1. © 2006 Prentice Hall, Inc.13 – 1 Operations Management Chapter 13 – Aggregate Planning © 2006 Prentice Hall, Inc. PowerPoint presentation to accompany Heizer/Render Operations Management, 8e

2. © 2006 Prentice Hall, Inc.13 – 2 Anheuser-Busch  Anheuser-Busch produces nearly 40% of the beer consumed in the U.S.  Matches fluctuating demand by brand to plant, labor, and inventory capacity to achieve high facility utilization  High facility utilization requires  Meticulous cleaning between batches  Effective maintenance  Efficient employees  Efficient facility scheduling

3. © 2006 Prentice Hall, Inc.13 – 3 Aggregate Planning  Objective is to satisfy market demand for products while minimizing cost over the planning period by adjusting  Production rates  Labor levels  Inventory levels  Overtime work  Subcontracting  Other controllable variables Aggregate planning determines the quantity and timing of resources that are required to match immediate periodic demand for all products.

4. © 2006 Prentice Hall, Inc.13 – 4 Aggregate Planning  A logical overall unit for measuring sales and output  A forecast of demand for intermediate planning period in these aggregate units  A method for determining costs  A model that combines forecasts and costs so that scheduling decisions can be made for the planning period Required for aggregate planning

5. © 2006 Prentice Hall, Inc.13 – 5 Positioning Aggregate Planning 6 months 12 months 18 months 6 months 12 months 18 months Facilities Planning Aggregate Planning Scheduling Planning Horizon

6. © 2006 Prentice Hall, Inc.13 – 6 The Planning Process Figure 13.1 Long-range plans (over one year) Research & Development New product plans Capital investment Facility location/expansion Intermediate-range plans (3 to 18 months) Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing cooperating 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 Responsibility Planning tasks and horizon

7. © 2006 Prentice Hall, Inc.13 – 7 The Central Question  How can I know if the capacity that I have is sufficient to meet demand?  How can I be sure that I will not end up with capacity that exceeds my demand?

8. © 2006 Prentice Hall, Inc.13 – 8 Activity: Calculating Aggregate Demand  After detailed analysis of the market, firm XY came up with the following data for their three products. The products are consulting services. What is the aggregate demand? JFMAMJJASOND Product A 41213141721212530313339 Product B 666666121212121212 Product C 151515151515151515151515 Aggregate Demand In thousands of units

9. © 2006 Prentice Hall, Inc.13 – 9 Activity: Calculating Aggregate Demand  After detailed analysis of the market, firm XY came up with the following data for their three products. The products are consulting services. What is the aggregate demand? JFMAMJJASOND Product A 41213141721212530313339 Product B 666666121212121212 Product C 151515151515151515151515 Aggregate Demand 253334353842485257586066 In thousands of units

10. © 2006 Prentice Hall, Inc.13 – 10 Activity: Calculating Resources Needed to satisfy Aggregate Demand  Firm XY’s plant, when operating at full capacity, produces a maximum of 5,000 units per day (working 20 days per month). To produce at this peak level, the firm has to employ 1000 people per month. If the firm employed 400 workers, what is the expected output per month?

11. © 2006 Prentice Hall, Inc.13 – 11 Activity: Calculating Resources Needed to satisfy Aggregate Demand  Assume that we keep employment at 400 workers per month. Estimate the degree of over-capacity and under- capacity per month? (excess capacity cannot be stored) JFMAMJJASOND Demand [units] 253334353842485257586066 Production level [units] 404040404040404040404040 Capacity- Shortage [A] [units] 281217182026 Excess- Capacity [B] [units] 1576526 In thousands of units

12. © 2006 Prentice Hall, Inc.13 – 12 Activity: Calculating Cost of Over- and Under-Capacity  Assume that each unit of shortage capacity implies a loss of $1.50 per unit of lost sale. For excess-capacity (no jobs to do) the cost is $2 per unit. Estimate the total cost of the resource plan. JFMAMJJASOND Demand [units] 253334353842485257586066 Production level [units] 404040404040404040404040 Capacity- Shortage [A] [units] 281217182026 Excess- Capacity [B] [units] 157652 [B] @ $2/unit $30$14$12$10$4 [A] @ $1.5/unit $3$12$18$25.5$27$30$39 In thousands of units Total loss = ($ 70 + $ 154.5 ) x 1000 = $ 224,500 per month

13. © 2006 Prentice Hall, Inc.13 – 13 Activity: Calculating Cost of Over- and Under-Capacity  Assume that Firm XY determine to manufacture average of the yearly aggregate demand each month. How would it affect the production cost? JFMAMJJASOND Demand [units] 253334353842485257586066 Production level [units] 464646464646464646464646 Capacity- Shortage [A] [units] 2113121184 Excess- Capacity [B] [units] 2113121184 [B] @ $2/unit $42$26$24$22$16$8 [A] @ $1.5/unit $31.5$19.5$18$16.5$12$6 In thousands of units Total loss = ($ 138 + $ 103.5 ) x 1000 = $ 241,500 per month

14. © 2006 Prentice Hall, Inc.13 – 14 Matching Supply to Demand  Comment: Changing the amount produced monthly may not help an organization to match supply with demand. In our example, cost savings amounted to: = (241,500 – 224,500)/224,500 x 100 = 7.57%

15. © 2006 Prentice Hall, Inc.13 – 15 Challenge of Matching Supply to Demand Fixed Components of service capacity Variable Components of service production capacity Demand below available capacity Demand matches available capacity Demand exceeds available capacity CASE 1 - raise demand using promotions - introduce new products - reduce variable service capacity - produce for future periods CASE 2 - reduce demand by shifting demand to other periods - increase variable service capacity - outsource

16. © 2006 Prentice Hall, Inc.13 – 16 Aggregate Planning Options Table 13.1 OptionAdvantagesDisadvantages Some Comments Changing inventory levels Changes in human resources are gradual or none; no abrupt production changes Inventory holding cost may increase. Shortages may result in lost sales. Applies mainly to production, not service, operations Varying workforce size by hiring or layoffs Avoids the costs of other alternatives Hiring, layoff, and training costs may be significant Used where size of labor pool is large

17. © 2006 Prentice Hall, Inc.13 – 17 Aggregate Planning Options Table 13.1 OptionAdvantagesDisadvantages 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 Sub- contracting Permits flexibility and smoothing of the firm’s output Loss of quality control; reduced profits; loss of future business Applies mainly in production settings

18. © 2006 Prentice Hall, Inc.13 – 18 Aggregate Planning Options Table 13.1 OptionAdvantagesDisadvantages Some 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 match demand to supply exactly. Creates marketing ideas. Overbooking used in some businesses.

19. © 2006 Prentice Hall, Inc.13 – 19 Aggregate Planning Options Table 13.1 OptionAdvantagesDisadvantages Some Comments Back ordering during high- demand periods May avoid overtime. Keeps capacity constant. Customer must be willing to wait, but goodwill is lost. Allows flexibility within the aggregate plan Counter- seasonal product and service mixing Fully utilizes resources; allows stable workforce May require skills or equipment outside the firm’s areas of expertise Risky finding products or services with opposite demand patterns

20. © 2006 Prentice Hall, Inc.13 – 20 Example:Aggregate Planning with Inventory  If firm XY has the opportunity to move inventory from period to period, how would the aggregate production plan change? JFMAMJJASOND Demand [units] 253334353842485257586066 Production level [units] 464646464646464646464646 Inventory Shortage [units] 2113121184 Excess- production [units] 2113121184 Inventory Carryover [units] 213446576569483523124 Inventory Depletion [units] 2113121184

21. © 2006 Prentice Hall, Inc.13 – 21 Example:Aggregate Planning with Inventory (2)  How would cost estimated in this case. Assume cost per unit per month is $0.15 cents. Average inventory per month = 414/12 = 34.5 units/month Storage costs per month = 34.5 x 12 months x 0.15 x 1000 = = $ 62,100 per year JFMAMJJASOND Demand [units] 253334353842485257586066 Production level [units] 464646464646464646464646 Inventory Carryover [units] 213446576569483523124 Inventory Depletion [units] 2113121184

22. © 2006 Prentice Hall, Inc.13 – 22 Mixing Options to Develop a Plan  Chase strategy  Match output rates to demand forecast for each period  Vary workforce levels or vary production rate  Favored by many service organizations  Level strategy  Daily production is uniform  Use inventory or idle time as buffer  Stable production leads to better quality and productivity  Some combination of capacity options, a mixed strategy, might be the best solution

23. © 2006 Prentice Hall, Inc.13 – 23 Level vs. Chase Strategy Figure 13.3 70 70 – 60 60 – 50 50 – 40 40 – 30 30 – 0 0 – JanFebMarAprMayJune=Month  221821212220=Number of working days Production rate per working day Level production using average monthly forecast demand Forecast demand

24. © 2006 Prentice Hall, Inc.13 – 24 Planning Example 1 Figure 13.4 Cumulative demand units 7,000 7,000 – 6,000 6,000 – 5,000 5,000 – 4,000 4,000 – 3,000 3,000 – 2,000 – 1,000 – – JanFebMarAprMayJune Cumulative forecast requirements Cumulative level production using average monthly forecast requirements Reduction of inventory Excess inventory

25. © 2006 Prentice Hall, Inc.13 – 25 Other Examples  Review Examples  Pp. 412-413  Pp. 410-411

26. © 2006 Prentice Hall, Inc.13 – 26 Logic of Aggregate Planning  Derive overcapacities and under-capacities based on aggregate demand  Determine strategy to use chase, level or mixed approaches  Explore the impact of three or more resources deployment plans that improve match between supply and demand  Compare the options by comparing the total costs (and profit margin implications)  Choose the option to use

27. © 2006 Prentice Hall, Inc.13 – 27 Law Firm Example (3)(4)(5)(6) (1)(2)LikelyWorstMaximumNumber of Category ofBest CaseCaseCaseDemand inQualified Legal Business(hours)(hours)(hours)PeoplePersonnel Trial work1,8001,5001,2003.64 Legal research4,5004,0003,5009.032 Corporate law8,0007,0006,50016.015 Real estate law1,7001,5001,3003.46 Criminal law3,5003,0002,5007.012 Total hours19,50017,00015,000 Lawyers needed393430 Table 13.9