23-12-2019

Aggregate Planning

Dr. Rachita Gupta

Sales and Operations Planning

• Determines resource capacity to meet demand over an intermediate time horizon

• Aggregate refers to sales and operations planning for product lines or families

• Sales and Operations planning (S&OP) matches supply and demand

• Objectives

• Establish a company wide plan for allocating resources

• Develop an economic strategy for meeting demand

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Sales and Operations Planning Process

Source: John Wiley & Sons, Inc. - Russell and Taylor 8e

Aggregate Planning Strategies

 Should inventories be used to absorb changes in demand?

 Should changes be accommodated by varying the size of the

workforce?

 Should part-timers, overtime, or idle time be used to absorb

changes?

 Should subcontractors be used and maintain a stable workforce?

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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

• Increase or decrease working hours

• Subcontracting
• Let outside companies complete the work

• Part-time workers
• Hire part-time workers to complete the work

• Backordering
• Provide the service or product at a later time period

Level Production Chase Demand

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Strategies for Managing Demand

• Shifting demand into other time periods

• Incentives
• Sales promotions
• Advertising campaigns

• Offering products or services with counter-cyclical demand

patterns

• Partnering with suppliers to reduce information distortion along

the supply chain

Quantitative Techniques For AP

QUARTER SALES FORECAST (LB)

Spring 80,000
Pure Strategies Summer 50,000
Fall 120,000
Mixed Strategy Winter 150,000

Hiring cost = $100 per worker

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

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Level Production Strategy

SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY

Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

Cost of Level Production Strategy

Level production

(50,000 + 120,000 + 150,000 + 80,000)

4 = 100,000 pounds

SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY

Spring 80,000 100,000 20,000

Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 0
400,000 140,000
Cost of Level Production Strategy

(400,000 X $2.00) + (140,00 X $.50) = $870,000

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Chase Demand Strategy

SALES PRODUCTION WORKERS WORKERS WORKERS

QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

Cost of Chase Demand Strategy

SALES PRODUCTION WORKERS WORKERS WORKERS

QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000 80,000 80 0 20
Summer 50,000 50,000 50 0 30
Fall 120,000 120,000 120 70 0
Winter 150,000 150,000 150 30 0
100 50

Cost of Chase Demand Strategy

(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

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Mixed Strategy
• Combination of Level Production and Chase Demand strategies

• Example policies
• no more than x% of workforce can be laid off in one quarter
• inventory levels cannot exceed x dollars

• Some industries may shut down manufacturing during the low

demand season and schedule employee vacations during that time

Aggregate Planning for Services

• Most services cannot be inventoried

• Demand for services is difficult to predict

• Capacity is also difficult to predict

• Service capacity must be provided at the appropriate place and time

• Labor is usually the most constraining resource for services

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Example

A swimwear manufacturing company needs help planning production for next

year. Demand for swimwear follows a seasonal pattern, as shown. Given the
following costs and demand forecasts, test these four strategies for meeting
demand:

(a) level production with overtime and subcontracting, as needed

(b) level production with backorders as needed
(c) chase demand
(d) 3000 units regular production from April through September ans as much
regular, overtime, and subcontracting production in the other months as needed
to meet the annual demand. Determine the cost of each strategy. Which strategy
would you recommend?

Month Demand forecast

Jan 1000
Feb 500
Mar 500
Apr 2000
May 3000
Jun 4000
Jul 5000
Aug 3000
Sep 1000
Oct 500
Nov 500
Dec 3000
Total 24,000

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Input: Beg. Wkrs 8 Regular $15 Hiring $100

Units/wkr 250 Overtime $25 Firing $200
Beg. Inv. 0 Subk $30 Holding $0.50
Backordering $10

Month Demand Reg OT Subk Inventory Backord #Wkrs #Hired #Fired

Jan 1000 2000 1000 0 8 0 0
Feb 500 2000 2500 0 8 0 0
Mar 500 2000 4,000 0 8 0 0
Apr 2000 2000 4,000 0 8 0 0
May 3000 2,000 3,000 0 8 0 0
Jun 4000 2,000 1,000 0 8 0 0 Cost: $448,000
Jul 5000 2,000 2,000 0 0 8 0 0
Aug 3000 2,000 1,000 0 0 8 0 0
Sep 1000 2,000 1,000 0 8 0 0
Oct 500 2,000 2,500 0 8 0 0
Nov 500 2,000 4,000 0 8 0 0
Dec 3000 2,000 3,000 0 8 0 0
Total 24,000 24,000 3,000 0 26,000 0 96 0 0

Input: Beg. Wkrs 8 Regular $15 Hiring $100

Units/wkr 250 Overtime $25 Firing $200
Beg. Inv. 0 Subk $30 Holding $0.50
Backordering $10
Month Demand Reg OT Subk Inventory Backord #Wkrs #Hired #Fired
Jan 1000 2,000 1,000 0 8 0 0
Feb 500 2,000 2,500 0 8 0 0
Mar 500 2,000 4,000 0 8 0 0
Apr 2000 2,000 4,000 0 8 0 0
May 3000 2,000 3,000 0 8 0 0
Jun 4000 2,000 1,000 0 8 0 0 Cost: $443,250
Jul 5000 2,000 0 2,000 8 0 0
Aug 3000 2,000 0 3,000 8 0 0
Sep 1000 2,000 0 2,000 8 0 0
Oct 500 2,000 0 500 8 0 0
Nov 500 2,000 1,000 0 8 0 0
Dec 3000 2,000 0 0 8 0 0
Total 24,000 24,000 0 0 16,500 7,500 96 0 0

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Input: Beg. Wkrs 8 Regular $15 Hiring $100

Units/wkr 250 Overtime $25 Firing $200
Beg. Inv. 0 Subk $30 Holding $0.50
Backordering $10

Month Demand Reg OT Subk Inventory Backord #Wkrs #Hired #Fired

Jan 1000 1000 0 0 4 0 4
Feb 500 500 0 0 2 0 2
Mar 500 500 0 0 2 0 0
Apr 2000 2000 0 0 8 6 0
May 3000 3000 0 0 12 4 0 Cost: $367,600
Jun 4000 4000 0 0 16 4 0
Jul 5000 5000 0 0 20 4 0
Aug 3000 3000 0 0 12 0 8
Sep 1000 1000 0 0 4 0 8
Oct 500 500 0 0 2 0 2
Nov 500 500 0 0 2 0 0
Dec 3000 3000 0 0 12 10 0
Total 24,000 24,000 0 0 0 0 96 28 24

Input: Beg. Wkrs 8 Regular $15 Hiring $100

Units/wkr 250 Overtime $25 Firing $200
Beg. Inv. 0 Subk $30 Holding $0.50
Backordering $10

Month Demand Reg OT Subk Inventory Backord #Wkrs #Hired #Fired

Jan 1000 1000 0 0 4 0 4
Feb 500 500 0 0 2 0 2
Mar 500 500 0 0 2 0 0
Apr 2000 3000 1,000 0 12 10 0
May 3000 3000 1,000 0 12 0 0
Cost:$388,400
Jun 4000 3000 0 0 12 0 0
Jul 5000 3000 2,000 0 0 12 0 0
Aug 3000 3000 0 0 12 0 0
Sep 1000 3000 2,000 0 12 0 0
Oct 500 500 2,000 0 2 0 10
Nov 500 500 2,000 0 2 0 0
Dec 3000 1000 0 0 4 2 0
0
Total 24,000 22,000 2,000 8,000 0 88 12 16

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