Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Operations Management Aggregate Planning

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Aggregate Planning Requires  Logical overall unit for measuring sales and outputs  Forecast of demand for intermediate planning period in these aggregate units  Method for determining costs  Model that combines forecasts and costs so that planning decisions can be made

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J  Setting goals & objectives  Example: Meet demand within the limits of available resources at the least cost  Determining steps to achieve goals  Example: Hire more workers  Setting start & completion dates  Example: Begin hiring in Jan.; finish, Mar.  Assigning responsibility Planning

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Planning Tasks and Responsibilities

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Planning Horizons Today3 Months 1 year5 years Planning Horizon Short-range plans Job assignments Ordering Job scheduling Dispatching Intermediate-range plans Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans Long-range plans R&D New product plans Capital expenses Facility location, expansion Responsible: Operations managers, supervisors, foremen Responsible: Operations managers Responsible: Top executives

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Relationships of the Aggregate Plan Aggregate Plan for Production Demand Forecasts, orders Master Production Schedule, and MRP systems Detailed Work Schedules External Capacity Subcontractors Inventory On Hand Raw Materials Available Work Force Marketplace and Demand Research and Technology Product Decisions Process Planning & Capacity Decisions

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J A mathematically based aggregate planning model requires considerable:  time  problem definition  model development  model verification  model application  expertise  people who understand the problem  people who understand both the modeling process, and the specific model  money  money to pay for all of the above  often requires funding for several people for several months! What’s Needed for Aggregate Planning

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J  Provides the quantity and timing of production for intermediate future  Usually 3 to 18 months into future  Combines (‘aggregates’) production  Often expressed in common units  Example: Hours, dollars, equivalents (e.g., FTE students)  Involves capacity and demand variables Aggregate Planning

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J  Meet demand  Use capacity efficiently  Meet inventory policy  Minimize cost  Labor  Inventory  Plant & equipment  Subcontract Aggregate Planning Goals

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J 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  using part-time workers

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Aggregate Planning Strategies Pure Strategies  Demand Options — change demand :  influencing demand  backordering during high demand periods  counterseasonal product mixing

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Aggregate Scheduling Options - Advantages and Disadvantages

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Advantages/Disadvantages - Continued

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Advantages/Disadvantages - Continued OptionAdvantageDisadvantageSome Comments Using part-time workers 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.

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Advantage/Disadvantage - Continued

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J The Extremes Level Strategy Chase Strategy Production equals demand Production rate is constant

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J  Mixed strategy  Combines 2 or more aggregate scheduling options  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 Aggregate Planning Strategies

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J  Graphical & charting techniques  Popular & easy-to-understand  Trial & error approach  Mathematical approaches  Transportation method  Linear decision rule  Management coefficients model  Simulation Aggregate Planning Methods

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J The Graphical 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 or to stock levels  Develop alternative plans, and examine their total costs

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Forecast and Average Forecast Demand

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Cumulative Demand Graph for Plan 1 Jan Feb Mar Apr May Jun Cumulative forecast requirements Cumulative level production using average monthly forecast requirements Reduction of inventory Excess inventory Cumulative Demand (Units) 7,000 6,000 5,000 4,000 3,000 2,000 1,000

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Farnsworth’s Transportation Table Period 1 (Mar) Period 2 (Apr) Period 3 (May) Unused Capacity (Dummy) Total Capacity Available (Supply) Beginning Inventory Regular Overtime Subcontract RegularX Overtime X Subcontract X Regular XX Overtime XX 50 0 Subcontract Xx Total Demand Period 3 Period 2 Period 1

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Comparison of Three Major Aggregate Planning Methods Charting/graphical methods Transportation method Management coefficient model Trial and error Optimization Heuristic Simple to understand, easy to use. Many solutions; one chosen may not be optimal LP software available;permits sensitivity analysis and constraints. Linear function may not be realistic Simple, easy to implement; tries to mimic manager’s decision process; uses regression Techniques Approaches Aspects

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Controlling the Cost of Labor in Service Firms Seek:  Close control of labor hours to ensure quick response to customer demand  On-call labor resource that can be added or deleted to meet unexpected demand  Flexibility of individual worker skills to permit reallocation of available labor  Flexibility of individual worker in rate of output or hours of work to meet demand

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Making Yield Management Work  Multiple pricing structures must be feasible and appear logical  Forecast the use and duration of use.  Manage the changes in demand.

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Hotel: Single Price Level $15 variable cost of room $150 Price charged for room Price Sales $sales = Net price * 50 rooms =150*50 =$7500 Demand Curve Passed up profit contributions Money left on the table Potential customers exist who are willing to pay more than the $15 variable cost Some customers who paid $150 for the room were actually willing to pay more

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Hotel: Two Price Levels $15 variable cost of room Demand Sales $100 Price #1 $200 Price #2 Total sales = 1 st net price * nd net price *30 = $8100 Net prices are: Price #1 => $85 Price #2 => $175

Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J Yield Management Matrix FixedVariable DuratIonofuseDuratIonofuse Predictable use Quadrant 1 Movies, stadiums, arenas, convention centers, hotel meeting space Quadrant 2 Hotels, Airlines, Rental cars,Cruise lines Unpredictable use Quadrant 3 Restaurants,Golf courses, Internet service providers Quadrant 4 Continuing care hospitals