Operations Management Aggregate Planning

Anheuser-Busch Anheuser-Busch produces nearly 40% of the beer consumed in the U.S. Matches fluctuating demand by brand to specific plant, labor, and inventory capacity High facility utilization due to meticulous cleaning between batches effective maintenance efficient scheduling

Aggregate Planning Provides quantity and timing of production for the intermediate future (usually 3 to 18 months ahead) Objective to minimize cost over the planning period while matching demand Links firm’s strategic goals and production plans (manufacturing) or work force schedules (service) It may be helpful to begin this chapter with a discussion of the various planning needs of an organization - from strategic planning down to day-to-day/hour-to-hour scheduling and dispatching. Identify the level of decision making (strategic, tactical, operational), and provide examples of the time periods and level of detail required - i.e., step through the various levels of disaggregation. When you get to this slide, you may want to spend a little extra time discussing how one develops a logical overall unit for measuring sales and output. Is the unit of dollars always the best? Could required units of capacity or something similar be used?

Aggregate Planning Goals Meet demand Use capacity efficiently Meet inventory policy Minimize cost Labor Inventory Plant & equipment Subcontract It may be helpful to begin this chapter with a discussion of the various planning needs of an organization - from strategic planning down to day-to-day/hour-to-hour scheduling and dispatching. Identify the level of decision making (strategic, tactical, operational), and provide examples of the time periods and level of detail required - i.e., step through the various levels of disaggregation. When you get to this slide, you may want to spend a little extra time discussing how one develops a logical overall unit for measuring sales and output. Is the unit of dollars always the best? Could required units of capacity or something similar be used?

Aggregate Planning Variables Production rate Labor levels Inventory levels Overtime work Subcontracting rates It may be helpful to begin this chapter with a discussion of the various planning needs of an organization - from strategic planning down to day-to-day/hour-to-hour scheduling and dispatching. Identify the level of decision making (strategic, tactical, operational), and provide examples of the time periods and level of detail required - i.e., step through the various levels of disaggregation. When you get to this slide, you may want to spend a little extra time discussing how one develops a logical overall unit for measuring sales and output. Is the unit of dollars always the best? Could required units of capacity or something similar be used?

Planning Horizons Planning Horizon 1 year 5 years Today 3 Months 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 Students should be asked about the characteristics of the decisions which must be made in each of these planning horizons.

Relationships of the Aggregate Plan Plan for Production Demand Forecasts, orders Master Production Schedule MRP system External Capacity Subcontractors Inventory On Hand Raw Materials Available Work Force Marketplace and Demand Research and Technology Product Decisions Process Planning & Capacity Detailed Work Schedules This slide illustrates the relationship between the aggregate schedule and other decisions areas within the organization.

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 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.

Aggregate Planning Strategies Pure Strategies Demand Options — change demand: influencing demand backordering during high demand periods Counter seasonal product mixing

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

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

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.

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 backorder. 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.

The Extremes Level Strategy Chase Strategy Production equals demand Production rate is constant It may be helpful to stress that the extremes depicted above are the opposite ends of a continuum.

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

Aggregate Planning Methods Graphical & charting techniques Popular & easy-to-understand Trial & error approach Mathematical approaches Transportation method Linear decision rule Management coefficients model Simulation Students might be asked to suggest what problem level-scheduling enables one to avoid. Why would level-scheduling result in the lowest production costs?

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 One example which is usually meaningful to students is course scheduling. OM Session 21: Bishal Shrestha

Forecast and Average Forecast Demand 22 18 21 21 22 20 10 20 30 40 50 60 70 Production rate per working day Jan Feb Mar Apr May Jun Forecast Demand Level production using average monthly forecast demand

AP - Example Mary Rhodes has rcvd the following estimates of demand requirements Stockout costs = $100, Inventory carrying cost = $25 per unit per month, 0 ending inventory, evaluate the two options on incremental basis Plan A: Produce at steady rate (minimum reqmt) and subcontract rest at $60 per unit Plan B: Vary workforce, which currently performs at 13000 units a month. Hiring cost is $ 3000 per 100 units and firing cost is $6000 per 100 units