( )/2

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory Average Inventory # Hired # Fired TC= 200* *5 + 0* *100 = $2,400 TC=Production + Holding + Hiring + Firing Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 47 =( )/2 =( )/2

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EXAMPLE #2: LEVEL CAPACITY MIS 373: Basic Operations Management Total Demand Production End Inventory Average Inventory # Hired # Fired TC= 200* *5 + 0* *100 = $2,400 TC=Production + Holding + Hiring + Firing Regular Production Costs: $10/unit Inventory Holding Costs: $5/unit/period Hiring Cost: $200/worker Firing Cost: $100/worker 48 =( )/2 =( )/2

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EXERCISE PROBLEM Perform aggregate planning using the level strategy: Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Period12345 Demand Two additional assumptions: 1.Unmet demands in a period can be held and fulfilled in a future period. 2.There is no cost associated with unmet demands.

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Beginning Inventory Total Demand Production End Inventory Avg. Inventory # Hired # Fired

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Beginning Inventory Total demand=190 Total demand=190 – 10 = 180 Production per period=180/5= Total Demand Production End Inventory Avg. Inventory # Hired # Fired

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Beginning Inventory Total Demand Production End Inventory -4 Avg. Inventory 3 # Hired 0 # Fired 1 By assumption #1, unmet demands in a period can be held and fulfilled in a future period. So, we keep track on the unmet demands, and try to fulfill them in a future period.

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Beginning Inventory Total Demand Production End Inventory -4 Avg. Inventory 3 # Hired 0 # Fired 1 Avg. inventory = [10 + (-4)]/2 = 3

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Beginning Inventory Total Demand Production End Inventory -4-8 Avg. Inventory 3-6 # Hired 00 # Fired = (-4) + (-4) Unmet demand from period #1 and from period #2

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Beginning Inventory Total Demand Production End Inventory Avg. Inventory # Hired 000 # Fired 100

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Beginning Inventory Total Demand Production End Inventory Avg. Inventory # Hired 0000 # Fired 1000

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SOLUTION: CHASE STRATEGY Beginning Inventory Total Demand Production End Inventory Avg. Inventory # Hired # Fired Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Beginning Inventory Total Demand Production End Inventory Avg. Inventory # Hired # Fired By assumption #2, there is no cost associated with unmet demand (i.e., negative inventory has no costs). TC=Production + Holding + Hiring + Firing = 180* *(3+1+2) *200 = $2,030

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Total Demand Production End Inventory Avg. Inventory # Hired # Fired Tim suggested another way to solve this problem. Pushing unmet demands to its next period

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Total Demand Production End Inventory 0 Avg. Inventory 5 # Hired 0 # Fired 1 Tim suggested another way to solve this problem. Pushing unmet demands to its next period Instead of -4 end inventory, here we have 0. See that the demand for period #2 increase from 40 to 44.

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Total Demand Production End Inventory 00 Avg. Inventory 50 # Hired 00 # Fired 10

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Total Demand Production End Inventory 000 Avg. Inventory 500 # Hired 000 # Fired 100

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Total Demand Production End Inventory 0004 Avg. Inventory 5002 # Hired 0000 # Fired 1000

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Total Demand Production End Inventory Avg. Inventory # Hired # Fired

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SOLUTION: CHASE STRATEGY Beginning Inventory: 10 units Beginning Workforce: 5 workers Production Rate: 10 units/worker/period Regular Production Costs: $10/unit Inventory Costs: $10/unit/period Hiring Cost: $100/worker Firing Cost: $200/worker Total Demand Production End Inventory Avg. Inventory # Hired # Fired TC=Production + Holding + Hiring + Firing = 180* * *200 = $2,090 While the TC number is different, this approach seems more intuitive than the previous approach, especially on the parts about inventory.

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AGGREGATE PLANNING IN SERVICES The aggregate planning process is different for services in the following ways: Most services cannot 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 services MIS 373: Basic Operations Management66

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AGGREGATE PLANNING IN SERVICES Hospitals: allocate funds, staff, and supplies to meet the demands of patients for their medical services Restaurants: smoothing the service rate, determining workforce size, and managing demand to match a fixed capacity Perishable inventory Airlines: complex due to the large number of factors involved (planes, flight & group personnel, multiple routes, airports etc.) Capacity decisions must also take into account the percentage of seats to be allocated to various fare classes in order to maximize profit or yield (Revenue Management) MIS 373: Basic Operations Management67

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KEY POINTS An aggregate plan is an intermediate-range plan for a collection of similar products or services that sets the stage for shorter-range plans. Two aggregate planning supply strategies are 1) chase demand strategy and 2) level capacity strategy. MIS 373: Basic Operations Management68

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