Chapter 15 - Aggregate Planning

Outline
Operations
Global Company Profile:
Management Anheuser-Busch
The Planning Process
Chapter 13
The Nature of Aggregate Planning
Aggregate Planning
Aggregate Planning Strategies
Capacity Options
PowerPoint presentation to accompany
Heizer/Render
Demand Options
Principles of Operations Management, 7e Mixing Options to Develop a Plan
Operations Management, 9e
2008 Prentice Hall, Inc. 13 1 2008 Prentice Hall, Inc. 13 2
Outline Continued Outline Continued

Aggregate Planning in Services
Methods for Aggregate Planning
Restaurants
Graphical Methods
Hospitals
Mathematical Approaches
National Chains of Small Service
Comparison of Aggregate Planning Firms
Methods
Miscellaneous Services
Airline Industry
Yield Management
Learning Objectives Learning Objectives

When you complete this chapter you When you complete this chapter you
should be able to: should be able to:
1. Define aggregate planning 4. Solve an aggregate plan via the

2. Identify optional strategies for transportation method of linear
developing an aggregate plan programming
3. Prepare a graphical aggregate plan 5. Understand and solve a yield

management problem
1
Anheuser-Busch Anheuser-Busch
Anheuser-Busch produces nearly 40% Product-focused facility with high fixed
of the beer consumed in the U.S. costs
Matches fluctuating demand by brand High utilization requires effective
to plant, labor, and inventory capacity aggregate planning of the four basic
to achieve high facility utilization stages of production
High facility utilization requires Selection and delivery of raw materials
Meticulous cleaning between batches Brewing process from milling to aging
Effective maintenance Packaging
Efficient employee and facility scheduling Distribution
Aggregate Planning Aggregate Planning

Determine the quantity and timing of Required for aggregate planning
production for the immediate future
A logical overall unit for measuring sales
Objective is to minimize cost over the and output
planning period by adjusting
A forecast of demand for an intermediate
Production rates
planning period in these aggregate terms
Labor levels
A method for determining costs
Inventory levels
Overtime work
A model that combines forecasts and
costs so that scheduling decisions can
Subcontracting rates be made for the planning period
Other controllable variables
The Planning Process Aggregate Planning

Long-range plans
(over one year)
Research and Development
New product plans
Capital investments Quarter 1
Facility location/expansion
Jan Feb Mar
Top
executives Intermediate-range plans 150,000 120,000 110,000
(3 to 18 months)
Sales planning
Production planning and budgeting Quarter 2
Operations Setting employment, inventory,
managers subcontracting levels Apr May Jun
Analyzing operating plans
100,000 130,000 150,000
Short-range plans
(up to 3 months)
Job assignments
Operations Ordering Quarter 3
managers, Job scheduling
supervisors, Dispatching Jul Aug Sep
foremen Overtime
Part-time help 180,000 150,000 140,000
Responsibility Planning tasks and horizon Figure 13.1
2
Aggregate
Aggregate Planning
Planning
Combines appropriate resources
into general terms
Part of a larger production planning
system
Disaggregation breaks the plan
down into greater detail
Disaggregation results in a master
production schedule
Figure 13.2
Aggregate Planning Capacity Options

Strategies
Changing inventory levels
1. Use inventories to absorb changes in
demand Increase inventory in low demand
periods to meet high demand in
2. Accommodate changes by varying the future
workforce size
Increases costs associated with
3. Use part-timers, overtime, or idle time to
storage, insurance, handling,
absorb changes
obsolescence, and capital
4. Use subcontractors and maintain a stable investment 15% to 40%
workforce
Shortages can mean lost sales due
5. Change prices or other factors to to long lead times and poor
influence demand customer service
Capacity Options Capacity Options

Varying workforce size by hiring Varying production rate through
or layoffs overtime or idle time
Match production rate to demand Allows constant workforce
Training and separation costs for May be difficult to meet large
hiring and laying off workers increases in demand
New workers may have lower Overtime can be costly and may
productivity drive down productivity
Laying off workers may lower Absorbing idle time may be
morale and productivity difficult
3
Capacity Options Capacity Options
Subcontracting Using part-time workers
Temporary measure during Useful for filling unskilled or low
periods of peak demand skilled positions, especially in
May be costly services
Assuring quality and timely

delivery may be difficult
Exposes your customers to a
possible competitor
Demand Options Demand Options

Influencing demand Back ordering during high-
Use advertising or promotion to demand periods
increase demand in low periods Requires customers to wait for an
Attempt to shift order without loss of goodwill or
demand to slow the order
periods Most effective when there are few
May not be if any substitutes for the product
sufficient to or service
balance demand Often results in lost sales
and capacity
Demand Options Aggregate Planning Options

Counterseasonal product and Option Advantages Disadvantages Some Comments
service mixing Changing

inventory
Changes in
human
Inventory
holding cost
Applies mainly to
production, not
levels resources are may increase. service,
Develop a product mix of gradual or Shortages may operations.
counterseasonal items none; no abrupt result in lost
production sales.
May lead to products or services changes.
outside the companys areas of Varying Avoids the costs Hiring, layoff, Used where size
workforce of other and training of labor pool is
expertise size by alternatives. costs may be large.
hiring or significant.
layoffs
Table 13.1
4
Aggregate Planning Options Aggregate Planning Options
Option Advantages Disadvantages Some Comments Option Advantages Disadvantages Some Comments
Varying Matches Overtime Allows flexibility Using part- Is less costly High turnover/ Good for
production seasonal premiums; tired within the time and more training costs; unskilled jobs in
rates fluctuations workers; may aggregate plan. workers flexible than quality suffers; areas with large
through without hiring/ not meet full-time scheduling temporary labor
overtime or training costs. demand. workers. difficult. pools.
idle time
Influencing Tries to use Uncertainty in Creates
Sub- Permits Loss of quality Applies mainly in demand excess demand. Hard marketing
contracting flexibility and control; production capacity. to match ideas.
smoothing of reduced profits; settings. Discounts draw demand to Overbooking
the firms loss of future new customers. supply exactly. used in some
output. business. businesses.
Table 13.1 Table 13.1

Aggregate Planning Options Methods for Aggregate

Planning
Option Advantages Disadvantages Some Comments
Back May avoid Customer must Many companies
ordering overtime. be willing to back order. A mixed strategy may be the best
during Keeps capacity wait, but
high- constant. goodwill is lost. way to achieve minimum costs
demand
periods There are many possible mixed
Counter- Fully utilizes May require Risky finding strategies
seasonal resources; skills or products or
product
and service
allows stable
workforce.
equipment
outside the
services with
opposite Finding the optimal plan is not
mixing firms areas of demand always possible
expertise. patterns.
Table 13.1
Mixing Options to Mixing Options to

Develop a Plan Develop a Plan
Chase strategy Level strategy
Match output rates to demand Daily production is uniform
forecast for each period Use inventory or idle time as buffer
Vary workforce levels or vary Stable production leads to better
production rate quality and productivity
Favored by many service Some combination of capacity
organizations
options, a mixed strategy, might be
the best solution
5
Graphical Methods Graphical Methods
Popular techniques 1. Determine the demand for each period
Easy to understand and use 2. Determine the capacity for regular time,
overtime, and subcontracting each period
Trial-and-error approaches that do 3. Find labor costs, hiring and layoff costs,
not guarantee an optimal solution and inventory holding costs
Require only limited computations 4. Consider company policy on workers and
stock levels
5. Develop alternative plans and examine
their total costs
Roofing Supplier Example 1 Roofing Supplier Example 1

Production Demand Per Day Forecast demand
Production rate per working day
Month Expected Demand Days (computed)

Jan 900 22 41 70
Level production using average
Feb 700 18 39 monthly forecast demand
60
Mar 800 21 38
Apr 1,200 21 57 50
May 1,500 22 68
40
June 1,100 20 55
6,200 124 30
Table 13.2
Average Total expected demand
requirement = Number of production days 0
Jan Feb Mar Apr May June = Month

6,200 22 18 21 21 22 20 = Number of
= = 50 units per day working days
124 Figure 13.3

Monthly
Cost Information Cost Information
Production at Demand Inventory Ending
Inventory carrying cost $ 5 per unit per month 50 Units
Month carry
Inventory cost per Day Forecast $ 5Change
per unit per Inventory
month
Subcontracting cost per unit $10 per unit Jan
Subcontracting 1,100
cost per unit 900 $10 +200
per unit 200
Average pay rate $ 5 per hour ($40 per day) Feb pay rate 900
Average 700 +200
$ 5 per 400
hour ($40 per day)
$ 7 per hour Mar 1,050 800 +250
$ 7 per hour 650
Overtime pay rate Overtime pay rate
(above 8 hours per day) (above 8 hours per day)
Apr 1,050 1,200 -150 500
Labor-hours to produce a unit 1.6 hours per unit Labor-hours to produce a unit 1.6 hours per unit
May 1,100 1,500 -400 100
Cost of increasing daily production rate $300 per unit Cost of increasing daily production rate $300 per unit
(hiring and training)
June 1,000
1,100 -100 0
Cost of decreasing daily production rate $600 per unit Cost of decreasing daily production rate $600 per unit 1,850
(layoffs) (layoffs)
Total units of inventory carried over from one
Table 13.3 Table 13.3 month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
6
Monthly 7,000
Costs
Cost Information
Production at Demand Calculations
Inventory Ending
50
Month carry
Inventory Units
cost per Day $9,250
Forecast $ 5Change
perunits
unit per Inventory
month 6,000
Inventory carrying (= 1,850 carried x $5 Reduction
Cumulative demand units

per unit) of inventory
Jan
Subcontracting 1,100
cost per unit 900 $10 +200
per unit 200 5,000 6,200 units
Cumulative level
Regular-time
Feb pay rate
Average labor
900 49,600
700 (= 10
$ 5 workers
+200
per x $40per
hour ($40 per
400day) production using
Mar 1,050 800 day x+250
124 days)
$ 7 per hour 650 4,000 average monthly
forecast
Overtime pay rate
Other (above 8 hours per day)
Apr costs (overtime,
1,050 1,200 -150 500 requirements
hiring, layoffs,
Labor-hours to produce a unit 1.6 hours per unit 3,000
May
subcontracting) 1,100 1,500
0 -400 100
Cost of increasing daily production rate $300 per unit
June
Total cost 1,000 1,100
$58,850 -100 0 2,000 Cumulative forecast
requirements
Cost of decreasing daily production rate $600 per unit 1,850
1,000
(layoffs) Excess inventory
Total units of inventory carried over from one
Table 13.3 month to the next = 1,850 units
Jan Feb Mar Apr May June
Workforce required to produce 50 units per day = 10 workers
Figure 13.4

Production Demand Per Day Forecast demand

Jan 900 22 41 70
Feb 700 18 39 Level production
60 using lowest
Mar 800 21 38 monthly forecast
Apr 1,200 21 57 50 demand
May 1,500 22 68
40
June 1,100 20 55
6,200 124 30
Table 13.2
0

Minimum requirement = 38 units per day 22 18 21 21 22 20 = Number of

working days

Cost Information Cost Information
Inventory carrying cost $ 5 per unit per month Inventory carry cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit In-housecost
Subcontracting production
per unit = 38$10units
per unitper day
Average pay rate $ 5 per hour ($40 per day) Average pay rate x $124
5 perdays
hour ($40 per day)
Overtime pay rate

$ 7 per hour
Overtime pay rate
= 4,712
$ 7 perunits
hour
(above 8 hours per day) (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit Subcontract
Labor-hours units
to produce a unit = 6,200 - 4,712
1.6 hours per unit
Cost of increasing daily production rate $300 per unit Cost of increasing daily production rate
= $300 per
1,488 unit
units
(hiring and training) (hiring and training)
Cost of decreasing daily production rate $600 per unit Cost of decreasing daily production rate $600 per unit
(layoffs) (layoffs)
Table 13.3 Table 13.3
7
Cost Information Production Demand Per Day
Inventory carry cost $ 5 per unit per month
Jan 900 22 41
In-housecost
Subcontracting production
per unit = 38$10units
per unitper day
Feb 700 18 39
Average pay rate x $124
5 perdays
hour ($40 per day) Mar 800 21 38
Overtime pay rate
= 4,712
$ 7 perunits
hour Apr 1,200 21 57
(above 8 hours per day) May 1,500 22 68
Costs Subcontract
Labor-hours units
to produce a unit = Calculations
6,200 - 4,712
1.6 hours per unit June 1,100 20 55
Regular-time
Cost labor
of increasing $37,696
daily production = (=
rate 7.6 workers
1,488
$300 per unit x $40 per
units 6,200 124
(hiring and training) day x 124 days)
Table 13.2
Cost of decreasing daily production
Subcontracting 14,880rate (= $600
1,488per unitx $10 per
units
(layoffs)
unit)
Table 13.3
Total cost $52,576 Production = Expected Demand

Cost Information
Forecast demand and

monthly production Inventory carrying cost $ 5 per unit per month
70
Subcontracting cost per unit $10 per unit
60
Average pay rate $ 5 per hour ($40 per day)
50 $ 7 per hour
Overtime pay rate
(above 8 hours per day)
40 1.6 hours per unit
Labor-hours to produce a unit
30 Cost of increasing daily production rate $300 per unit
Cost of decreasing daily production rate $600 per unit
0 (layoffs)
Table 13.3
22 18 21 21 22 20 = Number of
working days
Roofing Supplier Example 4 Comparison of Three Plans

Basic
Cost Information Production
Cost Extra Cost of Extra Cost of Cost Plan 1 Plan 2 Plan 3
Inventory carrying cost
Daily (demand x $ 5 perDecreasing
Increasing unit per month
Forecast Prod 1.6 hrs/unit x Production Production
Subcontracting
Month (units) cost
Rate per unit
$5/hr)
$10
(hiring cost)
per unit
(layoff cost) Total Cost Inventory carrying $ 9,250 $ 0 $ 0
Average
Jan pay
900 rate 41 $ 7,200 $ 5 per hour
($40 per$ day)
7,200
Regular labor 49,600 37,696 49,600
$7 $1,200
per hour
Feb
Overtime 700
pay rate39 5,600 6,800
(= 2 x $600) Overtime labor 0 0 0
(above 8 hours per day)
$600
Mar 800 to produce
Labor-hours 38 6,400
a unit 1.6 hours per unit 7,000
(= 1 x $600) Hiring 0 0 9,000
Cost
Apr of increasing
1,200 57daily production
9,600 rate
$5,700$300 per unit
15,300 Layoffs 0 0 9,600
(hiring and training) (= 19 x $300)
Cost
May of decreasing
1,500 68daily production
12,000
$3,300
rate $600 per unit
15,300 Subcontracting 0 14,880 0
(= 11 x $300)
(layoffs)
$7,800 Total cost $58,850 $52,576 $68,200
June 1,100 55 8,800 16,600
(= 13 x $600)
Table 13.3
$49,600 $9,000 $9,600 $68,200
Table 13.4
Plan 2 is the lowest cost option Table 13.5
8
Mathematical Approaches Transportation Method
Sales Period
Useful for generating strategies Mar Apr May
Transportation Method of Linear Demand 800 1,000 750
Programming Capacity:
Regular 700 700 700
Produces an optimal plan Overtime 50 50 50
Management Coefficients Model Subcontracting 150 150 130
Beginning inventory 100 tires
Model built around managers
experience and performance Costs
Regular time $40 per tire
Other Models
Overtime $50 per tire
Linear Decision Rule Subcontracting $70 per tire
Simulation Carrying $2 per tire per month Table 13.6
Transportation Example Transportation Example

Important points Important points
1. Carrying costs are $2/tire/month. If 4. Quantities in each column designate the
goods are made in one period and held levels of inventory needed to meet
over to the next, holding costs are demand requirements
incurred 5. In general, production should be
2. Supply must equal demand, so a allocated to the lowest cost cell
dummy column called unused available without exceeding unused
capacity is added capacity in the row or demand in the
3. Because back ordering is not viable in column
this example, cells that might be used to
satisfy earlier demand are not available
Management Coefficients
Transportation Model
Example
Builds a model based on managers
experience and performance
A regression model is constructed
to define the relationships between
decision variables
Objective is to remove
inconsistencies in decision making
Table 13.7
9
Other Models Summary of Aggregate
Planning Methods
Linear Decision Rule
Solution
Techniques Approaches Important Aspects
Minimizes costs using quadratic cost curves
Graphical Trial and Simple to understand and
Operates over a particular time period methods error easy to use. Many
solutions; one chosen
Simulation may not be optimal.
Transportation Optimization LP software available;
Uses a search procedure to try different method of linear permits sensitivity
combinations of variables programming analysis and new
constraints; linear
Develops feasible but not necessarily optimal functions may not be
solutions realistic.
Table 13.8
Summary of Aggregate Aggregate Planning in

Planning Methods Services
Solution
Techniques Approaches Important Aspects Controlling the cost of labor is critical
Management Heuristic Simple, easy to implement; 1. Accurate scheduling of labor-hours to
coefficients tries to mimic managers
model decision process; uses assure quick response to customer
regression. demand
Simulation Change Complex; may be difficult
parameters to build and for managers 2. An on-call labor resource to cover
to understand. unexpected demand
3. Flexibility of individual worker skills
4. Flexibility in rate of output or hours of
Table 13.8
work
Five Service Scenarios Five Service Scenarios
Restaurants National Chains of Small Service

Smoothing the production Firms
process Planning done at national level
Determining the optimal and at local level
workforce size Miscellaneous Services
Hospitals Plan human resource
Responding to patient demand requirements
Manage demand
10
Law Firm Example Five Service Scenarios
Labor-Hours Required Capacity Constraints
(1)
(2) (3)
Forecasts
(4) (5)
Maximum
(6)
Number of
Airline industry
Category of Best Likely Worst Demand in Qualified
Legal Business (hours) (hours) (hours) People Personnel Extremely complex planning
Trial work 1,800 1,500 1,200 3.6 4 problem
Legal research 4,500 4,000 3,500 9.0 32
Corporate law 8,000 7,000 6,500 16.0 15 Involves number of flights,
Real estate law 1,700 1,500 1,300 3.4 6
Criminal law 3,500 3,000 2,500 7.0 12
number of passengers, air and
Total hours 19,500 17,000 15,000 ground personnel, allocation of
Lawyers needed 39 34 30 seats to fare classes
Resources spread through the
Table 13.9 entire system
Yield Management Yield Management Example

Room sales Demand
Allocating resources to customers at Curve
prices that will maximize yield or 100
Potential customers exist who
are willing to pay more than the
revenue $15 variable cost of the room
1. Service or product can be sold in

Passed-up Some customers who paid
advance of consumption contribution $150 were actually willing
Total 50 to pay more for the room
2. Demand fluctuates $ contribution
= (Price) x (50
3. Capacity is relatively fixed rooms)
= ($150 - $15)
4. Demand can be segmented x (50)
= $6,750
Money left
on the table
5. Variable costs are low and fixed costs $15 $150 Price
are high Variable cost Price charged Figure 13.5
2008 Prentice Hall, Inc. 13 63 2008 Prentice Hall, Inc.
of room for room 13 64
Yield Management Example Yield Management Matrix

Room sales Demand
Curve Price
Total $ contribution = Tend to be fixed Tend to be variable
100 (1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 = Quadrant 1: Quadrant 2:
Predictable
$2,550 + $5,550 = $8,100

Movies Hotels
Stadiums/arenas Airlines
Duration of use
60 Convention centers Rental cars

Hotel meeting space Cruise lines
Quadrant 3: Quadrant 4:
Unpredictable
30
Restaurants Continuing care
Golf courses hospitals
Internet service
providers
$15 $100 $200 Price

Variable cost Price 1 Price 2 Figure 13.6 Figure 13.7
2008 Prentice Hall, Inc.
of room for room for room 13 65 2008 Prentice Hall, Inc. 13 66
11
Making Yield Management
Work
1. Multiple pricing structures must
be feasible and appear logical to
the customer
2. Forecasts of the use and duration
of use
3. Changes in demand
2008 Prentice Hall, Inc. 13 67
12

Chapter 15 - Aggregate Planning

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Chapter 15 - Aggregate Planning

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Outline

Outline Continued Outline Continued

2008 Prentice Hall, Inc. 13 3 2008 Prentice Hall, Inc. 13 4

Learning Objectives Learning Objectives

1. Define aggregate planning 4. Solve an aggregate plan via the

3. Prepare a graphical aggregate plan 5. Understand and solve a yield

2008 Prentice Hall, Inc. 13 5 2008 Prentice Hall, Inc. 13 6

2008 Prentice Hall, Inc. 13 7 2008 Prentice Hall, Inc. 13 8

Aggregate Planning Aggregate Planning

The Planning Process Aggregate Planning

2008 Prentice Hall, Inc. 13 13 2008 Prentice Hall, Inc. 13 14

Aggregate Planning Capacity Options

Capacity Options Capacity Options

2008 Prentice Hall, Inc. 13 17 2008 Prentice Hall, Inc. 13 18

Assuring quality and timely

2008 Prentice Hall, Inc. 13 19 2008 Prentice Hall, Inc. 13 20

Demand Options Demand Options

2008 Prentice Hall, Inc. 13 21 2008 Prentice Hall, Inc. 13 22

Demand Options Aggregate Planning Options

service mixing Changing

Table 13.1 Table 13.1

Aggregate Planning Options Methods for Aggregate

Mixing Options to Mixing Options to

Popular techniques 1. Determine the demand for each period

Roofing Supplier Example 1 Roofing Supplier Example 1

Month Expected Demand Days (computed)

2008 Prentice Hall, Inc. 13 33 2008 Prentice Hall, Inc. 13 34

Roofing Supplier Example 2 Roofing Supplier Example 2

2008 Prentice Hall, Inc. 13 35 2008 Prentice Hall, Inc. 13 36

Cumulative demand units

2008 Prentice Hall, Inc. 13 37 2008 Prentice Hall, Inc. 13 38

Roofing Supplier Example 3 Roofing Supplier Example 3

Month Expected Demand Days (computed)

Minimum requirement = 38 units per day 22 18 21 21 22 20 = Number of

2008 Prentice Hall, Inc. 13 39 2008 Prentice Hall, Inc. 13 40

Roofing Supplier Example 3 Roofing Supplier Example 3

Overtime pay rate

Table 13.3 Table 13.3

2008 Prentice Hall, Inc. 13 41 2008 Prentice Hall, Inc. 13 42

2008 Prentice Hall, Inc. 13 43 2008 Prentice Hall, Inc. 13 44

Roofing Supplier Example 4 Roofing Supplier Example 4

Forecast demand and

2008 Prentice Hall, Inc. 13 45 2008 Prentice Hall, Inc. 13 46

Roofing Supplier Example 4 Comparison of Three Plans

Transportation Example Transportation Example

Summary of Aggregate Aggregate Planning in

Five Service Scenarios Five Service Scenarios

Restaurants National Chains of Small Service

Yield Management Yield Management Example

1. Service or product can be sold in

Yield Management Example Yield Management Matrix

$2,550 + $5,550 = $8,100

60 Convention centers Rental cars

$15 $100 $200 Price

2008 Prentice Hall, Inc. 13 67

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