1. Chapter 13 – Aggregate Planning
Operations Management by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010
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2. Learning Objectives Explain business planning
Explain sales and operations planning
Identify different aggregate planning strategies & options for changing demand and/or capacity in aggregate plans
Develop aggregate plans, calculate associated costs, and evaluate the plan in terms of operations, marketing, finance, and human resources
Describe differences between aggregate plans for service and manufacturing companies
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3. The Role of Aggregate Planning
Integral to part of the business planning process
Supports the strategic plan
Also known as the production plan
Identifies resources required for operations for the next 6-18 months
Details the aggregate production rate and size of work force required
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4. The Role of the Aggregate Plan
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5. Types of Aggregate Plans
Level Aggregate Plans
Maintains a constant workforce
Sets capacity to accommodate average demand
Often used for make-to-stock products like appliances
Disadvantage- builds inventory and/or uses back orders
Chase Aggregate Plans
Produces exactly what is needed each period
Sets labor/equipment capacity to satisfy period demands
Disadvantage- constantly changing short term capacity
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6. Level Plan Example
Level production rate= 28,000 units/7 periods= 4000 units
Level workforce= (4000 units x .64 std.)/160 = 16 people
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7. Chase Plan Example
Chase hires and fires staff to exactly meet each periods demand
Period 1 = (500 units x .64 std.)/160 = 2 people, need to fire 16 people
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8. Types of Aggregate Plans con’t
Hybrid Aggregate Plans
Uses a combination of options
Options should be limited to facilitate execution
May use a level workforce with overtime & temps
May allow inventory buildup and some backordering
May use short term sourcing
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9. Aggregate Planning Options
Demand-based options
Reactive: uses finished goods inventories and
backorders for fluctuations
Proactive: shifts the demand patterns to minimize fluctuations e.g. early bird dinner prices at a restaurant
Capacity-based options
Changes output capacity to meet demand
Uses overtime, under time, subcontracting, hiring, firing, and part-timers – cost and operational implications
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10. Evaluating the Current Situation
Important to evaluate current situation in terms of:
Point of Departure
Current % of normal capacity
Options are different depending on present situation
Magnitude of change
Larger changes need more dramatic measures
Duration of change
Is the length of time a brief seasonal change?
Is a permanent change in capacity needed?
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11. Developing the Aggregate Plan
Step 1- Choose strategy: level, chase, or Hybrid
Step 2- Determine the aggregate production rate
Step 3- Calculate the size of the workforce
Step 4- Test the plan as follows:
Calculate Inventory, expected hiring/firing, overtime needs
Calculate total cost of plan
Step 5- Evaluate performance: cost, service, human resources, and operations
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12. Aggregate Plans for Companies with Tangible Products
Plan A: Level aggregate plan using inventories and back orders
Plan B: Chase aggregate plan using hiring and firing
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13. Problem Data for Plans A & B
Data for Sophisticated Skates
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14. Plan A - Level Using Inventory & Backorders
First calculate the level production rate (14400/8=1800)
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15. Plan A Evaluation Fill rate is 83.9% Fill rate is likely to low
Inventory levels seem to be okay
Human resources fires two employees
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16. Plan B – Chase Aggregate Plan Using Hiring and Firing
Using the same problem data as previous example, develop a chase aggregate plan using hires and fires but no overtime production.
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17. Plan B Evaluation Plan B costs slightly less than the level plan.
Hiring demands ranges from two in November to thirty-four in February
Utilization is highest, 70.6%, in December and even lower in the other months
Space and equipment are underutilized in every other month of the plan
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18. Aggregate Plans for Service Companies with Non-Tangible Products
Options remain the same – level, chase, and hybrid plans
Overtime and under time can be used
Staff can be hired and fired
Inventory cannot be used to level the service plan
All demand must be satisfied or lose business to a competing service provider
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19. Problem Data for Plans C, D, and E
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20. Plan C – Level Aggregate Plan with No Back Orders or Tangible Product
Staff of 69 people creates excessive UT (averages 30% UT)
Cost per service call is $46.15 ($708,000 Divided by calls)
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21. Plan D – Hybrid Aggregate Plan Using Initial Workforce and OT as Needed
Costs reduced by $77K and under time to an average of 20%
Cost per service call reduced to $41.13 (-$5.02)
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22. Plan E – Chase Aggregate Plan for Nontangible Products Using Hiring and Firing
Total cost reduced by $114K over Plan F, utilization improved to 100%, and cost per service call now $33.72 (-$7.41)
Workforce fluctuates from people- morale problems
Solution?? Compare smaller permanent workforce, more OT??
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23. Aggregate Planning Bottom Line
The Aggregate plan must balance several perspectives
Costs are important but so are:
Customer service
Operational effectiveness
Workforce morale
A successful AP considers each of these factors
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24. Aggregate Planning within OM: How it all fits together
Aggregate planning determines the resources available to operations to support the overall business plan. It is critical that accurate demand forecasts be available (Ch 8) so that a reasonable production plan can be developed. A company needs to determine the aggregate production rate output required to determine the appropriate size of the workforce.
After these determinations have been made, the company can calculate its inventory levels, back-order levels, capacity requirements, and customer service levels. If the plan requires seven-day-a-week operations, appropriate staff schedules need to be developed (Ch 15).
The aggregate plan specifies the number of employees needed. This allows company to determine how much equipment and workspace is needed, as well as to provide the input needed for developing a workplace layout (Ch 9) within the operations area. Aggregate planning provides the resources needed by operations to achieve the company’s strategic objective.
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25. Aggregate Planning Across the Organization
Aggregate planning, MPS, and rough-cut capacity affection functional areas throughout the organization
Accounting is affected because aggregate plan details the resources needed by operations
Marketing as the aggregate plan supports the marketing plan
Information systems maintains the databases that support demand forecasts and other such information
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26. Chapter 13 Highlights
Planning begins with the development of the strategic business plan that provides company direction & objectives for the next two to ten years.
Sales and operations planning integrates plans from the other functional areas and regularly evaluates company performance.
The level aggregate plan maintains the same size workforce and produces the same output each period. Inventories and backorders absorb fluctuations in demand. Chase aggregate plans change the capacity each period to match demand.
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27. Chapter 13 Highlights con’t
Demand patterns can be smoothed through pricing incentives, reduced prices for out-of-season purchases, or nonprime service times.
The difference in aggregate planning for companies that do not provide a tangible product is that the option to use inventories is not available
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28. The End
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