SCM 302 Ratcliffe

SCM 302
OPERATIONS
MANAGEMENT
Aggregate Planning and S&OP
SCM 302 - Aggregate Planning
Chapter 13 2
Aggregate Planning and S&OP

How much to produce? When to produce?
1. Define & explain sales and operations planning
and aggregate planning.
2. Compute chase and level strategies and their
horizon costs.
3. Explain techniques for addressing uncertainty
in production plans.
4. Describe how aggregate planning fits into the
overall production planning process.
Chapter 13 3
Test Your IQ: Frito Lays

• More than three dozen brands, 15 brands sell more
than $100 million annually, 7 sell over $1 billion
• Planning processes covers 3 to 18 months
• Unique processes and specially designed equipment
• High fixed costs require high volumes and high
utilization
• Demand profile based on historical sales, forecasts,
innovations, promotion, local demand data
• Match total demand to capacity, expansion plans, and
costs
• Quarterly aggregate plan goes to 36 plants in 17
regions
• Each plant develops 4-week plan for product lines and
production runs
• What information would you like to know

before developing the plan?
Chapter 13 4
The Operations Planning Hierarchy

• Top Executives
Long Range Planning • Expensive decisions, take significant time to implement
• Research & Development
(1-5 years) • New product introduction
• Capital investments
Support the strategic plan • Facility location/expansion
• Operations Managers, S&OP Team

Medium Range Planning • Capacity/production decisions for existing
resources
(3-18 months) • Sales and operations planning
• Production planning and budgeting
Support the sales plan • Employment, inventory, subcontracting levels
• Analyzing operating plans
• Operations Managers, Floor Supervisors

Short Range Planning • Daily/weekly scheduling and allocation decisions
• Job assignments
(0-3 months) • Ordering
Support existing orders • Job scheduling
• Dispatching
• Overtime
• Part-time help
Chapter 13 5
What are S&OP and Aggregate Planning?

• Sales & Operation Planning (S&OP)
• Integrate functional areas around a production plan which satisfies the
sales plan and meets business objectives.
• What is feasible? Which resources are below expectations?
• Coordinate internal and external resources
• Communication within cross functional teams.
• Aggregate Planning
• Determine quantity and timing of production for intermediate range
• Meet forecasted demand while minimizing cost
• Disaggregation: breaking down plan into greater detail.
• Master Production Schedule: a timetable of what is to be made when.
QUARTER 1
• 4 things needed for aggregate planning Jan. Feb. March
1. Unit for measuring sales and output
150,000 120,000 110,000
2. Aggregate demand forecast for planning period
QUARTER 2
3. Method for determining relevant costs
April May June
4. Model that combines forecasts and costs to inform scheduling decisions
100,000 130,000 150,000
QUARTER 3
July Aug. Sept.
180,000 150,000 140,000
Chapter 13 6
S&OP and the Aggregate Plan
Figure 13.2
Chapter 13 7
Apple
3C products
Business Level
iPhone
Macbook
Product Types
iPod
Product family: group of SKUs with similar design (e.g.

hard drive size)
• Share manufacturing resources.
• Demand patterns are similar, often planned as a unit
Families • Costs are often expressed at this level.
SKU’s Stock-keeping Units

Chapter 13 8
Aggregate Planning Capacity Options

1. Change inventory levels
• Increase in low periods to meet high demand later
• Costs: storage, insurance, handling, obsolescence, and capital
investment
• Shortages may mean lost sales
2. Varying workforce size by hiring or layoffs
• Training and separation costs for hiring and laying off workers
• New workers may have lower productivity
• Laying off workers may lower morale and productivity
3. Varying production rates through overtime or idle time
• May be difficult to meet large increases in demand
• Overtime can be costly and may drive down productivity
• Absorbing idle time may be difficult
4. Subcontracting
• Meet peak demand, may be costly
• Assuring quality and timely delivery may be difficult
• Exposes your customers to a possible competitor
5. Using part-time workers
• Useful for filling unskilled or low skilled positions
See Table 13.1 for advantages & disadvantages

Chapter 13 9
Aggregate Planning Demand Options

1. Influencing demand
• Use advertising or promotion to increase
demand in low periods
• Attempt to shift demand to slow periods
• May not be sufficient to balance demand and
capacity
2. Back ordering during high-demand
periods
• Requires customers to wait for an order
without loss of goodwill or the order
• Most effective when there are few if any
substitutes for the product or service
• Often results in lost sales
3. Counterseasonal product and service
mixing
• Develop a product mix of counterseasonal
items
• May lead to products or services outside the
company’s areas of expertise
See Table 13.1 for advantages & disadvantages
Chapter 13 10
ABC Corp. Forecasts Demand for Six Months

Chapter 13 11
Method for Aggregate Planning

• Select a plan that best meets your chosen objective
• Lowest cost
• Hiring / firing costs
• Inventory carrying costs. Backorder or stock-out costs
• Overtime / slack time costs
• Part time / temporary labor costs. Subcontracting costs
• Highest profit
• Minimum workforce disruption,
• While meeting your requirements (constraints ) e.g.

• no demand is ever backlogged
• must end horizon with certain amount of inventory
• Methods
1. Determine the demand for each period
2. Determine the capacity for regular time, overtime, and subcontracting each period
3. Find labor costs, hiring and layoff costs, and inventory holding costs
4. Consider company policy on workers and stock levels
5. Develop alternative plans and examine their total cost
Chapter 13 12
Production Planning Strategies

• Chase Strategy Demand
• Workforce levels are adjusted to
match demand requirements over
planning horizon.
• No inventory or backorders
Production
• Level Strategy Time

• A constant work force level is Demand
maintained over planning horizon. Production
• Inventory / demand backorders
are built and dissipated.
• Mixed Strategy
• Workforce levels are allowed to Time
change and inventory/ backorders
can be used.
Chapter 13 13
Back to the ABC Example

Monthly Demand for Apple Other Data
Production
Month Demand Starting Inventory = 0
No specific Ending Inventory Target
1 600 Previous Month’s Production = 1050
Costs
2 900
Production Cost: $100 per unit
Hiring: $30 per unit hired
3 1200 Firing: $70 per unit fired
Inventory: $20 per unit in inventory at
4 2000 the end of the month
Backorders: $50 per unit on backorder
5 1400 at the end of each month
6 800
Imagine that you are the assistant to the VP of Mfg and need to
develop different scenarios for the production plan.
What is the best production plan?
Chapter 13 14
The Chase Strategy

Produce The Required Demand Each Month
Production Hiring Firing
Hire Layoff
Month Demand Production Costs Costs Costs
(Units) (Units)
($) ($) ($)
There are many “right”
1050-600=450 (600)*100= (450)(70)= ways to set up the tables.
1 600 600 0 450 60,000 0 31,500
It depends on the data
(900-600)= (30)(300)= provided and how you like
2 900 900 300 90,000 9,000 0
0 to organize it.
3 1200 1200 300 0 120,000 9,000 0
4 2000 2000 800 0 200,000 24,000 0
5 1400 1400 0 600 140,000 0 42,000
6 800 800 0 600 80,000 0 42,000
Production Hiring Firing

Horizon Costs = 690,000 42,000 115,500
Total Horizon Cost = 847,500

Chapter 13 15
The Level Strategy With Backorders

Produce the Average Demand Each Period
What assumptions does this scenario make?
Average Monthly Demand =1150
Cumul- Cumul- Back-

Ending Prod’ction Inventory
ative ative Ending order
Month Demand Production Back- Costs Costs
Demand Prod’tion Inventory Costs
orders ($) ($)
(CD) (CP) ($)
1 600 1150 600 1150 550 0 115,500 11,000 0
2 900 1150 1500 2300 800 0 115,500 16,000 0
3 1200 1150 2700 3450 750 0 115,500 15,000 0
4 2000 1150 4700 4600 0 100 115,500 0 5,000
5 1400 1150 6100 5750 0 350 115,500 0 17,500
6 800 1150 6900 6900 0 0 115,500 0 0
Labor Inventory Backorders

Ending Inventory = max(CP-CD,0) 690,000 42,000 22,500
Ending backorders = max(CD-CP,0)
Total L/I/B Costs = 754,500
Don’t forget hiring/firing at start of horizon:
Hire (1150-1050)=100 units @ cost of 30 100(30) =3000
Chapter 13 16
The Level Strategy With No Backorders

What assumptions does this plan make?
Cumulative
Cumul- Cumul- Back-
Demand Ending Labor Inventory
ative Produ ative Ending order
Month Demand (CD) / Back- Costs Costs
Demand ction Prod’tion Inventory Costs
Cumulative No. orders ($) ($)
(CD) (CP) ($)
of Periods
(600)/1=
1 600 600 600 1220 1220 620 0 122,000 12,400 0
(600+9000/2=
2 900 1500 750 1220 2440 940 0 122,000 18,800 0
(600+900+1200)/3
3 1200 2700 900 1220 3660 960 0 122,000 19,200 0
4700/4=
4 2000 4700 1175 1220 4880 180 0 122,000 3,600 0
6100/5=
5 1400 6100 1220 1220 6100 0 0 122,000 0 0
6900/6=
6 800 6900 1150 1220 7320 420 0 122,000 8,400 0
Maximum = 1330. Produce at this constant level. Labor Inventory Backorders

732,000 62,400 0
Don’t forget hiring/firing at start of horizon: Hire (1220-1050)=170 workers @ cost of 170(30) =5100
Best suited for: Total L/I/B Costs = 794,400
Competitive conditions, e.g. substitute products exist
Seasonal products: candy company
Customer service is important to you
Chapter 13 17
Cumulative Demand and Production

Chase Level – Allowing Backorders
8000 8000
6000 6000
4000 4000
2000 2000
0 0
1 2 3 4 5 6 1 2 3 4 5 6
Month Month
Level – No Backorders
Legend 8000
Cumulative 6000
Demand 4000
Cumulative
2000
Production
0
1 2 3 4 5 6
Month
Chapter 13 18
Exercise #1.A THE CHASE STRATEGY

Units Units Production Hiring Firing Starting
Month Demand Production
Hired Fired Costs Costs Costs Inventory 0
Target
1 2800 Ending
Inventory
2 3000 Last Month’s

Production 3000
Unit
3 2400 Production
Cost $200
4 1200
Hiring Cost $50
5 3600
Firing Cost $75
6 2000 Inventory
Cost $60
Horizon Cost= Backorder
Cost $150
Total Horizon Cost=

Chapter 13 19
Exercise #1.B. THE LEVEL STRATEGY WITH BACKORDERS

Cum. Cum. Ending

Product Ending Labor Inventory Back-order
Month Demand ion Demand Producti Inventory Back- Costs Costs Costs
Production Rate
(CD) on (CP) orders
1 2800 2500 Starting

Inventory 0
2 3000 2500 Target Ending

Inventory
3 2400 2500 Starting

Workers 3000
4 1200 2500
Labor Cost $200
5 3600 2500
Hiring Cost $50
6 2000 2500
Firing Cost $75
Total
Inventory Cost $60
Total L/I/B Costs =

Backorder Cost $150
Total Horizon Cost=

Chapter 13 20
Starting and Ending Inventories

• What happens if you start the
planning horizon with inventory
• This can be used to fulfill demand in the
first few months
• What happens if you want to end the

planning horizon with inventory
• This is like having extra “demand” in
the last month that needs to be met
• The trick is to “net out” these

inventories from the demand to
create a net demand for each month
Chapter 13 21
Back to the Apple Example

Monthly Demand for Apple Other Data
Production
Month Demand Starting Inventory = 1000
No specific Ending Inventory Target
1 600 Previous Month’s Production = 1050
2 900 Costs:
Production Cost: $100 per unit
Hiring: $30 per unit hired
3 1200
Firing: $70 per unit fired
Inventory: $20 per unit in inventory at
4 2000 the end of the month
Backorders: $50 per unit on backorder
5 1400 at the end of each month
6 800
Now you have a starting inventory of 1000 (all else the same)
What is the best production plan?
Chapter 13 22

Positive Starting Inventory
Cumul- CND/ Cumul- Cumulative
Back-
ative Cumul- ative Production Ending Ending Productio Inventory
Net Produ order
Month Demand Net ative Actual + Starting Inventor Back- n Costs Costs
Demand ction Costs
Demand No. of Demand Inventory y orders ($) ($)
($)
(CND) Periods (CD) (CPI)
600-1000=--400
1 600 0 0 0 1020 600 2020 1420 0 102,000 29,280 0
1500-1000=
2 900 500 500 250 1020 1500 3040 1540 0 102,000 25,760 0
3 1200 1200 1700 566.67 1020 2700 4060 1360 0 102,000 7,840 0
4 2000 2000 3700 925 1020 4700 5080 380 0 102,000 1,920 0
5 1400 1400 5100 1020 1020 6100 6100 0 0 102,000 0 0
6 800 800 5900 983.33 1020 6900 7120 220 0 102,000 4,080 0
Labor Inventory Backorders
Maximum = 1104. Produce at this constant level. 612,000 98,400 0
Total L/I/B Costs = 710,400
Don’t forget hiring/firing at start of horizon: Fire (1020-1050)=30 workers @ cost of 30(70) =2100 Total Horizon Cost = 712,500
Chapter 13 23
Aggregate Planning in Services

• Most services use combination strategies
and mixed plans
• Controlling the cost of labor is critical
• Accurate scheduling of labor-hours to
assure quick response to customer demand
• Use an on-call labor resource to cover
unexpected demand
• Increase flexibility of individual worker
skills
• Increase flexibility in rate of output or
hours of work
Chapter 13 24
Service System:
Imagine ABC is a life insurance company.
Assuming they never wanted back-orders how
could a level strategy be implemented?
No. of units
Month Demand Labor cost
produced
Why can’t we use the approach from before?
=max {cumulative demand/cumulative no. of periods}
1 600 2000 200,000
200,000
2 900 2000 Must have enough staff to cover the busiest
200,000 period.
3 1200 2000
Assume demand is given in terms of no. of
4 2000 2000
200,000 insurance agent working hours needed.
200,000
5 1400 2000
200,000
6 800 2000
Maximum = 2000 Total Horizon Cost = 1,228,500

Therefore 2000 units needed
Don’t forget hiring/firing at start of horizon: Hire (2000-1050)=950 workers @ cost of 950(30) =28500
Chapter 13 25
$!#%…There’s Way Too Many Plans I

have to Evaluate
• Optimization software exists to
make planning better and faster
• Can set up the production planning
problem as a linear program
• Use software to solve
• Almost always, we want to
modify the mathematically
optimal plan
• No math model captures all the real
world issues
• Managers may need to modify the
plan based on their insights
Chapter 13 26
Sales and Operations Planning is a Crucial

Business Process
Sales/Marketing Forecasts Operational
capabilities/costs
Planning, Negotiation
and Revisions
Final Agreed
Plan
Chapter 13 27
SOP Seems to Assume Forecasts are Perfect

But We Know Forecasts are Wrong
Use Safety Stock Rolling Horizon Planning
Set safety stock targets for the Review production planning

expected inventory on hand at on a monthly basis to
the end of each month incorporate updated forecasts
• Safety stock should be high • See following slides
enough to buffer against
forecast uncertainty to a
desired probability
Chapter 13 28
Rolling Horizon Planning

Revise Plan on a Monthly Basis Given Updated Forecasts
1. Beginning of January: Do production plan for the year. Implement the January plan
Jan Feb March April May June July August Sept. Oct. Nov Dec
2. Beginning of February: Update demand forecasts. Do production plan for the

following 12 months. Implement February plan.
Jan
Feb March April May June July August Sept. Oct. Nov Dec
(next year)
3. Beginning of March 2010: Update demand forecasts and do production plan for the
following 12 months. Implement March plan.
March April May June July August Sept. Oct. Nov Dec Jan Feb
(next year) (next year)
4. etc. etc.
Chapter 13 29
Changing the Plan after a Forecast Update

• What if you commit on Jan. 1 to production in Feb. and it’s too late to change these on Feb. 1?
• E.g. hire a subcontractor to produce 200 units in Feb., but forecast is updated to 100.
• Plans in the frozen zone (e.g. next 2 months) cannot be changed, even if forecast is updated.
• Vary by company: those with more flexibility can have shorter frozen zones
• Vary by type of planning decision
• e.g. subcontracting plans be frozen 3 months ahead but overtime decisions only 1 month ahead
1. Beginning of January: Do production plan for the year. Decisions about January and February are
frozen (i.e. cannot be changed at later date).
2. Beginning of February: Update demand forecasts. Do production plan for following 12 months.
Not allowed change decision already made for February. Decisions about March are now frozen
Jan
(next year)
3. Beginning of March. Update demand forecasts and do production plan for following 12 months.
Not allowed change decision already made for March. Decisions about April are now frozen
Feb
March April May June July August Sept. Oct. Nov Dec Jan 2010
(next year)
4. etc. etc.
Chapter 13 30
Short Term Planning May Be in Weeks

not Months
1. Beginning of January: Do production plan for the year. Decisions about January and February broken
down into individual weeks. Decision for March, April etc are at the month level
Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Showing example with a 6
week frozen zone
2. Beginning of February 2010: Update forecasts. Do production plan next 12 months. Decisions about
February and March broken down into individual weeks. Decision for April, May, etc. are at the month
level
Jan
(next year)
Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 Week 11 Week 12 Showing example with a 6
week frozen zone
Chapter 13 31
Aggregation & Disaggregation

• Sounds like an awful lot of data to collect!!!
• Sales/Marketing: Forecasts for each product for the next 12-18 months
• Operations: capabilities and current costs
• Current Capacities/ Inventories
• Capacity adjustment options
• Capacity, Inventory, Labor costs
• Existing commitments
• Companies reduce the data needed using aggregation
• Toyota does not need to know whether car will be red or blue when sourcing components
• Grouping similar products reduces complexity of the planning problem
• Grouping similar products companies can increase plan accuracy. Why?
• Demand side aggregation
• Group products (or customer) into families sharing similar sales prices, demand patterns
• E.g. Plan Toyota Corollas rather than Toyota Corolla CE, LE and S types
• Supply side aggregation
• Group products using similar resources (equipment, labor, etc.), processing capabilities or costs.
• E.g. Plan plant’s production rather than production for each individual assembly line.
• At some point, the aggregate plan needs to be disaggregated for production scheduling
• E.g. The plant eventually needs to know whether it is building a CE, LE or S Corolla
• Disaggregation often occurs for the initial 0-3 months of a plan
• Because decisions regarding actual products and resources need to be finalized (frozen)
Chapter 13 32
SOP Exercise #2.A. THE CHASE STRATEGY

Num. Num.
Workers Workers Workers Workers Labor Hiring Firing Production
Month Demand 15
(before (after Hired Fired Costs Costs Costs Rate
Rounding) Rounding)
1 600 Starting
Inventory 0
Target
2 500 Ending
Inventory
3 1400 Starting
Workers 70
4 1200
Labor Cost $1,600
5 1100
Hiring Cost $500
6 500
Firing Cost $1,000
Horizon Cost= Inventory

Cost $20
Total Horizon Cost= Backorder

Cost $50
Chapter 13 33
SOP EXERCISE #2.B. THE LEVEL STRATEGY WITH BACKORDERS
Cum. Cum. Ending Back-
Ending Labor Inventory Production
Month Demand Workers Demand Production Back- order 15
Inventory Costs Costs Rate
(CD) (CP) orders Costs
1 600 Starting
Inventory 0
2 500
3 1400 Starting
Workers 70
4 1200
Labor Cost $1,600
5 1100
Hiring Cost $500
6 500
Firing Cost $1,000
Inventory
Cost $20
Total L/I/B Costs =
Backorder
Cost $50
Total Horizon Cost=

Chapter 13 34
SOP EXERCISE #2.C. THE LEVEL STRATEGY WITH NO BACKORDERS
Cum. Cum. Ending Back-
Ending Labor Inventory Production
Month Demand Workers Demand Production Back- order 15
Inventory Costs Costs Rate
(CD) (CP) orders Costs
1 600 Starting
Inventory 0
2 500
3 1400 Starting
Workers 70
4 1200
Labor Cost $1,600
5 1100
Hiring Cost $500
6 500
Firing Cost $1,000
Inventory
Cost $20
Total L/I/B Costs =
Backorder
Cost $50
Total Horizon Cost=

SCM 302 Ratcliffe

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SCM 302

Aggregate Planning and S&OP

Test Your IQ: Frito Lays

• What information would you like to know

The Operations Planning Hierarchy

• Operations Managers, S&OP Team

• Operations Managers, Floor Supervisors

What are S&OP and Aggregate Planning?

S&OP and the Aggregate Plan

Product family: group of SKUs with similar design (e.g.

SKU’s Stock-keeping Units

Aggregate Planning Capacity Options

See Table 13.1 for advantages & disadvantages

Aggregate Planning Demand Options

ABC Corp. Forecasts Demand for Six Months

Method for Aggregate Planning

• While meeting your requirements (constraints ) e.g.

Production Planning Strategies

• Level Strategy Time

Back to the ABC Example

The Chase Strategy

3 1200 1200 300 0 120,000 9,000 0

4 2000 2000 800 0 200,000 24,000 0

5 1400 1400 0 600 140,000 0 42,000

6 800 800 0 600 80,000 0 42,000

Production Hiring Firing

Total Horizon Cost = 847,500

The Level Strategy With Backorders

Cumul- Cumul- Back-

1 600 1150 600 1150 550 0 115,500 11,000 0

2 900 1150 1500 2300 800 0 115,500 16,000 0

3 1200 1150 2700 3450 750 0 115,500 15,000 0

4 2000 1150 4700 4600 0 100 115,500 0 5,000

5 1400 1150 6100 5750 0 350 115,500 0 17,500

6 800 1150 6900 6900 0 0 115,500 0 0

Labor Inventory Backorders

The Level Strategy With No Backorders

Maximum = 1330. Produce at this constant level. Labor Inventory Backorders

Cumulative Demand and Production

Exercise #1.A THE CHASE STRATEGY

2 3000 Last Month’s

Total Horizon Cost=

Exercise #1.B. THE LEVEL STRATEGY WITH BACKORDERS

Cum. Cum. Ending

1 2800 2500 Starting

2 3000 2500 Target Ending

3 2400 2500 Starting

Total L/I/B Costs =

Total Horizon Cost=

Starting and Ending Inventories

• What happens if you want to end the

• The trick is to “net out” these

Back to the Apple Example

The Level Strategy With No Backorders

5 1400 1400 5100 1020 1020 6100 6100 0 0 102,000 0 0

Total L/I/B Costs = 710,400

Aggregate Planning in Services

Maximum = 2000 Total Horizon Cost = 1,228,500

$!#%…There’s Way Too Many Plans I

Sales and Operations Planning is a Crucial

SOP Seems to Assume Forecasts are Perfect

Set safety stock targets for the Review production planning

Rolling Horizon Planning