1. Operations Management Aggregate Planning Chapter 13
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

2. Aggregation
Clustering goods or services that have similar demand requirements and common processing, labor, and materials requirements:
Individual 1040’s
Trust returns
Small business returns
Tax planning
Estate planning
# returns –or–
# forms –or–
# hours
# clients –or–
# consultations –or– $
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

3. Aggregate Planning
Responsibility Planning tasks and horizon
Determining the quantity and timing of production for the intermediate future (3 – 18 months)
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

4. 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.
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

5. Inputs to Aggregate Plan
Current machine capacities
Plans for future capacities
Workforce capacities
Current staffing level
Operations
Customer needs
Demand forecasts
Competition behavior
Distribution and marketing
Supplier capabilities
Storage capacity
Materials availability
Materials
Aggregate
plan
Cost data
Financial condition
of firm
Accounting and finance
New products
Product design changes
Machine standards
Engineering
Labor-market conditions
Training capacity
Human resources
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

6. Inputs to Aggregate Plan
Physical limitations / constraints
Managerial policy constraints
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

7. Relationships of the Aggregate Plan
Plan for
Production
Demand
Forecasts,
orders
Master
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
This slide illustrates the relationship between the aggregate schedule and other decisions areas within the organization.
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

8. Aggregate Planning Goals
Meet demand (maximize customer service)
Use capacity efficiently (minimize changes in workforce)
Meet inventory policy (minimize inventory)
Minimize cost (maximize profit)
Labor
Inventory
Plant & equipment
Subcontract
Backorder / stockout costs
At this point, we are making the decisions as to “how” we will meet the aggregate schedules, and “when” each major task with be performed.
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

9. Aggregate Planning Options
Capacity Options
Demand Options
Vary staffing (hire/fire, overtime, idle time, temporary workers)
Subcontracting
Change inventory levels
Vary prices
Vary promotion
Change lead times (e.g., backorders)
Offer complementary products
REACTIVE
AGGRESIVE
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

10. Aggregate Planning Strategies
Level Strategy
Chase Strategy
Mixed 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 Plan Worksheet
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

11. Graphical Approach 22 18 21 21 22 20 70 Level production using 60 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
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

12. 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
Discuss how the “control of labor costs” can be linked to measures of efficiency in performance of the overall service.
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

13. Yield Management
The aggregate planning process of allocating resources to customers at prices that will maximize yield (revenue)
Used where businesses have:
perishable inventory
service or product can be sold in advance
demand fluctuates
capacity is relatively fixed
demand can be segmented
variable costs are low and fixed costs are high
Examples – airlines, hotels, cruise lines, etc.
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

14. Hotel: Single Price Level
Sales
Demand Curve
Potential customers exist who are willing to pay more than the $15 variable cost
Passed up profit contributions
$ Net Sales = net price * 50 rm.
= ($150 - $15) * 50
= $6,750
Some customers who paid $150 for the room were actually willing to pay more
Money left on the table
Price
$15 variable cost of room
$150 price charged for room
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

15. Hotel: Two Price Levels
Sales
Demand
Net prices:
Price #1 = $85
Price #2 = $185
$ Net Sales
= $85 * 30 people + $185 * 30 people
= $8100
Price
$15 variable cost of room
$100
Price #1
$200
Price #2
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

16. Making Yield Management Work
Multiple pricing structures must be feasible and appear logical
Manage forecasts of use and duration of use
Manage the changes in demand.
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

17. Yield Management Matrix
Variable Price
Fixed Price
Quadrant 4
Continuing care hospitals
Quadrant 3
Restaurants, Golf courses, ISP’s
Unpredictable use
Quadrant 2
Hotels, Airlines, Rental cars, Cruise lines
Quadrant 1
Movies, Stadiums / arenas, Convention centers, Hotel meeting space
Predictable use
Durat ion o f use
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J

18. Summary
Aggregate planning reconciles conflicting needs and objectives
Aggregate plan specifies time-phased production rates, workforce levels and inventory holdings
Aggregation:
products / services are grouped into families
labor may be grouped along family lines or by skills
time may be aggregated (quarters, etc.)
Two basic planning options: changing capacity and changing demand
Aggregate planning strategies:
Level – constant workforce or production level
Chase – vary production to equal demand
Air NZ video
© 2004 by Prentice Hall, Inc. Upper Saddle River, N.J