Aggregate Sales and Operations Planning

Process planning
Long range

Supply network planning Forecasting and demand management

Strategic capacity planning Sales and operations (aggregate) planning Sales plan
Aggregate operations plan

Medium range

Master scheduling
Material requirements planning

Order scheduling
Short range

1-3

Sales and Operations Planning The process is designed to balance demand and supply of a company and to keep them in balance over time. Sales plan developed by marketing in terms of units of product groups, & Operation side decides an operation plan. Sales and Marketing develops operation plans for how the demand will be met by focusing on aggregate product and sales volume.

The Aggregate Operations Plan Main purpose: Specify the optimal combination of production rate (units completed per unit of time) workforce level (number of workers) inventory on hand (inventory carried from previous period)

Product group or broad category (Aggregation)

This planning is done over an intermediate-range planning period of 3 to18 months

Balancing Aggregate Demand and Aggregate Production Capacity

10000

Suppose the figure to the right represents forecast demand in units Now suppose this lower figure represents the aggregate capacity of the company to meet demand What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

10000 8000 8000 6000 4000 5500 4500 7000 6000

2000
0 Jan Feb Mar 9000 8000 6000 Apr May Jun

10000 8000

6000
4000 2000 0

4500

4000

4000

Jan

Feb

Mar

Apr

May

Jun

Required Inputs to the Production Planning System

Competitors behavior External capacity

Raw material availability

Market demand Economic conditions

External to firm

Planning for production

Current physical capacity

Current workforce

Inventory levels

Activities required for production

Internal to firm

Strategies for Adjusting Capacity

Level production
Producing at a constant rate and using inventory to absorb fluctuations in demand

Chase demand
Hiring and firing workers to match demand

Peak demand
Maintaining resources for high-demand levels

Overtime and under-time

Increasing or decreasing working hours

Strategies for Adjusting Capacity

Subcontracting Let outside companies complete the work Part-time workers Hiring part time workers to complete the work Backordering Providing the service or product at a later time period

Mixed Strategy Combination of Level Production and Chase Demand strategies Examples of management policies
no more than x% of the workforce can be laid off in one quarter inventory levels cannot exceed x units

Level Production

Demand Production Units

Time
13

Chase Demand

Demand Production Units

Time
14

Example:
QUARTER Spring Summer Fall Winter SALES FORECAST (LB) 80,000 50,000 120,000 150,000

Hiring cost = Rs.100 per worker Firing cost = Rs.500 per worker Regular production cost per pound = Rs.2.00 Inventory carrying cost = Rs.0.50 per pound per quarter Production per employee = 1,000 pounds per quarter Beginning work force = 100 workers

Level Production Strategy

Level production (50,000 + 120,000 + 150,000 + 80,000) = 100,000 pounds 4

QUARTER Spring Summer Fall Winter

SALES FORECAST

PRODUCTION PLAN INVENTORY

100,000 20,000 100,000 70,000 100,000 50,000 100,000 0 400,000 140,000 Cost of Level Production Strategy (400,000 X Rs.2.00) + (140,000 X Rs .50) = Rs.870,000

80,000 50,000 120,000 150,000

Chase Demand Strategy

Production per employee Beginning work force = 1,000 pounds per quarter = 100 workers
WORKERS WORKERS WORKERS NEEDED HIRED FIRED

QUARTER

SALES PRODUCTION FORECAST PLAN

Spring Summer Fall Winter

80,000 50,000 120,000 150,000

80,000 50,000 120,000 150,000

80 50 120 150

0 0 70 30 100

20 30 0 0 50

Cost of Chase Demand Strategy (400,000 X Rs.2.00) + (100 x Rs.100) + (50 x Rs.500) = Rs.835,000

Aggregate Planning Examples: Unit Demand and Cost Data

Suppose we have the following unit demand and cost information:

Demand/mo Jan 4500 Feb 5500 Mar 7000 Apr 10000 May 8000 Jun 6000

Materials Holding costs Marginal cost of stockout Hiring and training cost Layoff costs Labor hours required Straight time labor cost Beginning inventory Productive hours/worker/day Paid straight hrs/day

Rs. 5/unit Rs.1/unit per mo. Rs.1.25/unit per mo. Rs.200/worker Rs.250/worker .15 hrs/unit Rs.8/hour 250 units 7.25 8

Cut-and-Try Example: Determining Straight Labor Costs and Output

Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker?

Demand/mo

Jan
4500

Feb
5500

Mar
7000

Apr
10000

May
8000

Jun
60007.25x22

Productive hours/worker/day Paid straight hrs/day

7.25 8

159.5 / .15 = 1066.33

22x8hrsxRs.8=Rs.1408
Days/mo Hrs/worker/mo Units/worker $/worker Jan 22 159.5 1063.33 1408 Feb 19 137.75 918.33 1,216 Mar 21 152.25 1015 1,344 Apr 21 152.25 1015 1,344 May 22 159.5 1063.33 1,408 Jun 20 145 966.67 1,280

Chase Strategy (Hiring & Firing to meet demand)

Jan 22 159.5 1,063.33 1408
Lets assume our current workforce is 7 workers.

Days/mo Hrs/worker/mo Units/worker $/worker

First, calculate net requirements for production, or 4500-250=4250 units

Demand Beg. inv. Net req. Req. workers Hired Fired Workforce Ending inventory

Jan 4,500 250 4,250 3.997 3 4 0

Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers
Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired.

Below are the complete calculations for the remaining months in the six month planning horizon
Days/mo Hrs/worker/mo Units/worker Rs. /worker Jan 22 159.5 1,063 1,408 Feb 19 137.75 918 1,216 Mar 21 152.25 1,015 1,344 Apr 21 152.25 1,015 1,344 May 22 159.5 1,063 1,408 Jun 20 145 967 1,280

Demand Beg. inv. Net req. Req. workers Hired Fired Workforce Ending inventory

Jan 4,500 250 4,250 3.997 3 4 0

Feb 5,500 5,500 5.989 2 6 0

Mar 7,000 7,000 6.897 1 7 0

Apr 10,000 10,000 9.852 3 10 0

May 8,000 8,000 7.524 2 8 0

Jun 6,000 6,000 6.207 1 7 0

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
Demand Beg. inv. Net req. Req. workers Hired Fired Workforce Ending inventory Jan 4,500 250 4,250 3.997 3 4 0 Feb 5,500 5,500 5.989 2 6 0 Mar 7,000 7,000 6.897 1 7 0 Apr 10,000 10,000 9.852 3 10 0 May 8,000 8,000 7.524 2 8 0 Jun 6,000 6,000 6.207 1 7 0

22*8*8*3.997
Material Labor Hiring cost Firing cost Jan 21250 5,627.59 750.00 Feb 27500 7,282.76 400.00 Mar 35000 9,268.97 200.00 Apr 50000 13,241.38 600.00 May 40000 10,593.10 500.00 Jun 30000 7,944.83 250.00 Costs 203750 53,958.62 1,200.00 1,500.00 260408.62

Level Workforce Strategy (Surplus and Shortage Allowed)

Lets take the same problem as before but this time use the Level Workforce strategy This time we will seek to use a workforce level of 6 workers

Demand Beg. inv. Net req. W orkers P roduction Ending inventory Surplus Shortage

Jan 4,500 250 4,250 6 6,380 2,130 2,130

Below are the complete calculations for the remaining months in the six month planning horizon
Jan 4,500 250 4,250 6 6,380 2,130 2,130 Feb 5,500 2,130 3,370 6 5,510 2,140 2,140 Mar 7,000 2,140 4,860 6 6,090 1,230 1,230 Apr 10,000 1,230 8,770 6 6,090 -2,680 2,680 May 8,000 -2,680 10,680 6 6,380 -1,300 1,300 Jun 6,000 -1,300 7,300 6 5,800 -1,500 1,500

Demand Beg. inv. Net req. Workers Production Ending inventory Surplus Shortage

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
250 4,250 6 6,380 2,130 2,130 2,130 3,370 6 5,510 2,140 2,140 10 4,860 6 6,090 1,230 1,230 -910 8,770 6 6,090 -2,680 2,680 Jan 8448 31,900 2,130 Feb 7296 27,550 2,140 Mar 8064 30,450 1,230 Apr 8064 30,450 3,350 -3,910 10,680 6 6,380 -1,300 1,300 May 8448 31,900 1,625 -1,620 7,300 6 5,800 -1,500 1,500 Jun 7680 29,000 1,875

Note, total costs under this strategy are less than Chase at Rs. 260.408.62

22*8*8*6 6380 * 5

48000 181,250 5,500 6,850 241600

Labor Material Storage Stockou

Question Bowl

Sales and Operations Planning activities are usually conducted during which planning time horizon? a. Long-range b. Intermediate-range c. Short-range d. Really short-range e. None of the above Answer: b. Intermediate-range (i.e., 6 to 18 months)

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Question Bowl

Which of the following are Production Planning Strategies can involve trade-offs among the workforce size, work hours, inventory, and backlogs? a. Chase strategy b. Stable workforce-variable work hours c. Level strategy d. All of the above e. None of the above

Answer: d. All of the above

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Question Bowl

Which of the following are considered relevant costs in the Aggregate Production Plan? a. Costs associated with changes in the production rate b. Inventory holding costs c. Backordering costs d. Basic production costs e. All of the above Answer: e. All of the above

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Question Bowl

Which of the following Aggregate Planning Techniques can be performed using simple spreadsheets? a. Cut-and-try b. Linear programming c. Transportation method d. All of the above e. None of the above
Answer: a. Cut-and-try (The other two involve more complex computational effort than simple spreadsheets.)

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End of Chapter 16